More recently, the concept appeared in the circulation of Russian entrepreneurs startup– a new organization or enterprise operating in the field of new technologies and business.

Startups– these are young, full of strength and energy entrepreneurs who want to implement a new idea or plan. But any idea requires financial support. In this case, venture capital investments come to the rescue.

Concept of venture investment

Venture investments or venture capital(from the English Venture Capital, venture - a risky deal) represents a certain amount of money that an investor invests in new enterprises (startups) engaged in the development of new technologies, know-how and other innovative technologies.

Such organizations are characterized, first of all, by high risk due to the use of new products in business, rapid and dynamic development of activities, as well as receiving excess income in the event of successful implementation of a new idea on the market.

Simply put, any person or organization with sufficient capital has the right to invest it in the development of a new idea, project, product, service or production process that is not presented on the market. Such an investment or investment will be considered a venture capital investment.

New ideas and developments always require financial support. Therefore, it is venture investors who are involved in the development of innovative projects, be it new products in the medical field, construction, automotive industry and many others, and especially in computer programming.

Venture investments by their kind are direct investments, upon investment of which the investor receives a share in the authorized capital or a controlling stake, becomes a co-founder or founder and has the right to join the board of directors or other management body of the enterprise.

In addition, the investor has the right to solve the main tasks of the development and further functioning of the startup, finance and distribute income and expenses.

Why and who needs them?

If there were no venture investments in new projects, it is unlikely that society today would be able to demonstrate so many innovations in all spheres of life. Venture investors are the only ones who, risking their own capital, help young and promising entrepreneurs develop.

The thing is that innovation is a completely new product. No one knows how society will perceive it, whether it will be useful or whether it will remain forgotten, even without the practical application of the new idea. More than once, new technologies, having received good funding, failed miserably in the market and did not find application in society. This is why startups are very risky to invest in.

The banking sector, as a rule, strives to minimize all possible risks, and therefore venture investments are not the prerogative of financing credit institutions.

Therefore, it is very difficult for new enterprises to find financing for the development of innovative projects. This is where venture investors come to the rescue.

If the project has a positive outcome, they receive excess profits and, in addition, participate in the creation of new products or technologies, which then enter the mass market. Examples include common Internet projects - Skype, Google or MySpace.

Mechanism of operation

The process of a venture investor entering a new project is no different from the standard direct investment procedure:

1. First of all, the investor, being a specialist in a particular field, chooses the industry in which he would like to find a project, an innovative project.
2. Next, he evaluates the financial and technological performance of the startup.
3. Afterwards, the share in the authorized capital is repurchased and a controlling stake in the organization is purchased. The investor becomes the owner or co-owner of the business.

Investors do not invest the entire amount of funds at once, since the development of new technologies carries high risks. Therefore, the investment process is divided into several stages:

1. Pre-sowing stage– investing a small amount of money on market research, finalizing the concept of a product or technology.
2. The seed stage is conducting extensive research and releasing a trial batch of goods or launching a technology.
3. The first stage involves the first financing of the release of a new idea on the commercial market.
4. The second stage is increasing production volumes.
5. The third stage – rapid sales growth, stable production
6. The later stage is the development of the company and reaching a new level of investment - stock exchanges and foreign investments.

In this scheme, the investor begins to make a profit only at the penultimate – third stage. In view of this, venture investments are most often long-term in nature.

The difference between venture investments and other types of investment

The main difference between venture investments and other types of business financing is the high level of risk associated with further uncertainty about the position of a new product or technology on the market. Banks and direct investors avoid risky projects and refuse financing to entrepreneurs. In addition, the risk of startups is “approved”, i.e. the investor accepts possible losses.

Unlike investing in securities, where you can make a profit within a few months, venture investments are long-term investments. With proper development of a new idea, an investor will need about 5 or even 10 years for the product to enter the mass market and become recognizable.

Venture investors can lose everything if the innovation does not interest future consumers, or they can make extra profits due to a sharp increase in sales. High risk is compensated by high profitability. Almost no type of financing can achieve this effect.

In addition, the investor actively participates in the activities of the new organization, unlike, for example, the owner of portfolio investments, who receives only passive income. Most often, venture investors do not seek to obtain the entire stake or 100% of the organization. Usually about 30 - 40% is purchased in order to reduce the risk of loss.

Types of venture investments

As such, separate types of venture investments are not identified in scientific practice. There is only a division into types of investments related to the source of financing or areas of investment.

According to sources of financing, there are:

• Venture funds– specialized organizations or the state that invest in innovative projects funds received from several investors and aimed mainly at the development of new products and technologies.
• Individual investors or business angels- often individuals holding high positions in large corporations associated with the development of innovation, with sufficient capital to finance start-ups and new ideas. The main goal of these investors is to make a profit.

