The formation and effective functioning of the national innovation system requires the creation of an efficient innovation infrastructure.
The technical component of this infrastructure includes technoparks, business incubators, business centers, innovation and technology centers, that is, such structural formations that create favorable conditions for the development of innovative enterprises.
The financial component of the infrastructure today mainly uses two mechanisms - budget financing and bank credits. However, as foreign experience has shown, this is not enough for the mass development of innovative activity. To finance new technological companies that have not yet any guarantees or even a name under which they could get money from a bank, other instruments are needed, among which venture capital financing plays an important role. Venture capital has proved to be the most adapted for investment support for the reproduction of innovation, which involves a wide variety of risks.
However, it should be kept in mind that, although attractive, venture capital financing is not a universal mechanism. It is useful in its specific "niche" of development of innovative activity of enterprises and cannot compensate for the lack of funds from other sources for the development of scientific and technological sphere. It is not without reason that the share of venture capital in the total volume of investments in many countries is relatively small (except for the USA and Great Britain).
In addition, effective venture capital financing requires a certain level of national industry development able to take up innovations, as well as the existence of a stable and highly flexible monetary system, because otherwise enterprises that have used the services of venture capitalists will simply not be able to ensure the return of invested funds.
The technical component of this infrastructure includes technoparks, business incubators, business centers, innovation and technology centers, that is, such structural formations that create favorable conditions for the development of innovative enterprises.
The financial component of the infrastructure today mainly uses two mechanisms - budget financing and bank credits. However, as foreign experience has shown, this is not enough for the mass development of innovative activity. To finance new technological companies that have not yet any guarantees or even a name under which they could get money from a bank, other instruments are needed, among which venture capital financing plays an important role. Venture capital has proved to be the most adapted for investment support for the reproduction of innovation, which involves a wide variety of risks.
However, it should be kept in mind that, although attractive, venture capital financing is not a universal mechanism. It is useful in its specific "niche" of development of innovative activity of enterprises and cannot compensate for the lack of funds from other sources for the development of scientific and technological sphere. It is not without reason that the share of venture capital in the total volume of investments in many countries is relatively small (except for the USA and Great Britain).
In addition, effective venture capital financing requires a certain level of national industry development able to take up innovations, as well as the existence of a stable and highly flexible monetary system, because otherwise enterprises that have used the services of venture capitalists will simply not be able to ensure the return of invested funds.
Venture capital
Venture capital (from the English "venture" - a risky enterprise) is an investment in a developing business or startup, whose prospects for success are not yet known.
The main difference between such investments and regular ones is the potential of the project. If the risky venture finds the right business model for scaling up, it can become a major player in the market, and investors can expect a profit, sometimes thousands of times higher than the cost of investment. In the case of ordinary investments, the investor expects a stable, but not super-high income, but the risks of such an enterprise are usually much lower.
The main difference between such investments and regular ones is the potential of the project. If the risky venture finds the right business model for scaling up, it can become a major player in the market, and investors can expect a profit, sometimes thousands of times higher than the cost of investment. In the case of ordinary investments, the investor expects a stable, but not super-high income, but the risks of such an enterprise are usually much lower.
1. What is venture capital and what are its specific features
It should be noted that there is no single definition of venture capital. According to the definition of the European Venture Capital Association (EVCA), it is a share capital provided by professional companies that invest in and jointly manage new private companies or developing companies that demonstrate high growth potential. Other sources define venture capital as "long-term, risk capital invested in the shares of new and fast-growing companies with the aim of generating high returns once the shares of these companies are listed on a stock exchange".
Thus, venture capital can be characterized as an economic instrument used to finance the start-up of a company, its development, takeover or buyout by an investor during ownership restructuring. The investor provides the firm with the required funds by investing them in the authorized capital and (or) making a linked loan. For this he receives an agreed share (not necessarily in the form of a controlling interest) in the capital stock of the company, which he holds until he finds it necessary to sell it and receive the profit due to him.
For risk capital, compared to a bank loan, the guarantees of the company are not important. It is more important for it to have an attractive and real business idea, as well as a management able to realize it.
There is a formal and informal sector of venture capital.
The formal sector is dominated by venture capital funds that combine the resources of a number of investors. These are private and public pension funds (they account for over 50% of all venture capital investments in Europe), charities, investment funds, corporations, individuals and venture capitalists themselves. In addition, participants in the formal sector include special divisions or branches of commercial banks or non-financial industrial corporations, as well as government investment programs.
The informal sector of venture capital is the so-called "business angels." "Business angels" are usually professionals with business experience: businessmen, top managers and highly paid specialists (accountants, consultants, lawyers, etc.). They may have significant financial savings from their own labor. "Business angels" are active in the USA and many European countries, there the investment volume of the venture capital informal sector exceeds the investment volume of the formal sector.
The formal and informal sectors complement each other. Informal sector investment is particularly important in the very early stages of the development of "start-up" companies, when these companies need initial capital to complete theoretical research and bring a scientific idea to prototype. The formal sector tends to be active at later stages, when funds are needed to expand and develop production.
On this basis, several forms of venture capital financing can be identified.
