The economic essence of venture financing of innovational projects

In the context of the reformation of the Russian economy, transition from the administrative system to a market economy , a lot of new financial instruments and concepts have appeared , which, despite the more than 10 -year history of development have not been studied to the end. One of them became the term " venture financing ", " venture capital " and " business venture " that came to us from abroad, and derived from the English word «venture» which translates as " risky undertaking or business ", " speculation ", and its meaning is used in various disciplines , in addition to economic ones. It inadvertently used to refer to many things that are not venture capital investment, for example, as a synonym for business, loan, government securities, real estate transactions, gas and oil exploration and everything that requires risk and initiative. Such confusion is associated with not well established practice of venture capital financing and insufficient coverage of this area in Russian publications. Not coincidentally, in this content, even among those who are directly engaged in venture financing, there is no single interpretation of this concept.

In this regard, it is necessary to clarify the concepts of "venture financing" and "venture capital", which would reflect the nature, purpose and main features of these concepts.

The purpose of the venture financing is to obtain ultra-high income from investment funds, which the investor receives as a return in terms of n - the number of years, by selling increased in price stocks or the share of successfully developing business to a partners on the open market, or a large company, working in the same area as the developing company.

Venture financing has its own characteristics, the formation of which, have been influenced by the economic situation in the United States in the postwar years and the rapid development of science.

Demand of small innovative firms in the capital was huge, but was not satisfied with the traditional sources of loan capital: banks, insurance companies and other financial institutions who obtain excessive risk. This was the trigger for the development of specific forms of venture financing. Most Russian scientists classify VC funding as a form of joint-stock companies, while foreign venture business practice shows that a combination of corporatization and lending can exist. Simultaneous use of two types of funding gives opportunity to reduce the risk of investing in innovative projects. You can also say that venture capital funding is directly related to the grant funding as venture capitalists interested in the development of the company, after investing they provide a range of free services for management, provide consulting services and full support. It shows that venture capital financing refers, on the one hand, to the equity, and, on the other - to the debt (borrowed) funding. Despite this, differs significantly from the traditional forms and has its own characteristics, among which are the following:

• 1.    Investments are provided to new or already existing companies with rapid growth potential. The rapid growth of production and, consequently, greater profits, significantly exceeding the average, can be provided by the implementation of innovative projects. This is confirmed the fact that in the early days of venture financing major focus of venture firms have traditionally been the companies which applied high technology in its production process.

• 2.    Financing of the companies through acquisition of minority usually unlisted shares in the stock market, or the provision of funds in the form of interest-free loan or investment with an interest rate of LIBOR plus 2-4%. On the basis of this feature implies that the entrepreneur has no obligations to venture investor to return the funds invested in the company. Unlike a loan, funds for venture capital are not ensured by any guarantees - venture capital investors assume the full financial risk of failure, as well as the rest of the other participants. Also, this fact is confirmed by workers Nizhnevolzhsky Regional Venture Fund: "Venture investor does not need any - either formal guarantees "and that venture financing is different from a bank loan is the fact that the company has no obligation to repay the investor his money. Hence the conclusion that funding for the launch period actually performed on an irrevocable basis.

• 3.    Long term financing. Terms of venture financing vary from three to ten years. There are few sources such as venture capital, which will provide newly formed innovative companies significant funds for such a long time.

• 4.    Assisting in the management of the company financed. This feature is due the personal interest of venture capitalists in the successful development of the company, on the basis of the two previous features. Since the probability of losses is high, venture capitalists provide full support to the company financed - from consulting services to help in management.

• 5.    Venture capitalist focuses not on dividends, but on capital gains for the company. This conclusion is based on the statements of experts in the field of venture capital financing, who indicates that income from capital investment mostly returns in the form of capital gains at the end of an investment than in the

• 6.    In the process of decision-making of financing a lot of attention paid to the presence of managerial experience. This is primarily due to the fact that the success of the project depends on a strong management team, showing leadership qualities, with experience in similar work and calmly related to risk, able to work under conditions of uncertainty and implement ideas.

form of dividends.

It should also be noted that in the world there is no single approach to the definition of venture capital, which is due to the history of development of the market in different countries. And for this reason, in the U.S. and Europe, there are different interpretations of the same concept. In Europe, the concept of "venture capital" is a subset of private equity investment, and often these two concepts interchangeable, as venture capital can go to purchase of the companies, that are family owned. In the U.S. by contrast, deals of LBO / MBO excluded from the concept of venture capital. Generally during the birth and up to the 1990s under the "venture" means any kind of "risk financing" companies without regard to their size and the size of business, in recent years, venture capital funding is seen mainly as an investment in the company, in the early stages of development. An equity investment companies based in the later stages of development, were called "private equity investment" Below you can see a schematic diagram of an exemplary separation of risky investments in venture capital and direct private equity depending on the stage of development of investee companies.

Thus, venture financing - is a kind of equity and debt financing, acting as a special resource of investment in social reproduction, stimulating the development of science, technology and innovation, which is characterized by high risk and uncertainty in the final result, and ultrahigh return from investment in new or expanding companies. Based on the above definition, we can admit that that venture capital –is a funds for venture financing. It should also be noted, that in terms of venture financing is a mixing of concepts such as "venture capitalist" and " venture investor," they are often used as synonyms, although they are not. Their separation is extremely important in the organization of the venture financing. Venture capitalist - a legal or natural person directly or indirectly involved in the management of the venture fund, by investing their capital in that fund.

Venture investor - is a legal or natural person directly or indirectly involved in the management of the venture fund, by investing their capital in the fund. Venture capitalist - an intermediary between the investor and venture companies, strongly promotes the growth of invested companies interested in expanding its business, the purpose of which, without investing its own funds, be rewarded with a percentage of the profits through selling stokes or shares of this company.

Investor

Venture Fund

Investing Firm

This is the scheme of movement of capital in a venture fund and income distribution between investors and fund managers.

In terms of organizational structure Venture Institute can be formed either as a standalone company, or exist as an unregistered entity as limited partnership. Directors and management personnel can be hired by both the Fund and the private management company or manager, providing its services to the fund. Management Company usually has the right to annual compensation, to 2.5% per annum of the initial commitments of investors. In addition, the management company or individuals, employees of management department, as well as the main partner may be eligible the so-called Carried Interest - percentage of profits fund, typically reaching 20%. Most often, this interest is not paid up until the investors will not be fully refunded the amount of their investment in the. Technical assistance tools that are used to conduct the survey on a pre-investment stage can be part of the annual compensation of the managers of the management company, and in some cases identified as a separate item of expenditure. In the case of a limited partnership founders of the fund and investors are limited partners. Main Partner in this case is responsible for the management of the fund and performs the function of monitoring the work of the manager.