Theoretical foundations of venture financing. Venture financing as a special method of financing investments Need help studying a topic

AUTONOMOUS NON-PROFIT ORGANIZATION
HIGHER PROFESSIONAL EDUCATION
CENTRAL UNION OF THE RUSSIAN FEDERATION
"RUSSIAN UNIVERSITY OF COOPERATION"

DEPARTMENT OF FINANCE AND STATISTICS
Coursework
Discipline: "Investments"
On the topic: “Venture financing”

Completed by the student:
Petrova M.V.
Groups FK43
Scientific supervisor:

Moscow2011

Content:
Introduction………………………………………………………… …………………………..2
1. Venture financing;…………………………………… ……………..4
1.1 Definition of venture financing;…………………………………… ………………........................ ..6
1.2 Features of venture financing………………………………………………………………………………………..…..8
1.3 The essence of venture financing………………………………………… …………………….……….13
2. Venture financing in Russia……………………………………………………………… …………….…….14
2.1. History of the development of venture financing in Russia……………………………………………………………… …………….…….16
3. Mechanisms of venture (risk) financing: global experience and development prospects in Russia………………………………………………………………… ……………….……..21
4. Trends and opportunities for the development of venture financing in Russia……………………………………………………………… …………………..25
Conclusion……………………………………………………………………28
Appendix……………………………………………………………………30
References………………………………………………………………32

Introduction
Attracting equity capital to small and medium-sized private companies as a phenomenon and process was not known in post-perestroika Russia until recently. Our free capital market has not yet developed, so the majority of small and medium-sized entrepreneurs in Russia believe that there is nothing special to attract yet. At first, great hopes were placed on foreign investment, but over time, the Russian entrepreneur realizes the futility and loss of this option.
Active penetration of foreign capital into the Russian market, accompanied by an outflow of national capital outside the country, gives rise to many problems of economic, social and psychological nature. Meanwhile, the integration of the Russian economy into the world economic space is an irreversible process. The principles and ethics of civilized business are penetrating deeper and deeper into the consciousness of the Russian entrepreneur and his daily business practice.
State policy regarding small and medium-sized businesses (in fact, as well as business in general) is also still far from perfect. The confrontation between the state and society most painfully affects those who decide to start their own business, often from scratch, from scratch. These people have to live and work in a hostile environment. The feeling of insecurity gives rise to unbelief and apathy in some, while in others, on the contrary, it develops character and fighting qualities - the key to the success of any endeavor. The underdevelopment of the business infrastructure in Russia, combined with information impenetrability and the remnants of many years of isolation of the country from the rest of the world in the minds of many entrepreneurs, makes it difficult to see that a new financial industry is already operating in Russia today - venture capital.
Venture or risk capital is a phenomenon little understood by the vast majority of Russians. It is confused with bank lending or charity. There is practically no information about the nature and activities of venture funds and companies, apart from a few confusing notes in Moscow and St. Petersburg publications.
The name "venture" comes from the English "venture" - a risky enterprise or undertaking." During the era of perestroika, joint ventures were also called "joint ventures", which, perhaps, would be more correctly translated as "joint risky undertaking." The term "risky" itself implies that in the relationship between the capitalist investor and the entrepreneur claiming to receive money from him, there is an element of adventurism. And this is actually so.
Currently, civilized economic relations are being formed in the Russian economy, the stock market is developing, the banking system is developing, large private enterprises are emerging and developing. The development of civilized market conditions based on private entrepreneurship leads to the formation of alternative sources of funds - venture investments - investments in high-risk projects, or in venture innovation projects.
Venture entrepreneurship, promoting the creation of new and modernization of existing industries based on the use of science and technology, is a tool for the development and support of the real sector of the economy, a means of accelerating the development of private innovative entrepreneurship, and a tool for a positive impact on the national economy. Venture enterprises are the first enterprises (explers) operating in the market of radical innovations. This applies to all industries - biotechnology, telecommunications, communications, computer technology, industry, etc.
The purpose of this course work is to consider what venture financing is, features, essence, history of venture financing in Russia. Mechanisms, as well as trends and the possibility of its development in Russia.