1. Start-up venture investments are the most risky form of investment, including pre-start-up and start-up financing.
- Pre-startup financing concerns the very initial stages of business activity. It is often carried out even before the company is established. For example, financing of works on creation of a product prototype and its patent protection, sales market analysis, legal support of profitable contracts, strategic planning of future business activities, selection of managers and company formation up to the moment when it is possible to proceed to start-up financing.
- Start-up financing is an investment to provide for the company's start-up operations. It is expected that new products are already available, a management team has been selected, and market research has been done. The risk in this case is high, and investments will hardly return earlier than in 5-10 years.
2. The company's development venture financing is usually divided into financing of its initial and later stages.
- Initial stage financing is aimed at helping small companies with strong growth potential. As a rule, they cannot use a bank loan to develop production, as they are not yet able to guarantee its repayment. Given the relatively high degree of forecasting of investment results, the risk of investment in this case is somewhat lower than in the case of start-up financing, but it is still high.
Companies that have been in existence for less than 3 years and are not yet profitable are often financed in this way.
- Later-stage financing provides funds to enterprises with existing production that have a high potential for expansion ( for example, through the introduction of a new production line or the establishment of a retail network in new areas).
The risk of such investments is much lower than in previous cases, and their payback period is much shorter ( about 2-5 years). In this case, venture capital is an alternative to classical credits.
3. Financing of individual operations is done as a one-time act. As a rule, funds are allocated for a very short period of time ( for example, 2 years). In this way, for example, the purchase of companies for a certain client is financed, intermediate financing is carried out, which ensures the company's activity in the period between other types of financing, and funds are provided (and this is of primary importance) for the purchasing of the company by its management personnel.
In addition to the forms listed above, there are other types of venture capital investment, such as:
- saving financing (to revitalize a potentially bankrupt company);
- replacement financing (to replace part of the firm's external resources with its own capital);
- financing of operations related to the company's entry into the securities market.
A special place in the organization of venture investment is taken by various venture funds and their managing companies.
In fact, this is the only structure of the whole venture capital system that has opportunities for venture capital investment of large, complex and systemic innovations.
It is in the funds that ordinary financial and loan capital from many primary sources is transformed into initial venture capital. Venture capital funds, combining the resources of a wide variety of investors, are able to balance the differences between them and harmonize their interests (production, financial, sectoral, etc.). In addition, (as, for example, the experience of Canada shows), the state can actively act through the funds in a market economy, using the advantages of venture capital to solve such priority tasks as innovative development of the country's economy, leveling the level of socio-economic development of regions, activation of small business.
As they develop, venture capital funds turn into complex systemic formations. The main tendencies of their development are diversification of activity, complication of structure and functions, striving to create various associations, consortiums, trusts, development of international investment cooperation, creation of transnational organizations, striving for registration in offshore zones of preferential taxation.
It should be noted that the larger the fund, the more financial opportunities it has. For example, it can attract professional consulting firms for prior research of potential investment objects. That is why there are so-called mega-funds, which concentrate 2-4.5 and more billion dollars of venture capital. But the larger the fund, the more difficult it decides to undertake risky operations (and this, in fact, is the nature of venture capital), and the less its connection with the entrepreneurial resource.
Thus, venture capital can be characterized as an economic instrument used to finance the start-up of a company, its development, takeover or buyout by an investor during ownership restructuring. The investor provides the firm with the required funds by investing them in the authorized capital and (or) making a linked loan. For this he receives an agreed share (not necessarily in the form of a controlling interest) in the capital stock of the company, which he holds until he finds it necessary to sell it and receive the profit due to him.
For risk capital, compared to a bank loan, the guarantees of the company are not important. It is more important for it to have an attractive and real business idea, as well as a management able to realize it.
There is a formal and informal sector of venture capital.
The formal sector is dominated by venture capital funds that combine the resources of a number of investors. These are private and public pension funds (they account for over 50% of all venture capital investments in Europe), charities, investment funds, corporations, individuals and venture capitalists themselves. In addition, participants in the formal sector include special divisions or branches of commercial banks or non-financial industrial corporations, as well as government investment programs.
The informal sector of venture capital is the so-called "business angels." "Business angels" are usually professionals with business experience: businessmen, top managers and highly paid specialists (accountants, consultants, lawyers, etc.). They may have significant financial savings from their own labor. "Business angels" are active in the USA and many European countries, there the investment volume of the venture capital informal sector exceeds the investment volume of the formal sector.
The formal and informal sectors complement each other. Informal sector investment is particularly important in the very early stages of the development of "start-up" companies, when these companies need initial capital to complete theoretical research and bring a scientific idea to prototype. The formal sector tends to be active at later stages, when funds are needed to expand and develop production.
On this basis, several forms of venture capital financing can be identified.
1. Start-up venture investments are the most risky form of investment, including pre-start-up and start-up financing.
- Pre-startup financing concerns the very initial stages of business activity. It is often carried out even before the company is established. For example, financing of works on creation of a product prototype and its patent protection, sales market analysis, legal support of profitable contracts, strategic planning of future business activities, selection of managers and company formation up to the moment when it is possible to proceed to start-up financing.
- Start-up financing is an investment to provide for the company's start-up operations. It is expected that new products are already available, a management team has been selected, and market research has been done. The risk in this case is high, and investments will hardly return earlier than in 5-10 years.
