Venture investment market. Venture business. Financial investments

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

It often happens that a person or a group of people has been working on a product or service for a long time, thought out the business model wonderfully, compiled a business plan and are ready to dive headlong into work. But where can you get enough initial capital? In matters of a startup, the venture investment market can help. What is it?

What is a private equity fund?

A private equity fund is an intermediary who invests funds from various investors in the capital of their own private companies (that is, companies that are not listed on the stock markets - not public). Venture capital funds are also private capital that is invested in enterprises in the early stages of development. However, it is very difficult to draw a line between such concepts as financial investment in private capital and venture investments in practice, therefore, these terms are often put on an equal footing. However, there is a slight difference - it lies in the fact that the fundsventure capital investments are exclusively investing in start-up businesses.

Regulation at the legislative level

Venture investments in Russia are regulated by the law on joint investment, corporate and mutual funds. The law also introduced such a definition as "venture investment fund". The authors of this project have developed a legislative framework for creating an infrastructure for venture investment funds that would facilitate the development of projects for investment by various enterprises.

Venture investment in other countries

In fact, there are quite a few examples when such a concept as venture investment funds is defined at the legislative level. However, the activity of such organizations in many developed countries is very noticeable and has been developing for decades. In the United States of America at the beginning of the 2000s, venture investors invested almost one hundred billion dollars in various projects. Funded companies account for almost twenty percent of the total number of public American firms, more than thirty percent of the market value, eleven percent of all sales, thirteen percent of the profits of public corporations in the United States of America. As you can see, venture capital funds play a significant role in the US economy.

The market of Europe is the second after the States in terms of development. Venture entrepreneurship in the EU is also quite common. In particular, ten percent of the total investment is made up of investments in a start-upbusiness.

What is a venture fund?

A venture fund is a financial investment (investment) in a closed-type organization (corporate or share), on the structural component of the assets of which no significant restrictions have been imposed. Investors of such a fund can only be legal entities. The asset management company (AMC) deals directly with the assets of this fund, the custodian company ensures their safe storage. In particular, venture investments are intended not only to finance a growing business, but also to implement property management schemes.

Venture capital concept

Venture capital, contrary to popular misconception, plays a minor role in the issue of primary financing. A large share of all venture investments is directed to the development of projects initially funded by public funds. Capital plays a more significant role already in the next stages, that is, during the period when innovations become commercial. Investing in start-up projects is not "long" money - in the sense that such funds finance enterprises only until they acquire sufficient creditworthiness to be brought to the stock market or sold to large corporations (strategic investors). The usual term for venture investments is three to five years, and in rare cases it can reach eight years.

Prerequisites forstartup investing

The niche for venture investments exists because the capital market has a rather complex structure. Commercial banks are limited in terms of financing start-ups, they will not be able to increase interest rates to a level that would compensate for the risks of young enterprises. Moreover, borrowed capital is a very poor way to finance growing young companies, as there are risks of insolvency, respectively, banks can provide a loan in the amount secured by collateral. But the property of a newly created company is usually not enough. Financing from large portfolio investors (investment and pension funds), as well as from the stock market, is available only to mature and large companies. Venture investment funds just fill this gap - between the sources of financing for various innovations and the banking sector.

Venture capital income - where does it come from?

Investment funds, pension and university funds, insurance companies are the main sources of funds that make up venture investments. A small proportion of finance is necessarily invested in risky investments. The economy of developed countries and its development are directly dependent on the investment process, which is associated with certain risks. The expected income from such investments is from thirty to forty percent per annum.

When choosing a venture investment fund, they are guided by some indicators, which include projects thatfinanced by this fund, past successes and reputation of managers and administration. However, the influx of money leads to the emergence of insufficiently professional and experienced participants, as well as increased pressure on entrepreneurs to provide high results in a short time. It is these factors that are the reasons for the shift in the interest of venture capital funds towards financing large and medium-sized businesses at later stages, as this provides less risk and a faster exit. However, venture capital funds that finance startups achieve the highest return on their investments mainly due to a well-thought-out investment strategy, different ways of structuring transactions and, of course, risk diversification.

What strategy do VCs use?

Strategic decisions on the selection of projects for subsequent investment are extremely important. Only less than one percent of the projects considered at the initial stages reach the direct investment of funds. Ninety percent of all proposals are rejected almost immediately, and the remaining ten are subjected to the deepest analysis. Of these, they choose the lucky ones who receive long-awaited investments. Projects that are promising and promising are not the only targets for venture capital investors. In fact, funds from funds are often invested in growing and developing areas where there is not yet enough competition. According to statistics, in the early eighties, the bulk of investment was directed to energyindustries, in the mid-nineties - in the production of equipment, and in the 2000s the main cash flows go to the Internet business. The main pattern is that venture capital is directed to high-growth areas.

The myth of venture capital

A common misconception is that venture capital is about selecting promising companies that have the potential to become market leaders. Often this is not the case. At the stage of accelerated growth of the sector of the economy, many start-up companies are also developing intensively. It is only in the formative stage, when competition becomes fiercer, that winners and losers become clear. However, a competent venture capitalist will have already withdrawn the investment body from the project by that time. Therefore, it is absolutely not necessary to choose companies that will become winners in the long-term competition. It is enough to find an enterprise that satisfies the emerging demand and grows with the market, and at the right time to withdraw the initial investment volumes. VC funds often avoid stagnating market segments, as well as those industries that do not show growth potential.

Who is a venture capitalist?

In the classical sense, a venture capitalist is a person who not only finances developing companies, but also contributes to the creation of their value with his direct and active participation. He participates in the observation process, uses the experience of other projects andgeneral knowledge about the sector of the economy, attracts consultants, auditors, bankers, that is, contributes to the vigorous activity of the enterprise.

Correct deal structuring

There can be a lot of options for processing transactions. However, there is a pattern: transactions should be structured in such a way as to give the venture investment fund the opportunity to receive the greatest possible income if the enterprise is successful, and to insure it as much as possible against losses as a result of the collapse. The terms of transactions always contain provisions that govern the protection of the fund. If the project is successful, there may be a need for additional funding, and the fund will purchase new shares at the price of the initial funding. Moreover, the transaction also includes agency costs, which include both the costs of overcoming conflicts of interest and direct losses. Efficient deal structuring techniques reduce these costs. This is usually done through the participation of management in the capital of the company, the participation of venture capitalists in management and control, phased financing.

Best investments

A typical instrument for such a phenomenon as financial investments are convertible preferred shares. These shares at the time of exit from the investment project are converted into ordinary shares and sold among strategic investors (large corporations) or on the stock markets. This tool provides investors with good insurance if the venture turns out to be unsuccessful, since in thisIn this case, the latter is obliged to return the full amount of all invested funds to the holders of preferred shares.

The importance of diversification

Any VC fund wants to mitigate risk through diversification. This means that several funds are attracted for the financing process at once, one of which is the leader, and the rest act as co-investors. It rarely happens when one fund finances the entire enterprise. Attracting third-party partners allows you to diversify investments, which reduces risks.