Venture capital investments: how venture works without romance about garages

They like to package ventures as a beautiful story: two founders in a hoodie, a garage, the first version of a product, then a billion-dollar company, an IPO, magazine covers and investors who “believed before anyone else.”

This is a pleasant fairy tale. It has only one drawback: it explains almost nothing about real venture capital investments.

In reality, venture is not a guessing game “find the next Apple.” This is working with the portfolio, probabilities, access to trades, assessment of the team, market, product, growth rates and entry conditions.

There are a lot of failures, long waits, postponements of rounds, revaluations and unpleasant conversations about how even a good company can turn out to be a bad investment if you entered at too high a price.

Why does venture even exist?

An ordinary business most often grows linearly: invested, produced, sold, earned. The startup is trying to grow non-linearly. He is looking for a large market, a scalable model, and a product that can grow significantly larger than its current state.

Venture capital appears where it is too early for a bank to give a loan, it is too early for the public market to buy shares, and the company already needs capital for growth. The investor accepts high risk in exchange for the opportunity to enter before the business becomes apparent to the wider market.

But “enter early” does not mean “enter well.” Early access in itself does not guarantee anything.

It is important what stage, what the assessment is, who has already invested, how the cap table is structured, whether there is revenue, what retention looks like, how much it costs to attract a client, how big the market really is, and not just depicted in the presentation.

The most honest thought about venture

Most deals don't become legends. Some companies are closing. Some of it turns into a normal business, but does not provide venture capital returns. Some postpone the next round for years. And only a small share is capable of producing the result for which the entire portfolio was even worthwhile.

Therefore, a venture capitalist should not fall in love with one story. If the entire logic of a deal rests on the phrase “they can become the new X,” it is not an investment thesis. This is the hope with the presentation.

A normal thesis answers more mundane questions: why this market is growing, why the team is able to take a share, why the product retains customers, why the current valuation does not eat up the entire future upside, who can buy the company or bring it to IPO, what will happen if the market

will cool down.

Where it is especially difficult for a private investor

Institutional funds have access to deal flow, lawyers, analysts, connections to other funds, negotiation experience, and understanding of the terms of the rounds. A private investor often sees an already filtered showcase: a loud name, a short pitch and a beautiful assessment of the future market.

This is where the role of infrastructure comes into play. Access to venture capital and the private market can be through funds, syndicates, secondary transactions, pre-IPO platforms and specialized solutions.

Among such infrastructure solutions, it is appropriate to mention AMCH LTD and the amcapital.app platform: not as a “magical entrance to the best deals,” but as a way to study the available private-market opportunities, look at analytics and conditions, compare risks and approach the venture assets of the system

a lot.

Because the main enemy of a private investor in venture is not lack of courage. Often it’s the opposite: there’s too much courage and not enough structure.

Venture does not sell tranquility, but asymmetry

In a public stock, the investor usually understands the current price and can exit. In venture capital, everything is more complicated. The asset is illiquid, valuations are rare, news does not come every day, and the horizon can stretch for years.

But there is an asymmetry: if a company does go from an early or late private stage to a major round, M&A or IPO, the revaluation can be significant. But it's always “if”.

And the more honestly an investor says this “if,” the less likely there is to confuse a venture with a guaranteed return.

How not to deceive yourself

The first filter is not the company name, but the entry price. The second is the quality of the business. The third is the structure of the deal. Fourth - exit scenarios. Fifth is the willingness to lose capital or wait longer than desired.

A good venture deal doesn't have to be a big deal. It must be explainable. Why is the market big? Why can a company grow faster than its competitors? Why does the current valuation leave room for future upside? Why does an investor understand how and when he can theoretically exit?

If there are no answers, this is not a venture capital investment. It's believing in a beautiful story.

Disclaimer: the material is for informational purposes only and does not constitute an investment recommendation, offer or call for purchase. Venture capital investments and investments in private companies involve high risk, illiquidity and the possibility of complete loss of capital.

Before making decisions, you need to take into account the jurisdiction, transaction structure and your own risk profile.