2. The company's development venture financing is usually divided into financing of its initial and later stages.
- Initial stage financing is aimed at helping small companies with strong growth potential. As a rule, they cannot use a bank loan to develop production, as they are not yet able to guarantee its repayment. Given the relatively high degree of forecasting of investment results, the risk of investment in this case is somewhat lower than in the case of start-up financing, but it is still high.
Companies that have been in existence for less than 3 years and are not yet profitable are often financed in this way.
- Later-stage financing provides funds to enterprises with existing production that have a high potential for expansion ( for example, through the introduction of a new production line or the establishment of a retail network in new areas).
The risk of such investments is much lower than in previous cases, and their payback period is much shorter ( about 2-5 years). In this case, venture capital is an alternative to classical credits.
3. Financing of individual operations is done as a one-time act. As a rule, funds are allocated for a very short period of time ( for example, 2 years). In this way, for example, the purchase of companies for a certain client is financed, intermediate financing is carried out, which ensures the company's activity in the period between other types of financing, and funds are provided (and this is of primary importance) for the purchasing of the company by its management personnel.
In addition to the forms listed above, there are other types of venture capital investment, such as:
- saving financing (to revitalize a potentially bankrupt company);
- replacement financing (to replace part of the firm's external resources with its own capital);
- financing of operations related to the company's entry into the securities market.
A special place in the organization of venture investment is taken by various venture funds and their managing companies.
In fact, this is the only structure of the whole venture capital system that has opportunities for venture capital investment of large, complex and systemic innovations.
It is in the funds that ordinary financial and loan capital from many primary sources is transformed into initial venture capital. Venture capital funds, combining the resources of a wide variety of investors, are able to balance the differences between them and harmonize their interests (production, financial, sectoral, etc.). In addition, (as, for example, the experience of Canada shows), the state can actively act through the funds in a market economy, using the advantages of venture capital to solve such priority tasks as innovative development of the country's economy, leveling the level of socio-economic development of regions, activation of small business.
As they develop, venture capital funds turn into complex systemic formations. The main tendencies of their development are diversification of activity, complication of structure and functions, striving to create various associations, consortiums, trusts, development of international investment cooperation, creation of transnational organizations, striving for registration in offshore zones of preferential taxation.
It should be noted that the larger the fund, the more financial opportunities it has. For example, it can attract professional consulting firms for prior research of potential investment objects. That is why there are so-called mega-funds, which concentrate 2-4.5 and more billion dollars of venture capital. But the larger the fund, the more difficult it decides to undertake risky operations (and this, in fact, is the nature of venture capital), and the less its connection with the entrepreneurial resource.
The venture fund, risking large investments made for a rather long period of time in perspective productions, is directly interested in the rapid development of these productions.
Therefore, the fund's representatives are actively involved in managing the enterprises and advising the top management (the fund's representative is usually a member of the company's management board).
Since venture investments do not require warranties and capital return securities, the only assurance for venture investors is their personal experience and qualification during the selection of investment objects, as well as further active participation in their management.
The venture investor may not have a plan for the enterprise's development, but he requires that the management of the enterprise develop such a plan and generally follow it during the whole investment cycle (which in most cases is 3-10 years).
The venture investor hopes that during this time the enterprise will be able to increase its sales and income significantly, the market value of the enterprise will increase greatly, and the investor will be able to profitably "exit" from the company.
The strategy of future "exit" is usually thought out in advance.
The most common strategies of such "exit" are:
- selling the purchased shares on the stock market,
- selling the investment to a strategic investor,
- sale of its share of stock to other shareholders or to the management of the company.
In practice, the most common form of venture capital investment is a combined form, in which part of the funds is deposited in the share capital, and the other part is provided in the form of an investment loan.
Venture financing is characterized by the distribution of common risks between the venture investor and the businessman, a long period of co-existence, which provides for an open declaration by both parties of their goals at the very beginning of the common work. This approach is the main difference between venture capital investment and bank lending or strategic partnership.
So, venture capital differs significantly from traditional financing. Its main features are the following:
- Venture capital investment is provided to new or existing firms that have the potential for rapid growth.
- Often financed new companies at the initial stage of development, which are not yet able to obtain bank loans.
- Investments, which usually require a high rate of return, are provided on a quick payback basis for a period of 3 to 10 years.
- Then there may be an initial public stock sale, a merger or sale of the business, or other sources of financing may be explored.
- The businessman usually gives up a share in the ownership and management of the company in favor of the investor.
- Venture investors typically expect an average yearly return on investment of 20-50%.
- The availability of the company's management expertise is a major consideration in the funding decision.
Therefore, the fund's representatives are actively involved in managing the enterprises and advising the top management (the fund's representative is usually a member of the company's management board).
Since venture investments do not require warranties and capital return securities, the only assurance for venture investors is their personal experience and qualification during the selection of investment objects, as well as further active participation in their management.
The venture investor may not have a plan for the enterprise's development, but he requires that the management of the enterprise develop such a plan and generally follow it during the whole investment cycle (which in most cases is 3-10 years).
The venture investor hopes that during this time the enterprise will be able to increase its sales and income significantly, the market value of the enterprise will increase greatly, and the investor will be able to profitably "exit" from the company.