By investment objects they divide:

• Universal investors– finance funds in different industries, enterprises, can enter into investing in a new project at any stage of its life cycle, in addition, they can invest in various foreign countries.
• Highly specialized investors– choose one industry in which they finance a new idea at the startup or early development stage.

Venture funds

Venture funds are created on a legislative basis with the aim of financing innovative developments. Such funds are created voluntarily, accepting as contributions not only financial resources, but also material and intellectual resources. In addition, the fund accepts the promised investments, i.e. certain amounts of money guaranteed by the investor that the fund may need in the future.

Unlike other structures involved in the development of innovation - business incubators, sponsors, etc. venture capital funds do not own investments. They only play the role of accumulator and distributor of funds among their recipients. The fund operates through investor rewards.

In terms of contributions, investment funds can be:

• open-end funds in which the amount of capital, the number of investors and its validity period are not limited;
• closed funds, where the number of participants (shareholders) and the amount of capital are strictly regulated. Such funds exist for 5-10 years. In Russia, only this type is presented in the form of closed mutual funds.

According to the type of formation, there are the following types:

• Self-liquidating fund. It is created for a specific period to finance a specific project. The fund is considered closed after investors have been paid their share of the investment, including profits.
• Evergreen fund. Involves subsequent investment in another project after the completion of the previous one. In this case, only the invested funds are returned to the participants, and the proceeds go to further financing. This does not require the closure and creation of new funds, and the investor can exit it at any time by selling his share.
• Club or parallel investment fund. It is an unofficial fund, not registered in accordance with the established procedure. More often it is created by private investors who transfer management of the fund to a management company, which has the right to place funds for projects only in agreement with investors.

The work of the fund is to finance several projects from startups. New companies then develop over several years. When the peak of profitability is reached, the funds put up for sale shares of the enterprise in the form of a direct investment object or placement of securities on stock exchanges.

In Russia, the state venture fund is the Joint Stock Company "Russian Venture Company", which is the creator of many other venture investment funds in Russia - industry funds, micro-funds, foreign funds. These are LLC “Civil Technologies OPK”, ZPIF OR(V)I “Leader-Innovations”, DIT Foundation “Aerospace Finematics” and others.

In total, RVC JSC manages 21 funds. The main areas of investment are medicine and information and Internet technologies.

The venture investment market in Russia and in the world

The very concept of venture investment arose in the 40s of the 20th century in the USA, but in practice it found its application only in the 60s. Moreover, the impetus was the latest developments of the Soviet Union in the field of astronautics - the United States was afraid to lag behind technological progress and launched a program for the development of innovative developments with government support. At this point, venture funds and investment companies began to appear.

In Europe, the venture capital sector also began to emerge by the 1970s. In Russia, the first venture investments appeared in the 90s of the 20th century.

According to researchers in Russia, by the end of 2015, the cost of venture investments decreased by 50%, despite the fact that the number of transactions in innovative industries increased to 20%.

Looking objectively, the venture investment market continues to grow, but is decreasing in monetary value due to the unstable financial situation in the country.

The most famous fund in Russia for the development of innovative projects and venture investments is the Skolkovo Fund, which combines not only an investment center, but also independent practical development and implementation of innovations in technology parks and clusters.

The Skolkovo Center is supported at the state level on the basis of federal legislation, and as a result, the tax burden is reduced and some state registration and licensing procedures are simplified. Skolkovo cooperates with many foreign centers and foundations. Thus, agreements were concluded with Singapore innovation centers on joint work in the form of an acceleration program.

The Skolkovo center is often compared to Silicon Valley in the USA, which was created in the 1970s. This center receives a third of all venture capital investments in the United States. Silicon Valley is home to many technology-based companies, especially in the field of the latest computer developments.

In 2015, more than 300 transactions involving venture investments by both funds and business angels were registered in Russia.

Of course, this figure is significantly lower than in Western European countries or the United States, but there is a steady increase in venture capital investments in new developments, despite foreign policy and financial instability. 85% of all transactions were directed to the field of information and computer technologies and programming. In addition, the lion's share of venture investments flows into Russian developments from the initial stage - seeding.

In addition, there is an increase in Russian venture investments in foreign projects also closely related to Internet programming and computer technology.

An interesting fact is that about 80% of all venture investments fail and the project does not make a profit.

Why then does the sphere of innovative developments show growth rates in cash injections?

The thing is that, as noted earlier, new projects are capable of generating super-profits, and the remaining 20–30% of successful startups more than pay off all the risks and bring in considerable income.

However, due to such conditions, it is becoming increasingly difficult for venture investment funds to finance new projects, and business angels are coming to the rescue. It is transactions with specialist investors that produce results in the form of successful business ideas and the latest developments. Such an area as biotechnology appeared only thanks to venture investments from business angels.

