Venture investments are Types of venture investments

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Venture investment helped many companies reach a high level and brought a lot of money to investors who believed in young and talented professionals. But this does not change the fact that this activity is inevitably associated with high risks.

Venture investments and venture business

Such investments can be described as the investment of funds in a specific company, project or idea that is at the very beginning of its development and implementation. Of course, such an investment is associated with high risks. But at the same time, many investors are ready to act, because if the project develops successfully, they will receive significant profits.

You could say that the risk that comes with VC investment is proportional to the level of return possible.

As a rule, progressive developers or novice businessmen form an actual idea, which in the future can bring a very high income. But, as is often the case, they do not have the necessary funds to launch the project. In this case, startups turn to investors, presenting their idea to them. Individuals who agreed to finance a risky project with a brightperspective, become co-owners of the newly formed company.

So venture capital investment is one of the ways to earn fast and risky money. At the same time, it is also possible to purchase shares of a company that has recently entered the stock market. There is also an expectation that the value of securities will increase significantly over time.

Types of venture investments

In principle, it would be logical to categorize not the investments themselves, but the companies that apply for them.

You can start with a startup. This is a company that was recently formed and, accordingly, does not have a long market history. Such organizations are in need of funding, due to insufficient funds for research and development activities and the organization of subsequent sales. Venture investments in startups are one of the most popular areas.

Investing in a project that is at the idea level. In this case, there is also a need for additional research and testing to create pilot samples of the product before it is brought to the market.

Investments can also attract those companies that are already fully functioning, but are experiencing a crisis of funds needed to expand sales and production. Funding is often used to increase fixed assets of working capital or conduct market research.

Another object of investor interest may be an organization withfinished product, but at the same time being at the initial stage of commercial implementation.

As you can see, venture investments are quite a popular investment direction.

Venture business

This term should be understood as investments, which in most cases have the form of share capital. It is invested, as a rule, in fast-growing enterprises that demonstrate significant potential. Such funds are often directed towards the implementation of current technological innovations.

Such funding is focused primarily on the commercialization of the results of scientific research in high-tech and knowledge-intensive areas. Prospects for such investments are not guaranteed, and the risk is, of course, significant.

In this case, venture investments are the type of financing in which investors are not focused on receiving dividends. Their goal is to sell their stake in the company after its market value is high enough.

As for the process of selling such a share, it can be put up on the open market. Another company developing in the same area is also capable of buying it. The interest of business partners, who will be happy to increase the percentage of their investments within the framework of a particular project, is not excluded.

Entry threshold for investment

In order to understand the essence of venture investments, it is worth considering the mechanism of their action, which may have certain features. One of them ishigh entry threshold.

We are talking about the following fact: venture investment requires a minimum of 10 thousand dollars, and in some cases several million. Therefore, for those who have a couple of thousand, it makes no sense to consider such a prospect.

But there is an alternative for those who have some funds and are willing to risk them. This opportunity is provided by joint investment institutions or funds. Each such fund has a manager whose activity is limited to the accumulation of funds from small investors and their subsequent investment in a promising project. The risks do not become less.

A tangible and obvious disadvantage of such a scheme is that all fund participants are forced to rely on the competence of the manager, not being able to make decisions on their own.

Lack of control and long investment horizon

Another feature of venture investments is that none of the persons financing the project seeks to have a controlling stake, as well as to manage the company. The only thing they agree to is the risk of losing investment. As for the responsibility for the development of the project, it falls mainly on the shoulders of top managers. But if the company is developing rapidly, and investors fix the wrong, in their opinion, sides of the strategy, then they can become directors to exercise personal control over the organization's activities. But this is more the exception than the rule.

As for the long investment horizon, we are talking about the inability to withdraw the invested funds at any convenient time. This is due to the fact that almost always the entire amount of investments is mastered by the project, and they can be received only if the company manages to stay on the market. Initially, it should be understood that some companies may need several years from the date of launch to enter the stock market.

No guarantees

Venture investment is a type of investment in which players receive either all or nothing. This means that after the fact of financing, the investor can wait years for the company to develop and eventually sell his stake for several million dollars. But there is a risk that after a long wait, the project will be unprofitable and all investments will be lost. In the vast majority of cases, the real profit of startup participants can be determined only after the company's shares are publicly placed on the stock exchange. As a result, the price of the company's shares will be determined by its investment attractiveness.

The situation in Russia

If we consider Russian venture investments, it is worth noting that this direction of financing cannot be called particularly popular in the CIS. Initially, even the most promising projects within the Russian Federation were invested mainly by foreign investors. But at the moment, Russian venture funds have already formed, which develop this type of investment. For example, OAO Russian Venturecompany together with the REVI Association monitors various funds on an ongoing basis and provides qualified assistance in their development.

For these purposes, various specialized presentations, forums and exhibitions are organized.

Conclusion

Venture investing is certainly popular in the world, as it allows the development of bright companies and often brings fabulous returns. But it is worth remembering that many investors have lost funds invested in seemingly promising projects. Therefore, we can conclude that this path is for experienced businessmen.