1.Venture financing.
VENTURE FINANCING- allocation of funds from venture (risk) capital to small research or development firms for the development, refinement and implementation of innovations that are risky but promising. As a rule, the owners of money capital, providing loans to inventors and entrepreneurs, cannot make claims against them in relation to property collateral for the loan or demand from them guarantees of entering the market with innovations on time, making a profit and repaying debts with interest.
One of the main sources of financing innovative projects is venture capital.
Venture (risk) capital is a form of investing capital in investment objects with a high level of risk in the hope of quickly obtaining a high rate of return.
Venture capital is formed to finance venture companies, which are business cooperation between company owners and venture capital owners to implement high-risk projects in order to obtain significant (above the market average) income.
Venture capital financing consists of financing investments in new areas of activity, so it is accompanied by high risk in exchange for significant returns.
A venture enterprise is an enterprise whose activities are related to the development of new types of products, services, technologies that are unknown to the consumer, but have great market potential, which is associated with a high degree of risk of their promotion on the market. However, the innovation of their activities ensures high income.
Venture financing is based on a preliminary assessment of the investment project, the activities and financial condition of the company implementing this innovative project.
Venture financing is carried out in the form of corporatization.
Venture funds are created to finance ventures. The investment resources of a venture fund are intended for venture capital companies that have a high chance of growing into large profitable enterprises. These chances come with high risk.
Therefore, a venture fund is characterized by the distribution of risk between project initiators and investors.
One of the main ways to protect against investment risks is insurance. This also applies to venture financing. Mechanisms for organizing insurance and guarantees of attracted investment resources for venture projects include the creation of a state insurance system for the risks of venture investors.
The main operating principles of a venture fund are:
1) creation of a venture capital fund in the form of a partnership in which the organizer bears full responsibility for the use of the fund’s funds. For this purpose, a business plan is being developed;
2) placement of venture fund funds for various projects with a risk level of no more than 25% and with a return on investment period not exceeding 3-5 years;
3) “exit” of venture capital from a venture enterprise through its transformation into an open joint-stock company with the placement of shares of the venture enterprise on the stock exchange or their sale to a large corporation.

1.1 Definition of venture financing.
There are many definitions of what venture financing is, but they all come down to its functional task: to promote the growth of a specific business by providing a certain amount of cash in exchange for a share in the authorized capital or a certain block of shares.

A venture capitalist who heads a fund or company does not invest his own funds in the companies whose shares he acquires.

Venture capitalist - it is an intermediary between syndicated (collective) investors and the entrepreneur.

This is one of the most fundamental features of this type of investment. On the one hand, the venture capitalist independently decides on the choice of a particular object for investment, participates in the work of the board of directors and in every possible way contributes to the growth and expansion of the business of this company.
On the other hand, the final decision on investment is made by the investment committee representing the interests of investors. Ultimately, the profit received by a venture investor belongs only to the investors, and not to him personally. He has the right to count only on part of this profit if he owns part of the business.

These principles were laid down at the initial stage of the formation of venture capital by the founding fathers of this business - Tom Perkins, Eugene Kleiner, Frank Caufield, Brook Byers and others.

In the 50s and 60s, they developed new fundamental concepts for organizing financing: creating partnerships in the form of venture funds, collecting money from limited partners and establishing rules for protecting their interests, using the status of a general partner. This organizational design of the investment process was innovative for America in the mid-20th century and created a very significant competitive advantage.

