Investing in startups: theory and practice by Sergey Kartashov

Recently, the word startup has become very popular. This concept is extremely capacitive and extensive. The topic of startups is becoming increasingly relevant in the United States. This is a relatively new concept for our state, but now they are increasingly entering the global market of innovative technologies with successful projects. So, first let’s understand what startup is. It is important to note that the term “startup” is not included in US law. Therefore, we use the classic definition of a startup given by the American entrepreneur Stephen Blank ( one of the most famous startup methodologists , a successful entrepreneur and innovator, creator of the Consumer development concept and author of the profile book “The Startup owner’s Manual”): a startup is a temporary structure designed to find and implement a large – scale business model.


In simpler words, you can define a startup as a new commercial project that is created in order to make a profit from the business after its successful development.


The term “Startup” is translated from English as “the beginning of the process”, its “start”. However, not every commercial project that has opened can be called a startup. Only a small part of business projects developed from scratch fall under this definition.


Note that a distinctive feature of a startup is the novelty of its business model. Its main feature is the ability of such a business model to become scalable, namely, to be repeated and expanded. The latter statement is based on the opinion of Steve Blank.


Today, the main niche of startup creators is represented by young people in the age category from 25 to 30 years, who have an original view of the organization of the enterprise and the ability to implement creative ideas aimed at making a profit.

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A specific feature of a startup company is a chronic lack of finances, lack of a reliable material base and a shaky position of the company in a large market. Contrary to popular belief, a startup is not a smaller copy of a large enterprise, since the classical understanding of business does not imply the presence of innovative technologies.


For the active development of any startup project, financial investments are necessary. The size of material needs increases directly in proportion to the growth of the company. At the first stage of implementing an idea, it may take several thousand dollars, and in the process of development, the amount will increase to millions.


Finding a source of funding is a top priority when creating a startup, since the further development of the project depends on the availability of material support. Currently, young startups resort to “Networking”to find potential investors. This term refers to profile conferences and events aimed at studying promising projects. Any company that feels potential in its startup project can take part.


In addition to startups, investors also participate in such industry conferences and forums. They carefully watch the presentations offered by the participants, express their opinion on the advantages and disadvantages of the project, and conclude agreements with future partners.


Some startups found their investors by publishing the project on various sites. In addition, there are exchanges of start-up companies on the network, as well as a number of organizations that finance such projects. You can contact them directly.


The source of income for investors of new projects is the difference between the initial investment in the company and what it will later bring. Sometimes this income is formed at the expense of a share in the profit, but more often the investment occurs in the form of acquiring a part of the company, the value of which is low at the initial stage, for the purpose of its subsequent sale.

At the same time, investing in startups significantly depends on the stage at which they are located. The main components (which can be divided into separate auxiliary stages) of the new project life cycle are:

Initial (seed), which begins with the preliminary formulation of the startup idea and ends with the creation of a prototype. This stage is commonly referred to as the” valley of death ” because it does not involve making a profit, and the risk that the startup will not move on to the next stage of execution is very high. There are fewer people willing to invest at this stage.

Growth, which includes creating working prototypes and versions, launching them, and attracting consumers. The risks of investments at this stage are significantly reduced as it is completed.

Exit, where a company leaves the Startup category, starts issuing shares, and becomes a participant in the stock market. There will be a lot of people willing to invest here, but the return on such investments will be much less than at the previous two stages. On the other hand, the risk of losing money here will be much less.

Experience shows that an average of 3% of new ideas survive at the “seeding” stage, but investing in startups at this stage is a unique opportunity to get a share in a future successful business with very low initial amounts that need to be invested.

However, the reality today is that investments in startups in the United States at the “seed” stage most often occur at the expense of grants and government funds, and business angels and venture funds prefer to start investing money already at the development stage.


Investing in new projects can be divided into two basic categories:


Deferred to stability. This type of investment is a classic investment of money with the need for future returns. An agreement is concluded between investors and developers that includes the following information: determining the stage of the project to which financing will be carried out. In return, the investor receives a certain share of the profit from the further development of the project. You can draw an analogy with buying shares of a promising company that already has a specific product and convincing forecasts.

Rolling financing. The peculiarity of this type of investment is that developers have the opportunity to receive money at the early stages of project development. In some cases, a clear startup idea is enough to finance it. Investors cooperate only with those start-up companies that have the potential to recoup their investment not by 2 or even 3 times, but dozens of times.



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