However, many analysts believe that the recent financial crisis has helped bring order to the Russian innovation industry. Due to funding cuts, specialists work more carefully on projects, reduce expenses, and postpone unnecessary and dubious innovations.

Investors evaluate new projects more modestly, due to which there is no unjustified increase in the cost of new ideas and large financial losses.

Despite all the difficulties and risks, all experts and analysts unanimously say that the future belongs to venture investments. After all, there are still a lot of new discoveries to be made and introduced into people’s everyday lives.

The word “venture” came into Russian from the English “venture”, which literally means to take risks, dare, dare. A venture fund is a structure that invests in innovative projects and startups. You can read about Russian venture funds, and this article will discuss global venture funds.

History of the development of venture investments

The birthplace of venture financing is the USA. The first American Research and Development Fund (ARDC) was created in 1946. The fund's largest success story is considered to be an investment in Digital Equipment Corporation (DEC) in the amount of $70 thousand. After 11 years, ARDC received a return on funds from the project of more than 500 times, which amounted to 101% annual return.

Initially, venture investments were formed using funds from private investors. The first step towards professional fund management was the adoption in 1958. law on investment in small business.

During the 1960s and 1970s, venture capital firms concentrated their investment activities primarily on starting and expanding companies. Investments were aimed at the development of electronics, medicine or data processing technology. As a result, venture capital has become synonymous with technology finance.

The growth of the venture capital industry was sparked by the emergence of independent investment firms Sand Hill Road, Kleiner Perkins and Sequoia Capital in 1972. They primarily invested in computer firms and PC programming and service companies.

In Europe, venture financing appeared only in the late 70s of the last century. During this period, there were already several dozen companies engaged in venture investments in the United States. High-profile successes in this area (DEC, Apple, Genentech) led to a sharp increase in the number of venture capital firms: by the end of the 80s, there were more than 650 venture capital firms.

The real dawn of venture capital came at the end of the 90s, when funds began to make huge profits from investments in the development of the Internet and other computer technologies.

The Nasdaq stock market crash and the technology recession of the early 2000s rocked the venture capital industry. (companies whose business develops entirely on the Internet), which lasted from March 2000 to October 2003, forced online stores Pets.com, Webvan, Boo.com, as well as communications companies Worldcom, NorthPoint Communications and Global to leave the market Crossing. Many venture capital firms have closed.

The resurgence of the IT and Internet sectors from 2004 to 2007 helped revitalize the venture capital landscape. However, venture capital is still not at its 2000 level: the chart below shows that it was around $120 billion back then, down from only $100 billion last year in 2018. Source: www.statista.com, Value of venture capital investment in the United States from 1995 to 2018.

Venture fund structure

The structure of a standard venture fund, with a number of simplifications, is very similar to the American ones. They are united by the desire for high potential profits and a large commission for success, while popular ones in the United States are increasingly limited to tracking stock indices, charging only a relatively low management fee of 1-2% per annum. However, hedge fund capital circulates in financial markets and is concentrated around the securities of well-known companies, while venture capital works with young companies that usually have not yet gone through the procedure of placing their securities on the stock exchange ().

As you can see, in the above diagram, a division is made into investors, who almost completely form the capital of the fund, and into the management company, which manages these funds for a commission. The management commission on average ranges from 2 to 4%, and its reward for success is about 20-25%. All this is very close to the hedge fund numbers. The management company does not have the right to withdraw investors' money to its own accounts or the accounts of third parties.

However, since venture funds require highly qualified investors, government regulation in this area has been weakened, which again makes venture funds similar to hedge funds. So scandalous stories happen here periodically. Thus, the head of the Asenqua Ventures fund was sentenced to 12 years in prison, and the head of Rothenberg Ventures, Mark Rotenberg, had to resign as director after an investigation. He got off very lightly because he was accused of unproven embezzlement of $7 million.

Investors can also suffer when investments from honest venture funds are directed into a project that turns out to be fraudulent. For example, funding for the Theranos project exceeded $1 billion, with Blue Cross Blue Shield Venture Partners and Fortress as investors. It was about a blood test using ultra-small quantities, which turned out to be a fake: the founders of the project face up to 20 years in prison. The founder of the Mozido payment system, designed to support the poor population of third world countries, can receive a similar term - project funding exceeded $300 million.

The most common, although not the only possible form of organizing a venture fund is a Limited Partnership (the Russian analogue is an investment partnership). This scheme avoids double taxation, potentially possible with foreign investments, while at the same time maintaining sufficient freedom in making investment decisions. It is found in the venture capital systems of the USA, Great Britain, and Israel.

Organizationally, venture funds can also be funds of funds. In this case, they invest not in other companies, but in other venture funds. This provides diversification, but turns into a double commission: both the parent and target venture funds will reduce the potential profit by some amount. For example, a fund of this type is the Russian Venture Company (RVC). As noted above, funds of all types typically invest their capital in late-stage projects that are ready to present results or a sample of their products and help bring them to a mass audience.

