The modern economy is a complex structure in which investments have a special place. The latter, in turn, with the simplest classification, can be divided into risky and relatively risk-free. Risk investments are also called venture investments, and here venture funds play a separate important role.
This article explains in detail what a venture fund is, how it works, how it differs from a venture capital company, and which funds are included in the TOP 10 by investment size in 2022.
- What is a venture fund
- A venture fund and a venture company are not the same thing.
- Types of venture funds
- How does a venture fund work?
- How to create a venture fund
- How to raise money from a venture fund
- Best Venture Funds in 2021
What is a venture fund
Concept of a venture fund
Venture fund
is a type of investment fund that invests money in high-risk startups, securities, or private equity investments with the goal of achieving extremely high returns. According to statistics, about 70-80% of venture investments “burn out” and only 30-20% pay back all the funds invested, including those that did not bring results.
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About 90% of venture capital investments have the highest degree of risk.
By registering its fund as a venture fund, the company automatically receives the rights to conduct more risky investment activities (there is no obligation to diversify risks), buy corporate rights, and issue loans to companies.
Sources of venture fund financing
A venture fund can receive funding from various sources:
- State corporations and companies;
- Individuals;
- Banking institutions;
- Pension funds;
- Investment companies.
Venture fund funds can be used to finance projects from any industry (however, at the same time, there are also industry venture funds
, which sponsor projects from certain areas). The stage of development of the project is also unimportant - even startups that are at the idea stage can receive money.
In 2022, most venture capital funds will invest in the following industries:
- Information Technology;
- Pharmaceutical sector;
- Healthcare;
- Industry;
- Real estate;
- Trade.
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The main goal of a venture fund is to obtain excess profits, so most of the projects in the fund’s portfolio are startups with the potential for rapid growth or promising projects of well-known companies.
What a venture fund is is explained in simple words in the video below:
Venture fund in simple words
Main stages of venture investment
Venture investment, like other types of capital investments, goes through several stages - from the emergence of an idea, a specific product sample and a business plan to the launch of the product on the market, the project reaching payback, after which the company becomes an independent player.
The main goal of a venture fund, therefore, is to make initial investments for the rapid promotion of a startup, which subsequently transforms into a successful commercial company. There are at least 5 different stages along this path.
Pre-start (“seed”) stage
At this stage, the company as such has not yet been created; only an idea is being sought for drawing up a business plan. The startup has to prove that his project will be commercially profitable and will pay for itself in a fairly short time, i.e. “sow” confidence in your business. The fund invests small funds in developing a business model, creating a prototype product (for example, a technical tool), preliminary market research and recruiting a team. Also at this stage, a business plan is developed, which is compiled based on the obtained market data.
Early stage
This is the early funding stage. If the startuper convinces the fund that their proposal is profitable, they become full partners and continue cooperation. Since the product has already been created and has passed the first (pilot) tests, at this stage funds are allocated to its promotion on the market.
On the other hand, investments are also made in organizational processes. A company is created, the relevant documents are drawn up, a team is actively recruited, the composition of the management is determined, with whom the fund agrees on the main priorities for the near future.
Middle stage
This stage is also called the expansion stage. The company is actively developing, mass production of products is being launched. For this purpose, production facilities, equipment and other necessary property are purchased. In some types of startups, payback occurs already at this stage, but often this is not possible.
Late stage
This stage is characterized by the company’s transition to the stage of full payback. Profitability must be stable and not stop over several months or years. Then they talk about the positive cash flow that the company attracts. Investments from the venture fund are already minimal; only individual investments are possible if necessary. Financing is also provided in cases where it is planned to bring the project to the stock market after 1-2 years.
Final stage
Finally, at the last stage, investors leave the company. This means that they sell a majority stake to the original owners, either by making them available for management buyouts or by listing them on the stock market. In this case, the sale of shares occurs at prices that significantly (several tens of times or even orders of magnitude) exceed the initial value of the controlling stake. It is through this that venture funds receive the bulk of their profits.
A venture fund and a venture company are not the same thing.