The strategy of future "exit" is usually thought out in advance.
The most common strategies of such "exit" are:
- selling the purchased shares on the stock market,
- selling the investment to a strategic investor,
- sale of its share of stock to other shareholders or to the management of the company.
In practice, the most common form of venture capital investment is a combined form, in which part of the funds is deposited in the share capital, and the other part is provided in the form of an investment loan.
Venture financing is characterized by the distribution of common risks between the venture investor and the businessman, a long period of co-existence, which provides for an open declaration by both parties of their goals at the very beginning of the common work. This approach is the main difference between venture capital investment and bank lending or strategic partnership.
So, venture capital differs significantly from traditional financing. Its main features are the following:
- Venture capital investment is provided to new or existing firms that have the potential for rapid growth.
- Often financed new companies at the initial stage of development, which are not yet able to obtain bank loans.
- Investments, which usually require a high rate of return, are provided on a quick payback basis for a period of 3 to 10 years.
- Then there may be an initial public stock sale, a merger or sale of the business, or other sources of financing may be explored.
- The businessman usually gives up a share in the ownership and management of the company in favor of the investor.
- Venture investors typically expect an average yearly return on investment of 20-50%.
- The availability of the company's management expertise is a major consideration in the funding decision.
2. state stimulation of venture capital
The development of the venture capital industry largely depends on the state support level. Developed countries use both direct and indirect measures of state stimulation of venture capital development.
Direct measures include specific mechanisms aimed at increasing the supply of venture capital. These are direct financial stimulus, government loans and risky public investments in share capital. Such instruments can be directed both to venture capital funds and directly to small and medium-sized enterprises.
Indirect measures to support venture capital include creating conditions for the development of business in the country as a whole, developing competitive stock markets for small and growing firms, developing long-term sources of capital, simplifying the procedure for forming venture capital funds, and stimulating interaction between large and small enterprises and financial institutions.
When developing programs of state support for the venture capital industry, it is important to take into account what stage of the investment process the state policy is aimed at. The experience of foreign countries shows that small knowledge-intensive companies especially need support at the early stages of their development, and the private sector's proposals for "start-up" financing are usually not enough. It is in this area that government support becomes particularly relevant.
The process of formation and development of venture business at a certain stage required the creation of professional organizations, which began to appear in the form of non-profit associations. At first, national associations were created, of which the oldest is the British Venture Capital Association (BVCA), founded in 1973. The European Venture Capital Association, founded in 1983, initially had only 43 members, but now has 320. The differences in the goals and objectives of national associations are determined by the different levels of countries' economic development, as well as by the national innovation and economic policy priorities. However, the very need for formal venture capital movement structuring indicates its growing influence and importance.
Direct measures include specific mechanisms aimed at increasing the supply of venture capital. These are direct financial stimulus, government loans and risky public investments in share capital. Such instruments can be directed both to venture capital funds and directly to small and medium-sized enterprises.
Indirect measures to support venture capital include creating conditions for the development of business in the country as a whole, developing competitive stock markets for small and growing firms, developing long-term sources of capital, simplifying the procedure for forming venture capital funds, and stimulating interaction between large and small enterprises and financial institutions.
When developing programs of state support for the venture capital industry, it is important to take into account what stage of the investment process the state policy is aimed at. The experience of foreign countries shows that small knowledge-intensive companies especially need support at the early stages of their development, and the private sector's proposals for "start-up" financing are usually not enough. It is in this area that government support becomes particularly relevant.
The process of formation and development of venture business at a certain stage required the creation of professional organizations, which began to appear in the form of non-profit associations. At first, national associations were created, of which the oldest is the British Venture Capital Association (BVCA), founded in 1973. The European Venture Capital Association, founded in 1983, initially had only 43 members, but now has 320. The differences in the goals and objectives of national associations are determined by the different levels of countries' economic development, as well as by the national innovation and economic policy priorities. However, the very need for formal venture capital movement structuring indicates its growing influence and importance.
3. History of the venture capital industry formation
The venture capital industry was born in the USA with active government support in the 50s of the last century. In 1958 Congress decided to launch the SBIC (Small Business Investment Company) program. Under this program, the U.S. government provided access to public financing to young growing companies, provided that they attract funds from private investors in the ratio of 2:1 or 3:1 ( that is, two or three parts of the capital should be from private sources).
SBICs were regulated by the Small Business Administration (SBA). Those private companies that agreed to participate in the SBIC program received government subsidies in exchange by issuing SBA-guaranteed bonds. As the SBIC program evolved, independent private venture capital funds and companies began to appear in parallel, and over time evolved into what is now known as the venture capital industry.
The history of the first venture capital companies in the United States is interesting.
Venture activity as an independent business began in Silicon Valley, where modern computer science and telecommunications were born. In 1957, Arthur Rock (then working at a Wall Street investment banking company), received a letter from Eugene Kleiner, an engineer at Shokley Semiconductor Laboratories in Palo Alto, who was looking for a company that might be interested in the idea of producing a new silicon transistor. After their meeting, it was decided that Arthur Rock would gather $1.5 million dollars to fund Kleiner's project. However, none of the 35 corporate investors that Rock contacted decided to take part in financing such a risky deal: to create a company for a completely new idea that had not yet been put into practice.
