It takes a lot of investment to bring a promising idea to life. Many investors choose not to get involved with companies that raise funds to enter the market with some innovative product, new service industry or scientific development. Credit organizations are reluctant to provide funds for startups, as there is always the possibility that the project will be unprofitable or will not start at all.
But, despite the high percentage of risk, for each new business, there may be someone willing to invest in it in exchange for a block of shares in a start-up company. The finance that is attracted to various innovative start-ups is a venture capital investment in simple terms.
Types of venture investments
- Depending on the stage at which a startup is, experts distinguish four types of venture capital.
- To start a business / production. Considering that investments take place at the stage when there is only an idea, and the company is not yet registered or is in the process of registration, this is the most risky type of investment. Research by Forbes magazine shows that 50% of startups close in the first five years.
- Expansion / development. A new business can work stably and even bring some kind of profit, but the company does not have funds for development, implementation of new ideas, expansion of the area, launch of new products. Banks are not supporters of the venture capital market, so they try not to lend to those who have recently started their activities and do not have significant achievements.
- Targeted investment. The project is launched, the business is running, goods are being produced, and services are being provided. But even in this case, there are some unplanned expenses. For example, when a cash gap occurs, which often happens in young enterprises, or when expensive equipment breaks down. Targeted support for an operating company can be provided in exchange for a seat on the board of directors or the provision of a large block of shares.
- Anti-crisis investment. If the project is under the threat of bankruptcy, but investors see good prospects in it, finances are used to refinance debts, pay salaries to employees and other mandatory payments. Rescuing a startup from the crisis, an investor can get a key position in the company or even a controlling stake.
Features in the venture capital market
To finance any project, an investor must find it, agree on conditions with the responsible persons, complete a deal and wait for the result. Only the most risky invest in startups that are at the very initial stage of their implementation, because everything is shrouded in uncertainty: how the company will behave in the market, how will potential competitors react, whether the product / service will find its consumer.
Investments at the initial stage involve huge risks, but they give the investor the opportunity to get a large share in the company for a relatively small amount. At the same time, there may be a chance that the investment object will become successful, such as Microsoft or Tesla. Those who invest in a business at its inception stage are called business angels.
The more confident a young company feels in the market, the more of its ideas it has already implemented, the higher the entry bar for a venture investor will be. Taking into account the fact that the business is already working, the risk for investors will be several times less than for business angels.
In both cases, you can forget about quick income, since all profits will be spent on business development, sales and marketing activities.
Pros and cons of venture capital investments
For a beginner entrepreneur, every penny is valuable, so getting money for the development of a startup from an investor, and not from a credit institution at a high interest rate, is a great success. The business will develop without the credit burden hanging over the company with a monthly payment.
The investor has every chance to get unlimited profit with a small investment and become one of those who helped found something great.
Venture capital investments have one huge drawback: if the startup fails and there is not enough investment to save it, the investor will lose everything that he invested, and without any compensation.
Venture funds
Both private investors and investment funds, which are called venture funds, are engaged in investments in new businesses. They are engaged in investing money in a seemingly promising business at its initial stage. As a rule, the overwhelming majority of transactions turn out to be unprofitable, but the profit from other projects covers all losses and brings the fund to a plus, which is what the venture capital funds are based on.
