Venture investment. Advantages of venture investments for the investor

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Today we are considering such concepts as venture investments and a venture investor, the advantages and disadvantages of such investments.

Venture capital investment is a type of investment intended as an investment of cash in start-up or growing organizations, where the activity is caused by a high or moderate level of risk. As a rule, financial instruments are implemented in organizational structures where they specialize in innovative, engineering and research developments, development of technologies that need the market.

Investments are divided into certain stages:

early
stages of growth and expansion

Venture investments are predominantly invested in the early stages, where they fall into three subcategories:

Presowing. A significant amount is allocated here for the development of concepts for the future business.
Sowing. Funding is provided to complete product development and initial marketing.
First. Funding is provided to start commercial production and sales.

Risk is the main difference from more traditional investing I. After all, banking organizations, due to high risks, will not provide direct credit assistance, and private investors or venture funds will become the main source of financing.

What is a venture fund?

Venture fund is an investment direction fund focused on interaction with “new generation” companies, or with start-ups. By the word startup, we mean a project. Venture funds have found their niche for a long time, because the legislation of most countries allows such risky investments.

Both individuals and companies, pension funds, banking organizations can become participants in such a fund. As a rule, the founders of a venture company often contribute their share of the money.

Initially, the fund's portfolio can include from 8-13 companies. For a long time (5-8 years) objects develop and grow. After organizations become successful in their activities, the venture fund sells its shares through shares, or sells it to a private investor.

On the basis of cooperation with the fund, there is a contract (agreement) on partnership on limited rights. Investors who invest in the fund are called "LPs - limited partners" - limited partners, and persons who invest the accumulated funds of the fund in developing organizations are called "GPs - general partners" - main partners.

In 2005, venture capital funds completed a record 5,000 deals in the US, with a total investment of about $7 million.

Venture investor

Venture investor is a common face
company invests with
high potential opportunities. Such investors are called "Business Angels". As a rule, such “angels” are the main source of funding and assistance for a startup, but if the project is not successful and fails, the venture investor will not be able to return his spent money.

The subject for investment can be not only projects, but also unrealized ideas. At the same time, business angels at a professional level try to control their risks as much as possible and take part in the project in every possible way, namely:

determine an effective startup strategy;
personal vision and accumulated experience;
apply all kinds of connections;
attract partners and future customers (users);

Often, investors act together, pooling their resources. Thanks to cohesion, the risks of venture investments will be reduced significantly.

In our country, such investments are not as developed as in the USA or in Europe, where about 50,000 transactions are carried out annually with a total volume of $500,000.

According to Igor Gladkikh, in Russia, angel investors try not to advertise themselves and often execute grant programs. But there are some associations of venture investors in the Moscow region and in the eastern regions. Thanks to statistics conducted in 2015, the majority of business angels invested in projects in the information technology industry. Well, we hope that they fully justify themselves.

Advantages and disadvantages

Probably, initially it is necessary to focus on the fact that venture investors are people who have not a small income, an average of 150-250 thousand dollars. The venture investment market attracts, first of all, with high profitability, compared to the stock exchange or real estate. It is worth considering in more detail what advantages and disadvantages "angel" investments have.

Advantages:

Venture investors give impetus to the development of new technologies, scientific discoveries and
inventions.
They can act both individually and together with several venture investors
They expect their money back in 3-4 years. This gives a definite plus, since the object will have enough time to realize itself during this time.
For their investments, they claim only a part of the shares of the company with voting rights
The financial market is so wide that it allows you to find a business angel on any continent if a startup manages to interest him.

Flaws:

Financing occurs only at the initial stage of the organization (project).
Lack of wide reputation. Subsequently, they may not turn out to be angels, but “devils”.
Careful study of the object and making the final decision take a lot of time. This can take anywhere from six months to six months.

As a rule, business angels are people with suggestible capital: successful businessmen and investors. Most of them have already gained professional experience, they can clearly analyze and make forecasts. But no one excludes the possibility of becoming a venture investor and investing small amounts in projects of people we know or are close to.