Venture fund management company
A venture fund and a venture company are two different concepts, although in Russia they are usually used as synonyms. But from the point of view of terminology, this is incorrect, since a company (or firm) is a legal structure and the individuals who are part of it and manage funds. And a fund is precisely the assets managed by a venture capital company.
In Russia they often say “Pantera Caüital venture fund,” but this is incorrect, since Pantera Caüital has many different funds that differ in the type of assets, industry focus, geographic policy, etc.
several funds under management
, therefore, it is more correct to use either simply the name of the company, or use the expression “management”, “venture firm”.
Goals and objectives
The investment and venture fund aims to achieve high profits. To protect investments, enterprises invest in dozens of startups and thereby insure themselves against the risk of losing funds. According to statistics, 7 out of 10 start-up companies go bankrupt, so money is invested in several projects, which provides insurance against loss of funds. Even if 70% of the investment burns out, the rest will bring profit and cover expenses.
The tasks of such structures:
- Accumulation of investment capital by collecting funds from investors.
- Market analysis and selection of businesses with high growth potential.
- Financing projects with the highest potential profit.
- Taking a business to an IPO or selling a business.
As a rule, venture capital funds work with 8-10 companies at a time. After the business becomes independent and generates stable profits, it is sold. The reasons for the decision are related to the fact that the management of such structures is focused on obtaining excess income in a short period of time. This is necessary to cover losses from bankrupt firms.
Types of venture funds
Types of venture funds
Venture funds can be divided into several types, depending on specific characteristics. The classification below is typical for Russian venture funds.
By
capital
formation :
- State;
- Private-public;
- Corporate (foreign and Russian);
- Personal (business angel venture funds).
By geography
investments:
- Investing in Russian companies;
- Investing in foreign companies.
By volume of funds
:
- Small (up to $50 million);
- Medium ($50-150 million);
- Large (from $150 million).
By region
investments (only in Russia):
- Federal;
- Regional.
Industry venture funds
By industry
focus:
- Universal (invest in different industries);
- Highly specialized information technology venture funds;
- Highly specialized venture funds of the real economy.
By investment stage
:
- Pre-sowing, sowing, starting;
- For development and scaling.
By level of investment portfolio diversification
:
- Poorly diversified;
- Highly diversified.
Some facts about venture funds in Russia:
- State venture funds occupy 30%, corporate and financed by business angels – 70%;
- More than 90% of funds finance the Central Federal District (Moscow and surrounding cities);
- 80-90% of funds finance exclusively the information technology sector;
- Only 10% of funds engage in seed and seed investments.
Advantages and disadvantages
The benefits include:
- financial support for several years;
- during the implementation of the project, the fund does not require interest on the invested money;
- good return on investment;
- promotion of scientific research developments to the consumer circle;
- non-financial support for the company before it enters the market.
Disadvantages of this type of investment:
- high entry threshold for private investors;
- the investor cannot independently decide where to send the funds; the organization in question does this independently;
- long payback period;
- There are many investments where there is a high level of risk, but there are a large number of projects with low risk.
How does a venture fund work?
The principle of operation of a venture fund
How a venture fund works:
- Venture fund managers receive a list of investment projects that have applied for funding.
- Relevant documents are drawn up.
- The fund selects projects and startups to which funds will be allocated.
- Participants in the venture fund contribute funds and the management company also allocates money.
- The venture fund provides stage-by-stage financing of projects.
- The venture fund provides control and advice throughout the entire stage of project financing.
- At the end of the financing stage, the fund receives income from the sale of shares and/or its share in the business.
- Profits are distributed among the participants of the venture fund.
Let's consider some important points in the work of a venture fund.
It all starts with the venture fund receiving applications for funding. Most companies themselves send applications to a venture fund to receive funding, but 90% of them are eliminated at the initial selection stage. Causes
can be very different:
- Incorrectly drawn up business plan;
- Poorly completed documentation and application;
- Inconsistency with industry, geographic, scientific and technical, etc. fund policy.
