Venture capital investment: what it is, risks and prospects

Venture capital investments are investments in innovative and promising projects that can grow quickly and bring significant profits. This type of investment is one of the riskiest, as only 25% of startups meet expectations. Approximately half of them perform worse than planned or go bankrupt. Only 10% achieve their goals, and only one out of a hundred becomes a “unicorn”, bringing investors multiple profits.

Most often venture capital funding is directed to the IT sphere, including the development of software, applications, ecosystems, cloud computing and AI that can attract the attention of a wide audience or large customers.

Let’s take a closer look at venture capital investments: their types, features, pros and cons, and opportunities for profitable investments.

What is venture capital investment

Venture investments are investments in fast-growing innovative startups with the aim of obtaining high profits in the future. They are characterized by a high degree of uncertainty and the risk of complete loss of investment if the original plan is not realized.

A venture capitalist is a professional (company or individual) with large capital and expertise in startups. The strategy is usually to invest in multiple projects, where successful investments offset losses from unsuccessful ones.

Characteristics of venture capital projects

A venture can be a startup with the potential for rapid growth and high profits. An example would be an innovative exchanger that uses new technologies to capture the market. A venture project must have:

  1. Innovativeness – utilization of new ideas and technologies.
  2. Technological – compliance with modern technological standards and a high profit-to-cost ratio.
  3. Leapfrog growth – rapid transition from a startup to a large business.
  4. Scalability – the ability to quickly capture markets and expand the customer base.

Types of venture investments

According to the stages of project development:

  1. Seed Capital – investments at early stages, when the project exists only on paper. This is the riskiest stage.
  2. Startup Capital – financing at the stage of testing and finalization of the product.
  3. Early Stage Capital – investments in startups that have started sales but have not yet achieved self-sustainability.
  4. Expansion Capital – funds for scaling up production and entering new markets.
  5. Bridge Financing – pre-IPO support.

By source of funding:

  1. Angel Investors – individuals providing early stage capital.
  2. Venture Funds – organizations that raise money to invest in startups.
  3. Corporate venture funds – divisions of large corporations that finance innovative projects.
  4. State venture capital financing – programs to support startups at the state level.

Principles of functioning of venture investments

Young ambitious projects often need capital. Banks do not lend without collateral, while venture capital funds and business angels can assess and take risks by investing in many startups. This allows them to hope that at least one project will succeed.

Startups grow quickly and need capital at all stages until they become attractive to large companies or IPOs. However, venture capitalists get a piece of the business and can influence its development, which also brings management skills and connections to startups.

Risks of venture capital projects

The main reasons why innovative projects fail are:

  1. Insufficient funding.
  2. Improper positioning in the market.
  3. Problems with the product.
  4. Inexperience or conflicts in the team.
  5. Inability to scale.
  6. Ineffective management of resources.
  7. Changes in industry or technology.
  8. Legal problems.
  9. Unsuccessful marketing strategy.
  10. Lack of customer focus.

Pros and cons of venture capital investment

Advantages:

  1. High returns.
  2. Opportunity for passive participation.
  3. A chance to become the owner of a large company.
  4. Tax benefits.

Disadvantages:

  1. High risks.
  2. Specific knowledge is required.
  3. Low diversification.
  4. High entry threshold.

How to become a venture capitalist

Venture capitalists are successful entrepreneurs who want to invest in new businesses. They can act individually, through crowdfunding platforms or as part of investment clubs. Investors must have sufficient capital, knowledge, choose a direction for investment, analyze projects and participate in their development.

Earnings on venture capital projects

For successful investing you need to:

  1. Have the necessary amount of money to lose.
  2. Be educated and follow the market.
  3. Choose the direction of investment.
  4. Analyze the business plan and the potential of the project.
  5. Negotiate the terms of the investment.
  6. Participate in the development of the company.
  7. Sell assets or shares in an IPO.

Conclusion

Venture capital investment is investing in high-growth startups with the aim of earning high returns. It is one of the riskiest types of investments, requiring significant capital and knowledge. You can enter the market as a private investor, through funds or crowdfunding platforms. The more developed the company, the lower the risks and potential returns. Investors earn returns when assets are sold in a takeover or IPO.