Only Sherman Fairchild, who was an innovator himself and already had experience in creating new technology companies, agreed. It was he who provided the necessary funds. This is how Fairchild Semiconductors, the first semiconductor company in Silicon Valley, was founded. After that, Arthur Rock had Intel and Apple Computer, and by 1984 he had gained popularity and his name became synonymous with success. He was the first who introduced the term "venture capital".
Around the same time, another famous venture capitalist, Tom Perkins, made his riskiest deal ever. Working for David Packard (one of the co-owners of the now world-famous Hewlett-Packard Company), he invented an low-cost and easy-to-use gas-pumped laser. He invested all his savings in the new company, which was so successful that after a short period of time Perkins managed to sell it to Spectra-Physics. After that, he too met Eugene Kleiner and totally devoted himself to the venture capital business.
In those years it was not easy to create new innovative companies: there were not so many real businessmen involved in innovations, and the necessary infrastructure had not been created yet. Corporate investors were not interested in investing in financial structures that were little understood at that time. The first venture fund, created by Arthur Rock in 1961, contained only 5 million dollars. But the results of the fund's work were amazing - Rock, having spent only 3 million, after a short time returned almost 90 million to investors.
At that time, venture investments did not have any notable impact on the development of the American economy. The few companies created under the SBIC program could not yet show any major achievements. For a long time, until the late 1970s, the total amount of funds declared as investments in venture capital funds and companies was no more than 100 million dollars a year.
The number of innovative new companies that would need financial assistance and management advice was small. Small groups of venture capital firms existed in the Boston, San Francisco, and New York area, and everyone involved in the business knew each other rather well. These are such names as Arthur Rock, the Dreper family, Franklin (Pitch) Johnson, and Tom Perkins.
However, the later formation of venture capital matched the rapid development of computer technology and the growing prosperity of middle-class Americans. Such well-known companies as DEC, Apple Computers, Compaq, Sun Microsystems, Microsoft, Lotus, Intel managed to become modern giants of computer business largely thanks to venture capital. Moreover, the rapid growth of new industries, such as personal computers and biotechnology, was possible mainly with the participation of venture capital investments.
SBICs were regulated by the Small Business Administration (SBA). Those private companies that agreed to participate in the SBIC program received government subsidies in exchange by issuing SBA-guaranteed bonds. As the SBIC program evolved, independent private venture capital funds and companies began to appear in parallel, and over time evolved into what is now known as the venture capital industry.
The history of the first venture capital companies in the United States is interesting.
Venture activity as an independent business began in Silicon Valley, where modern computer science and telecommunications were born. In 1957, Arthur Rock (then working at a Wall Street investment banking company), received a letter from Eugene Kleiner, an engineer at Shokley Semiconductor Laboratories in Palo Alto, who was looking for a company that might be interested in the idea of producing a new silicon transistor. After their meeting, it was decided that Arthur Rock would gather $1.5 million dollars to fund Kleiner's project. However, none of the 35 corporate investors that Rock contacted decided to take part in financing such a risky deal: to create a company for a completely new idea that had not yet been put into practice.
Only Sherman Fairchild, who was an innovator himself and already had experience in creating new technology companies, agreed. It was he who provided the necessary funds. This is how Fairchild Semiconductors, the first semiconductor company in Silicon Valley, was founded. After that, Arthur Rock had Intel and Apple Computer, and by 1984 he had gained popularity and his name became synonymous with success. He was the first who introduced the term "venture capital".
Around the same time, another famous venture capitalist, Tom Perkins, made his riskiest deal ever. Working for David Packard (one of the co-owners of the now world-famous Hewlett-Packard Company), he invented an low-cost and easy-to-use gas-pumped laser. He invested all his savings in the new company, which was so successful that after a short period of time Perkins managed to sell it to Spectra-Physics. After that, he too met Eugene Kleiner and totally devoted himself to the venture capital business.
In those years it was not easy to create new innovative companies: there were not so many real businessmen involved in innovations, and the necessary infrastructure had not been created yet. Corporate investors were not interested in investing in financial structures that were little understood at that time. The first venture fund, created by Arthur Rock in 1961, contained only 5 million dollars. But the results of the fund's work were amazing - Rock, having spent only 3 million, after a short time returned almost 90 million to investors.
At that time, venture investments did not have any notable impact on the development of the American economy. The few companies created under the SBIC program could not yet show any major achievements. For a long time, until the late 1970s, the total amount of funds declared as investments in venture capital funds and companies was no more than 100 million dollars a year.
The number of innovative new companies that would need financial assistance and management advice was small. Small groups of venture capital firms existed in the Boston, San Francisco, and New York area, and everyone involved in the business knew each other rather well. These are such names as Arthur Rock, the Dreper family, Franklin (Pitch) Johnson, and Tom Perkins.
However, the later formation of venture capital matched the rapid development of computer technology and the growing prosperity of middle-class Americans. Such well-known companies as DEC, Apple Computers, Compaq, Sun Microsystems, Microsoft, Lotus, Intel managed to become modern giants of computer business largely thanks to venture capital. Moreover, the rapid growth of new industries, such as personal computers and biotechnology, was possible mainly with the participation of venture capital investments.