Tom Perkins himself described the process this way: “Looking back, I think what we invented then was right. First of all, we always remembered and were aware that our limited partners were the source of our capital, Therefore, we initially developed a number of rules that protected their interests. For example, to this day, no general partner can have a personal investment in a company in which the partners may have an interest, even if they eventually withdraw from it. This principle ensures that there is no conflict between our personal interests and our interests as partners. Even in the event that one of us, as a member of the board of directors, has the opportunity to purchase part of the shares at a preferential price, we are obliged to transfer them to our partners in order to do so. they could also benefit from it. Moreover, unlike other venture capital funds, we never reinvested profits. All profits were immediately distributed to our limited partners, and thus all of our funds ceased to exist. Our investors liked it. Another principle was that newly created funds were not allowed to invest in companies where our earlier funds had invested..."

These principles remain largely unchanged to this day. The organizational structure of a typical venture capital institution is as follows.
It can be formed either as an independent company, or exist as an unregistered entity as a limited partnership (something like a “full” or “limited” partnership, using Russian legal terminology). In some countries, the term "fund" refers to an association of partners rather than a company as such. The fund's directors and management staff may be employed by the fund itself or by a separate "management company" or fund manager providing services to the fund. The management company is generally entitled to an annual management charge, typically up to 2.5% of the investor's initial commitments.

In addition, the management company or individuals, employees of the management staff, as well as the general partner, can count on the so-called “carried interest” - a percentage of the fund’s profit, usually reaching 20%. More often than not, this interest is not paid until investors have been fully reimbursed for their investment in the fund and, in addition, have received a predetermined return on their investment.
In the case of a limited partnership, the founders of the fund and investors are limited partners. The general partner in this case is responsible for managing the venture fund or monitoring the work of the manager. A limited partnership is tax-free. This means that it is not subject to taxation, and its participants must pay all the same taxes that they would pay if their income or profits came directly from the companies in which they independently invested their funds.

1.2. Features of venture financing

Venture financing is associated with mutual investments in shares, that is, with risk and stock market play.

A venture capitalist does not invest directly in a company, but in its share capital, the other part of which is the intellectual property of the founders of the new company.

Investments are made in companies whose shares are not yet listed on the stock exchange.

Venture capital is directed to small high-tech companies focused on the development and production of new high-tech products.

Venture capital is provided to new high-tech companies for a medium to long term and cannot be withdrawn by the venture capitalist at his own request until the end of the company's life cycle.

Venture capital funding is provided primarily to companies with potential for growth, rather than to companies that are already generating high profits.

Venture capital is used to support non-traditional (new and sometimes completely original) companies, which, on the one hand, increases risk, and, on the other, increases the likelihood of achieving extremely high profits.

Investing venture capital in exclusive small high-tech companies is dictated by the desire not only to obtain higher income compared to investments in other projects, but also by the desire to create new sales markets, taking a dominant position in them.

Venture investments are not provided forever, but only for a certain time.

Venture financing is a kind of loan to new companies, a long-term loan without guarantees, but at a higher interest rate than in banks.

A venture capitalist investing in a new small company must decide in advance how he intends to exercise his right to profit. In other words, it must determine how to exit the investment at the end of the life cycle of the financed company (in 5-7 years).

As a company develops, its assets and liquidity increase both due to the emergence of demand for unquoted shares and due to the emerging competition between those wishing to acquire a new profitable business.

The success of the development of an invested small company is determined by the increase in the price of its shares, the reality of a profitable sale of the company or part of it, as well as the possibility of registering the company on the stock exchange with the subsequent profitable purchase and sale of shares on the stock market.

The mutual interest of the company's founders and investors in the successful and dynamic development of a new business is associated not only with the likelihood of receiving high income, but also with the opportunity to become a participant in the creation of a new progressive technology that stimulates the scientific and technological progress of the country.

The role of the investor in the successful development of a new company is not limited to the timely provision of venture capital, but also includes simultaneously investing his business experience and business connections that contribute to the expansion of the company’s activities, the emergence of new contacts, partners and markets.

