What is venture capital?
Wswire.com believes that venture capital is a kind of private equity investment in the form of equity capital. Its investment operation mode is that investors invest in venture companies or high-growth oriented enterprises, occupy the shares of the invested company and cash out at an appropriate time.
Venture capital companies only invest in unlisted enterprises. Their interest lies not in owning and operating venture enterprises, but in quitting and finally realizing investment income. Because the capital of venture capital is called public stock market, the liquidity of investment capital is much lower, so the rate of return it pursues is relatively high. In order to reduce the risk, most venture capital companies do not seek a controlling position in the enterprise, and only when the investment company seeks to control the business direction of the invested company will it deliberately seek to become the largest shareholder; Managers of investment companies generally do not participate in the daily management of the invested enterprises, and mainly rely on a set of detailed project feasibility review procedures to evaluate the possibility of successful investment before investing. Dividends are not the goal pursued by venture capitalists. The sole purpose of venture capital companies is to drive their investment to increase value through the rapid development of the invested enterprises, and cash out at an appropriate time. The exit method can be public listing (IPO), sale of equity to a third party (trade sale), entrepreneur repurchase or liquidation.
The capital investment market can be divided into four parts:
Public bonds and private claims
Public equity and private equity
Venture capital is a kind of private equity investment, which is relative to public offering (open stock market) and private placement bond (such as bank loans). In addition to venture capital, private equity investment also includes leveraged buyouts, mergers and acquisitions, mezzanine investments and turnarounds. In fact, the difference between venture capital and private equity investment is not so obvious. Multi-venture capital funds often participate in MBO/MBI and corporate restructuring investment. The position of venture capital funds in the financial capital system is shown in the following figure:
The candidates for venture capital companies are mostly start-ups or fast-growing high-tech enterprises, and occasionally they will invest in traditional industries with broad market prospects, retail industries with novel business models or some special consumer goods industries. These industries generally provide high value-added technologies, products or services, and can obtain long-term and guaranteed profits. Wswire.com's entrepreneurship refers to the rapid development of enterprises through innovation in technology, products or management. In addition to entrepreneurial enterprises, venture capital companies will also be interested in the following four situations:
Loss-making enterprises turn losses into profits by introducing capital, management and technology.
MBO/MBI/Bimbos helps internal managers or/and external management teams to acquire companies.
Leveraged acquisition (/LBI) internal financing acquisition or third-party financing acquisition
Refinancing involves changing shareholders, replacing creditor's rights with equity and partially cashing out shareholders.
Each venture capital company has its own characteristics and positioning, the difference lies in investment scale, regional focus, industry preference, investment transaction type and enterprise development stage. Professional investment companies generally have a minimum investment limit because they don't have so much time and energy to consider and manage many small projects. In order to avoid excessive concentration of risks, they also have a maximum investment limit.
Venture capital companies can be regarded as retailers of funds. They raise funds from large funds (such as pension funds, insurance funds, large banks, large listed companies or government agencies (we can regard these funds as fund wholesalers)) and set up venture capital funds. Then venture capital firms invest their money in potential and fast-growing growth enterprises (usually high-tech companies) and own shares in these invested enterprises. The investment period is generally between two and seven years.
Venture capital companies are interested in sources of funds, potential enterprises and cash channels. The profit mode of venture capital companies is mainly to sell pre-invested shares at a price higher than the original price. There are three main exit ways of venture capital, namely, stock listing, share transfer and liquidation. Among them, the recipients of share transfer can be other investment companies, buyers of enterprise mergers and acquisitions, or entrepreneurial entrepreneurs.
Venture capital companies generally have their own investment funds and also act as agents for the investment business of other funds. For agency investment business, venture capital companies generally charge 1.5-3% agency fee, and another 20-25% capital appreciation. In addition to the value-added transfer of equity and investment management agency fees, the income sources of venture capital companies may also include interest on bonds or creditor's rights, stock investment income and consulting income.
Because the history of start-ups is short, the management and monitoring system is often not perfect, and the liquidity of equity is very low, investing in start-ups is very speculative and risky, and the return on investment of venture capital funds is much higher than that of stock investment funds. The target return on investment (ROI) of European and American venture capital funds is 15-30%, and the investment companies that do well can reach 40-60%. Considering the risks of specific projects, for each project invested by the fund, the target investment rate of return is higher, and the risk of investing in China is higher, so the expected rate of return is higher. According to the 2-6-2 principle of venture capital industry, out of every ten investment projects, two may generate excess returns (ten times more than the investment amount), six have mediocre returns and two fail. Generally speaking, 80% returns come from 20% projects, so the target rate of return of each specific project must be higher than that of the whole fund. Some people say that VC has invested in ten projects, and it is expected that nine projects will fail. It is really a big misunderstanding to make big money by a successful project. VC hopes to invest in ten projects, all of which are successful. Where there is gambling, only one project will succeed?