4. The experience of some countries in the venture capital investment development
In the 1990s, the U.S. already accounted for more than ¾ of the world's venture capital. The global average yearly return on venture capital funds is 17-25%, which is significantly higher than bank returns.
The USA and Canada traditionally focus on financing first of all new and very young innovative companies, even though the risk of such investments is high.
In order to reduce risks, venture funds use the mechanism of investing in individual projects. A characteristic feature of small knowledge-intensive companies in the United States is their narrow specialization. As a rule, they produce one or two types of products. Such firms employ a significant number of scientists and engineers and have a high share of R&D expenses - more than 7% of the value of finished products.
Another characteristic feature of venture capital financing in the U.S. and Canada is the large share of high-tech companies in the total number of venture capital recipients.
Many large corporations (IBM, General Electric, etc.) themselves create special departments in their structure (so-called "internal ventures"), designed to select and finance interesting ideas and the latest technologies proposed by both independent small knowledge-intensive companies and employees of the corporation itself.
For example, General Electric has 30 venture capital companies with a total fund of $100 million.
Xerox has established a venture capital department, Xerox Technology Ventures, with a fund of $30 million, where company employees (engineers, researchers, inventors, etc.) can apply for support of their independent innovation and technology projects. If the project is assessed as commercially viable, the venture fund allocates money for its implementation. If the "internal venture" is successful, it becomes one of the production units of the corporation, and its products are sold through the sales channels operating in the corporation.
The most successful of the 15 "internal ventures" of IBM Corporation was the project of creating and launching personal computers on the market. By 1980 (one year after its creation) the products were launched on the market, and in 2 more years the yearly sales amounted to 2.5 billion dollars, exceeding the sale of any other model of computing equipment produced by IBM.
Among the reasons for the rapid development of the venture capital industry in the United States should be noted, first of all, the high development of stock markets. In addition, the development of American innovative enterprises is promoted by the existence of a powerful national payable market, a fixation on which often means a victory in international competition. It is also important that American universities receive large allocations for research from the public and private sectors, are highly mobile, competition-oriented and interested in commercialization of their scientific developments.
The USA and Canada traditionally focus on financing first of all new and very young innovative companies, even though the risk of such investments is high.
In order to reduce risks, venture funds use the mechanism of investing in individual projects. A characteristic feature of small knowledge-intensive companies in the United States is their narrow specialization. As a rule, they produce one or two types of products. Such firms employ a significant number of scientists and engineers and have a high share of R&D expenses - more than 7% of the value of finished products.
Another characteristic feature of venture capital financing in the U.S. and Canada is the large share of high-tech companies in the total number of venture capital recipients.
Many large corporations (IBM, General Electric, etc.) themselves create special departments in their structure (so-called "internal ventures"), designed to select and finance interesting ideas and the latest technologies proposed by both independent small knowledge-intensive companies and employees of the corporation itself.
For example, General Electric has 30 venture capital companies with a total fund of $100 million.
Xerox has established a venture capital department, Xerox Technology Ventures, with a fund of $30 million, where company employees (engineers, researchers, inventors, etc.) can apply for support of their independent innovation and technology projects. If the project is assessed as commercially viable, the venture fund allocates money for its implementation. If the "internal venture" is successful, it becomes one of the production units of the corporation, and its products are sold through the sales channels operating in the corporation.
The most successful of the 15 "internal ventures" of IBM Corporation was the project of creating and launching personal computers on the market. By 1980 (one year after its creation) the products were launched on the market, and in 2 more years the yearly sales amounted to 2.5 billion dollars, exceeding the sale of any other model of computing equipment produced by IBM.
Among the reasons for the rapid development of the venture capital industry in the United States should be noted, first of all, the high development of stock markets. In addition, the development of American innovative enterprises is promoted by the existence of a powerful national payable market, a fixation on which often means a victory in international competition. It is also important that American universities receive large allocations for research from the public and private sectors, are highly mobile, competition-oriented and interested in commercialization of their scientific developments.
The yearly volume of investments in the EU countries by more than 500 venture capital funds operating here reaches 20 billion euros.
However, unlike American venture capital funds, European venture capital funds try to invest not in start-ups, but in already established and well-proven businesses.
In Western Europe, venture capital is used mainly for enterprise development. It should be noted that in the 1980s the activity of investing in shares of private firms in Europe (except for the UK and the Netherlands) was very low. About 1/3 of all investments were provided by banks, which are known to be oriented towards safer operations. Since the mid-1990s, venture capital financing began to grow rapidly. Thus, in 1997 alone, venture investments in Germany increased by more than 650%, in Sweden - by almost 2000%.
The absolute leader in Europe in the development of venture capital industry is Great Britain, which accounts for almost half of all European venture capital investments. Moreover, about one third of these investments are made outside the country.
One of the reasons for such a rapid development of the venture capital industry in those years was the interest of top managers in obtaining the companies they worked for. This structure of venture capital is typical today for Great Britain and France. An exception for Europe is the Netherlands, where venture capital financing is organized similarly to North America. But if in the USA investments in high technologies dominate (firms based on innovative technologies make up about 60% of the companies that received venture investments there), in Western Europe venture investments are distributed between different industries quite evenly, and the process of financing development programs covers a wide range of companies, not limited only to high-tech firms.
