The name "venture" comes from the English "venture" - "risk venture or undertaking". (Remember, during the era of perestroika, joint ventures were also called "joint ventures", which, perhaps, would be more correctly translated as "joint venture".) The term "risk" itself implies that in the relationship between a capitalist investor and an entrepreneur claiming to receiving money from him, there is an element of adventurism. And it really is. Risk (venture) investment, as a rule, is carried out in small and medium-sized private or privatized enterprises without providing any collateral or mortgage, unlike, for example, bank lending. Venture funds or companies prefer to invest in companies whose shares are not freely traded on the stock market, but are fully distributed among shareholders - individuals or legal entities (unquoted or unlisted companies). Investments are directed either to the equity capital (equity investment or financing) of closed or open joint-stock companies in exchange for a share or block of shares, or are provided in the form of an investment loan (debt financing), usually medium-term by Western standards, for a period of 3 to 7 years. The interest rate on such loans is either not set, or is LIBOR + 2 - 4%. (LIBOR - London Interbank Offered Rate, literally - the London Interbank Offered Rate - the average interest rate at which banks in London provide loans against placing deposits with them. Information about its fluctuations is published by the Financial Times, based on the weighted average rate for 3 and 6-month dollar deposits of $10 million at 11 am each business day, accounted for by five banks: National Westminster Bank, Bank of Tokyo, Deutsche Bank, Bank Nacional de Paris, and Morgan Guarantee Trust of New York.)
In practice, however, the most common form of venture investment is the combined form of investment, in which part of the funds is contributed to equity capital, and the other is provided in the form of an investment loan.
A venture investor, as a rule, does not seek to acquire a controlling stake in a company (at least in the case of initial investment). And this is its fundamental difference from a "strategic investor" or "partner". The latter often initially wants to establish control over a company that interests him for one reason or another.
The goal of a venture capitalist is different. By purchasing a block of shares or a share less than the controlling stake (minority position or stake), the investor expects that the company's management will use his money as financial leverage in order to ensure faster growth and development of his business. Neither the investor nor his representatives take on any other risk (technical, market, managerial, price, etc.), except for the financial one. All of these risks are borne by the company and its managers (remember: joint venture). At the same time, another preference of a venture investor is the ownership of a controlling stake by the company's managers. Having a controlling stake, they retain all incentives for active participation in business development. If the company, during the period of being in it as a co-owner and partner of a venture investor, succeeds, i.e. if its value within 5-7 years increases several times compared to the initial one, before investment (pre-money evaluation), the risks of both parties are justified and everyone receives an appropriate reward. If the company does not live up to the expectations of the venture capitalist, then he can completely lose his money (in the case when the company declares itself bankrupt), or, at best, return the invested funds without receiving any profit. Both the second and third options are considered failures. Profit (capital gains) of a venture capitalist arises only when, after 5-7 years after investing, he will be able to sell his block of shares at a price several times higher than the initial investment. Therefore, venture investors are not interested in the distribution of profits in the form of dividends, but prefer to reinvest all the profits in the business.
The very process of selling in the venture business also has its own name - "exit" - "exit". The period of stay of a venture investor in the company is called "living with the company".
The division of joint risks between a venture investor and an entrepreneur, a long period of "coexistence" and an open declaration by both parties of their goals at the very initial stage of common work are the components of quite probable, but not automatic success. However, it is this approach that is the main difference between venture capital investment and bank lending or strategic partnerships.