And finally, an interview with a venture investor from Ukraine:

Venture capital investment has helped many companies reach a high level and brought a lot of money to investors who believed in young and talented professionals. But this does not change the fact that this activity is inevitably associated with high risks.

Venture investments and venture business

Such investments can be characterized as the investment of financial resources in a specific company, project or idea, which are at the very beginning of their development and implementation. Of course, such an investment is associated with high risks. But at the same time, many investors are ready to act, because if the project develops successfully, they will receive significant profits.

We can say that the risk that accompanies direct venture investments is proportional to the level of possible income.

As a rule, progressive developers or novice businessmen form an actual idea, which in the future can bring a very high income. But, as is often the case, they do not have the necessary funds to launch the project. In this case, startups turn to investors, presenting their idea to them. Those who agree to finance a risky project with a bright future become co-owners of the newly formed company.

So venture capital investments are one of the ways to earn fast and risky money. At the same time, it is also possible to purchase shares of a company that has recently entered the stock market. There is also an expectation that the value of securities will increase significantly over time.

Types of venture investments

In principle, it would be logical to distribute by type not the investments themselves, but the companies that apply for them.

You can start with a startup. This is a company that was recently formed and, accordingly, does not have a long market history. Such organizations are in need of funding, due to insufficient funds for research and development activities and the organization of subsequent sales. Venture investments in startups are one of the most popular areas.

Investing in a project that is at the idea level. In this case, there is also a need for additional research and testing to create pilot samples of the product before it is brought to the market.

Investments can also be attracted by those companies that are already fully functioning, but are experiencing a crisis of funds needed to expand sales and production. Financing is often used to increase fixed assets of working capital or to conduct market research.

Another object of interest for investors may be an organization with finished products, but at the same time being at the initial stage of commercial implementation.

As you can see, venture investments are a fairly popular investment direction.

Venture business

This term should be understood as investments, which in most cases have the form It is invested, as a rule, in fast-growing enterprises that demonstrate significant potential. Such funds are often directed towards the implementation of topical technological innovations.

Such funding is focused primarily on the commercialization of the results of scientific research in high-tech and science-intensive areas. Prospects for such investments are not guaranteed, and the risk, of course, is significant.

In this case, venture capital investments are the type of financing in which investors are not focused on receiving dividends. Their goal is to sell their stake in the company after its market value is high enough.

With regard to the process of selling such a share, it can be put up on the open market. Another company developing in the same area is also capable of buying it. The interest of business partners, who will be happy to increase the percentage of their investments in the framework of a particular project, is not ruled out.

Entry threshold for investment

In order to understand the essence of venture investments, it is worth considering the mechanism of their action, which may have certain features. One of them is the high entry threshold.

We are talking about the following fact: venture investment requires a minimum of 10 thousand dollars, and in some cases several million. Therefore, for those who have a couple of thousand, it makes no sense to consider such a prospect.

But at the same time, there is an alternative for those who have a little money and are willing to risk it. This opportunity is provided by joint investment institutions or funds. Each such fund has a manager whose activity is limited to the accumulation of funds from small investors and their subsequent investment in a promising project. The risks do not become less.

A tangible and obvious disadvantage of such a scheme is that all fund participants are forced to rely on the competence of the manager, not being able to make their own decisions.

Lack of control and long investment horizon

Another feature of venture investments is that none of the persons financing the project seeks to own or manage the company. The only thing they agree to is the risk of losing investment. As for the responsibility for the development of the project, it falls mainly on the shoulders of top managers. But if the company is developing rapidly, and investors fix the wrong, in their opinion, facets of the strategy, then they can become directors to exercise personal control over the organization's activities. But this is more the exception than the rule.

As for the long investment horizon, we are talking about the inability to withdraw the invested funds at any convenient time. This is due to the fact that almost always the entire amount of investments is mastered by the project, and they can be received only if the company manages to stay on the market. Initially, it should be understood that some companies may need several years from the date of launch to enter the stock market.

