The market of venture investments. Venture entrepreneurship. Financial investments

It often happens that a person or a group of people worked for a long time on a product or service, wonderfully thought out the business model, compiled a business plan and was ready to immerse themselves in the work. However, where do you get enough initial capital? The venture capital market can be helped by the venture capital market . What is it?

What is a private capital fund?

The private equity fund calls intermediaries that invest the funds of various investors in the capital of their own private companies (that is, companies that are not listed on the stock markets - not public ones). Venture investment funds are also private capital, which 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 capital investments, so often an equals sign is placed between these terms. Yet there is a slight difference - it consists in the fact that venture investment funds are engaged in investing exclusively in a start-up business.

Regulation at the legislative level

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

Venture investment in other countries

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

The European market is second only to the US in terms of development. Venture entrepreneurship in the EU is also quite common. In particular, ten percent of the total investment is made by investing in a start-up business.

What is a venture fund?

A venture fund is a financial investment (investment) in a closed-type organization (corporate or unitary), the structural component of its assets were not subject to significant restrictions. Investors of such a fund can only be legal persons. The Asset Management Company (AMC) deals directly with the assets of this fund, the company-keeper ensures their safe storage. In particular, venture investments are intended not only to finance a growing business, but also to implement schemes for property management.

The concept of venture capital

Venture capital, in spite of popular misconception, plays an insignificant role in the issue of primary financing. A large share of all venture capital investments is aimed at the development of projects initially financed by public funds. Capital plays a more significant role already at the next stages, that is, at a time when innovations become commercial. Investing in new projects is not "long" money - in the sense that such funds finance enterprises only until they acquire sufficient creditworthiness to be bred 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 can reach eight years.

Prerequisites for investing start-ups

The niche for venture capital investments exists because the capital market has a rather complex structure. Commercial banks are limited in the financing of start-up enterprises, 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 bad way to finance growing young companies, since there are risks of insolvency, accordingly, banks can provide a loan in the amount secured by collateral. But the property of a newly established company is usually not enough. Financing on the part of large portfolio investors (investment and pension funds), as well as the stock market, is available only to mature and large companies. Venture investment funds fill this gap - between funding sources for different innovations and the banking sector.

The income of venture funds - 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 share of finance is necessarily invested in risky investments. The economy of developed countries and its development directly depend 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 certain indicators, which include projects financed by this fund, past successes and reputation of managers and administration. However, the inflow of money leads to the emergence of insufficiently professional and experienced participants, as well as to increasing pressure on entrepreneurs with the demand to ensure a high result in a short time. These factors are the reasons for the shift in the interest of venture investment funds towards financing large and medium-sized businesses in the later stages, as this provides less risk and a faster exit. However, venture funds that fund start-ups achieve the highest return on their investments, mainly due to a well thought out investment strategy, different ways of structuring transactions and, undoubtedly, diversifying risks.

What strategy do venture investors use?

Strategic decisions on the selection of projects for subsequent investment are extremely important. Only less than one percent of projects considered in the initial stages reach direct investments. Ninety percent of all proposals are rejected almost immediately, and the remaining ten are subjected to the deepest analysis. Of these, and choose the lucky ones who receive long-awaited investment. Projects that are promising and promising are not the only goals for venture investors. In fact, funds are often invested in growing and developing areas, where competition is still insufficient. According to statistics, in the early eighties the bulk of investments went to the energy sector, in the mid-nineties - to the production of machinery, and in the two-thousandth, the main cash flows go to the Internet business. The main regularity is that venture capital is sent to fast-growing areas.

The Myth of Venture Capital

A common misconception is the opinion that venture entrepreneurship is engaged in selecting prospective companies that have the potential to enter the market leaders. Often this is not so. At the stage of accelerated growth of the economy, many start-up companies are also developing intensively. Only at the stage of formation, when competition becomes more rigid, winners and losers become clear. However, a competent venture capitalist would already withdraw the body of investment from the project by that time. Therefore, it is absolutely not necessary to choose companies that will become winners in the long-term competitive struggle. It is enough to find an enterprise that meets the emerging demand and grows with the market, and at the right time to deduce the initial investment. Often, venture capital funds avoid stagnant segments of the market, as well as those industries that do not show the potential for growth.

Who is a venture capitalist?

In the classical sense, a venture capitalist is a person who not only finances development companies, but also contributes to the creation of their value through their direct and active participation. He participates in the monitoring process, uses the experience of other projects and general knowledge about the economic sector, attracts consultants, auditors, bankers, that is, promotes the active operation of the enterprise.

Proper structuring of transactions

There can be a lot of options for making deals. However, there is a regularity: transactions should be structured in such a way as to give the venture investment fund the opportunity to get as much revenue as possible if the enterprise is successful and to insure it as much as possible from losses as a result of the collapse. 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 cost of the initial financing. Moreover, the transaction also includes agency costs, which include both the costs of overcoming conflicts of interest and direct losses. Effective methods of structuring transactions can reduce these costs. Usually this is done through the participation of management in the company's capital, participation of venture capitalists in management and control, and phased financing.

The best means for investing

A typical tool for such a phenomenon as financial investments, Convertible preferred shares are considered . These shares at the time of withdrawal from the investment project are converted into the most common and sold out among strategic investors (large corporations) or in the stock markets. This tool provides investors with good insurance if the company is unsuccessful, since in this case the latter is obliged to return the full amount of all invested funds to the owners of preferred shares.

The Importance of Diversification

Any venture investment fund Wishes to reduce the degree of risks through diversification. This means that several funds are attracted to the financing process, one of which is the leading one, and the others are acting as co-investors. Seldom happens, when one fund finances the enterprise entirely. Attracting third-party partners allows diversifying investments, which reduces risks.