Venture capital investments


You may have heard the expression “venture investor” more than once, but not everyone is familiar with it. In this article we learn what a venture capital investment is, and also how to make money from it.

Definition

Venture capital investments are funds that investors give to companies or organizations that are starting their way. Simply put, these are investments for a startup of a new project. In the case when the project goes uphill and begins to develop, bringing profit to its creators, investors who have invested money also earn. But if it turns out that the company goes bankrupt, ceases to function, then venture capital investments “burn out”.

It is difficult to predict the future of a startup, where investors rely more on luck and experience. This makes venture capital investment far more risky than other types of investment. But of course, there’s another side to it, which is that it’s more profitable. If the project becomes successful and in demand, then the investor can earn a fortune.

Venture capital investment is mainly popular in the United States and Europe, the main market direction of such investments are high-tech projects and innovative companies. An example of such a project can be seen by almost everyone on their phone-this is the Instagram application. In 2010, Steve Anderson invested $250,000 in the app. His fund owned 12%. Two years later, Facebook bought the app for $1 billion, making Anderson almost a legend in the field of venture investors.

Another person who has successfully invested his savings is a professor from Stanford, David Cheriton. He made his fortune and got on the Forbes list thanks to investments in the project of his students Sergey Brin and Larry Page. In 1998, students needed money for their company Google, then Cheriton invested in a venture in the amount of $200,000. These examples can be considered an exception to the rule, but this is the idea of a venture.

The stages that the company goes through at the stage of formation:

  • Formation of the project plan.
  • The beginning of the development of stages.
  • A startup sells itself on the market, but without a stable profit.
  • The business occupies its niche and begins to become stable, but there is a need to expand production.
  • The business has become public, a strategic investor buys out the share of a venture capital one.

When an investor invests at first , it will mean that he has invested in a venture.

Why do they invest in venture capital?

Venture capital investments have the largest returns in the world, among all investments. And venture investors who are lucky enough to become fabulously rich and can easily get on the pages of Forbes magazine.

Investors risk their personal funds if they like the idea of the project or the company itself, which needs money.

The next reason investors invest their savings in such risky startups is because of emotion. For example, a person decided to invest in a business that will produce household chemistry and if the project is successful, the investor can only be happy with profit and nothing more. But if that same person were to invest their savings in a company, say, Tesla, then they become part of an innovative business that will continue to grow. However, if he invests a sizable amount of money, he will become a popular person in the investment world.

How investors find a successful project

In the investment world, there’s a phrase, “Guess a unicorn”. What does that mean? Investors have this notion of “The Unicorn,” which is to find a project that can be valued at a billion dollars or more. I mean, finding a startup like that is pretty problematic, and so is a unicorn. In a mythological creature, an investor can invest about $100,000, and when the business takes off and starts to be valued at a billion dollars, it can sell its stake to strategic investors with a high profit margin. The latter, in turn, invest in the already formed “unicorns”, and the ventures exactly look for such startups at the stage of their birth. To date, the largest number of such projects have been in the United States and China.

In order to increase the chances of success, venture investors invest their money in several new projects at once. The goal of this approach is logical: to find among the “dummy” companies one ” unicorn” that will not only be able to recoup all unsuccessful investments, but will also allow you to earn good money.

Such investments help prospective developers realize their ideas. They receive a steady stream of financial support and, as the company starts to earn, investors sell their shares. It’s a win-win for everyone.

  • Developers can implement their ideas.
  • Investors make money on this.

What can be the income and what are the risks

As mentioned earlier, venture capital investments can have a large income. And what it will be, already depends on the stage at which the financing of the developing project was made. If you invest money when the project is at the beginning of its path, then along with greater risks, the profitability will be higher. The average share can be 5-10%. If you start investing in an already developing project, with a ready-made business model, then the risks become minimal, but it will be more expensive to enter such a business.

It is worth knowing: when an investor invests in a new project, he will be able to sell his share or shares only when there is a buyer, otherwise you will have to wait for the business to go on the stock exchange.

There are a lot of other problems that the investor may not even be aware of at the beginning of the startup. One of the frequent problems is document writing. When a contract is concluded, it is worth remembering that it is better to hire a qualified lawyer to help make it. If this is not done, it may be that the contract may be designed in such a way that the investor will gain less profit than he had hoped at the beginning, or lose no profit at all.

The next challenge that investors often face is taxation. In each country, it may be different. Therefore, careful consideration should be given to this paragraph, otherwise the investor would have an unpleasant opportunity to become acquainted with double taxation.

And of course, it is desirable for a person to have good capital before becoming an investor. And that’s because many projects that might have a promising future would have to be well invested.

Conclusion

What conclusion can be drawn from all of the above? Venture capital investments in simple words are investments that have great risks, while they are the most profitable in the world. An investor can enrich himself by investing a small amount in a promising project at the stage of its inception. Much of this kind of investment depends on the luck and experience of the investor. You can try yourself in a venture if you have patience and are ready to wait for a profit for more than one year, and also do not be afraid to lose everything that you have invested if you make a mistake with the project. But as they say, the risk is worth it, because if you manage to find the ” unicorn”, then the investments will multiply tenfold and even, perhaps, your face will adorn one of the pages of Forbes magazine.

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