However, in addition to focusing on small, successfully developing enterprises with the prospect of rapid growth, venture capital is also characterized by a number of additional features.
Here are some of them.
Since for the profitable implementation of investments made in venture enterprises, a new high-tech company must enter the stock market to sell shares, the owner of the funds invested in the company is not interested in dividends, but in the increase in capital itself. Typically, venture capitalists, when investing in venture capital, want to increase their capital by at least 5-10 times in 7 years. Moreover, since a venture enterprise can enter the stock market for the first time in the best case scenario 3-5 years after investment, the venture capitalist does not expect to make a profit before this period. And throughout this entire period, the venture capital invested in the company is illiquid, and the real amount of profit becomes known only after the enterprise enters the stock market, when venture capital investors receive income by selling their block of shares to those interested for an amount significantly exceeding the amount of funds initially invested in the company.
And this “excess” can be quite impressive. For example, in Russia, one small scientific team, thanks to a more than modest investment (only a few thousand dollars), created the drug "Thymogen", which turned out to be a powerful immune stimulant, in which several countries showed interest at once. In the end, only the license for its production itself was sold to the United States for several million dollars. Not a single industrial project, or even the financial and banking frauds that flourished in Russia until a certain time, can provide such a profitability - several thousand percent. Only a venture business can provide such incredibly high profitability.
A very characteristic feature of venture financing is that the investor almost never seeks to acquire a controlling stake in the company, which is fundamentally different from a “strategic investor” or “partner.” The investor mainly takes on financial risk, and shifts such types of risks as technical, market, managerial, price, etc. to management, which has a controlling stake in the company.
Based on the nature of venture entrepreneurship, almost any investment in any stage of development of new companies is a high-risk financial operation, the degree of risk of which, combined with courage and the ability to wait, can only be compensated by the high profitability of the invested high-tech company in the later stages of its development.
Since venture investments are high-risk, and in the event of unsuccessful development of the company, the investor loses all invested funds, venture capitalists, in order to reduce risks as much as possible, strive to directly participate in the management of the enterprise by serving on the Board of Directors. This also explains the fact that venture capitalists are often directly involved in the selection of objects for investment, as well as the fact that they always simultaneously carry out several venture operations, that is, they work with new, existing, and prepared for sale companies .
To minimize risk, venture capitalists typically spread their funds across multiple projects, while multiple investors may back a single project. For this purpose, venture financing uses a phased allocation of resources in the form of small portions (tranches) or, as they say among venture businessmen, through a “drip”, when each subsequent stage of the enterprise’s development is financed depending on the success of the previous one.
And finally, the owners of venture capital, directing investments to places where banks (by charter or out of caution) do not dare to invest, not only receive ordinary or preferred shares, but also stipulate a condition (in the case of purchasing preferred shares) according to which the investor has the right at a critical moment to exchange them for simple ones in order to thereby acquire control over a “limping” company and try to save it from bankruptcy by changing the development strategy. And this is quite justified, since venture capitalists take great risks, turning their funds into shares of other companies, and counting on high profits, characteristic of the most successful high-tech companies, whose share prices increase several times over 5-7 years.
Since the decisive role in the success of an enterprise often belongs not so much to the idea underlying the product and technology, but to the quality of enterprise management, the venture capitalist delves less into the intricacies of a scientific idea, preferring to conduct a detailed assessment of the potential capitalization of this idea and the organizational abilities of the leader and management of the company .
The venture capitalist works with the invested company until it not only gets back on its feet, but also becomes attractive to potential buyers. From this moment on, yesterday’s owner of the invested funds, and now who has become the owner of a package of popular shares, considers his functions exhausted and exits the investment, freeing up capital “frozen” for several years and receiving a long-awaited profit.
To do this, the venture capitalist has two fundamentally possible options:
- or the sale of shares on the stock market, which is preceded by an initial public offering (IPO);
- or direct sale of the company or its part to the buyer who is ready to purchase it at a price that provides the investor with the amount of profit he has planned. After which the venture capitalist partes forever or temporarily with the company with which he “lived” for 5-7 years. And, as practice shows, he did not live in vain.
And despite the fact that, by its nature, venture financing is necessarily associated with risk, it is the excessive risk of financing an unknown company that is the most significant limiting factor for a potential investor considering where to invest free money more profitably: buy shares in an oil company, invest money in a new company , developing the technology of tomorrow, which is obviously risky, or put money in a bank at a low, but guaranteed interest rate.
However, in principle there cannot be completely risk-free financial transactions - there are many examples in life when oil companies go bankrupt, and the most seemingly reliable banks turn out to be bankrupt (in this regard, Russians still have too fresh memories of the banking collapses of 1998), and a risk that seemed too great and completely obvious to many is often, in fact, clearly exaggerated. Moreover, it turns out that those who were not afraid to take risks ended up winning big.
Another very characteristic feature of venture capital financing is that venture capital is always sensitive to fashion and follows it relentlessly. Investments are more readily and most often directed to those industries that are associated with the possibility of quick and profitable sales of high-tech products, for which there is already or is just becoming a rush demand that brings the greatest profit.
For example, in the 80s of the last century, a craze for CD “seedroms” began, and immediately venture capitalists began to readily invest large amounts of money in this industry and on conditions favorable to companies. Then this fashion began to fade, and the influx of investment dried up. The same picture was observed when the craze for mobile phones appeared. The same thing will happen in the near future with the previous knowledge-intensive services that provided Internet access. Undoubtedly, after a short time, software for personal computers will no longer bring the same profits, and as a result, venture investments in this industry will be significantly reduced, because there are no and cannot be eternally attractive industries in the real sector of the economy for venture financing. The only thing that is eternal is the desire of venture capitalists to increase their assets.
Therefore, the conclusion is quite legitimate: venture financing will always be attractive to those who are ready for a high degree of risk, the initial illiquidity of the company’s assets and the long-term “freezing” of a certain part of their capital for the sake of bringing a scientific and technical idea to life, meeting the new needs of humanity and subsequent unguaranteed receipt excess profits.
Thus, venture financing is a unique type of investing in new high-tech companies to ensure their formation, growth and development with the aim of making a profit if the project is successfully implemented. That is, this is a high-risk investment of private capital in high-tech small companies capable of producing knowledge-intensive products or services in high demand in the future.
However, it is still not entirely correct to equate venture financing with high-risk financing, since in general any financing, including the basic provision of a loan, and even the decision to lend money to a friend, is also a certain risk.