The 10% who passed the initial selection proceed to the next stage - analysis of risks, marketing and economic profitability.
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As a result, only 1-2% of companies receive funding from a venture fund.
On average, one fund finances 10-15 projects at once, of which 70-80% will fail and only 20-30% will bring excess profits and recoup failed investments.
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Based on this, we can name the main rule that venture funds follow - to invest money exclusively in those projects whose profits in the future will reach the size of the initial capital. Therefore, companies with systematically slow revenue growth are not included in the sphere of interest of venture funds.
Venture fund investment objects
Which companies are the object of investment by venture funds:
- Projects (sometimes even at the idea stage) that are engaged in primary development or conduct research to release a promising product and need funding;
- New companies that have just entered the market and need funds to scale their activities;
- Companies that are developing a new product;
- Well-known developed companies that need additional financing to increase production speed and expand sales markets.
According to statistics, most venture funds prefer to invest in developed companies.
Despite the fact that a venture fund represents a medium- to long-term investment (from 3 to 10 years), at the end of the round the management company always
exits a startup (unlike strategic investors and some business angels). Correctly determining the moment to exit a business is one of the most important tasks of a venture fund.
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This should be the point of development when the growth of the startup’s profitability will slow down, move into the stage of systematic increase in income and stop bringing in excess profits in a short time.
Exit from the investment round can occur through the sale of securities or shares in the business:
- On the stock market through IPO;
- Strategic investor;
- Startup founders.
Distinctive features
Distinctive features of venture investment projects:
- The fund allocates money for a long period (5 – 10 years) and does not require its return. That is, he completely takes on the risks of failure and is aware that he can easily earn and easily lose everything.
- There is no interest, guarantors, or pledge of property, unlike lending by commercial banks.
- The fund and the project owner become equal partners who are equally interested in success. Hence, not just the transfer of money to implement the idea, but also comprehensive advice from experienced experts. For startups, such assistance at the initial stage is sometimes more important than financing.
- Failure and loss of money do not lead to the bankruptcy of the owner, the imposition of penalties on him, the sale of property and other “delights” that await a defaulter on a bank loan. We took risks together with the fund and lost together.
According to statistics, only 70–80% of projects financed by venture funds succeed and allow owners and investors to earn huge fortunes. The rest of the investments turn out to be unsuccessful. But it is precisely these 20–30% that make this risky business one of the most highly profitable.
I have already partially touched on the topic of bank lending. I would like to dwell in more detail on the comparison of venture investments and the ability to finance a project with a loan.
| Characteristic | Venture fund | Bank loan |
| Opportunity to receive money for an innovative project | High, that’s exactly what the fund exists for | Strives for 0. The bank needs a clear economic justification and a stable position of the enterprise in the market |
| Security | Without collateral of property and guarantee. The fund has a stake in the company. Upon achieving certain results, he sells it and makes money on it | Pledge of property, surety |
| Redemption | There are no monthly repayments or interest. The fund is entitled to a share of the profits as the owner of a share in the company | Monthly mandatory repayment of the loan and accrued interest |
| Role in the development of the company | Direct participation, since the foundation is directly interested in success. Professional analysts, economists and investors advise the owner at all stages of the project | No participation. The bank is interested in returning the issued funds |
| Financing terms | Investments are transferred in one or more tranches. The refund period is not specified | The return period is clearly stated in the contract. Violation entails sanctions |
| Risk | High. But funds deliberately go for it, expecting high returns in the future | Low, since the interest rate includes the risk of non-repayment of the loan. And a bail or surety reduces it even more. Plus banks often require insurance |
How to create a venture fund
The principle of creating a venture fund
How to create a venture fund:
- Create start-up capital.
- Form an investment strategy.
- Select jurisdiction.
- Select investment region.
- Prepare documentation for conducting activities.
- Form a team.
- Start investing.
Let's look at some points in more detail.
This issue is most relevant for private investors who have relatively large starting capital.
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It is recommended to allocate no more than 10-15% of all savings for the formation of a venture fund.
