What is venture capital investment?

Venture capital investments is a type of investment in which investors invest in early-stage, high-potential startups with the expectation of a high return on investment.

#VENTURE

#INVEST

#ВЕНЧУР

Venture capital investments is a type of investment in which investors invest in startups at an early stage and with high potential, expecting a high return on investment. The purpose of venture capital investments is to support and develop a startup, which in turn can lead to the company's IPO or takeover by another company. Venture investments offer a higher level of risk than traditional investments, but their rewards can be more substantial if the startup becomes successful, which makes them attractive for startups and investors alike.

Startups are financed by private or institutional investors known as venture capitalists (VCs). Venture capitalists typically invest in early-stage companies that have a unique product or service, a promising business model, and a strong management team. In exchange for their investment, venture capitalists receive a stake in the startup, which gives them a say in the company's strategic decisions and a share of its future profits.
The process of venture capital investment typically involves a series of negotiations and due diligence between the startup and the venture capitalist. The startup must present an attractive business plan that lays out its vision, market conditions, and growth strategy. And if this convinces him that the startup has the potential to succeed, he decides to fund the company.
Once the investment is made, the venture capitalist provides the startup with valuable experience and support. This can include advising the company on its operations, helping to build its management team, and networking with key industry players. The VC also plays an important role in obtaining additional funding from other investors.

The process of venture capital investment usually includes several stages, each of which serves a specific purpose and offers different benefits to both startups and investors. Thus, the following stages are distinguished:

Seed stage. This is the earliest stage of venture capital investment, when startups are just starting to develop their product or service. At this stage, startups can get funding from angel investors, friends, acquaintances and family of the funder, and if they are lucky, from seed-stage-oriented venture capital funds. The purpose of the seed stage is to provide startups with the capital they need to validate their idea and develop a minimum viable product (MVP).


Early stage. The stage when a startup has already developed a minimum viable product (MVP) and is looking to expand. When the startup has proven to be viable, it has a wider range of willing investors. Early stage funding is needed to provide startups with the capital they need to launch their product or service into the marketplace, expand their customer base, and build a sustainable business model.

Expansion stage. Comes when a startup has established itself in the market and is looking to expand its operations and reach the next level. Often the initial investors at this stage seriously increase their financial support, actively attracting new investors through their channels. In addition, retail investors start to get involved in investing at this stage. At the expansion stage, it is necessary to provide the startup with capital to scale its operations and increase its presence in the market.

Late stage. At this stage, startups become established companies with a proven successful track record. As a rule, there are no problems with financing at the late stage due to the attraction of the widest range of investors, but there is a serious threat of over-inflating the company's value. At this stage of development, the venture capital exits.

This can happen in three ways:

1. The company goes public - there is a stock market entry through an IPO;
2. Takeover of the company by another company;
3. Sale by over-the-counter transaction (rare).

Investing at each stage has its own disadvantages and advantages. Understanding the stages of venture capital investment, their goals and objectives, is crucial for both startups and investors, as it helps to make informed decisions about the type and amount of capital needed to achieve certain goals.

As with any investment, it is important to carefully weigh both the advantages and disadvantages before making a decision. The advantages and disadvantages of venture investing in general (depending on the stage of development of the startup, one or another point may dominate or lose influence).

Advantages:

1. High return potential. Venture capital investments can bring high returns if the startup becomes successful and goes for an IPO or is acquired by another company;
2. Diversification. Venture capital investments can help investors diversify their portfolios and reduce overall risk;
3. Access to new ideas and technology. By investing in startups, investors move beyond traditional conservative financial instruments and ideas;
4. Direct access to the startup, its team and founder. Thus there is an opportunity to directly influence the vector of the company's development.

Many like to focus exclusively on the advantages, leaving all the disadvantages out of brackets, but in the end such an approach is detrimental to both the disseminator of one-sided information and the recipient.

Disadvantages:

1. High risk. Venture capital investments are considered high-risk because startups have a higher probability of failure than established companies;
2. Long investment horizon. Funding often occurs at the very nascent stage of a company, when there is still a long way to go to break-even and profitability metrics;. Venture capital investments are considered high-risk because startups have a higher probability of failure than established companies;
3. Lack of liquidity. Venture capital investments are often illiquid, which means that investors cannot easily sell their stake in the company;
4. High entry threshold. To guarantee success, you often have to invest in dozens of projects in parallel with a large check.

How to become a successful venture capitalist

Becoming a successful venture investor requires a combination of knowledge, skills and experience. Let's highlight and consider a few key points.

To begin, it is necessary to develop a thorough understanding of the venture capital industry. This includes an understanding of the different stages of venture capital investment; the types of companies that are typically financed; and the risks and benefits associated with venture capital investment. This knowledge will help you make informed decisions about which companies to invest in and when to exit the investment.

At the same time, you need to build yourself a network of industry contacts. Building a network of industry contacts is critical for any venture capital investor to stay abreast of new investment opportunities, market trends and industry news. Building relationships with entrepreneurs, venture capitalists and other investors will also give you valuable insight into the investment process and help you make more informed investment decisions.

Next, develop a strong investment thesis. This is the set of criteria you use to evaluate potential investment opportunities. It should be based on your understanding of the industry, your investment goals, and your tolerance for risk. The investment thesis will help you make more informed decisions about which companies to invest in and how much to invest.

Strive to build a diversified investment portfolio. Diversification is key in any investment portfolio, and venture capital is no exception.

Constantly monitor and re-evaluate your investments. Things change very quickly - yesterday you invested in a promising growth company, and today the core team members have left it or the macroeconomic sanction has changed. That's why it's important to keep your finger on the pulse of your investments so you can make informed decisions about when to exit.

It's never too late or judgmental to seek mentorship and guidance. You should always learn from more experienced venture capitalists - it's the only way to concentrate on another person's trial and error experience instead of going through everything yourself and spending more time.

There are many criteria according to which the general state of venture investing in Russia for the current year 2023 is considered to be terrible. The main two are as follows:

1. The sheer number of sanctions imposed on the financial sector of the Russian Federation is seriously impeding the flow of Russian capital. Russian money has become toxic. Many channels previously used for investing have been cut off for Russian investors, and new loopholes to circumvent the restrictions are constantly being closed.
2. Political uncertainty prevents long-term planning. Everything is changing very quickly and dramatically, and investors have no influence on these changes. Previously set aside capital for risky investments, many are forced to spend it on things and services that are more necessary in the here and now.

And there is only one criterion, according to which everything is not so bad. And it is rather applicable to the venture capital industry inside Russia. It is in the moments of the greatest uncertainty that the strongest companies are born, which are destined to become successful, besides the thresholds for entry for investors have fallen significantly. The one who discerns a unicorn in the turmoil will win here.

Fortunately, in the modern era, tools are emerging that were unavailable to previous generations of venture capital investors. Tools that make it easier to dive into the world of venture investing, lower the entry threshold for the investor, and have a clear and user-friendly interface.

One such tool is our AM Capital platform, thanks to which you can learn not only in theory but also in practice what venture capital investments are and how to make money on them.