What is venture financing?
Venture financing is long -term high -risk investments in the capital of new high -tech startups (or already well -established venture companies). The latter are, as a rule, relatively small enterprises focused on the development and production of high -tech products.
The venture industry is most developed in the United States. Also, this area is actively developing in Europe and in China.
How venture financing differs from classical investments?
Venture financing, as a rule, is associated with a high risk of losing investments in each specific company (this probability is usually more than 50%). Thus, this area is associated not only with growing innovative companies, but also with high profit expectations and significant risk.
The return of invested funds usually occurs at the time the investor sells his share in the company. The profitability of investments is achieved due to high returns from the most successful projects.
What are the advantages and disadvantages of venture financing?
For startups, the advantages of venture financing are as follows:
- The possibility of attracting a significant amount of capital for the implementation of high -risk projects, when other sources of funds are not available.
- To attract funds, you do not need collateral and other types of security, as in the case of loans.
- Funds can be provided in a short time.
- As a rule, this type of financing does not provide for interim payments (interest, dividends), etc. D.
- The ability to attract funds not only in the initial stages, but also as the company grows up and improve the product created (during subsequent rounds of financing).
Disadvantages for startups:
- Difficulties may arise when finding investors and attracting an amount in the planned amount.
- Venture investors can offer financing on disadvantageous conditions.
- The possibility of attracting venture North Korean Hackers financing is highly dependent on the state of the market.
- The likelihood of an unexpected exit of the investor from the project or the implementation of his share to third -party entities.
- The need to allocate a share (the use of venture financing can lead to a change in the distribution of ownership and loss of control over decision -making).
- Weak development of the industry in many countries.
For investors, the main advantage of venture financing is high potential profitability. Of the obvious disadvantages-a high risk of loss of invested funds and a relatively long investment horizon (3-7 years). In addition, venture investment is designed mainly for experienced investors with special knowledge and focusing in the field of project implementation.
What are the stages of attracting venture investments?
To streamline investments and reduce risks, the process of financing the project is usually divided into several stages called rounds. In various cases, the investor may be financing using several rounds or one of them. In other words, the division into rounds is convention, and it is not at all required.
Sowing round (Seed-rang)-the first stage of attracting funds at which investors often are the founders of the startup, their relatives or friends. Typically, the initial funds cover part of the expenses of the project team, the development of a business plan and a prototype of a future product, as well as market research. As a rule, at this stage, a startup is not able to provide independent financing. Nevertheless, the product developed for this stage can be able to solve the real problem of the client.
Sometimes venture investors participate in Pre-Eed Raunde. This is the very first stage of attracting investment, at which a novice startup among developments can only have an interesting idea.
Financing at the sowing stage is the most risky, since the investor does not yet see the final product and has only preliminary assessments of the project. In the United States, sowing capital usually starts with several hundred thousand dollars and does not exceed $ 1 million.
Round a usually implies investing in a company with an already working product, loyal customers and clear development plans. The amount of funds raised at this stage significantly exceeds the amounts received before. The startup begins to build a formal structure, enters the market, expands.
Round in involves the scaling of the company after achieving pre -agreed targets. Often at this stage, the startup masters new sales markets, expands in a busy niche, and increases the volume of profit. The volumes of attracted financing usually start from $ 1 million.
Round with The company generates cash flows sufficient for self -financing. In other words, the startup becomes profitable, dispensing without support from the outside.
Round d Typically, this stage precedes the exit on an IPO or the company’s sale to a strategic investor.
Who are business angels?
Business Angel – private venture investor, providing financial and expert support of companies in the early stages of development.
Historically, business angels are the main source of external financing of new companies with a rapid growth potential. They help startups overcome the stage when the volume of resources necessary for the development exceeds the possibilities of the founders. The startup gets the opportunity to expand the staff, finish work on the first version of the product, and also attract the first customers.
Business angels invest directly in the company, operating on their own capital. Unlike an institutional investor, an angel can invest not only in a finished project, but also in the idea. The business angel is part of the company’s capital in the Council of Directors and the ability to block the decisions of the founders who will consider it irrational.
What venture companies specialize in crypto industries?
One of the most famous venture companies specializing in blockchain and cryptocurrencies is Pantera Capital, Blockchain Capital, Polychain Capital, Andreessen Horowitz, Digital Currency Group, Galaxy Digital and Morgan Creece. The latter is notable for the fact that the first in the industry attracted funds from pension funds.
Pantera Capital is considered one of the most profitable venture companies. Last year, it became known that the company opens a venture fund for $ 175 million, focused on projects from the sphere of blockchain and cryptocurrencies. In the field of interest of the fund – startups in the late stages of development, developing, in particular, infrastructure solutions and trading platforms.
A prominent participant in the crypto industry is Blockchain Capital Blockchain. Last year, she attracted a record at that time $ 150 million for a fund specializing in bitcoin and blockchain startups. The company’s partners are a famous analyst with Wall Street Spencer Bogart and Bitcoin developer Jimmy Song. At one time, Blockchain Capital invested in Coinbase, Ripple, Circle, Kraken, 0x, Xapo and Abra.
Infographic below the Digital Currency Group, CEO and the founder of which is Barry Silbert, a well -known figure in the crypto industry, is presented.
The Head Fund PolyChain Capital, which is considered one of the largest in the industry, attracted $ 175 million at the beginning of this year. Funds will be aimed at acquiring shares in those encountered with problems of cryptocurrency projects.
In 2018, PolyChain was the first hedge fund in the cryptocurrency space, the amount of assets under the control of which exceeded $ 1 billion. However, large – far from always means profitable. So, in less than a year, the value of assets at the disposal of the Polychain Capital fund sank by a third.
Which is more popular – venture financing or ICO/IEO?
The sphere of primary proposals of coins (ICO) is currently in deep decline. So, in the first quarter of 2019, ICO projects attracted $ 118 million-58 times less than last year, when this figure was $ 6.9 billion.
Of the 2500 projects, the development of which the Tokendata service has tracked since 2017, only 45% managed to attract funding. Moreover, only 15% of successful ICO tokens are traded at the price of the release or higher.
On the other hand, primary exchange offers (IEO) are gaining popularity. They are an alternative version of the ICO, where an exchange plays a key role, which is engaged in the selection of promising and viable, in its opinion, projects. IEO projects are carried out on the basis of many trading platforms, attracting significant funds. However, in its scale, this area is not yet comparable with the volume of the ICO market in 2017 – early 2018.
IEO model – not without flaws, it has a number of problems. There are also no guarantees that the regulators in the near future will not take care of this area, as is the case with ICO.
The sector of Security Token Offerings (STO) is gradually developing, but this market segment is still quite small.
According to DIAR, only in the first three quarters of 2018, venture investments in blockchain and cryptocurrency startups amounted to $ 3.9 billion, which is 280% more than the indicators of the total of 2017. The average investment in cryptocurrency startups increased by almost $ 1 million – if in 2017 this figure was $ 1.5 million, then by the end of last year this figure was already $ 2.5 million.
Judging by the dynamics, the good old venture financing develops stably high pace, significantly ahead of such innovative forms as ICO/IEO/STO. It is also worth noting that the market value of bitcoin is quite closely correlated with activity in the venture investment market. Therefore, with the restoration of the price of the first cryptocurrency to past heights, one can also be expected to continue the growth of the venture capital market.