Invest The Way Venture Capital Firms Do And Generate A Large ROI
Venture capital is mostly a self-explained form of financing that consists of investment funds managed by a firm that provides ‘venture capital,’ meaning high-risk capital that supports companies and organizations with the hope that these provide a great return on investment (ROI). Usually, they tend to be extremely good when it comes to generating large returns on their initial investments.
There are two key elements within them: general and limited partners. The general partners are the people who handle all the investment decisions (finding and agreeing to terms with startups and companies) and working with companies to grow and meet their goals. Limited partners, on the other hand, are the people and organizations who provide the necessary capital to complete those investments.
To summarize, general partners make the investments, and limited partners provide the funds. And even if general partners might invest some of their own money through the fund, this tends to account for only 1% of their whole fund size.
So, the cycle looks a bit like this: startups fundraise to convince venture capital firms, business angels, etc., to fund them in exchange for equity, and general partners must convince limited partners, such as pension funds, public venture funds, endowments, hedge funds, etc., to invest in their fund with the promise of big returns (between 5x and 10x) in a certain period of time (usually from 8 to 10 years).
The venture capital firms must then go on to make clever investments so they can give the limited partners their money back, plus a profit. This works very well because it allows the group to invest in businesses that at face value are considered risky, such as new businesses that might have untested technology or a concept that has never been tried before, and reap the rewards together. But however risky the business might be, venture capital firms only invest in companies that are compliant with their criteria. This includes, as a rule, business ventures that offer a clear strategy, which means a fast way to liquidate their investment when they so choose.
Also, they have a homologue in private equity firms that follows most of the investment model of venture capital firms but with a distinct difference: a venture capital firm can choose to invest in a company at any stage of its development which means from their seed investing or startup stages early on until a later second or third round of investment. Private equity firms will only invest in companies that are over their initial funding stages and are already stablished and making some form of return.
Both of these investment models are characterized by staying with their companies all the way to their IPO, when they’re finally publicly traded on the stock market. Because they’re looking for a long-term investment strategy that they will actually cash on no sooner than 8 to 10 years, there are other very important aspects that they evaluate when choosing an investment, such as:
- Is the management team experienced and committed?
Venture capital and private equity firms thoroughly evaluate a venture management team and hold them in high value when they have a proven track record, industry know-how, and are seriously committed to their project.
- Is the industry an innovative one? Is it currently well-performing?
Since venture capital firms aim to support investments that are projected for a large period and that have high growth potential, industry evaluation is fundamental. One of the ways to turn a profit regardless of the situational financial conditions is the ability to get involved in the right industry at the right time. And industries that are poised for economic growth have historically had major booms that had to do with innovation.
- What’s the market size? Is it global or local? And is it large enough to sustain profitability?
The bigger the market, the bigger the potential for growth. Venture capital firms always prefer a project that’s structured to reach global markets over local ones, and coupled with the stage the business’s industry currently is in, it can be the deciding factor to support your venture. A far-reaching market with massive adoption potential for your product maximizes return projections for a long-term investment, and venture capital firms love this.
- Is the product innovative, or differentiated enough to be noticed?
In line with the second point, innovation drives progress and it drives profits. An innovative product is one that offers the consumer something that they didn’t even know they wanted or needed. Such a product always changes the rules of the game. Turn your eyes to Apple and its iPhone if you’re still confused about why this matters.
- Is the business model simple or complex? Is it scalable?
A project that creates entry barriers for competitors is always a safer bet in the long run. And this is usually owed to their business models. A complex one that’s not easily replicable ensures that even if in the long run an emergent market will rise from a venture, said project will still remain at the forefront of the industry for years to come.
- What are the projections on returns? Do the numbers make sense?
This is one of the last points venture capital firms evaluate and with reason. No matter how good the numbers on a business plan may look, if they’re not consistent with what all the previously explained aspects pertaining to a particular project are saying about the venture, then it’s dead in the water. No investor, venture capitalist, public entity, or particular investor is going to risk capital on senseless projections. Why? The first reason is the possibility of a scam and if it’s not a scam then this means laziness. Why is laziness such a serious matter? We hope you haven’t forgotten about point No. 1 on this list.
All of these are questions that are typically asked by all venture capital firms and all professional investors who aim to think and invest like one. It’s this sort of smart work, research, and years of experience that lead venture capital firms to be able to identify amazing opportunities on different markets that have given them that highly sought-after reputation of turning huge ROIs.
But what does this mean for you then, especially if you’re not working—and can´t do so—through a venture capital firm? How can you invest in the same way and reap the same benefits?
Well, if it isn’t obvious by now, you have to start by applying all of these criteria to your investment evaluations and turn your sights to those promising markets that are instilling change in the industry. Markets like financial technologies, also known as fintech, a sector that has come a long way to help alleviate and mitigate a lot of the limitation of the current banking, trading, and remittance market practices. Fintech is effectively advancing the landscape in a worldwide spectrum with emergent technologies, such as blockchain integration, still emergent and poised to have long-term and far-reaching effect in the world of global finances.
There’s one company from this sector that has been receiving a lot of praise after being subjected to this type of shark evaluation. This company happens to be a holding for a consortium of fintech companies, managed by a visionary team of experts with a global vision aimed to redesign the financial world through a differentiated and innovative New Asset Class (NAC) with intrinsic value that greatly reduces the amount of time needed to benefit investors with amazing returns and an almost immediate exit strategy.
If you need to pull back your investment, luckily, this NAC also has the ability to act as a liquid asset that can be quickly cashed out if you need funds immediately or just want to pull your funding back. No doubt this private holding and its applications will set the industry standard of the 21st century for the fintech sector.
Professional investors know that they need to stay ahead of all the trends, and this NAC is one tool for that purpose. Click the link below to read on.