Venture investment – what is it?
Not so long ago, venture capital investments began to be talked about in the Russian Federation. Not only investors are interested in the development of venture investments, but also, those who want to get money for business development. This type of investment is initially designed for a high percentage of profits.
As you know, direct investments imply a much lower level of profitability and, as a consequence, the same low level of risk. If you plan to contact venture capital investments, you can expect a high level of return: at least 50-100% per annum. To date, you can find a lot of legal entities and individuals involved only in venture capital investments. The funding sphere for Russian artificial intelligence, which is widespread today, is at the top of the list in terms of profitability.
Similarly, venture capital investments have proven to be effective in many European countries – they bring stable high dividends to investors.
Unlike their Western counterparts, Russian investors are not familiar with venture funds, as well as with private equity funds. The Russian government’s need to introduce venture capital investment has been driven by the successful experience of its Western colleagues and the need to address the problem of significant dependence of the economy on raw materials.
In fact, venture capital investments can be interpreted as the financing of a business characterized by attractive opportunities, but not yet established on the stock exchange. There are developers of an interesting business idea, but the authors do not have sufficient funds for its implementation. This is where venture capital investment comes in.
Advantages and disadvantages of venture investments
When a startup has an interesting idea for a business, but there is no money for its implementation, venture investments will be very useful. The businessman is not obliged to provide guarantees to investors. The development of business is in accordance with the contract, there are no clear rules in terms of the distribution of parties.
How does venture capital investment look like on the part of the investor? How profitable are these types of start-ups? Venture capital investments have their advantages and disadvantages. Let’s look at them.
Advantages for investors
- If the project is successful, the investor receives a substantial profit. There are cases when innovative ideas bring to sponsors about 1000% in just a few months. If you will be lucky, in a short period of time you can become the owner of a successful business.
- It often happens so that it is profitable for an investor to become the owner of 50% of a small startup than 0.03% of a large business.
- Valuable business experience. By investing in a startup, you will receive a lot of useful information.
Shortcomings for investors
- Investing in a new startup involves high risks. The author of the idea has no obligations. There are no guarantees of success. Given the strong competition, there is always a risk of bankruptcy. Be ready to part with the money.
- It is no secret that some startups are not at all entrepreneurial in nature, they are ordinary crooks. To attract trustworthy depositors, they organized spectacular presentations, but once the funds were received, they disappeared. In order to agree on cooperation with investors, it is advisable to conclude a contract.
Specifics of venture capital investment
- Investment occurs at the moment of project opening when the capital is just being formed. It is quite possible that part of the funds is contributed before the registration of the organization. Investors look only at business plans, as it is not possible to estimate the practical profitability now.
- The creator of a startup does not guarantee anything to the investor. In case of failure, the person who invested the money will not be able to demand it back.
- When you become an investor in a venture project, you acquire a part of it, which is specified in a separate contract. When a project starts to make a profit, you can count on your share. The amount of this share does not always depend directly on the amount of investment. Sometimes it happens that the creator of a startup does not invest anything in his or her project or invests very little, and the main part of the investment is taken over by investors. However, the investor cannot own more than 50% of the project.
- Some start-ups have allowed investors to increase their investments several times in a short time. A high percentage of profit is a significant plus. After all, even one successful investment will be able to cover several unsuccessful ones. And if the investor also possesses skills of startup evaluation, it will not be difficult for him to choose a suitable project.
- It is not necessary to invest in venture startups at the moment of its opening. It happens that the creator needs funds in the process of working.
- In the case of classical investment, the investor may seek to buy a controlling stake in the company or simply a significant part of it. If the investor has a controlling interest, his or her vote will be decisive in making important decisions on the board of directors. However, in venture capital investment, the sponsor does not aim to buy back the controlling stake. He simply invests money and expects a substantial return. The direct participation of the sponsor in the regulation of the project activities is stipulated in the contract, i.e. important decisions can be taken jointly or by the entrepreneur himself.
- The sponsor does not have to rely on dividends from profits in the first years. All profits are used for further development. Revenue sharing is possible only if the business is firmly established in the market. However, there may be exceptions to this rule.
In conclusion, examples of projects are provided. The cost of WhatsApp reached $ 16 billion in a few years. The cost of Twitter at the end of 2013 was more than $ 14 billion. The start of the project on the development and implementation of the virtual reality helmet of Oculus fell in August 2012. And now Facebook is going to buy out Oculus for $2 billion.