Venture investment is ... Venture investment market

Venture investment is a relatively young concept for Russian investors. The tool is just entering our life and is gaining momentum. It is intended for the development of promising areas of activity, the implementation of innovative and innovative ideas, the authors of which do not have their own funds for their implementation. That is, in essence, this is the contribution of personal capital to the business of another person in the hope of receiving future income.

The concept

Venture investment is a kind of investment in a company that involves investment at the beginning of its formation. Most of these are risky investments when it is not possible to calculate potential profits. In this case, business is innovation, innovative ideas, completely new technologies, for the implementation of which no bank will provide a loan.

The bottom line: an investor invests in a promising entrepreneur who has an innovative idea, and he wants to bring it to life. In this case, the investor receives a share in the new enterprise, the actual value of which cannot be determined, since there is essentially no business yet. For example, if you buy shares of an existing company, then at any time they can be sold, having seen that its activities become unprofitable. And this will return at least part of the investment.

In the case of venture capital investments, it is impossible to sell shares, since they cost nothing, because, we repeat, the company does not conduct any activities or business yet. The entrepreneur in whom the money is invested can either create a profitable company or burn out without realizing his ideas.

Also, the volume of venture investments to the end cannot be calculated accurately, because in most cases the market for products manufactured by the entrepreneur often does not yet exist, or is, but in its infancy.

Features

We highlight the distinguishing features of the type of investment under consideration:

1. They are implemented both in new and in operating companies.
2. Investments are made to those enterprises and innovators who produce or want to launch a unique product on the market, thereby creating a new niche. These entrepreneurs and companies are called venture capital firms.
3. The experience of managers is the main criterion in determining the prospects for the possibility of obtaining financing.
4. Entrepreneur gives back a share in the business to a venture investor.
5. The return on investment occurs over a long period.
6. Having reached the minimum profitability, in most cases the company switches to other types of financing. Often through IPOs (stock issues), business sales, etc.
7. The venture investment market provides an opportunity to get up to 50% of the profit by the time the company reaches normal liquidity.

That is, this is a highly profitable type of investment, but it is necessary to keep in mind the maximum level of risk in the form of non-return of investments in principle.

Differences from other species

Strategic investments (or corporatization) are called investments in existing enterprises, the purchase of shares, the replenishment of the authorized capital. Despite the visible similarities, there are differences:

1. Direct venture capital investments are made at the initial stages of the formation of the company, in fact, it is created with these funds. Strategic investment is the entrance to an existing company.
2. Venture investments have an increased level of risk, we can say the maximum. Shares can lose a little in value, but there is practically no chance of their total depreciation. A venture project, on the other hand, can fail completely.
3. Strategic financing involves the purchase of a controlling stake to control the company. Venture investors only buy a share of the revenue generated.
4. The amount of venture capital investments is often significantly more than corporatization, since a completely new product is released on the market, for which it is necessary to create its own niche and demand.
5. The potential profit level of venture companies is an order of magnitude higher in comparison with strategic financing. For example, the most successful company cannot give more than 25% of the price of the entire package per year, while a successful startup can increase the amount of invested funds by several times.

The benefits of such investments

For a novice entrepreneur with an innovative idea, venture capital investment is an ideal option. With the receipt of funds for the implementation of his ideas, he does not have any obligations to the investor: the business is conducted on conditions of mutual assistance, the implementation of a common project. Of course, an entrepreneur pays a share in his business, but this is a better option than not realizing the idea at all, besides if you understand its benefit and potential profit.

For an investor, by and large, startups are profitable. With their help, he gets many opportunities. However, as in any business, there are pros and cons.

Advantages of such investments

We list the main points:

1. In the case of a successful project, the return on investment is maximum. If you find a successful project with real prospects, there is every chance to earn a large sum and become a co-owner of a large successful company in the future. There are examples when investments in innovations brought about 1000% of profit per year in comparison with initial investments.

2. To get a tangible part in the company, there is no need to invest tens of thousands of dollars. Enough and a small amount to start a company. For some investors, it is better to own 50% in a startup than 0.05% in a large corporation.

3. This type of investment provides tremendous management experience that may be suitable in the implementation of new ideas.

Cons for investor

The following are distinguished here:

1. Investments are associated with a high level of risk. Not every entrepreneur brings his idea to the end. Having decided to invest in innovations, it is better to prepare mentally that there will be no return of funds, as well as income.
2. It happens that in the role of entrepreneurs were scammers who did not have any innovative ideas. In order not to become a victim, before transferring funds, it is important to conclude an agreement where it is necessary to register all the details of cooperation.

Types of Venture Investments

Allocate:

1. Seed capital. The concept of idea and business is fully developed, which means additional costs for research and prototyping.
2. New company just launching its product on the market. Investments are made for the subsequent development and refinement of the product, sometimes for initial marketing.
3. Expansion of activities. Investments are made in companies at the stage of rapid growth, but which need additional capital to increase productivity.
4. Acquisition of a controlling stake. The limitation in funds forces managers of their company to resort to a venture capitalist.
5. Acquisition of shares by third-party investors. External managers are part of an existing team with the intention of acquiring a business.
6. Correction of the status of the enterprise. Senior management of the company is moving the company from open to closed so that venture investors can redeem its shares.

Who conducts such activities

The most common investors of such investments are individuals, in the business community they are called business angels, because they are ready to risk their savings and invest in a very risky project.In most cases, they are not interested in profit, because they have a regular source of profit, investing in startups for them - for the sake of business prospects.

There is also a venture capital fund. Their professional career is investing in startups, but at the same time they are more scrupulous about their money. To receive investments, an entrepreneur needs to write a detailed business plan for implementing his idea and prove it. The Fund has little idea, it needs guarantees.

Often, such funds are chosen by those projects that entrepreneurs offer, having already successfully implemented their ideas and projects.

Sometimes venture capital investments are made by large concerns, joint-stock companies, or large corporations with different lines of business.

The state also has the opportunity to invest in innovative projects, but to get them you need to go through bureaucratic formalities.

The development of the military-industrial complex is the first venture investment in Russia. The first venture capital fund appeared about 20 years ago.

Today they are developing, but for certain reasons at a slow pace. Only a culture of investment, legislation is being created.

Summary

Venture investment is a type of investment that involves tremendous prospects with a very high level of risk. In general, such investments are made by persons (or companies) who are ready to part with a large amount of money, having only unclear prospects of potentially high profits.