Foreign investors are quickly mastering a typical pattern of venture financing. It is simple – they are supposed to grant a certain amount of money in exchange for a portion of a company’s charter capital or a definite number of shares.
This pattern works as a good catalyst for developing business in concrete industries, usually science-intensive.
Having become venture capitalists, foreign investors head a venture company or fund. However, they do not buy shares with their own money but pool together the finances of a group of collective investors.
Venture capitalists are the main link between their company (fund) and this group. The role of such a locomotive can be played by agencies with a good reputation and Western experience.
At the same time, they should not be new on the Russian market because they guarantee the investment – more psychologically than financially.
In Russia, venture capitalists independently choose where to invest and work in the council of directors, trying to expand the business of their company or fund.
But the final decision on investment rests with the investment committee that is guarding the interests of collective investors. As a result, the profits that are produced by the professional operation of venture capitalists do not belong to them personally. They can only count for a part of these profits – the rest will go to those who have invested their own money.
The appeal of venture investment is in its high mobility. A company or a limited partnership can deal with venture capital without being registered. If a venture capitalist creates a fund, he or she may hire a managing company or managers that usually receive up to 20% of the main profits.
In Russia, limited partnership is quite widespread. If it is formed, the founders of a company (fund) and investors become partners with limited liability.
Limited partnership is a good option because it is not taxable, and taxes on profits are the same as they would be if profits were generated by investments.
Despite the appeal of venture investment, foreign investors should remember that the Russian legislation does not yet have normative acts regulating the operation of venture companies and funds. For this reason, the funds operating on Russian territory or having business contacts with Russian companies from the outside are not Russian resIdents.
Domestic venture structures will not appear in Russia for a long time. This is why foreign investors are taking over the initiative in establishing venture capitals and funds. They are using the law-making experience of such countries as Britain, France and the Netherlands, where this mechanism is judicially adjusted. In many cases, these companies and funds are registered off-shore. This is not only a very simple procedure. It also removes sensitive issues of dual taxation of incomes and profits.
It would be appropriate to mention that lack of a proper legal foundation and streamlined taxation in Russia are impeding the flow of foreign investment.
But foreigners should not be scared by these problems. There is no doubt that bold businessmen who are ready to go for sensible risks will capitalize on them. Venture business in Russia has good prospects and a quite predictable future.