1.3. The essence of venture financing.
Today, very few domestic firms and entrepreneurs practice attracting venture capital. According to sociological surveys, only a small portion of entrepreneurs have an idea about venture investment. An even smaller portion has objective and reliable information about the mechanisms of venture investment. Therefore, there is a need to popularize venture investment, teach venture financing methods, and attract venture capital.
Venture capital is an economic instrument used to finance the start-up of a company, its development, takeover or buyout by an investor during ownership restructuring. The investor provides the company with the required funds by investing them in the authorized capital and (or) issuing a related loan. For this, he receives an agreed share (not necessarily in the form of a controlling stake) in the authorized capital of the company, which he retains until he sells it and receives the profit due to him.”
The essence of venture capital is manifested through its functions, which include:
- Research and production function. Aimed at promoting technological breakthroughs and developing innovation and business activity, which ultimately contributes to the economic innovative growth of economic systems.
- Function of commercialization of scientific, technical and innovative activities.
etc.............

Venture funding is an investment in an innovative business in the early stages of its development. Venture capital originated in the United States and has become widespread throughout the world. This type of financing has a high level of risk.

The meaning of venture financing is that the investor invests small, by his standards, amounts in several projects (startups), which can potentially grow to the size of a large corporation. At the same time, the investor understands that the majority of projects will go bankrupt, but those one or two businesses that can grow and scale their activities will cover all the investor’s expenses.

For businesses, venture capital financing is an indispensable means of obtaining money for their activities before the company can generate profits on its own.