Venture funds usually work in cycles of about 10 years - during the cycle it is supposed to make investments, receive profits and distribute them among investors. However, there are also evergreen funds, the difference of which is that the profits are not distributed to investors, but are immediately sent to new projects. Investors of such funds become owners of shares, which, with successful investments, increase in price - in order to fix profits, the shares must be sold to another participant. This scheme is similar to the trading of closed-end mutual funds on a standard exchange.

Venture Investments Today

Today, venture capital companies are not a union of private investors, but an association of entire corporations. Large companies create their own funds to finance technological developments. The funds employ hundreds of people who analyze the market, select investment projects, calculate potential profits and attract new investors.

According to CB Insights, 2018 saw the highest level of venture capital funding in 18 years. Over the past year, $207 billion was invested in various startups and projects, half of which were in the United States. In total, more than 14 thousand transactions were concluded.

The most funded areas were:

• artificial intelligence;
• digital health;
• financial technology

The chart below shows the distribution of global venture capital for 2016:

It is clearly seen here that the main concentration of venture capital is in the northern part of the United States, while second place is shared by a noticeable margin between Europe and China. So it is not surprising that when distributing venture capital investments by city, only two non-American cities made it into the TOP 10:

Moscow is in 20th place with an indicator of about 320 million dollars. Interestingly, the first two cities in the table above account for almost as much venture capital funding as all of Latin America or South Asia over 10 years:

And this is what the most active European venture funds look like:

TOP 10 venture funds in the world

Venture capital firms primarily differ in the areas in which they invest capital. Each fund chooses a narrowly focused niche in which it looks for promising projects. When compiling the rating, the following performance indicators were taken into account:

• number of successful projects;
• amount of assets under management;
• number of venture capitalists;
• business reputation

The TOP 10 current venture funds in the world are presented in the table.

As can be seen from the table, the most successful venture capital investments are related to information and communication areas.

Venture investors

Since 2000 Forbes annually publishes the TOP 10 successful venture investors in the world. This rating was called the “Midas List” in honor of the mythological king who turned any object into gold with one touch. Link: www.forbes.com/midas

At the end of 2018 The Midas list looks like this:

1. NilShen (Sequoia Capital China);
2. Peter Fenton (Benchmark);
3. Bill Gourley (Benchmark);
4. Jim Goetz (SequoiaCapital);
5. JPGen (Qiming Venture Partners);
6. Kathy Xu (CapitalToday);
7. Hans Tung (GGV Capital);
8. Mary Meeker (BondCapital);
9. Neeraj Agrawal (BatteryVentures);
10. Eric Paley (FounderCollective).

Current data

Data on venture investments and funds changes quickly and sometimes dramatically, as when comparing 2000 with 2001 or 2002. The distribution of venture capital by country and stage of the investment project can be found on the website https://stats.oecd.org:

A division of the World Bank website https://tcdata360.worldbank.org/indicators/cap.avail offers to compare the volume of venture investments in the country with the world average over the past 10 years:

The ranking represents 137 countries. Russia's top ranking of 60 was in 2007, at the peak of years of stock market growth and an influx of enthusiastic investors, but has fallen five years behind the global average since 2008. The USA took first place in 2017. For the latest information on venture funds, visit the CB Insights website: https://www.cbinsights.com/research/ and search for “Top 100 Venture.”

How to invest in global venture funds

Only an accredited investor can invest in a venture fund. To obtain accreditation, you must meet at least one of the following conditions:

• having an income of $200,000 annually for the last 2 years;
• having assets worth more than $1 million;
• insider interest in the company

If the investor is a married couple, then their total income for the last 2 years is taken to calculate the minimum income. It must be at least $300,000.

When calculating the value of personal assets, the value of the housing in which the potential investor directly resides is not taken into account.

Insider interest refers to a connection to the company in which the money is invested. For example, the investor could be the CEO or a partner.

First of all, strict requirements for investor accreditation are applied to protect people themselves from risks. Therefore, funds conduct a thorough check of a potential investor in order to prevent the person from being completely ruined.

If an investor does not meet the criteria established by a venture fund, then he can become a so-called business angel. They have already been mentioned above - these are wealthy citizens who provide financial support to startups at the initial stage. In exchange, they receive convertible debt or equity.

The modern world would not be the same without venture capital investments. All six of the most valuable US companies this decade - Facebook, Apple, Netflix, Microsoft, Amazon and Google - were backed by venture capital funds. Tesla and Uber are also funded by venture capital firms.

