The terms “venture capital” and “venture business” originate from the English word “venture”, which is translated in the well-known dictionary by W.K. Muller as “risk venture or undertaking”, “speculation”, “amount at risk”.
The expressions “venture” or “venture” borrowed from English-language economic publications have taken root in the domestic economic lexicon since the mid-80s, and due to their unexpected popularity, they have often been used in a wide variety of phrases, including those very far from the original semantic meaning. . There really was every reason for this. Indeed, in the conditions of market relations or close to them, any investment of funds in commercial projects with the aim of making a profit is inevitably associated with risk.
In fact, in addition to a high degree of risk, the American venture business model (which is what this article will mainly discuss) has a number of characteristic differences from other, more common mechanisms for financial support for entrepreneurial projects, for example, from traditional bank lending operations. . Three such differences are of greatest interest.
The first fundamental difference lies in the fact that in the case of venture financing, the necessary funds can be provided for a promising idea without a guaranteed provision with the existing property, savings or other assets of the entrepreneur. The only collateral is a specially agreed share of shares of an already existing or newly created company.
If the company's business goes well, the investor will be able to sell his share of shares at a certain stage and, as a result, return not only the funds invested in the project, but also get a tangible profit. If the project fails, and in many cases it is simply impossible to exclude such an outcome in advance, the maximum that the investor will claim is a part of the assets of this company, proportional to its share in the registered authorized capital.
Moreover, unlike traditional direct investments, the possibility of losing the invested funds is allowed from the very beginning if the funded project does not bring the expected results after its implementation. Venture capital investors go to share all the responsibility and financial risk with the entrepreneur.
The need for loans of this kind often arises among beginners or small entrepreneurs, inventors, scientists and engineers who are trying to independently implement new original and promising developments that have appeared in them.
The road to a commercial bank is most often closed for them for several reasons. Firstly, many innovative projects begin to make a profit not earlier than in three to five years, or even later, which means that such loans should be calculated for the long term. But then they will “hang” on the bank's balance sheet and spoil its financial performance. Second, for lending institutions such as banks, the associated financial risk is too high. Thirdly, banks will definitely require the provision of collateral or guarantees, and the entrepreneur himself, even if he has some kind of fortune, will have to think about whether it is worth risking his well-being and the well-being of his family for the sake of “pie in the sky”.
However, one should not think that venture capital investors meet the entrepreneur on the basis of altruistic beliefs. Rather, on the contrary, the interest of investors is precisely to get a profit from their investments, which will be significantly higher than when placing free financial resources on bank deposits or investing them in government securities with a fixed income.
For example, according to data published in the mid-1980s by a survey of 38 American funds specializing in risky investments, their average rate of return before tax was in 1970-1974. 23.4% per year, in 1975-1980. - 32.5% per year, in 1984 (the last year taken into account in this survey) - 40%.2 This is very high by the standards of a real market economy, far exceeding similar indicators for the US manufacturing industry in the same period of time.
Therefore, before making a final decision on participation in venture financing of specific ideas and developments, a lot of preliminary work is carried out to study the level of training and personal qualities of an entrepreneur, analyze the submitted business plan, assess the associated risks and possible ways to reduce them. This is the aim of the technology of selection and support of risky investment projects, worked out over many years in practice, which has incorporated the recommendations of management science, personal experience and intuition of venture business professionals.
Some important aspects of this technology will be discussed in more detail below. In the meantime, we only note that the active participation of investors in the management of financed projects at all stages of their implementation, starting
Starting from the examination of still “raw” entrepreneurial ideas and ending with the provision of liquidity for the shares of a newly created company, represents the second fundamental difference between the venture business and ordinary commercial lending operations.
Finally, the third fundamental difference is due to the fact that venture funds, like no other investor (except perhaps the state), are ready to invest in new science-intensive developments. Even when they are accompanied by a high degree of uncertainty. After all, it is here that the largest potential reserve of profit is hidden.
Let's take a few examples to illustrate.
The first relates to a relatively young field of R&D - genetic engineering. As is known, the first works on the creation of recombinant DNA molecules were published in 1972-1974. The new technology made it possible to combine DNA fragments of various origins into one biologically active molecule, thereby opening up the possibility of creating microorganisms and cell cultures with properties preprogrammed in the laboratory at the genetic level.
In 1976, one of the developers of this technology, later a Nobel Prize winner, R. Boyer, together with a young manager, R. Swenson, contributed $500 each and registered a new firm, Genentech, to commercialize the results of scientific research. When the venture capital-backed firm first floated its stock on October 14, 1980, its stock price soared from $35 to $89 a share in 20 minutes. As a result, each of the founders became the owner of a fortune of 82 million dollars.3 Equally significant profits went to their investors.