Subjects of venture financing

Startups

Companies at an early stage of development act as donors - startups. These companies can exist both at the level of an idea on paper and at the level of a business that has a certain revenue and even profit.

Key characteristics of startups:

1. Innovation;
2. The business model is being tested;
3. The business is in its infancy.

It is necessary to distinguish between startups and small businesses. A flower shop or bakery is not a startup because it uses proven, well-known business models. Also, startups are not the innovative divisions of large corporations, since these enterprises have a long-established business model and innovation is only a part of their business.

Most often, startups arise in the IT industry due to the general innovativeness of this industry, as well as the low barrier to entry into the Internet business. Young enterprises are also emerging in a number of other knowledge-intensive industries: pharmaceutical, engineering, biological, etc.

Investors

Venture investors are divided into types presented in the table.

Name Organizational form Characteristics

Business angels Private investors or groups of investors Fund start-ups at the earliest stages of development (starting with an idea)

Pre-seed and seed funds Business structures Finance start-ups in the first stages of testing a business model

Venture funds Large business structures Provide financing at the stage of scaling the business model

Business angels are wealthy people who invest their money in startups in hopes of making a profit. There are business angels who invest professionally and have made this their main occupation. There are also angels on the market, for whom investing in innovative companies is just a way to diversify their investment portfolio. For startups, professional business angels with industry expertise are preferable, because they will be able to provide a young company not only with financing, but also with connections and recommendations for business development. A good business angel, on the one hand, participates in the management of the company, on the other hand, allows startups to make decisions independently. The most famous business angels in Russia:

Igor Ryabenky;
Arkady Moreinis;
Pavel Cherkashin;
Alexander Galitsky.

Venture capital funds are investment funds that invest in startups at various stages, from pre-seed to late rounds of venture capital funding. The purpose of the fund is to make a profit.

The activities of any fund can be divided into the following stages:

The fund attracts funds from a number of investors, including wealthy individuals, business structures and sometimes budget funds.
The fund analyzes the market and invests money in several startups (usually at least 10) by purchasing shares in these companies. At the same time, the prospects of the business model, the personalities of the founders, and the financial performance of the young company are analyzed.
The fund takes part in the management of funded startups, which are called portfolio companies. The fund's task is to bring the maximum number of its portfolio companies into profit. The investment cycle of a venture fund is 4-7 years.
The Fund exits from portfolio companies. This is the most important stage in the fund’s activities, because right now it is making a profit. The way out is to sell the shares purchased by the fund at a significantly higher price, because the startups have grown. The difference in the price of buying and selling shares in successful startups can vary tens or even hundreds of times.

In the activities of funds, the stage of ruin of some portfolio companies is inevitable. But if out of 10 of the fund's portfolio companies, in each of which the fund invested $100,000, at least one turns out to be Facebook or Twitter, the fund will receive a profit that will compensate for its investments in unprofitable companies. The fund's task is to compose an investment portfolio in such a way and manage it in such a way as to ultimately receive income.

There are also funds of funds - these are large organizations that finance and manage venture capital funds. In Russia, such an organization is the state fund RVC - Russian Venture Company. This structure not only invests in promising startups, but also acts as an institute for the development of the venture capital industry in our country.

The most active venture funds in Russia:

Altair Capital;
Almaz Capital;
Runa Capital
TMT Investments
Flint Capital
Maxfield Capital
ImpulseVC

Other structures

In addition to investors and startups, there are a number of public and private organizations that provide infrastructure and information support to the venture capital industry.

Business incubators provide startups with the opportunity to rent an inexpensive office or co-working space, provide technical infrastructure and information support. They often act as a liaison between startups and investors. Business incubators are either government-owned and provide services for free, or charge startups a small fee. As a rule, incubators do not require a share in the business for their assistance.