For a small investor (business angel), the best option would be to form a venture fund for seed and start-up investments
, since the capital in this case can be about $2 million. To participate in the financing of large well-known companies, the starting capital should be about $10-15 million.
When choosing a strategy, first of all, the investment period is selected; on average, you need to count on 5-10 years. When investing in particularly promising companies, it can be significantly less and be about 3 years.
Jurisdiction of a venture fund in Switzerland
When choosing a jurisdiction, pay attention to an offshore zone, for example, the Cayman Islands. You also need to decide in which companies you will invest - Russian or foreign. The latter, in particular, require more funds to launch a venture fund.
Assembling a team is perhaps the most important stage, since the success of the venture fund will directly depend on how well the staff is selected. On average, operating expenses (office maintenance, if remote work is not planned, salaries) for the entire period of work will amount to 1-2% of the starting capital. If the project is successful, the team receives 15-20% of the profit.
Pros and cons of venture capital investments
The activities of the funds are aimed at making a profit, but they do not always generate income. That is why before starting a company, it is necessary to understand the advantages and disadvantages of such a step. For convenience, we summarize them in a table.
| pros | Minuses |
| Obtaining ultra-high profits in a short period of time. | High risk of bankruptcy for a start-up business. |
| Contribution to the development of science and technology in the country. | The need for early exit from the project. |
| Quick payback with the right choice of investment objects. | Making a profit in the long term. |
| You don't need to have a lot of capital to generate income. Sometimes a small investment is enough. | |
| Gaining rich business experience. |
How to raise money from a venture fund
Raising money from a venture fund
How to raise money from a venture fund:
- Draw up a competent business plan. Draw up documents (investment terms, deal structure, venture investment agreement).
- Make a list of venture funds of interest.
- Send out applications.
- Pass the selection.
- Get funding.
A good business plan is half the battle, as it is the first document that investors evaluate.
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And when investing in venture capital, you need to have a very high-quality business plan, since potential investors must be convinced that “it’s worth it,” despite the high level of risk.
Other documents also play a very important role, especially the investment agreement - everything must be spelled out clearly and transparently in it, otherwise the investor may refuse at the final stage.
You can find venture funds that would like to invest in your project on various specialized Internet resources. For example:
- Business incubator and accelerators - 500Startups, TechStars, Ycombinator;
- Business social network LinkedIn.
In addition, you can attract investments from business angel venture funds, especially if you have a promising project with an original idea. According to statistics, business angel venture funds often invest in projects with a very high degree of risk. You can find business angels on the following resources: Funded.com, Angel Capital Association, Angel Investment Network.
How to interest an investor?
Getting investment to implement your project is a difficult task, but it is doable. Especially if you apply to the right address and are able to prove that it’s worth investing in your startup. What should those who intend to receive financing from a venture fund pay attention to?
Compliance of the project with the fund’s specialization
Typically, venture funds invest in projects in a specific industry, for example, biotechnology, IT, etc. In 2015, the total volume of venture investments in the Russian Federation amounted to $135 million. At the same time, 85% of all transactions were projects in the field of information and communication technologies (ICT).
Ekaterina Teplukhina
CEO of Primer Capital
First of all, the project must correspond to the investor’s profile. For example, there are IT funds, funds investing in agricultural development and others. We finance early-stage biotechnological developments. Current developments that are aimed at solving pressing problems immediately attract attention.
Simone Arizzi
Director of Innovation at the scientific and technological concern Dupont
Of course, interest in a startup is largely determined by how well it fits into the company’s long-term strategy. At the moment, we are primarily interested in such areas as agro-industrial business, materials with improved properties, materials for industrial applications. For example, several years ago we acquired Innovalight from Silicon Valley, which develops products in the field of photovoltaics (this is a branch of science at the intersection of physics, photochemistry and electrochemistry). We also publish on the Internet lists of areas of potential interest to us.
Project stage
No less important for a venture investor is the stage at which the project is. Despite the fact that venture funds invest in projects in the early stages, coming to them with only a prepared speech is pointless.