No guarantees

Venture investment is a type of investment in which players receive either all or nothing. This means that after the fact of financing, the investor can wait years for the company to develop and eventually sell his stake for several million dollars. But there is a risk that after a long wait, the project will be unprofitable and all investments will be lost. In the overwhelming majority of cases, the real profit of startup participants can be determined only after the company's shares are publicly placed on the stock exchange. As a result, the price of the company's shares will be determined by its

Situation in Russia

If we consider Russian venture investments, it is worth noting that this direction of financing cannot be called particularly popular in the CIS. Initially, even the most promising projects within the Russian Federation were invested mainly by foreign investors. But at the moment, Russian ones have already formed and are developing this type of investment. For example, OJSC Russian Venture Company, together with the REVI Association, monitors various funds on an ongoing basis and provides qualified assistance in their development.

Various specialized presentations, forums and exhibitions are organized for these purposes.

Conclusion

Venture capital investment is certainly popular in the world, as it allows bright companies to develop and often brings fabulous returns. But it is worth remembering that many investors have lost funds invested in seemingly promising projects. Therefore, we can conclude that this path is for experienced businessmen.

Venture investment is the investment of funds, which is equity capital, in promising, fast-growing enterprises. Such investments are one form of technological innovation.

In theory, there is more than one definition of the concept of "venture investment", however, they all proceed from its functional task: to promote the development of a particular business by injecting a certain amount of financial assets, in exchange for which shares or part of the authorized capital are issued.

Benefits and risks of venture capital investment

Venture investments are directly related to investing in shares, and where there are shares, there is a certain amount of risk.

Investments are made in companies whose shareholdings have not yet been listed on the stock exchange. so-called. "venture capital" is invested in new developing companies for the medium and long term. There is no possibility to withdraw it at the investor's request before the end of the campaign life cycle.

Venture capital is provided mainly to companies with a clear potential for their development, and not to those companies that have already taken their place in the market and bring high profits.

Venture financing is aimed at supporting new (unusual and sometimes exotic) companies, which increases the likelihood of obtaining ultra-high profits, but on the other hand increases the risk.

A venture investment is a kind of loan for new companies, a long-term loan, not backed by guarantees, but with a higher interest rate than in banks.

With the development of the company, its assets and liquidity grow, which is due to the emergence of demand for shares (unlisted), as well as the competition among those who want to acquire a very profitable business.

Although, in addition to focusing on successful small enterprises with the potential for rapid growth, venture capital also has a number of additional features.

Here is a short list of the main distinguishing features.

Since, in order to realize investments with a profit, namely those made in venture enterprises, it is necessary that a new high-tech company enter the securities market to sell shares, the owner of the funds invested in the company is not interested in dividends, but in the level of capital increase. Venture capitalists who have invested in venture capital companies tend to want to increase their capital by at least 5-7 times over 7 years. Since the entry of a venture enterprise into the stock market can be carried out, at best, after 4 years from the moment of investment, and, realizing this, the venture capitalist does not expect to receive a profit before this period. During this period, this capital is illiquid, and the amount of profit will become known only after the company enters the securities market, when their block of shares is sold to those who wish for an amount significantly exceeding the amount of funds originally contributed to the company.

Venture investment in Russia

And this "excess" can sometimes be quite significant. For example, in Russia, one small research team, thanks to a very modest investment (several thousand US dollars), managed to create the drug "Timogen", which has powerful immunomodulatory properties, interest in which was shown in several countries at once. As a result, only one license for the production of the drug was sold in the US for several million dollars. Such a profitability of several thousand percent cannot be given by any production project, and even financial and banking machinations common in Russia in the recent past. Such an incredible increase in profits can only be caused by venture capital business.

A characteristic feature of venture investments is that the desire of the investor to acquire a controlling stake in the company is practically absent, which fundamentally distinguishes him from a partner or a strategic investor. The investor assumes financial risk, and other types of risks: market, technical, price and management, etc., are assigned to management, which has a controlling stake in the enterprise.

Given the nature of the venture business, almost any such investment, regardless of the stage of development of the new company, is a financial transaction with a high degree of risk, the degree of which, combined with courage and patience, can only be justified by the high profitability of the invested high-tech enterprise in the later stages of its development.