Public policy measures have played an important role in the development of the venture capital industry in Europe. Governments of Western European countries create favorable conditions for the development of venture capital funds.
For example, the Netherlands government ensures coverage of half of possible losses related to investing in private companies. Venture capital funds in the Netherlands and France attract investment capital mainly from the largest banks and insurance companies, while in Great Britain - from pension funds, which account for about one third of all financial investments. This is because in the UK, pension funds that invest in venture capital businesses are subject to preferential tax treatment.
Such targeted government intervention has ensured the rapid development of the venture capital industry in Western European countries.
However, unlike American venture capital funds, European venture capital funds try to invest not in start-ups, but in already established and well-proven businesses.
In Western Europe, venture capital is used mainly for enterprise development. It should be noted that in the 1980s the activity of investing in shares of private firms in Europe (except for the UK and the Netherlands) was very low. About 1/3 of all investments were provided by banks, which are known to be oriented towards safer operations. Since the mid-1990s, venture capital financing began to grow rapidly. Thus, in 1997 alone, venture investments in Germany increased by more than 650%, in Sweden - by almost 2000%.
The absolute leader in Europe in the development of venture capital industry is Great Britain, which accounts for almost half of all European venture capital investments. Moreover, about one third of these investments are made outside the country.
One of the reasons for such a rapid development of the venture capital industry in those years was the interest of top managers in obtaining the companies they worked for. This structure of venture capital is typical today for Great Britain and France. An exception for Europe is the Netherlands, where venture capital financing is organized similarly to North America. But if in the USA investments in high technologies dominate (firms based on innovative technologies make up about 60% of the companies that received venture investments there), in Western Europe venture investments are distributed between different industries quite evenly, and the process of financing development programs covers a wide range of companies, not limited only to high-tech firms.
Public policy measures have played an important role in the development of the venture capital industry in Europe. Governments of Western European countries create favorable conditions for the development of venture capital funds.
For example, the Netherlands government ensures coverage of half of possible losses related to investing in private companies. Venture capital funds in the Netherlands and France attract investment capital mainly from the largest banks and insurance companies, while in Great Britain - from pension funds, which account for about one third of all financial investments. This is because in the UK, pension funds that invest in venture capital businesses are subject to preferential tax treatment.
Such targeted government intervention has ensured the rapid development of the venture capital industry in Western European countries.
The venture capital market in Russia is rather young - it began its formation in the nineties. The history of this market is one of temporary periods of growth, followed by crises, which each time set it back.
The 90s: where it all began
The first systemic steps towards the formation of a venture capital market in Russia were taken in the mid-90s, more than twenty years late from the West, and were started by Western investors who gained access to the Russian market through the process of privatization of industrial enterprises and the reduction of trade and financial barriers.
In 1994-1996, the European Bank for Reconstruction and Development established 11 regional venture capital funds with a capital of 10-30 million dollars to support the Russian economy. These funds did not invest in technology development, but invested in medium-sized enterprises producing consumer goods and services, but at great risk.
At the same time, the International Finance Corporation (IFC), a member of the World Bank Group that focused on investments in developing countries, launched a Russian-American program in Russia. As part of this program, the U.S.-Russia Investment Fund ($440 million) was created.
According to Financial Times estimates, by the end of 1997, 26 investment funds with a total capital of about $1.5 billion were operating in Russia.
2000-2010s
The beginning of the 2000s in the world is characterized by crisis reconstruction, a boom in investment and a global boom of Internet companies, which will reach Russia with a late arrival. Yandex, Rambler, and Ozon were the first leaders of the Russian Internet industry to attract investment.
The government is beginning to play a major role in the development of the innovation economy and the venture capital market. Between 2004 and 2009, the government created state development institutions RBK, Rusnano and the Skolkovo Foundation, which worked to generate interest in technological business.
An important event that illustrated the government's recognition of the venture capital industry was the Resolution of the Federal Commission for Securities Market of Russia dated August 14, 2002 N31/ps "Regulations on the Composition and Structure of Assets of Joint-Stock Investment Funds and Assets of Unit Investment Funds".
For the first time it mentions "venture capital" funds among other investment institutions and defines requirements to the composition and structure of assets of venture capital funds.
After overcoming the crisis in 2008-2009 the market has again entered the phase of steady growth.
Rusnano Corporation from 2007 to 2012 has invested in more than 100 projects worth more than 130 billion rubles. The Skolkovo Foundation from 2010 to 2014 issued 150 grants to technology companies for 9.9 billion rubles.
In 2013, a number of incentives were implemented in the field of legislation and taxation: special tax status for Skolkovo residents, software licensing benefits, reduction of social fees for IT companies.
By 2013, Russia ranked 4th in Europe in terms of high-tech investments. The Wall Street Journal wrote about the boom in venture capital investment in startups in Russia. Russia has become one of the fastest growing venture capital markets, ranked among the top five in Europe by foreign experts.
At the same time, 2013 was a record year not only in terms of investment volumes, but also in the capitalization of venture capital funds.
In the same years, the largest Russian companies Mail.Ru Group, Yandex, Qiwi, Luxoft, Tinkoff Bank and others entered the international stock exchange.
