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Venture Capital

Page history last edited by Brian D Butler 11 years, 1 month ago

 

 

 

 

 

 

 

Table of Contents:


 

 

 

 

 

VC business model in a nutshell:

 

VCs goal is to make a large investment, receive a high return, and do that quickly in order to have a liquidity event

 

Venture Capital companies raise money from institutional investors, and invest that money for them in other companies. 

 

How Venture Capital Firms Make Money

• After they return 1x on investment, they receive 20% of profits. Also, 20% of fund is allocated to general partners and special limited partners. 2% of fund is used as an administrative fee.

 

• Target is 25-30% annual Internal Rate of Return (IRR) or 500 basis points (5%) over the S&P

 

 

VC model presentation:

 


Beginners Guide to Venture Capital - Get more Business Plans

 

 

 

 

Venture Capital confidence indicator:

http://www.usfca.edu/sobam/nvc/pub/svvcindex.html

 

SV VC Confidence Index 2008 Q4

 

The Silicon Valley Venture Capital Confidence Index hit an all time low of 2.77 in the fourth quarter. (The survey ranks confidence from 1 to 5, with 1 being the lowest.) It was the fifth consecutive new low since the index began in the first quarter of 2004. The index is compiled by Mark Cannice at the University of San Francisco. He contacted 33 San Francisco Bay Area VCs and asked them about their outlook for the entrepreneurial environment for the Bay Area over the next six to 18 months.

 

 

Suggestion to VC's

 

VC firms should increase transparency when it comes to what they are looking for. Not so much in terms of industry sector or company stage (most firms already do that), but in terms of the actual pitch process and typical terms. Be specific about how entrepreneurs should approach you, what you're looking for in a presentation, and what terms you are probably willing to offer if interested (not valuations, but participation, etc.). This stuff is rarely trade secret, and can save both the VC and the entrepreneur valuable time and effort. Moreover, it will help VCs from missing out on certain opportunities because of the presentation rather than because of the potential…

 

 

 

 

Exit Strategy: why is it important?

 

In the traditional early-stage venture capital investment model, a vibrant IPO market is necessary for success. Backing early-stage companies is risky and, in any venture capital fund portfolio, the anticipation is that a number of investments will end up being written down or written off. Traditionally, the large return multiples available by taking a high-growth company public were necessary to cover the losses generated on these investments and to build an attractive return on the overall portfolio. Since the bursting of the Internet Bubble, however, significant IPOs have dwindled, increasing investment holding periods and dragging down returns. see venture capital trends to find out why exit strategies have become more difficult...

 

How well have PE /  VC firms performed since going public (IPO - post exit)?....for this discussion, please look at the PVCI index:  "The Thomson Reuters Post-Venture Capital Index (PVCI) is a market-valued index that measures the performance of public stocks of companies that have received financing from a U.S. venture capital firm or buyouts limited partnership prior to going public. The index, which was comprised of 608 companies as of Sept. 30, seeks to track the universe of venture-backed stocks from the point of going public until publicly traded for 10 years.  Companies remain in the index for 10 years from the IPO date or until price data is no longer available, they are acquired or removed from a publicly traded exchange. The index is calculated daily and does not take into account dividends. It began in January 1986 with an initialized index value of 100."  If you’d like to learn more about the PVCI or get a regular update, subscribe to Venture Capital Journal. (Get a free trial here.)

 

 

How is Venture Capital different than Private Equity?

 

Venture capital is a type of private equity.  It is a subset of private equity.  Therefore all venture capital is private equity, but not all private equity is venture capital.

 

Venture Capital is the early stage form of private equity where investors focus on investing in startup (highly risky) ventures.   Private equity is just a pool of private money (not publicly trades as in stocks, bonds, etc) that invests in private companies. 

 

Private Equity deals are normally in later stage companies.

 

Financially, the key difference between how VC and PE deals are financed has to do with leverage.   PE deals use lots of leverage, while VC deals do not.  For more information about this topic, please see our discussion on financial leverage

 

 

Why should investors invest in private companies?