Taking into account the degree of risk, and the fact that in the event of an unsuccessful investment in the company, the investor will lose all invested funds, capital owners, in order to reduce risk, are directly involved in the management of the company, being members of the board of directors, as well as when investing by business angels. For the same reason, venture capitalists are often personally involved in the selection of investment objects, and still always strive to conduct several venture operations at the same time, therefore, they are ready to work with both new and existing ones, as well as companies preparing for sale.

In order to reduce risk, a venture capitalist usually distributes his assets among several projects, although it is possible that several investors support one project. To do this, with the introduction of venture resources, phased financing is used. Funds are allocated in small portions of “tranches”, in the slang of venture businessmen this means “through a drip”, i.e. each subsequent financial injection is possible only after a successful previous one.

Also, venture investors, investing where the bank (for reasons of caution or by the charter) does not decide to invest, receive not just a block of ordinary or preferred shares. But at the same time, they negotiate a condition (by purchasing preferred shares) according to which they will have the right to exchange them for simple ones at the onset of a critical moment in order to similarly gain control over the “chondrous” company and try to take it away from bankruptcy by a radical change in strategy. Such actions are fully justified, because. venture investors take huge risks by transferring their funds to the shares of other companies, hoping to receive high profits, which are characteristic of the most successful companies in the field of high technologies, the share price of which increases several times over 5-7 years.

The decisive role in the success of an enterprise often belongs to the quality of management actions, and not to the fundamental idea that is the basis of the technological process and products. Therefore, a venture businessman pays less attention to the subtleties of a scientific idea, and prefers to thoroughly assess the potential opportunities for capitalization of this idea and the managerial abilities of the head and administrative level of the company.

The venture investor continues to work with the sponsored company until it not only firmly "gets on its feet", but also becomes a "tidbit" for potential buyers. When such a moment comes, the former owner of the invested funds, and now the owner of a popular block of shares, considers his mission completed and exits the investment, releasing funds frozen over several years and receiving a well-deserved profit.

To withdraw funds, a venture capitalist has two very real options:

sell your block of shares on the stock market, for this purpose by first placing the shares in an open subscription "initial public offering-IPO";
or directly sell the company or part of it to such a buyer who offers an amount that provides the investor with his predicted profit. As a result, a venture investor, as a rule, forever says goodbye to the company that was “native” to him for 5-7 years. And judging by the practice of the money, effort and time spent, such a “parting” does not cause sadness.

And, despite the fact that venture investments are inherently risky, it is this excessive risk of investing in an unknown company that represents the most significant limiting factor for a potential investor considering where to invest free capital with the greatest profit. Buy shares in the oil business, invest in a new company that develops the technologies of tomorrow, which is fraught with risk, or put funds in a bank, at least at a low, but guaranteed interest rate.

Although absolutely risk-free financial transactions, in principle, do not exist - life is replete with examples when oil companies also collapse, and the most reliable banks become bankrupt (here Russians remember the collapse of banks in 1998), and that risk, which seemed to many so big and more than obvious, in reality turned out to be clearly exaggerated. In addition, it turns out that those who dared to take risks received a very significant bonus for their risk.

Another very significant feature of venture capital investment is that venture financing is always very sensitive to fashion and takes into account its trends. Most often, investments are made in those industries that are associated with a quick and profitable opportunity to sell high-tech science-intensive products that are already in high demand, or this demand is just emerging and threatens with big profits.

For example, at the end of the last century, a mass enthusiasm for reading CD devices began, and immediately venture capitalists began to invest huge amounts of money in this industry with great willingness and on favorable terms for companies. And with the departure of this fashion, the flow of investment dried up. The same phenomenon was observed when the cell phone craze emerged. It can also be predicted in the near future for services that have ceased to be knowledge-intensive services to provide access to the Internet. Of course, after some time, the production of software for personal computers will lose its profitability, which will also lead to a reduction in venture investments in this sector of the economy, since there are no and in principle no permanent sectors of the economy, forever attractive industries for venture investment. Only the desire of venture capitalists to increase their funds will be eternal.