In 2014-2016, the market sentiment was pessimistic - the most mentioned factors affecting the market were the crisis and sanctions.
However, year on year, participants continued to increase investment volumes and the number of deals.
In 2017 and 2018, the number of deals was about the same 302 (2017) and 299 (2018), but the total investment volume increased significantly: from $471 million (2017) to $714 million (2018).
While investors continued to be concerned about Russia's growing isolation and new sanctions, they noted a recovery in the venture capital market as a whole at the end of 2019.
Political and economic events impacted many sectors, with consequences including foreign investors withdrawing from the Russian market, difficulties in raising capital from foreign investors, entering new markets and scaling companies. The crises, the fall of the ruble, and sanctions all set the industry back, followed by two to three years of recovery.
With the advent of the Coronacrisis, uncertainty is weighing heavily on investors, because in some niches businesses have sagged.
In some segments, such as online education, food delivery and not only food, projects have shown rapid growth, but this does not mean that they will maintain the same performance.
The Russian venture capital market is still small compared to the international one. However, in total, over the last 20 years it has managed to do a lot for its development and formation. The need for innovation is realized by the government and corporations, which have become prominent players in the industry in the last two years, both in the role of direct investors and venture funds.
The 90s: where it all began
The first systemic steps towards the formation of a venture capital market in Russia were taken in the mid-90s, more than twenty years late from the West, and were started by Western investors who gained access to the Russian market through the process of privatization of industrial enterprises and the reduction of trade and financial barriers.
In 1994-1996, the European Bank for Reconstruction and Development established 11 regional venture capital funds with a capital of 10-30 million dollars to support the Russian economy. These funds did not invest in technology development, but invested in medium-sized enterprises producing consumer goods and services, but at great risk.
At the same time, the International Finance Corporation (IFC), a member of the World Bank Group that focused on investments in developing countries, launched a Russian-American program in Russia. As part of this program, the U.S.-Russia Investment Fund ($440 million) was created.
According to Financial Times estimates, by the end of 1997, 26 investment funds with a total capital of about $1.5 billion were operating in Russia.
2000-2010s
The beginning of the 2000s in the world is characterized by crisis reconstruction, a boom in investment and a global boom of Internet companies, which will reach Russia with a late arrival. Yandex, Rambler, and Ozon were the first leaders of the Russian Internet industry to attract investment.
The government is beginning to play a major role in the development of the innovation economy and the venture capital market. Between 2004 and 2009, the government created state development institutions RBK, Rusnano and the Skolkovo Foundation, which worked to generate interest in technological business.
An important event that illustrated the government's recognition of the venture capital industry was the Resolution of the Federal Commission for Securities Market of Russia dated August 14, 2002 N31/ps "Regulations on the Composition and Structure of Assets of Joint-Stock Investment Funds and Assets of Unit Investment Funds".
For the first time it mentions "venture capital" funds among other investment institutions and defines requirements to the composition and structure of assets of venture capital funds.
After overcoming the crisis in 2008-2009 the market has again entered the phase of steady growth.
Rusnano Corporation from 2007 to 2012 has invested in more than 100 projects worth more than 130 billion rubles. The Skolkovo Foundation from 2010 to 2014 issued 150 grants to technology companies for 9.9 billion rubles.
In 2013, a number of incentives were implemented in the field of legislation and taxation: special tax status for Skolkovo residents, software licensing benefits, reduction of social fees for IT companies.
By 2013, Russia ranked 4th in Europe in terms of high-tech investments. The Wall Street Journal wrote about the boom in venture capital investment in startups in Russia. Russia has become one of the fastest growing venture capital markets, ranked among the top five in Europe by foreign experts.
At the same time, 2013 was a record year not only in terms of investment volumes, but also in the capitalization of venture capital funds.
In the same years, the largest Russian companies Mail.Ru Group, Yandex, Qiwi, Luxoft, Tinkoff Bank and others entered the international stock exchange.
In 2014-2016, the market sentiment was pessimistic - the most mentioned factors affecting the market were the crisis and sanctions.
However, year on year, participants continued to increase investment volumes and the number of deals.
In 2017 and 2018, the number of deals was about the same 302 (2017) and 299 (2018), but the total investment volume increased significantly: from $471 million (2017) to $714 million (2018).
While investors continued to be concerned about Russia's growing isolation and new sanctions, they noted a recovery in the venture capital market as a whole at the end of 2019.
Political and economic events impacted many sectors, with consequences including foreign investors withdrawing from the Russian market, difficulties in raising capital from foreign investors, entering new markets and scaling companies. The crises, the fall of the ruble, and sanctions all set the industry back, followed by two to three years of recovery.
With the advent of the Coronacrisis, uncertainty is weighing heavily on investors, because in some niches businesses have sagged.
In some segments, such as online education, food delivery and not only food, projects have shown rapid growth, but this does not mean that they will maintain the same performance.
The Russian venture capital market is still small compared to the international one. However, in total, over the last 20 years it has managed to do a lot for its development and formation. The need for innovation is realized by the government and corporations, which have become prominent players in the industry in the last two years, both in the role of direct investors and venture funds.
Task. Describe the experience of venture capital investment development in your country. Write your report in the document on the link.