Startup accelerators help young companies at a very early stage of development. The activities of accelerators are somewhat reminiscent of the work of business angels, but accelerators do not always take a share. Accelerators perform, first of all, an educational function. A typical accelerator recruits several startup teams into training groups and trains them for 3-6 months, helps them bring a product to market and test their business model, provides them with the necessary connections, and then introduces them to investors. The goal of accelerators is to bring startups to the market that are ready for investment from angels or funds.

Investment brokers and consultants work with both startups and investors. They provide market participants with information, introduce them to each other, and help startups “package” their business idea and present it correctly to the investor. Among investors, the attitude towards such consultants is twofold; some investors believe that if someone leads startup founders “by the hand,” then such startups will not be successful.

Industry organizations and associations. There are a number of associations and organizations on the market that help both investors and startups.

The following examples can be given:

1. RAVI - Russian Association of Venture Investment. It unites leading market players and aims to promote the development of the venture capital industry in our country.

2. Rusbase is a platform that brings together Russian investors and startups.

3. Crunchbase is the world's largest database on the venture capital market, including information on young firms and investors.

Stage Characteristics Types of investors Average investment volumes

Pre-seed A startup exists at the level of a business idea. Business angels Up to $10,000

Seed Startup testing a business idea Business angels, seed funds $10,000 - 50,000

Venture rounds Startup scales business idea Venture funds From $50,000

The parameters of the stages of venture financing differ somewhat in different literature, but we can clearly divide the stages at which an unrealized business idea or an idea at the initial level of implementation is financed (pre-seed and seeding) and the stages of financing of already mature startups that scale their business model (investment rounds).

In the classical model, venture financing is followed by Private Equity (direct investment), and after that - IPO. Private equity funds invest in mature organizations with a tried and proven business model with the goal of further scaling those businesses. IPO (Initial public offering) is an entry into the stock exchange, the company's issuance of its own shares and the transformation of the company into a public one. Any venture investor is interested in returning their funds, and IPO or Private Equity are good tools for this.

Impact on economics and technology

Venture financing is a tool that helps develop young innovative companies that will never be given a loan by a bank and that do not have serious start-up capital. Venture played a colossal role in the development of global technologies, and it was thanks to venture financing that such giants as Google, Facebook, Twitter and a number of other companies appeared. In Russia, the venture market is in its infancy.

One of the forms of financing investment projects by creating a new enterprise designed specifically for the implementation of an investment project is venture financing. The concept of “venture capital” (from English. venture- risk) means risk capital, invested primarily in new areas of activity associated with high risk. Venture financing allows you to raise funds for the initial stages of implementing investment projects of an innovative nature (development and development of new types of products and technological processes), characterized by increased risks, but at the same time the possibility of a significant increase in the value of enterprises created to implement these projects. In this respect, venture investment differs from financing (by purchasing an additional issue of shares, shares, etc.) of existing enterprises, the shares of which can be acquired for the purpose of further resale.

Venture financing involves raising funds for the authorized capital of an enterprise from investors who initially intend to sell their share in the enterprise after its value increases during the implementation of the investment project. Income associated with the further functioning of the created enterprise will be received by those persons who purchase its share from the venture investor.

Venture investors (individuals and specialized investment companies) invest their funds with the expectation of receiving significant profits. First, with the help of experts, they analyze in detail both the investment project and the activities of the company offering it, financial condition, credit history, quality of management, and the specifics of intellectual property. Particular attention is paid to the degree of innovation of the project, which largely determines the potential for rapid growth of the company.

Venture investments are carried out in the form of acquiring part of the shares of venture enterprises that are not yet listed on stock exchanges, as well as providing loans or in other forms. There are venture financing mechanisms that combine different types of capital: equity, loan, entrepreneurial. However, venture capital generally takes the form of equity capital.

Venture capital usually includes small enterprises whose activities involve a high degree of risk in promoting their products on the market. These are enterprises that develop new types of products or services that are not yet known to the consumer, but have great market potential. In its development, a venture enterprise goes through a number of stages, each of which is characterized by different opportunities and sources of financing.