 

why to Private equity investors invest?  the only reason:  to achieve higher returns than can be achieved in the public stock market.  If not, then there is no reason to take on the additional risk associated with a private company.  Private investors should expect a risk-premium.  Returns should be higher (see our discussion on ROI return on investment

 

 

 

 

trends in Venture capital

 

venture capital trends

 

Global_Trends_VC_06.pdf

 

private equity trends

 

 

VC / tech Bloggers worth reading:

 

 

 

 

 

Effect of the Credit Crisis:

 


Sequoia Venture Capital Warning to CEOs - Get more Business Plans

 

 

 

 

List of VC deals

 

 

 

Past Performance (% returns historically)

 

pe-performance_544×420.jpg

Note that not all VC investments succeed.  Here is a list of famous VC investment failures

 

 

 

 

Find Venture Capital

A venture capital resource library and list of firms:  Global Directory of Funding

 

 

 

Companies with the most VC funding (as of 09/2008):

 

a list of all the technology startups that have raised at least $25 million over the past two years, according to CrunchBase. The ~160 startups to stockpile that much capital recently are listed below.

 

  1. Facebook - $455M
  2. ZeniMax - $310M
  3. Nanosolar - $300M
  4. OverSee - $210M
  5. OANDA - $200M
  6. Kayak - $196M
  7. GridPoint - $167M
  8. Plastic Logic - $150M
  9. eSolar - $140M
  10. Demand Media - $135M
  11. SulfurCell - $134M
  12. Modu - $120M
  13. United Mobile - $115M
  14. Zhaopin - $110M
  15. Ning - $104M
  16. Glam Media - $104M
  17. hulu - $100M
  18. 9You - $100M
  19. Specificmedia - $100M
  20. SpinVox - $100M
  21. Rearden Commerce - $100M
  22. Ausra - $97.8M
  23. CDNetworks - $96.5M
  24. Move Networks - $91.3M
  25. Spot Runner - $91M
  26. Tesla Motors - $85M
  27. Big Fish Games - $83.3M
  28. Realtime Worlds - $81M
  29. Adconion Media Group - $80M
  30. The Active Network - $80M
  31. HelioVolt - $77M
  32. Youku - $77M
  33. Datapipe - $75M
  34. Trion World Network - $70M
  35. Arcadian Networks - $70M
  36. Vantage Media - $70M
  37. A123Systems - $70M
  38. Boston Power - $68.6M
  39. Infinia - $66.5M
  40. LinkedIn - $65.8M
  41. Fisker - $65M
  42. Brightcove - $64.4M
  43. SilkRoad technology - $64M
  44. Coremetrics - $60M
  45. ReachLocal - $55.2M
  46. Veoh - $55M
  47. Federated Media - $54.5M
  48. Slacker - $53.5M
  49. RockYou - $52.5M
  50. 51.com - $51M
  51. HealthCentral - $50M
  52. ChannelAdvisor - $50M
  53. Blowtorch - $50M
  54. Dayjet - $50M
  55. GarageGames - $50M
  56. Revolution Money - $50M
  57. Slide - $50M
  58. Strands - $49M
  59. obopay - $49M
  60. JumpTap - $48M
  61. ice - $47M
  62. Greenplum - $46M
  63. Internet Mall - $45M
  64. Clear - $44.4M
  65. Jingle Networks - $43M
  66. Avail Media - $42M
  67. Metaweb Technologies - $42M
  68. BitTorrent - $42M
  69. Amobee - $42M
  70. Enforta - $40M
  71. Undertone Networks - $40M
  72. Turbine - $40M
  73. Pure Digital Technologies - $40M
  74. Trilliant - $40M
  75. SiBEAM - $40M
  76. Teneros - $40M
  77. SearchMe - $39.6M
  78. fabrik - $39.2M
  79. Zynga - $39M
  80. Turn - $38.5M
  81. LifeLock - $37.9M
  82. Digg - $37.2M
  83. GreatCall - $36.6M
  84. Segway - $35M
  85. hi5 - $35M