Based on the foregoing, the conclusion is appropriate: venture investment will always be attractive for those who are not afraid of the initial illiquidity of the company's shares, take a risk, and “freeze” a certain part of their capital for a long time in order to translate an innovative business idea into reality, satisfying the new needs of people and subsequent obtaining excess profits, and not guaranteed.

Thus, this type of investment is a kind of investment of funds in new highly scientific companies in order to ensure their formation, subsequent development and growth in order to receive super profits as a result of the successful completion of the project. That is, this is an investment of private capital in small but promising high-tech companies that in the future will produce high-tech services or products that are in great demand.

But it is not worth drawing a parallel between venture capital investments and financing associated with a high risk, as well as equating them, since any type of financing, including the simplest loan, or lending money to acquaintances, contains a certain amount of risk.

Prepared by the editors: "Business GiD"
www.site

There are many types of investment, differing in terms, industries, properties of capital. One type of investment is venture financing of projects (). What is the peculiarity of this type of investment?

Venture investment belongs to the group of high-risk investments. The essence of these financial injections is that the money is invested in the authorized capital of developing enterprises that are engaged (or are going to be engaged) in the development of high-tech projects.
Large companies that receive stable profits are not interested in investors of this kind.

Structure of venture investment

As already mentioned, this type of financing refers to long-term investments with high risk. All that interests a potential investor is newly created small and medium-sized businesses, whose main task is the development and implementation of new technologies. Of course, provided that these technological solutions will be in high demand in the market in the future. The goal of the investor is to make a profit several times over the money invested in the project in a few years.

Naturally, venture financing is not available to all newly created companies. There is a fairly clear ranking of enterprises that may qualify for funding:

The first are organizations that have a ready-made idea in their assets, but do not have the funds for subsequent research work.
Newly created companies with ready-made technological developments, but not having the opportunity to establish a trial release of the product.
Enterprises whose products have already been tested and are ready to launch products on the market.
Operating enterprises with ready-made technological solutions, launching their products on the market, but in need of financing. Cash infusions are needed to expand the scope of activities, develop new technologies, and conduct additional research.

This classification does not guarantee that all companies that meet the listed data can immediately receive venture financing. In fact, investors are not looking for potential partners. To receive financial injections, it is the newly developing companies that must themselves look for an investor. How does this happen? By searching through acquaintances, friends, the Internet. What you need to provide to the investor: a decent business plan with a development strategy for several years ahead.

If many aspiring entrepreneurs think that with such a business plan you can go to the bank and get a loan, they are greatly mistaken (by the way). The time when such schemes worked remained in the nineties of the last century. Today, not a single bank will undertake to finance a high-risk project that does not guarantee solid profits at the initial stage. Venture investment, while similar to bank lending, differs precisely in that the investor is ready to take risks and invest in such a project.

The investment scheme is quite simple and transparent. Venture financing of investment projects is carried out as follows:

A small business with an innovative project approaches a potential investor. The purpose of the enterprise is to obtain financing for the development and implementation of high-tech solutions that can ensure constant demand in the market. At a minimum, such an enterprise should interest the investor not only with an innovative idea, but also with a competent business plan.
If the investor is interested in the proposal, the details of future cooperation are discussed. Financing can be carried out by injecting cash into the share capital of the company or in the form of loans (for a long period at a minimum percentage). At the same stage, the distribution of future profits is discussed. Features of venture financing are that a potential investor is interested not only in an innovative project that should be financed. Investors pay much attention directly to the organization of the enterprise. After all, it is competent management and the correct distribution of the funds received that ultimately affect the work on the introduction of new technologies.
After the company takes a leading position in the market, the liquidity of the shares increases, and the profit increases, the time comes for the distribution of income. For example, an investor can simply sell his stake to the company at the end of the project (provided that they rise in price). In general, a project can be considered profitable if it is possible to make a profit of 20 to 50% in about 5-7 years after the start of investment.

Types of investors

There are two main types of venture capital investors:

Venture funds, which are formed with the assistance of several investment funds.
Business angels, that is, single investors. Roughly speaking, this category includes large entrepreneurs.