Chairman of the Board of the iVenturer Foundation RUS
When a project is at the idea stage, it is difficult to obtain funding. In the Western market, with a business plan you can already go to the bank, to investors, etc. In Russia this is simply useless - they simply won’t invest in such a project.
Practice shows that most projects do not need investments, but competencies.
Many projects come to venture funds “raw” and unfinished. Often, a person who is capable of coming up with an interesting project is unable to assemble a full-fledged team. Therefore, we have to bring projects to fruition in special accelerators.
Team
This point often turns out to be decisive, although many people underestimate it. For example, in the practice of iVenturer Foundation RUS, it often happened that investors liked the team, but the project itself was rather weak. As a result, specialists were helped to change the course a little, which helped improve the startup.
You need to understand that a team is not just a collection of people. Among those who launch a startup, a lawyer, financier and marketer are needed who will be involved in further promotion.
Alexey Olin
Chairman of the Board of the iVenturer Foundation RUS
We have minimum requirements for the project team. Firstly, he must have at least two co-founders. Secondly, it is desirable that team members have experience in the field in which the project is located, or similar experience applicable to this field. Thirdly, you must have the ability to present yourself correctly.
The last point is so important that it’s worth talking about separately.
Presentation
In addition to what exactly you present, it is also important how you do it. You need to present the project in such a way that the investor is interested. Entrepreneurs often delve into technical details, while investors are more interested in the financial model and strategy of the future business. He needs to understand the entry point, exit point and how much he can earn in the end.
Simone Arizzi
Director of Innovation at the scientific and technological concern Dupont
An absolutely necessary condition for a project to be successful is a combination of marketing and technical competencies. Unfortunately, many Russian startups lack the ability to justify the commercial value of their product. This is the first thing that needs to be taken into account when communicating with potential investors.
The main mistake of most startups is to focus on the wrong things. For example, when telling what the value of a product is, many people say that it is cheaper. This is a bad motivation, because other players will be able to reduce the price of the product in the future.
In addition to all this, representatives of venture funds give their potential clients some more useful advice:
Ekaterina Teplukhina
CEO of Primer Capital
Thanks to a common interest - the successful development of the project and the growth of its profitability - the investor and the team become partners. The main thing is to promptly respond to requests and immediately warn the investor about any difficulties that may arise, so that they are not identified at the final stages and do not become an obstacle to successful cooperation.
Simone Arizzi
Director of Innovation at the scientific and technological concern Dupont
I would recommend startups to get acquainted with potential investors at the very beginning of product development in order to be able to adjust something. To do this, you can use all the capabilities of the R&D infrastructure to which you have access. These are various business incubators, accelerators, and scientific clusters.
Alexey Olin
Chairman of the Board of the iVenturer Foundation RUS
At the stage of applying to a venture fund, you must have a team, a development plan and a financial model. An investor needs to enter the project wisely and understand when he can get out and get his money back. He is not interested in taking your idea, copying it, putting together a team around it and trying to implement it. On the contrary, it is more interesting for an investor to overpay for the fact that there is already a team that is doing this.
Attracting investment is a step that any serious project will have to take at some point. However, there is no need to rush into it: the project must be sufficiently well developed and ready for implementation, and the startup must have a team capable of implementing this project efficiently. Otherwise, it is better to go to friends and relatives for money, rather than to a venture fund.
Keep in mind: even an idea that can save all of humanity and pursues the best goals is unlikely to be appreciated by an investor if you cannot present it competently. Therefore, you should be very carefully prepared for communicating with representatives of venture funds.
Who are business angels and how do they differ from venture investors?
Surely at least once, you have heard the definition of a business angel. But what kind of person is this and what does he do? These are private investors who invest their own money in a startup, while funds accumulate funds from the state, companies and ordinary investors. In this regard, angels invest amounts not exceeding $100 thousand.
Business angels enter the project much earlier than the organization in question. While the former invest before creating a prototype, the latter prefer to work with an already developed model.
Entrepreneurs invest in projects located in the nearest regions from them, since in this case it is more convenient for them to monitor the work of the new enterprise.