However, the success of venture capital investments in the past does not guarantee a similar result in the future. Next to successful companies is a longer list of clay colossi that collapsed in 2000, despite huge injections of funds. And a huge number of unpromoted projects. Therefore, although investments through venture funds are inaccessible for the average person, there is no point in regretting it - on the surface there are only beautiful stories with high income, while few people like to talk about losses. An ordinary investor can easily increase his capital by investing in a diversified package of already established companies, for which a few thousand dollars or even less is enough.

Where to invest money in pursuit of super income? Oil, cars, construction? The answer is somewhat disconcerting. 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 investments. And this is no coincidence. Only new ideas will provide you with a strategic competitive advantage. Like any other method of investment, investing in venture projects has its own characteristics, advantages and disadvantages. Invest wisely!

What is venture investment?

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

The above definition contains all the key disadvantages and advantages of venture investment.

Innovation

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

1. "New product - new market". Involves developing new customer needs and forming a new market. Example: The production of the first mass-produced personal computer, Apple, in 1976 led to the creation of a new market. The best startup in history.
2. "New product - old market". It involves a large-scale capture of the existing market with the help of a new product designed to better satisfy the needs of customers. Example: The creation of the new Google search engine in 1997 turned the market upside down and brought investors windfalls. 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 of return of the invested amounts. The investor must be prepared to lose his money in advance.

Long term

The long-term nature of the project is as follows:

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

Extra income

The purpose for which a venture investor enters a 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 through a share in current profits (for example, in the form of dividends), but only through the growth of the company’s capital value. The latter is determined by the market price of capital, which is expressed:

• the price of the company's shares on the stock market or;
• the price at which a third-party company is willing to buy the share (if the project does 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 cost is called strategic. To evaluate it, you will need an accurate understanding of the current income that the project generates, as well as potential future income (strategic financial plan for 5-10 years).

Other Features

1. A significant amount of investment. Entry threshold: from 10 thousand dollars to several million. The average bill for a venture deal in Russia is about $1 million.
2. Investment objects may be:

   small and medium-sized innovative companies with high growth potential;

   just people promoting an idea and already having successful experience in the past.

Low forecast accuracy.

Often, the transaction structure is complex and there are 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 maximum complete control and management (for example, becoming a CEO or joining the board of directors).

If you do not have a strategic interest, do not limit yourself to one project, but collect a portfolio of them, then you become a venture businessman. In this case, you must be internally prepared and focused on a timely exit.

The average life cycle of an investment in a 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 their 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. Areas of analysis:

1. Analysis of the possibility of scientific and technical implementation.
2. Analysis of marketing feasibility.
3. Economic feasibility analysis.
4. Risk analysis.
5. Analysis of required financial resources.
6. Analysis of human resources. Competence of project managers (confidence in success), the presence of a cohesive team, the ability to attract qualified specialists to the project.
7. Analysis of the legality and legal parameters of the project (necessary patents, licenses).

Sowing stage (feed)

Investor risk: maximum.

Completion of R&D and preparation for launch. At this stage it is important:

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

Venture investing is investing in a start-up business. By deciding to invest money in a company or enterprise that has just appeared on the market, an investor risks losing everything. But he has a chance to recoup his investment many times over. For example, M. Markkula invested 250 thousand dollars in Apple at the beginning of the company’s journey. He later sold his part of the company, earning over 150,000,000 greenbacks.

Venture investment is usually associated with high technology and innovation, but not always. There are many other projects that are receiving similar investments. These are the areas of construction, trade, and restaurant business. However, it is innovative projects that attract investors the most, since they are considered to have a greater chance of surviving and making a profit.

The word “venture” is translated from English into Russian as “risk” and, in fact, venture investment involves huge risks, since you have to finance projects with virtually no guarantees, on your word of honor.

Having appeared in the middle of the last century, venture investment has spread widely both abroad and here in Russia. More and more innovations are receiving funds for development from extra-budgetary funds. This is the same loan that is provided to a young company.

But the money will be given if she can prove that she has good potential and opportunities for growth.

The risk often pays off, and a new, in-demand product appears on the market. If successful, it will be many times greater than his investment. But he may lose his money if he fails. The investor has the opportunity to withdraw the invested money, but only after the completion of a certain period, which is specified in the agreement. Moreover, it is not a fact that he will be able to return the entire amount if the startup fails.

For this reason, many investors prefer to participate in the company's affairs themselves. Everything is important for the development of a project: professionalism, skills, management ability.

Investors involved in promoting the project in which they invested money are called business angels.

Briefly about venture funds 💸

The basis of a venture fund is finance, which is directed towards the development of the most interesting startups with the expectation of recouping the investment many times over. They are formed for a period of five years, and the participants in such funds are banks and large businessmen.

Some funds are created to invest in certain areas, for example, in IT technology projects. These are specialized funds. Other organizations (universal funds) can finance several niches at once: medicine, construction, light industry.

There are certain criteria by which companies are selected for venture investment. It is important that:

• the project was innovative;
• there were no problems with the use of new technologies in the production of the product;
• there was an opportunity to monopolize a certain niche in the market.