Venture funds have at their disposal accumulated (total) capital, which is distributed among investment projects. All members of the fund are divided into two categories:

The main partners who control and distribute financial flows. The share of the main partners in the venture fund is no more than 20%.
Limited partners who directly invest money in the fund, but do not have the right to dispose of the funds. Their share in the fund can reach 80%.

Venture funds, in turn, are divided into:

Specialized, which finance only in a certain industry or in a certain region (country).
Universal, which diversify financial injections into completely different industries.

Venture capital funds finance a wide variety of companies at different stages of their existence. Such organizations willingly invest in companies that have just opened or in enterprises that are just planning their activities (seed investment). But preference is given to still existing companies that have a ready-made and tested project, the so-called start-up companies. If an existing enterprise plans to expand the scope of activities and enter the market with a new offer, the venture fund will certainly finance such an undertaking.

Today, there are a large number of corporate funds on the market, which unite many small organizations and companies operating in the field of innovative technologies under their wing. The merger of diverse companies enables corporate funds to minimize possible risks by diversifying investment interests.

Now about the so-called business angels. These include large entrepreneurs or wealthy people who carry out venture financing of the same small enterprises and newly created companies. The difference between business angels and venture funds is that the process of obtaining funds from individuals is much faster, the terms of repayment are gentle, and the interest on invested capital is lower than that of funds.

Venture investment risk

Since the main point of investing is to place finance in the equity capital of the organization, the most important risk can be called the possible illiquidity of shares in the future. In a word, where there is a turnover of shares, there is always a risk of shortfall in profit or direct loss.

A venture investor finances an enterprise whose shares are not yet listed on the stock exchange. The peculiarities of venture financing are that such projects are designed for a long period, so it is almost impossible to predict the possibility of making a profit at the initial stage. It all depends on the intuition of the investor himself. Moreover, the investor often cannot withdraw the money invested in the project until the end of the contract.

The risk is also due to the fact that this kind of investment is always aimed at the development and implementation of new technologies, often quite unusual. Such projects, of course, can bring a decent profit, but there is also a high probability of failure of the developed idea.

Venture capital investment is similar to bank lending. The only difference is that the interest in investing is much higher. But this is balanced by the fact that there are no guarantees in such an investment.

Venture investment in Russia

Although it is generally accepted that America is the birthplace of this type of investment, venture financing was almost always present in Russia. The most striking example is developments in the military-industrial complex of Russia. It is thanks to venture financing that the country's military complex has reached significant heights. Naturally, the investment was made not with the support of private funds and individuals, but directly from the state budget.

An attempt to create venture funds in Russia was made back in 1994-1995. For a number of reasons, the development of private investment for the introduction of innovative technologies in Russia did not find a proper response. Venture financing in Russia was carried out by funds that had in their composition the majority of capital of foreign origin. Simply put, the developments successfully brought profit to Western investors, or even went abroad. The reason is the weak material and technical equipment and the lack of tax incentives for Russian enterprises that introduce advanced technologies.

Today, the problems of venture financing in Russia lie in the wrong approach of the investors themselves. The main snag is that the Russian economy is currently not stable, it is not entirely correct to talk about projects that can be implemented in 5-7 years. In addition, funds that could invest funds demand from Russian enterprises not only fresh technological solutions, but also well-established production. Simply put, in order to receive funds from the fund, you need to show the results of the finished product, which has received encouragement from a wide range of buyers. With such an approach, the very idea of venture capital simply loses its meaning.

However, given the presence of many people with high scientific and technical potential, one can hope that there will also be business angels who are able to adequately evaluate the proposed business projects and promote the development of new technologies through venture financing of small enterprises.

Where to invest in the pursuit of super profits? Oil, cars, construction? The answer is somewhat discouraging. Invest in unexpected innovative business ideas, technologies and products in any industry. Such investments are called venture investments. The history of the world economy shows that most of the participants in the Forbes list became such at one time only thanks to venture capital investments. And it is no coincidence. Only new ideas will provide you with a strategic competitive advantage. Like any other way of investing, investing in venture projects has its own characteristics, advantages and disadvantages. Invest wisely!

