Peculiarities of venture capital investment: what you need to know
In order for a company to scale and grow, it needs money, and a venture capitalist can give it. It is a company or an individual who invests in startups, most often technological ones. Both parties benefit from such cooperation – the business will receive the necessary capital for further entry into the market, and the investor can count on a part of the income in the future. However, not to be at a disadvantage, it is necessary to take into account the peculiarities of venture capital investment.
The main goal for such businessmen is to develop the startup and increase its capitalization. Venture capital activity carries risks, and one should understand that profits can be expected for decades, but one should invest now.
For example, an investor financed a startup at the initial stage of development, and bought its stock for a few cents. Over time, the company began to cost more, its securities rose in value to $1, then reached the mark of $100 per share. Accordingly, the funds invested in the early development of the company have now brought the investor a good profit, and the papers can be sold at a high value.
However, it should be remembered that startup shares are not a liquid instrument that can be sold at any time, as, for example, in public companies. In this case, you will have to look for someone willing to buy securities of such a company on your own, because it will not be possible to do this through the stock exchange. In addition to illiquidity, it is worth remembering the risks – the market has many start-ups with a good idea, but success is achieved by a few. Therefore, a venture capitalist should be prepared for the fact that most of his investments will not give the expected profit.
A project in the early stages of development is riskier, and if you work with such options, it is better to invest in many different startups, but with small funds. For example, if there is a budget of $10 million, it is better to invest 100 thousand each in 100 early-stage companies, and hope that what number of them will bring profit and recoup losses in others. More often than not, about 80% fail.
For projects in the later stages of development, you can use the option of investing 2.5-3 million dollars, and you get only three companies. In this case, if everything is correctly calculated, the level of risk will be the same in the first and second cases.
It is also necessary to form a financial reserve, since some of the companies to be invested will need help. Here it is also important to choose which startups can and should be saved, and which do not make sense.