Features and stages of venture investment

Venture investment is only advisable when high profits are achieved. at the very first stages of enterprise development, but pay off only after five to ten years. Three years at the earliest. A lot of time is spent on research, marketing, etc.

As a rule, investors withdraw their invested funds, but only after a high level of development has been achieved. Since they are interested in making a quick profit, they support the company, give advice, use their experience and business connections.

You need to understand that the risks in venture investing are extremely high. But business is structured in such a way that the higher the risk, the greater the likelihood of making a good profit.

A venture fund is organized by entrepreneurs who are ready to invest their money provided they receive a good profit. They usually do the following steps:

• looking for companies that have high potential and can generate high profits;
• analyze companies for economic feasibility, risks, profitability;
• draw up a business plan;
• think over an investment strategy (for product research, marketing, advertising the possibility of entering new markets, etc.);
• conclude contracts;
• are engaged in the development of the enterprise, consulting and providing assistance;
• receive income from the sale of shares or from company profits.

Venture investing takes several stages:

• Stage 1. Seed stag e. Sowing. The company already has an idea, but no product. Investments go towards prototyping.
• Stage 2. Start-ap stage. Pilot stage. The product has already been created, but has not yet been tested.
• Stage 3. Early stage. Early stage. Products are being prepared to enter the market.
• Stage 4. Expansion stage. At this time, the products begin to be actively sold.
• Stage 5. Later stage. The company is being enlarged and transformed into a public joint stock company.

Problems of venture investment in Russia

Venture financing in our country is in its infancy. Preference is given to essential goods, the prices of which are not flexible.

Unfortunately, venture investment in the Russian Federation is very specific and associated with many problems. This is especially true for innovation. In Russia:

• intellectual property protection is not regulated;
• there are no experienced managers who could lead the funds;
• There are no laws providing tax breaks for business representatives opening venture funds.

But still, there are many new and truly new ones in Russia that can attract domestic and foreign investors.

Russian venture funds: TOP 5 💰

In Russia, venture funds are a special segment. But we also have more than a dozen funds that have proven themselves to be the best and are ready to invest in various startups.

Runa Capital

The fund was founded by serial Russian entrepreneur S. Belousov. Thanks to him, Rolsen household appliances and much more appeared on the Russian market. Success is achieved through good marketing and launching products on the world stage. It invests up to $10 million and requires a stake of up to 40 percent.

The fund specializes in consumer services, games and applications. The fund is ready to invest up to $1 million. Its share is usually 40 percent.

The fund has invested in Ozon and Yandex and many other interesting projects, for example, in the food delivery service Deliveryhero.ru. The fund's share reaches 35%. The founders of the fund believe that the philosophy of business and investor should be identical, and invest money based on this belief.

His brainchildren include Trends Brands and Ostrovok.ru. Money was not always invested in successful endeavors. The investor's share starts from 3 and ends at 30 percent. If the idea is of interest to the fund, it will invest 10 million greenbacks in it.

E Ventures

The founders of the fund are from Germany, but they have been working on the Russian market for a long time. They invested in the Teamo dating site and the online sporting goods hypermarket Heverest.ru. Share when investing from 10 to 40%. Investments are up to $10,000,000.

Venture capital investments allow startups that are just starting their business and have growth potential to increase their equity capital. The creator of a potentially attractive business receives funds at the development stage, when it is often difficult and impossible to obtain bank loans. Increasing equity capital consolidates the company's financial structure without debt. Thanks to venture capital, the author of a business idea receives support, advice and a powerful impact on both banking organizations and the development of the project.

What is venture investment?

Like many economic concepts, the definition of “venture investment” comes from the English language. Literally translated it means “risky investments.”

It is difficult to more accurately reflect the “venture” essence. Investing in an unknown business that is not even a participant in exchange trading is truly an adventurous venture.

For there are only two development scenarios - losing money (breaking even, at best) or making huge profits.

During innovation, a company needs capital to fund research and development of prototypes or pre-production series. This is called seed phase financing.

There may be several cases when a company (individual) needs to attract venture capital investments:

• the idea is completely new and requires the creation of a legal structure (company) that will test and develop a new product in order to offer it on the market;
• the idea arises during the activities of an existing company and it is necessary to finance the development of a new product;
• the new product was tested and showed satisfactory results for its further promotion. Therefore, the launch requires new input for commercialization (communication, advertising, international development, etc.).

At the initial stage of project development, investors invest their own funds.

When a company reaches a stable market level (issues shares), the package of securities (determined at the investment stage) is sold at a favorable price.

