Investments in New Businesses: Venture Capital

By Viktoriia Dorofeieva

In this article, we will get acquainted with such a concept as “investment”. In particular, we will learn what “venture capital” is and its importance in terms of investments in new businesses.

What is “investment”?

An investment is an input (material, spiritual, monetary, mental) into an object which, after a certain period, will provide expected income in business (and not necessarily in material terms). 

Objects of financial investment

It is not the only business that is the object of investment, there are many areas where monetary investment can generate income:

– securities;

– real estate;

– the currency of the countries with a developed economy;

– intellectual and other forms of ownership

The most popular areas for investment in new businesses:

– Buying land plots.

– Purchase of real estate, including non-residential/industrial premises.

– Reconstruction of existing buildings, their overhaul.

– Investments in ready-made business (own or someone else’s).

– Purchase of copyrights, patents, licenses, and other intangible assets.

Not all types of investments in new businesses are available for private investors “directly”. As in the case of a bank, some organizations attract funds from individuals, which are distributed among financed commercial projects as they are received.

Benjamin franklin quote about money and investments
Stages of investment in new businesses

There are several stages of venture capital investment, each of which involves the achievement of predetermined intermediate goals. 

1. “Pre-seeded“. Relatively modest funds are spent on product development or team building or market research. Investments are made based on theoretical calculations only.

2. “Seed“. Issue an experimental batch of the product.

3. Stage A. At this stage there is already a product and stable sales. Production requires dosed and constant investment as the previously allocated funds run out. This is a stage of increased risk (competitors become more active, processes within the company change), but also with more opportunities for earning.

4. Stage B. Investing in production volume and inventory growth. Business development. The sales market grows, investments will require to expand the business model.

5. The investor carries out additional capitalization, or the project reaches the level at which it can already attract classic investors.

It is very important to invest consistently so that the young company will gradually solve its problems and gradually transform business processes. Therefore, one of the key tasks of the investor is to provide every next investment package. Not earlier and not later than it is objectively required.

What for?

It is impossible to get anything in the future if you don’t do anything in the present. The purpose of any investment is to increase the amount of money invested. 

Venture investment is this?

Venture investments are risky investments in new businesses looking for a scalable business model.

In other words: investors invest in a completely modern business that claims to take over the world. Most likely, the business will fail along with the investments. But if a miracle happens and the business does not fail, investors will become co-owners of the new Google, Amazon, or Facebook. That is, the risks are off the charts, but also the potential profit is supposed to be the jackpot.

At the same time, not any new business is venture capital. For example, a young social network like Instagram will be a venture project, while a roadside cafe or hotel will not.

What for?

The main reason is profitability. Venture investments are the highest yielding assets in the world business, and successful venture capitalists sit tightly on Forbes’ lists.

To understand the order of numbers: first investments in Google were only $100,000, on Facebook – $500,000, in Apple – $150,000. Today even the minimum shares of these companies are worth tens of billions of dollars. The current capitalization of Apple and Google exceeds a trillion dollars, and Facebook capitalization is $600b.

Yes, these are exceptional cases. But the whole venture business is built on exceptions, so the examples are appropriate.

Peter thiel facebook investment
Source: Peter Thiel
Global experience

In the United States, this phenomenon has a reasonably long history – over half a century. And every year venture capitalists spend up to $30 billion on investments in promising start-ups. This is an impressive figure: the combined venture capital investment of the four leading countries following the United States accounts for about half of that amount. Venture investments came later to Europe. They also proved to be a powerful tool for a market participant who is willing to take risks for high returns. This type of investment in new businesses represents differently in most developed and developing countries. Many successful projects have started with venture capital investment, from Alibaba to Yandex.

ROI of venture capital investment

As it has been already mentioned that venture capital investments are the most profitable and riskiest investments in the world. Also, the results of venture investments are polar. Successful capitalists take their main money from the market, while the rest are satisfied with little.

Roi of venture capital investments
Source: Wealthfront

According to the Wealthfront research, 2% of the best venture capital funds generate a 95% profit. That is, the situation with venture funds is similar to the situation with start-ups – money and fame go to the strongest.

However, broad venture capital is still ahead of stock indices. According to Cambridge Associates, over twenty-five years, venture capital has shown 13.51% annual return versus 10.22% of the S&P 500 index. And the yield on early-stage venture capital was 54.4%.

Roi of venture capital investments
Source: Cambridge Associates

Pay attention: In twenty-five years, the return on early investments in new businesses was almost five times higher than the return on late-stage investments. And this is not data for a single company, but a wide range of funds.

Well-known examples of venture capital companies

Several recent sensational stories that have brought to venture capitalists from risky investments in new businesses to billion dollars profits.

Taxi Uber

Launched in 2009, it now operates in seventy-six countries around the globe. Uber shares are traded on the stock exchange, and the company’s capitalization is $64b. However, back in 2010, the Angel Round valued Uber at $4m. The value of Uber has increased by 16000 times in eight years.

uber company evaluation and key investors
Source: Yahoo Finance
Zoom

It was founded in 2009 and today has 750k users. Zoom trades the shares on the exchange; the company’s capitalization is $24b. The company’s valuation on Series A was a thousand times less and was 24.5m. Seven years have passed since then.

zoom company evaluation
Source: Craft
Airbnb private house rentals

The same Uber, only for rent, not for taxi hire. Airbnb started work in 2008 and currently values at $35b. This is one of the few venture capital projects that has a positive operating profit. The Angel Round evaluated the company at $2.5m. It grew 14,000 times.

airbnb company evaluation
Source: Craft

After reading this article you have a complete overview of the investments’ word and venture capitals potentiality. You may find interesting the 9 reasons why you should invest in both Slovenia and Luxembourg for running your business.

If you run out of experience and knowledge on the topic and you want to invest for the first time, this article is for you.

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