The risk associated with early stage investments is expected to be high due to a variety of reasons. The portfolio company may be less than 3 years old, promoted by first generation entrepreneurs, offering a service or product for the first time in a market. In some cases, they may have revenue, but may not have achieved break-even. Most VCF exercise risk mitigation through –
- Time & Portfolio Diversification – Investment is spread over 3-5 years so that all investments are not made at the peak of a economic cycle. Moreover, 10-15 start-ups are nurtured so that the risk is balanced across the portfolio.
- Milestone based disbursements – Investment tranches are linked to realistic milestones so that capital is optimally utilized.
- Effective deal structuring & investor protection – This is ensured with measures such as founder vesting, founder lock-in, pre-emptive right, liquidation preference, information rights, right of first refusal, valuation protection, tag along, drag along, special rights to exit etc.