About investors

Venture capital (special funds intended for startups) consists of the following investors:

1. Investor Clubs - This category consists of small groups of individuals who invest in the development of local small businesses. Investments rarely exceed $15,000.
2. Investors are individuals, often former entrepreneurs. They personally invest their own funds in the most promising projects. The average amount varies between $50-150 thousand.
3. Corporations and venture capital funds are the largest investors, typically funding companies in excess of $1 million. This category intervenes at the development stage rather than at the time of creation.

Venture investors are minority shareholders in a company—their investment is temporary and is not intended to remain a long-term partner or shareholder. To attract them, an innovative project must have significant growth potential and an impeccable business plan, with all calculated risks.

Types of venture funds

The venture fund is focused exclusively on working with startups and innovative projects (the share of venture investments in the total volume is at least 90%).

The priority tasks are:

1. Raising funds from participating investors;
2. Selection and detailed analysis of startup projects;
3. Financing an innovative project at all stages;
4. Participation in company management (secondary);
5. Development team support.

As a rule, the fund invests in a large number of projects at once (at least 15-20) and only 25% of them will bring profit that will fully satisfy the participants. Despite careful marketing, economic and forecasting research, it is impossible to predict which product will become in demand. But even a single “successful” project is able to completely cover losses and bring the so-called “super income”.

Venture funds are classified according to the following criteria:

• origin of capital – public, private, Russian, foreign;
• direction of venture investments - Russian assets, foreign startups;
• size of the investment portfolio – small ($10 thousand-50 million), medium ($50-150 million), large (from $150 million);
• geographical coverage - federal, regional, district;
• industry focus - universal, information technologies, etc.;
• investment stages – pre-seed, seed and starting.

The operating scheme of venture funds is almost identical for all types:

• the author of the project submits an application for investment;
• a comprehensive analysis of the innovative product is carried out;
• participants contribute cash or intellectual property (patents, rights, etc.) to the fund;
• the fund contributes its share as a secondary management company;
• the project falls under legal and administrative organization;
• financing is carried out one-time (rarely) or in stages, while the fund has the right to launch the issue of shares at its discretion;
• full control over the implementation of the business project is exercised and comprehensive support is provided (1-10 years);
• exit from the project and sale of shares (shares) on the stock exchange, interested investors, managers (founders) of the company that authored the product.

In addition to the work scheme, all venture funds share two rules by which financing is carried out:

1. Money is invested only in those projects that will allow in the foreseeable future to earn an amount approximately equal to the total capital of the fund. Classic projects that already have a stable, guaranteed income are not included in the scope of interests - they do not bring “extra profits”.
2. A venture fund always exits a project as soon as it stabilizes its performance on the stock exchange. The moment of exit is determined by long-term forecasts and is almost always correct.

Advantages and disadvantages

The main advantage of venture investments lies in the operating principle of this type of financing – obtaining “extra profits” in a relatively short time.

But you should not consider risky investments only as a way to enrich individual entrepreneurs. This is also a significant contribution to the state’s economy.

The development of science and technology allows Russia to compete in the global market. Without venture investments, many projects would have remained on paper or smoothly passed into the ownership of another country. The loss of valuable personnel is more pressing than ever. High-tech professionals are looking for a better life abroad, unwilling to sacrifice their talent in the name of the bureaucratic system. Therefore, venture investments have been gaining momentum in recent years. For example, compared to 2011, the number of transactions increased by 3 times, and the average investment amount increased by 2.5 times.

The main disadvantage of venture investments is high risk. Most of the funded projects turn out to be unprofitable. With insufficient knowledge, the investor will not only not make a profit, but may also lose capital.

Another minus is rather conditional. Venture investment is a long-term perspective. Return on investment 2-3 years (average). Therefore, you shouldn’t expect “quick” money.

Well, the last “disadvantage” is that only an experienced entrepreneur or a person with fairly serious free capital can engage in venture investments. A theoretical basis must be added to the main condition. Knowledge about risky investments is not enough.

We still need to understand the field of financing in order to adequately evaluate the project.

Risks

Any unknown product at the development stage has investment risks. In economics, there are several factors that influence the formation of unfavorable forecasts:

Mistakes when analyzing the prospects of a project

The classic model for evaluating an innovative product contains only three forecasts - the current situation, deterioration of conditions and improvement of the economic situation.

But in reality, a whole set of assumptions is used. For example, analytics managers include in the analysis the dynamics of development in the field of investment, the general economic situation in the country, consumer preferences, etc. The larger the list, the higher the risk of venture investments.

Tension within a company introducing a new product

The corporate environment plays an important role in the final result of a startup. Replacing leading managers, developers, and directors at the innovation creation stage can have a negative impact on the product, up to the complete freezing of the project (which actually happens with 75% of promising ideas). The risk for venture investments is obvious - failure to meet deadlines for implementation or abandonment of development.

