Breaking into Venture Capital: Overcoming Obstacles and Embracing Potential

The words "venture" and "venture capital investment" are heard more and more often nowadays, but many beginner investors experience fear of uncertainty and doubt when choosing this method of financing.

In order to better understand this topic, I asked Aleksandr Belov, co-founder and CEO of the Prosto VC club*.*

First of all, it is important to understand that angel investors are very eager to reach out to the top startups investments in which can multiply your invested money many times over. But for a regular angel investor, this is virtually impossible. Especially remotely, it is impossible to reach the best venture deals that take place, for example, in Silicon Valley - there are thousands of funds there, claiming your place in the startup. Therefore, the only working business model for getting into such deals is the model of community and co-investment with those who already know how to get into such deals.

Why do people go into venture capital? And what is it, anyway?

Venture means nothing less than investment. It’s neither philanthropy, nor sponsorship of startups and not just the financing of some technologies. In abstract terms, venture is a field of financial engineering. Simply speaking, it is one of the ways to multiply your own capital. Not to save, but to multiply, because venture capital is a high-risk tool, so it is much less suitable for saving than classical banking and stock exchange options, which means that people come to venture capital to earn money.

It is important for both beginner investors and startups to understand this - a venture capitalist is the same as an entrepreneur who is looking for a way to make a super profit, but in a more passive way. That is, if a start-up founder's contribution consists of 90% of his time and 10% of his personal funds, an investor, on the contrary, wants to devote 10% of his time, but is ready to compensate 90% of his "involvement" with money. This is what the investor's partnership with the startup is based on.

In Kiyosaki's Cash Flow Quadrant, this type of employment is called "Investor". It turns out that those who aim at this part of the quadrant go into venture capital. They can be former entrepreneurs, top managers, celebrities who have the initial capital to make the first steps towards this role.

Venture is, obviously, not quick, you have to wait several years for your share in the startup to grow in monetary terms. And during these years you have to build a whole portfolio of projects, i.e. invest in other startups to reduce the risk of losses and increase the chances that several portfolio projects will shoot up and bring super profits - 10, 100, in rare cases 1000 times more than you invested in them. This is why people come to venture capital when there is no longer a goal of making money "here and now".

Why do they go into venture capital - from a purely practical point of view, to be able to earn much more than with any other tool. In real estate the average income yield is 8-10% per annum, the average annual yield of the US stock market is 15%,the investments into metals in some cases can reach 20%. In venture capital it is historically 30-40%. But it is important to realize that not every startup will show such profitability, and the portfolio as a whole - you should be prepared that out of 10 startups 5 will pass away, a few more will bring nothing, and only 1-2 will show such growth that the earnings from them will cover the losses from all the others.

To sum it up - people go into venture capital with the aim to improve their standard of living; to satisfy their own motivation to provide for the future, for their tom

orrow better due to strategically higher profitability than can be obtained in classical financial instruments.

Is venture capital complicated, is it knowledge available only to a few?

After talking to the founders of the Venture Club, I can say that, in fact, no - this opinion about venture capital is not accurate - it comes from ignorance, from the lack of completeness of information. Like when you first go to the gym and you think that losing weight and gaining muscle is some kind of rocket science. Or like when we all thought that about math in first grade. But as you dive in, the subject gets easier.

Venturing is an extension of entrepreneurial or management experience. Decision making is very similar, the same questions about market, team, strategy are relevant as in any other non-venture project. Of course, there are nuances - for example, in venture capital you have to be a little more immersed in technological trends; you have to do market analytics a little differently. But there is already a lot of information on how to do this.

The main rule of thumb is that if you start today, in six months you will have a good understanding of venture capital and an idea of what kind of portfolio you want to have. If you don't start - you will be six months off your own startup earning schedule.

Do venture capitalists need large amounts of capital?

It's no secret that previously an investor's check to a startup was several tens or hundreds of thousands of dollars. Even 5 years ago, the minimum check was $25,000-30,000.

But the industry is evolving. The business model of syndicates and venture clubs has emerged - where several investors can throw together smaller checks, and eventually score one substantial one. There are already deals where the minimum check is $10,000, and there are even deals where the minimum check is $5,000. But at the same time, all club members together can raise up to $500,000, which is even more than the checks of many funds at the early stage of a startup's development. In this case, the investor has no commitments, they independently decide whether to join the deal and in what amount. To do this, the club provides all the information required to make the decision.

In addition, there are online platforms where you can invest as little as $1,000 in your favorite startup according to the same principle.

All this makes it possible, even with a relatively small amount of capital allocated for high-risk venture investments, to assemble a balanced portfolio of projects in different industries, in different markets and with different levels of risk.

Moreover, Aleksandr told me that even those club members who have large venture budgets should not be in a hurry to put $100,000 into each project. From the point of view of statistics and mathematical expectations, it is better to distribute these $100,000 into a dozen of projects. Strategically, this will give a better return on the entire portfolio.

And if you see that some startup is rapidly taking off, you will have the opportunity to put a bigger check into the startup at the next round, thus greatly reducing risks by investing substantial checks only in the most successful projects in your portfolio. So, small initial checks are a boon for the investor, it is his option to "take a place" in a promising project without risking all his capital at once.

So if you are ready to allocate $5,000-10,000 several times a year to your favorite startups, join venture clubs - they give you the opportunity to get a small check into interesting and often exclusive deals that are simply impossible to discover without a club.