At the first stage of development of a venture enterprise, when a product prototype is created, minor financial resources are required; At the same time, there is no demand for this product. As a rule, the source of financing at this stage is the own funds of the project initiators, as well as government grants and contributions from individual investors.

The second (starting) stage, at which the organization of a new production takes place, is characterized by a fairly high need for financial resources, while there is still practically no return on the invested funds. The main part of the costs here is associated not so much with the development of product production technology, but with its commercial component (formation of a marketing strategy, market forecasting, etc.). It is this stage that is figuratively called the “valley of death”, since due to the lack of financial resources and ineffective management, 70–80% of projects cease to exist. Large companies, as a rule, do not participate in investing in a venture enterprise during this period of its development; The main investors are individuals, the so-called angels or business angels, who invest personal capital in the implementation of risky projects.

The third stage is the early growth stage, when the product begins to be manufactured and marketed. There is a certain profitability, but the capital gain is not significant. At this stage, the venture begins to be of interest to large corporations, banks, and other institutional investors. For venture financing, venture capital firms are created in the form of funds, trusts, limited partnerships, etc. Venture funds are usually formed by selling a successfully operating venture enterprise and creating a fund for a certain period with a certain direction and volume of investment. When creating a fund in the form of a partnership, the organizing firm acts as the main partner; it contributes a small portion of the capital by raising funds from other investors, but is fully responsible for managing the fund. Once the target amount is raised, the venture capital firm closes the subscription for the fund and proceeds to invest it. Having placed one fund, the firm usually moves on to arrange subscriptions for the next fund. The firm may manage several funds at different stages of development, which helps spread and minimize risk.

At the final stage of development of a venture enterprise, venture investors withdraw from the capital of the companies they finance. The most common methods of such an exit are: repurchase of shares by the remaining owners of the financed company, issue of shares through an initial public offering, or takeover of the company by another company. In the United States, successful venture investments usually result in a listing of shares on NASDAQ (the largest stock exchange for trading shares of young innovative companies).

With the development of new technologies and widespread distribution of manufactured products, venture enterprises can achieve a high level of production profitability. With an average rate of return on government securities of 6%, venture investors invest their funds expecting an annual return of 20–25%.

Thus, based on the nature of venture entrepreneurship, venture capital is risky and is rewarded due to the high profitability of the production in which it is invested. Venture capital has a number of other features. These include, in particular, investors' focus on capital gains rather than dividends on invested capital. Since a venture enterprise begins to place its shares on the stock market three to seven years after investment, venture capital has a long waiting period for market realization and the magnitude of its growth is revealed only when the enterprise enters the stock market. Accordingly, the founder's profit, which is the main form of income for venture capital, is realized by investors after the shares of the venture enterprise begin to be quoted on the stock market.

Venture capital is characterized by the distribution of risk between investors and project initiators. In order to minimize risk, venture investors distribute their funds between several projects, while at the same time one project can be financed by a number of investors. Venture investors, as a rule, strive to directly participate in the management of an enterprise and make strategic decisions, since they are directly interested in the effective use of invested funds. Investors control the financial condition of the company and actively contribute to the development of its activities, using their business contacts and experience in the field of management and finance.

The attractiveness of investing capital in venture enterprises is due to the following circumstances:

acquisition of a stake in a company with likely high profitability;
ensuring significant capital growth (from 15 to 80% per annum);
availability of tax benefits.

The volume of venture financing in industrialized countries is growing dynamically. Venture capital is acquiring a decisive role in economic development. This is due to the fact that it was thanks to venture enterprises that it was possible to implement a significant number of developments in the latest areas of industry, to ensure rapid re-equipment and restructuring of production on a modern scientific and technical basis.

The largest volume of venture investments in the world comes from the United States (about $22 billion), followed by Western Europe and the Asia-Pacific region by a significant margin. In Russia, venture capital is in its infancy: there are currently 20 venture funds operating here, managing funds worth about $2 billion.

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