What is venture capital investment?

Investment in high-risk innovative projects aimed at obtaining excess income V long-term perspective.

This definition contains all the key disadvantages and advantages of venture capital investment.

Innovation

Innovative projects are aimed at finding and bringing to the market a new product (business idea, technology, product or service). There are several options for innovative strategies, in particular:

"New product - new market". It involves the education of new customer needs and the formation of a new market. Example: production in 1976 of the first mass-produced personal computer "Apple" led to the creation of a new market. The best startup ever.
"New Product - Old Market". Assumes a large-scale capture of an existing market with a new product designed to better meet the needs of customers. Example: the creation of the new Google search engine in 1997 turned the market upside down and brought windfall to investors. It is noteworthy that a year after the start of work, Larry Page and Sergey Brin made an offer to Yahoo to sell the search engine, but they refused. And where is Yahoo now?

Risks

The high risks of the project are associated with the innovative nature of the developments and consist in the absence of any guarantees for the return of the invested amounts. The investor must be prepared to lose his money in advance.

Long term

The duration of the project is as follows:

Long discrete investment period (3–5 years). On the way to success, the project goes through several stages, each of which requires cash injections. Only the development stage can last several years.
Long payback period. In some cases - more than 10 years. Target break-even period: 3 years after entering the project or 1 year after the launch of production and the launch of the product on the market.

windfall profits

The purpose for which the venture investor enters the project. The features of venture financing discussed above do not allow the investor to be satisfied with normal market profitability, otherwise the project will not be effective. The target effective annual rate of return is from 25–30 to 100% or more.

The investor expects to receive such profitability not at the expense of a share in current profit (for example, in the form of dividends), but only due to the growth in the cost of the company's capital. The latter is determined by the market price of capital, which is expressed as:

the price of the company's shares on the stock market or;
the price at which a third-party company is ready to buy out a share (if the project did not go to IPO).

Advice! At the pre-final or final stage of the project, you can independently estimate the cost of capital by discounting future cash flows from the project. This value is called strategic. To evaluate it, you will need an accurate understanding of the current revenues that the project generates, as well as potential future revenues (strategic financial plan for 5-10 years).

Other features

Substantial investment. Entry threshold: from 10 thousand dollars to several million. The average check of a venture deal in Russia is about $1 million.
Attachment objects can be:

Low accuracy of forecasts.

Often, a complex transaction structure and a large number of participants (private and public investors, intermediaries in the form of venture funds and management companies, etc.). The importance of legal and organizational issues.

If you invest in only one project and have a strategic interest in it, then you turn into a venture capitalist. In this case, it is vital for you to ensure the fullest possible control and management (for example, become a CEO or join the board of directors).

If you do not have a strategic interest, do not limit yourself to one project, but collect their portfolio, then you become a venture businessman. In this case, you must have internal readiness and focus on a timely exit.

The average life cycle of investments in venture business usually does not exceed 5-10 years. During this time, venture organizations must achieve such economic results that would allow investors to fully return the funds and exit the business with a profit.

Stages of venture investment

Pre-sowing stage

Search for new business ideas, technologies, products, projects under development or launch, promising young companies. It will take time and money. Selection criterion: the possibility of obtaining excess profits in the long term. Directions of analysis:

Analysis of the possibility of scientific and technical implementation.
Marketing feasibility analysis.
Analysis of economic feasibility.
Risk analysis.
Analysis of the necessary financial resources.
Analysis of personnel potential. The competence of project managers (confidence in success), the presence of a cohesive team, the ability to attract qualified specialists to the project.
Analysis of the legality and legal parameters of the project (required patents, licenses).

Seed stage (feed)

Investor risk: maximum.

Completion of research and development and preparation for launch. At this stage it is important:

Create a product prototype.
Provide patent protection.
Form a project team.
Think over the legal and organizational structure of the project: the composition of investors, participants and management bodies.
Decide on a strategy and formalize strategic business plans: marketing, production, financial.
Assess the adequacy of funding (if necessary, use alternative sources of venture capital funding).
Develop a schedule for launching the project.