  86. Bestofmedia Group - $35M
  87. Yodlee - $35M
  88. Angie’s List - $35M
  89. Lehigh Technologies - $34.5M
  90. Sermo - $34.5M
  91. ooma - $34M
  92. meebo - $34M
  93. Dailymotion - $34M
  94. Clearspring - $33.5M
  95. XunLight - $33M
  96. Cuil - $33M
  97. Seatwave - $33M
  98. Dilithium Networks - $33M
  99. Waterfront Media - $33M
  100. Mzinga - $32.5M
  101. Vanu - $32M
  102. Vuze - $32M
  103. PicScout - $32M
  104. Pando - $31.9M
  105. Etsy - $31.3M
  106. BuzzNet - $31M
  107. Global Roaming - $30.5M
  108. NebuAd - $30.2M
  109. MFG - $30M
  110. Zillow - $30M
  111. GodTube - $30M
  112. 56.com - $30M
  113. Zazzle - $30M
  114. Metacafe - $30M
  115. Batanga - $30M
  116. VideoJug - $30M
  117. Eyeblaster - $30M
  118. badoo - $30M
  119. Viagogo - $30M
  120. IGA Worldwide - $30M
  121. Leapfrog on-line - $30M
  122. MobiTV - $30M
  123. MOLI - $29.6M
  124. Automattic - $29.5M
  125. Intacct - $29M
  126. Genius - $29M
  127. LiveOps - $28M
  128. RadioFrame - $28M
  129. PGP Corporation - $27.3M
  130. Milestone Systems - $27M
  131. Palo Alto Networks - $27M
  132. Tideway - $27M
  133. BlackArrow - $26.8M
  134. ChoiceStream - $26.5M
  135. Ruckus - $26M
  136. ContextWeb - $26M
  137. Solarflare - $26M
  138. Quantcast - $25.7M
  139. Become - $25.5M
  140. Mimeo - $25M
  141. Reunion - $25M
  142. Gemini - $25M
  143. PharmaNation - $25M
  144. InMage Systems - $25M
  145. Aurora Biofuels - $25M
  146. Nimbuzz - $25M
  147. Firefly Energy - $25M
  148. Yelp - $25M
  149. Meraki - $25M
  150. Dash - $25M
  151. Retail Convergence - $25M
  152. Trulia - $25M
  153. SpringSource - $25M
  154. Zecco - $25M
  155. Koolanoo Group - $25M
  156. Verimatrix - $25M
  157. Optaros - $25M
  158. Visible World - $25M
  159. Splunk - $25M
  160. DeviceVM - $25M

 

History of Venture Capital:

 

A brief history of venture capital

Historically, private companies in the U.S. were funded by individuals, families, or tightly knit groups of people. In the 1960s, there were a few wealthy individuals in California who took to investing their money in early stage technology companies. These people were "angels." Returns on investments were excellent. Angels began to systematically search for and invest in companies. In 1971, three of these successful angels raised additional funds from other rich individuals and institutions and placed the money in the first "venture capital funds."

 

A crash and a rebirth

Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors became wary of this new kind of investment fund. In 1975, only one venture capital fund raised money, but that was the same year software developer Tandem Computers took $1 million from a venture capital firm. Eventually, Tandem grew into a $2.6 billion firm and was bought by Compaq in 1997. Returns were tremendous for the few firms in the business in the late 1970s. The U.S. government lent a helping hand in the form of legislation through this period. In 1978, for example, capital gains taxes were reduced, so anyone making profits from investing in venture capital firms, or any venture capital firms making profits from investing in private companies, paid lower Federal taxes. That was the first big year for venture capital. The industry raised approximately $750 million in 1978.

