How to become a venture investor: five steps for beginners

Venture investments are mainly carried out by funds or eminent business angels. But can a person without experience start investing in developing companies and get a big income?

About the expert: Victor Orlovsky, founder and managing partner of Fort Ross Ventures.

What is Venture Investment

The verb venture in translation from English means “to take risks or decide on something.”

A venture capitalist is an investor who supports young projects – startups – in the early stages. As a rule, we are talking about high-risk transactions, in which you can either increase the invested amount dozens of times, or lose everything to the penny. Most successful entrepreneurs consider this method of financing because of the high profitability if the project is successful.

The main thing you should know about venture investments is that most new companies fail, 90 out of 100 newly created startups will not survive. Yes, it’s risky. But, by investing as a venture investor at an early stage, at the exit you can get a very large income from one company, which will more than pay for your losses.

Who can become a venture investor

First you need to figure out why you want to invest. If you are investing to earn money, you must understand that the risks here are very high. If you’re investing for pleasure, that’s a different story. My advice:

  • look at your liquid capital (cash and other assets), subtract from it what you spend on living, and invest 15% of the remaining amount in venture capital investments;
  • your expected return should be at least 15% per annum, because you can earn about the same (maximum) on less risky instruments on an organized exchange;
  • do not compare this return with the business you manage – for venture capital projects, your return on weighted risk is in any case the maximum;
  • you have to understand that venture capital is not a liquid asset. Get ready to wait a long time. Better yet, get ready to actively help the company grow and solve problems, which, believe me, there will be a lot;
  • be prepared to catch the moment when you have to tell yourself “stop” and let the startup die, no matter how hard it is.

Five steps to building the right investment strategy

A good venture investor is the first to get access to any startup that is trying to raise money, and knows how to choose the best one from them.

1. Set a goal to become a good investor

A good investor is the one that startups come to first, before they show their presentation to others. A good investor is trusted by startups and other investors if we are talking about a fund. To become a good investor, you need to build your brand (personal or fund), as well as deeply understand the subject (that is, where you invest).

You should see everyone who is looking for investments at that stage of development, that geography and in the area that you want to be involved in. For example, if you are going to invest in early-stage startups with Russian founders in the field of AI, and there are 500 such startups in the market, your task is to get access to all these 500 companies. To do this, you should engage in networking – establish trusting relationships in the startup community and spread information about yourself as an investor as widely as possible.

When you see a startup, ask yourself the question – are you the first to whom he came, or not? If yes, great, it will allow you to choose better projects for investment.

This is how venture funds and private investors work – first they build their own brand, then this brand works for them. Of course, if you have ten exits (exit, bringing the company to the stock exchange. — Trends), and all of them are like Facebook, a queue will line up for you. Building a brand without good exits is a big problem. Even though you didn’t have them, everyone you invested should say that you are the best investor, because you invest not only with money, but also with advice, connections, and so on. A good investor is a constant work on your own ideal reputation. To build a good brand, you must be of service to the community. If you helped both the companies that you invested in and even those that you didn’t invest in, you will still have a good base of connections and will be well-reviewed. The best will come to you for money, in the hope that you will be able to help them in the same way as you helped others.

2. Learn to understand people

When you talk to a startup (especially if their business is at an early stage), follow them as a person. What and how he does, what he says, how he expresses his ideas. Make inquiries, call his teachers and friends, understand how he overcomes difficulties. Any startup goes through the “death zone” – even Google, not yet born, was one step away from failure. A strong, courageous, strong-willed team, ready to fight, not to lose heart, to rise after defeats, to recruit and retain talents, will definitely win.

3. Learn to understand trends

If you talk to any Silicon Valley startup or investor, they will say that they really just got lucky. What does lucky mean? This is not just a coincidence, luck is a trend. Imagine yourself as a surfer. You catch a wave: the larger it is, the more earnings, but the more difficult it is to stay on it. A trend is a long wave. For example, trends in COVID-19 are remote work, delivery, online education, e-commerce, etc. Some people were just lucky that they were already in this wave, others quickly joined it.

It is important to catch the trend in time, and for this you need to understand what the future will look like. Many companies caught him at the stage when he was not yet truly serious. For example, in the 1980s, investors spent billions on algorithms similar to current AI. But nothing happened. Firstly, it turned out that at that time there was still too little data in digital form. Secondly, there were not enough software resources – no one could imagine how much time and computing power it would take to process such arrays of information. When IBM Watson was announced in 2011 (the world’s first AI algorithm. — Trends), this story took off because the right prerequisites appeared. This trend was no longer in the minds of people, but in real life.

Another good example is NVIDIA. In the 1990s, a group of engineers suggested that modern computers and graphical interfaces would require vastly different processing speeds and quality. And they made no mistake when they created the graphics processing unit (GPU). Of course, they could not even imagine that their processors would process and train machine learning algorithms, produce bitcoins, and that someone would try to make analytical and even operational databases based on them. But even one correctly guessed area was enough.

Therefore, your task is to catch the wave at the right time and in the right place.

4. Learn to find new investors

There is a joke: the main task of an investor is to find the next investor. The company is growing, and if you have only $100, you have to find someone who will then invest $1 million in it. This is a big and important task not only for a startup, but also for an investor. And don’t be afraid to invest.

5. Don’t invest bad money after good money

An early-stage startup sells you the future – the company doesn’t have anything yet, and the future is easy to draw and easy to test with potential investors. Do not buy? Then we will redraw the future until we find a person who believes in this future to the extent that he will invest his money. Let’s say you are the investor. Your next job as an investor is to help the startup achieve that future. But how long do you need to support a startup? Say, six months later, the money ran out. During this time, you should get to know the company very well and evaluate the team. Are these guys capable of achieving the future they have envisioned for you?

The advice is simple – put aside everything you’ve been doing and forget about how much money you’ve invested. Look at this project as if you are investing in it for the first time. Describe all the pros and cons, compare them with the records you made before your first investment. And only if you have a desire to invest in this team as for the first time, put money. Otherwise, do not make new investments – this is bad money after good.

How to choose projects for investment

Try to invest with experienced people – those who already understand the topic. Communicate with teams. Consider as many projects as possible, without delving into the first one that comes across. Do not fall for FOMO (fear of missing out, “fear of missing out on something important.” — Trends) — startups in their presentations fuel this fear perfectly. At the same time, they do not deceive you, but create the future that you want to believe in, and do it professionally. So they create fear in you that you will miss something. But you should get rid of it.

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