False originality of the product

The risk is formed at subsequent stages of development and increases as the innovation approaches 100% plagiarism, and this has nothing to do with the dishonesty of the authors. It’s just that as implementation progresses, it turns out that it is impossible to fully realize the idea. A striking example of this is social networks, which are launched by thousands, with slight differences in the interface.

But Facebook or Twitter will remain popular.

Unforeseen implementation costs

This is the risk most innovating companies and therefore investors face. As the project develops, it turns out that the investment amounts in the business plan require upward adjustments. If a venture fund was attracted, then it leaves the project, despite the investments (the same 75% of risk included in the profitability forecast).

To the main risks we can add quite specific ones - a fraudulent startup, bankruptcy of a company, merger with large corporations, rapid entry to a stable stock exchange level, change of administration and internal policy. It is very difficult to predict exactly what risk an investor will face, so funds and investors approach financing very carefully.

Stages

The definition of venture investment implies financing a startup in the early stages of development, which in turn are classified according to the following criteria:

Early stage

Includes pre-seed stage, seed stage and early stage funding. Venture investments are insignificant at the first stage - production of a demo product, at the second - commercial promotion and, finally, a full-fledged investment for production.

Expansion stage (medium)

Investments are aimed at equipment and replenishment of turnover. At this stage, the company can already generate income and attract traditional financiers (banks).

Late stage

The company is growing rapidly and generating significant income. There are 1 to 2 years left before entering the stock market. Investments are raised for capitalization and issue of securities.

Final stage

Venture investors exit a project by selling their stake or shares on the stock market, to other investors or directly to the company to the innovator.

Where to look for projects

An investment object that will bring big profits in 3-5 years is easiest to find for wealthy people, entrepreneurs, and large businessmen. After all, it is to them that the author of the idea comes for financial support. But if you wish and have the funds, you can find a promising project for beginners in the field of venture investments:

Through acquaintances, friends, relatives

It is enough to mention a couple of times during a meeting that there is a certain amount that you want to invest in an interesting project and there will be no end to proposals. Every second aspiring entrepreneur seeks financial support for the intellectual component of innovation.

Through investment exchanges

There are many resources where startups look for investors and vice versa. For example, start2up.ru provides users with extensive opportunities for concluding transactions.

On collective investment platforms

One of the types of investment exchanges is collective investment platforms. Venture investments here are made at the final stage of a startup. The company has already issued shares, but the price is still low. You can buy shares directly on the stock exchange, which acts as a regulator of the economic relationship between the company and the investor.

If you have free capital, basic knowledge about high technologies (as an option) and there is no fear of losing your savings, then you can try to succeed in venture investments. This can be done in several ways:

Investors

The easiest way to become a venture investor is to provide financial support to people close to you with interesting ideas. The main thing is to practice professionally and methodically.

Crowdfunding platforms

Collective platforms that pool funds from small investors are the best option for small investments ($10-15 thousand). The international resource Angellist or the Russian StartTrack have proven themselves well for a successful start in venture investments. For an additional reward, experienced investors will help you avoid getting involved in an overtly risky startup and distribute finances across 10-15 projects with the most favorable prognosis.

Syndicates

A popular option for venture capital investments is early-stage syndicates. They are created both on crowdfunding platforms and by foundations. You can conduct joint financing with one of the club members. Risks are reduced through interaction with experienced investors. But profits are also declining. You will have to pay a percentage for legal support (10%), a success fee (20%) and taxes (10-15%).

Venture fund

If you have capital of more than $1 million that is lying idle, you can pay attention to venture funds. Over 3-5 years, the fund will allocate funds to 15-20 promising companies. The advantage of the investor in this case is that he has a whole team of experienced specialists working for him, which makes profit almost guaranteed. The downside is that you have to deposit all the money and forget about it for at least 3 years (on average 3-7 years).

TOP 5 Russian venture funds with a reliable reputation:

1. PBK is a state fund, operating since 2009, focused on scientific and technical developments.
2. Prostor Capital has existed since 2011 and has gained an impeccable professional reputation thanks to a low percentage of unsuccessful transactions.
3. Russian Ventures - the founder of the fund, Evgeny Gordeev, has been specializing in IT technologies for more than 20 years. Therefore, in 90% of cases he makes the right decisions.
4. Softline – founded in 2008, capital $20 million. The orientation is classic for Russia – information technology.
5. ABRT - has been operating since 2006, investing in businesses related to software development.

By entrusting his considerable money to the fund, a novice investor receives an almost guaranteed profit (90%) or at least does not go into the red, which is also considered a positive result in venture investments.

Conclusion

Venture investment is a risky undertaking for morally stable people. Despite the fairly high probability of losing our savings, thanks to investments in innovation, we now enjoy civilized benefits - aviation, railways, social networks and Apple gadgets. It is enough to give a single example to imagine the possibilities of venture investments. In 2007, Jim Breuer invested $12.7 million in the Facebook project.