In recent years, investment in software development has brought good returns. The American company Microsoft, founded two decades ago by 19-year-old Bill Gates, is known all over the world thanks to the DOS and WINDOWS operating systems, and today he has become one of the richest people in the world. Here are two very recent examples. four
The stock price of Pixar Animation Studio, a computer animation company specialized in the field, rose on the first day of the placement from $22 to $39. Apple Computers) managed to place 80% of the issue on the first day and collect $1.1 billion thanks to this.
Shares in the IPO of Internet software developer Netscape Communications Corporation, which cost $28 in August 1995, rose in price to $171 in December of that year. And this is in the conditions of an oversaturated US market!
Tempting ideas for the commercial use of new scientific developments and specialized firms for their implementation often arise on the basis of large research institutions and universities with the direct participation of leading scientists. Around such centers there is usually an increased concentration of venture capital. It is no coincidence that he played such a prominent role in the formation of famous US science parks: Silicon Valley near Stanford University and Route 128 near Harvard University and the Massachusetts Institute of Technology.
The foregoing does not mean at all that the venture business is “tied” to the field of R&D. Risk capital investors not only constantly monitor the development of science and technology, but also react to the slightest changes in economic policy and market conditions. Evidence of this is the structure of venture capital distribution and dynamic shifts observed in it from time to time.
So, in the USA in just 5 years from 1980 to 1984. the share of risky investments in the energy sector has decreased from 20% to 2%. The reason for this change is the decline in world prices for energy resources and the refusal of the Reagan government from the energy program of the previous administration. At the same time, the share of risky investments related to the production and improvement of computer technology increased from 26% to 43%. This can be explained to a large extent by the beginning of the widespread use of personal computers.
In the second half of the 1980s, more than 60% of US risk capital was concentrated in the field of microelectronics, computer science, computer technology and communications. In the early 1990s, American venture capital funds were actively investing in software development, computers, telecommunications and medical equipment.
At the same time, in Western European countries, risk capital investors prefer more traditional projects in manufacturing, services, consumer goods and industrial products.
Minimization of financial risks in the process of choosing organizational forms of risky investments
As noted above, the development of venture business as a special form of financial entrepreneurship
The government followed the path of developing organizational forms and mechanisms to reduce the risk of individual investors. The evolution of different approaches to the implementation of risky investments is illustrated in Fig. one.
The simplest organizational form allows direct financing by an investor of an entrepreneurial project that interests him (Fig. 1a). This form is associated with the greatest financial risk, but promises the investor with the successful completion of the project and the highest profits. In the case of scientific and technical projects, it is used in practice, mainly by large investors, and even then at the later and less risky stages of the innovation cycle.
Specifically conducted studies show that in the process of making investment decisions, the risk factor usually outweighs the factor of potential benefit. Therefore, risk capital investors prefer to diversify their efforts by sharing the financial risk and the resulting return.
Such diversification can take several basic forms.
Firstly, an experienced investor will not entrust all the funds to one entrepreneur, but will distribute them among a small number of different projects (Fig. 1b). Due to this, the previously assumed unsuccessful outcome of one or more investments will be compensated for by other, more successful investments. Practice shows that despite the most careful selection, out of every 10 projects started, about 4-5 end in complete failure, 3-4 lead to the emergence of viable, but not profitable firms, and only 1-2 projects give really brilliant results, for which , in fact, there is a venture business. It is thanks to such successfully implemented projects that an average high rate of return for investors is ensured.
Secondly, risk capital investors can go for joint financing of some large and promising entrepreneurial projects (Fig. 1c). In addition to reducing the amount at risk for each individual investor, this creates a shared interest in the successful completion of the project and provides, in some cases, a synergy effect from the pooling of expertise, business connections and managerial experience.
Thirdly, a joint venture fund can be created, on behalf of which risky investments will be made (Fig. 1d). Such funds, which have become very widespread, have the status of a financial partnership with limited liability. Their participants receive profit and incur losses in proportion to the invested funds. In the US, there are, according to various estimates, from 400 to 600 such funds. According to published estimates, they account for more than 75% of risk capital.
The total volume of a venture fund is usually negotiated during its formation and is in the range of 5-10 million dollars, although in some cases it can reach larger amounts. The contributions of individual participants are, as a rule, from 200 to 750 thousand dollars.
The implementation of financial transactions in conditions of increased risk imposes special requirements on investment management. In this regard, the development of venture business from the very beginning was associated with the formation of the institution of professional managers who receive special remuneration based on the results of their activities.
Specialized venture capital firms that take on the management of one or more risk capital funds have become widespread. Often such firms, which have already proven themselves in the eyes of investors as skillful and reliable partners, initiate the formation of new funds. Management services are paid annually in the amount of 2-3% of the total volume of the risk capital fund for 7-12 years, for which the existence of the fund is calculated.
After the implementation of the risky investment program and the sale of securities of new entrepreneurial firms, the income received by the venture fund is divided among its participants in accordance with the initial contribution. The exception is the venture fund manager, whose share, in accordance with the concluded contract, can reach up to 20-30% of the profit, even if its initial financial contribution was only 1% of the total amount of funds accumulated in the fund.