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16 August 2023 14h50
Source: Banco Carregosa

Venture capital: 6 tips for investors

Venture capital: 6 tips for investors
Venture capital: 6 tips for investors


Find out what venture capital is, what the benefits and risks are, and how to make an informed decision.



Venture capital is a type of private investment that has been at the heart of countless success stories, from Facebook to Google. In exchange for a stake in the company, investors back start-ups or companies with high long-term growth potential. The potential for financial return – and the risks involved – are significant, so it's important to know exactly how to assess the companies, the management teams and the markets in which they operate. Find out what venture capital is and why it continues to be the choice of some of the world’s most successful investors.



What is venture capital?

Venture capital is a form of financing for early-stage companies with the potential to grow rapidly, but which are generally unable to access traditional bank loans. These companies typically present themselves as innovators in sectors such as artificial intelligence, shared mobility, energy, telecommunications and other areas with the prospect of rapid development.

In return for this funding, investors take equity stakes in companies, usually a significant or controlling stake. If the company is successful and is bought by another company or goes public through an IPO (Initial Public Offering), venture capitalists can make a substantial return on their investment.

In this way, investors help start-ups to finance their initial operations, expand their business, develop products and technologies, hire talent and reach key milestones. Venture capital can therefore be seen as a driver of innovation and entrepreneurship.




Venture capital: 6 tips for investors


Source: KPMG Venture Pulse



Despite the huge potential for financial returns, recent times have highlighted the challenges of venture capital for investors. Global venture capital investment fell to $57 billion in the first quarter of 2023 – a particularly low figure when compared to the more than $170 billion recorded in the same quarter a year ago. This decline is due to a number of cumulative factors, including the protracted war in Ukraine, inflation and persistently high interest rates.

However, this decline also reflects greater selectivity on the part of investors, who are increasingly looking at the results and performance metrics of start-ups. Nevertheless, there are still a number of advantages to this form of investment for both the companies and the investors.



What are the benefits of venture capital?


Benefits for start-ups


• Significant funding: Venture capital opens the door to much larger amounts of funding than is generally available through traditional bank loans. Companies can then access the resources they need to grow, develop products, expand operations, hire talent and achieve key business objectives.


• Strategic support: In addition to funding, start-up companies can also receive strategic support and advice. Venture capitalists often have a wealth of experience in the industry and can offer valuable advice on strategy, operations, marketing and other key aspects of the business. This advice is important to avoid common mistakes, make informed decisions and capitalise on growth opportunities.


• Networking: Funding can also give start-ups access to investor networks, which is vital for opening doors, finding partners, clients and suppliers, and even attracting additional investors in the future.


• Validation and credibility: The fact that a start-up has been funded by a venture capital investor is often seen as a stamp of approval and credibility. It may attract the attention of other investors, suppliers, clients and staff, demonstrating the company’s ability to thrive and grow.


Benefits for investors

Venture capital investors also enjoy a number of benefits that explain the strong interest in this type of investment worldwide.


• Potentially high returns: Venture capital offers the potential for significant returns on investment. While there are always risks involved, the return can be significant if the investee company is successful, and even more so if it is acquired or goes public (IPO).


• Portfolio diversification: Venture capital investors typically build a diversified portfolio of investments in different start-ups. This strategy helps to spread risk, as not all investee companies will be successful. Diversification allows investors to take advantage of opportunities with high growth potential, while mitigating some of the risk associated with investing in a single company.


• Engagement and influence: Venture capital investors have the opportunity to actively engage with companies, providing strategic advice, sharing expertise and helping to shape the future of start-ups. This can be rewarding for investors who want to have a direct impact on the success of the companies in which they have invested.



What are the risks of investing in venture capital?

It is important to remember that venture capital is considered a high-risk investment, as most early stage companies will not be successful. Investors should be aware of these risks and carefully analyse investment opportunities before making a decision. Here are some key points to consider:


• Risk of bankruptcy: Start-ups and early stage companies have a relatively high failure rate. In fact, less than 1% of start-ups make it to the IPO stage, where the return to investors is most significant.


• Liquidity risk: Venture capital investments tend to be long term and it may be necessary to wait several years for the company to mature or to reach the conditions to sell or go public. During this period, investors cannot expect to receive liquidity or a return on their investment.


• Risk of dilution: As the business grows, new shares may be issued to new investors, diluting and reducing the holdings of existing investors. If this dilution is significant, the potential returns to existing investors may be affected.


Market risk: It is important to remember that the performance of start-up companies is also subject to economic conditions and market cycles. In times of recession, these companies may find it more difficult to obtain additional funding, grow or achieve their goals.



What type of venture capital is there?

There are different types of venture capital, depending on the stage of development of the company and the purpose of the investment.


Seed capital - refers to the investment made in a company at an early stage, often when it is still just an idea or a concept. It is therefore often used to fund initial research and development, market testing and building a minimum viable product (MVP).


Early-stage venture capital – this type of investment is made in companies that are in the early stages of development, but already have a product or service on the market and are looking to grow nd expand into new markets.


Corporate venture capital – refers to investments in start-ups that are directly aligned with the business strategy of the investor. For example, companies may invest in start-ups to gain access to technology and innovation for the purpose of a strategic partnership.



How do I invest in venture capital?

Investing in venture capital can be a lucrative strategy, but there are risks involved. It is therefore important to consider these best practices when making this type of investment.


1. Invest in a specialised fund

This is the most common way to invest in venture capital. Specialised funds are managed by teams of professional investors and pool the capital of several investors. By choosing this investment route, you can take advantage of venture capital investment opportunities with a lower initial investment than if you invested directly in these companies and benefit from the expertise of a specialised team.


2. Diversify the portfolio

It is important to diversify venture capital investments by spreading capital across multiple companies and sectors. This reduces the risk of relying on the performance of a single company and increases the likelihood of positive returns.

This good practice of diversifying investments within the fund is also one of the benefits that specialised funds offer their investors.


3. Carry out a detailed study

Before investing, it is important to thoroughly analyse the investment opportunity, paying particular attention to the start-up’s business model and to specialised funds’ investment policy, management team, competition, market potential and other relevant factors. Careful research will help identify risks and opportunities.


4. Assess the history and experience

When choosing a start-up to invest in, it is important to analyse its past investment history, return performance and industry experience. Assessing the start-up's reputation and credibility can help you make a more informed decision. However, while this analysis can be difficult, precisely because the company is just starting its business, in the case of specialised funds you can analyse more closely their activity, the return of the funds that these managers have already managed and the history of the management company.


5. Think long term

Investing in venture capital usually requires a long-term approach. It is common for these types of investments to take several years to mature and generate significant returns. You should therefore be prepared not to expect a return on your investment in the short term.


6. Closely monitor the progress of start-ups

It is important to closely monitor the progress of investee companies or the investment fund and to stay involved as much as possible. Keeping abreast of challenges and successes will help to make informed decisions and identify any additional funding needs or strategic changes.


7. Bring in the experts

Even if you have experience in venture capital, working with a team of experts is key. The in-depth knowledge of financial advisors and private bankers is essential to help select the best investment opportunities, provide strategic guidance and manage the complexities of the process.



Banco Carregosa, a benchmark

Investing in venture capital always involves uncertainty and risk, regardless of the sector or project. It is essential to seek professional advice in order to carry out a thorough analysis prior to making an investment in venture capital.

With the help of Banco Carregosa’s team of experienced professionals, you can benefit from the highest level of advice and monitoring to design solutions that match your risk profile and profitability goals. Contact us.