 

The era of the IPO

If venture capital hit its stride in the late 1970s, it started sprinting in the 1990s. For instance, venture capital firms backed 260 IPOs in 1996. VCs that took their portfolio companies public in the fevered markets of the late 1990s earned very high returns, averaging 35 percent per year. Some top investments produced results of 100 percent compounded annual growth through this period. By 1997, the rapidly growing venture capital industry reached a 10-year high, raising approximately $10 billion in new capital, compared with approximately $1.5 billion per year in 1991.

 

Internet money

Venture capital continued to boom into the early 21st century. Their appetites whetted by the biotech mania of the early 1990s, venture capitalists vigorously embraced the horde of fledgling Internet companies (dotcoms) launched in the latter half of that decade. It was good for the Internet - and good for the VC firms. In 1998, delighted venture capitalists sunk $16 billion into companies nationwide - $4.55 billion into Silicon Valley alone. Many venture capital firms saw their investments in dotcoms explode into a rainbow of profit. Think of the foresight of Sequoia Capital, which in 1995 sunk $2 million into Yahoo!, now a $1.9 billion company, or Benchmark Capital, which had the good fortune of putting money into online auctioneer eBay, now worth $1.4 billion. At a June 1999 conference sponsored by Red Herring, Adam Dell moaned: "We are bombarded by so many deals and so much information, it's difficult to be strategic as opposed to simply reactive."

 

The party's over

The frenzy of dotcom investment drove the expansion of the Internet, but it also created a massive bubble of overvalued stocks and over-inflated VC expectations. Many felt the "everybody wins" environment was too good to last, and it was. By September 2000, the dotcom bubble had burst; disenchanted with promised earnings that never materialized, investors pulled out of the Internet fad, leaving many companies devastated. Stocks plummeted, dotcom became a term of mild derision, and venture capitalists were left with egg on their collective face. Despite this market readjustment, and the generally bearish environment of the early 21st century, venture capital continues to be an attractive field. VCs are more cautious, but they know that the next big thing is still out there somewhere.

 

The stages of venture capital investment

Venture capital firms invest in over what could be considered five different stages of a company's growth. Note that some of these terms overlap. Seed is an investment of between $1,000 and $500,000 made when a company is just a few people and/or an idea. Start-up is an investment of between $50,000 and $1 million in private companies that are completing product development and beginning initial marketing. First stage (or early stage) denotes an investment of between $500,000 and $15 million made when a company has completed its product but has no, or little, revenues. Second stage (or later stage) is an investment of between $2 million and $15 million when a firm has product and revenues and has often already taken money from other institutional investors. Third stage (or mezzanine) investments range from $2 million to $20 million, often invested in a profitable company for a major expansion generally leading to an IPO in three to eighteen months.

 

Take it to the bridge

Bridge financing is a term often applied to speedy financing of a company that is in trouble and needs some more time to get to a more substantial round of financing. But sometimes a "bridge financing" is a bridge to an IPO. In this case, "bridge" refers to an investment of between $2 million and $20 million made only three to twelve months before the company goes public. The company is typically profitable at this stage. The reasons a company would want a round of financing so near to the time it raises lots of inexpensive money from the public are to improve its balance sheet, attract a prestigious investor to its board (which will help increase its value in the public markets) or to hedge its bets in case it fails in its attempt to sell its equity to the public.

 

Supporting portfolio companies

VCs aren't just about the money. Firms regard themselves as partners in the entrepreneurial process. Thus, providing support to portfolio companies becomes an essential part of an associate's job. Concretely, this means: doing research and strategic planning; attending Board of Directors meetings; helping locate and screen potential additions to a company's management team; convincing new recruits that they should work with your portfolio company; supporting the management team; negotiating and working with I-bankers and acquirers of the company; raising more money from other equity sources; negotiating with banks for debt financing; reporting to the rest of your VC firm on changes, problems and triumphs; and helping acquire other companies.

 

 

for more: http://vault.com/nr/main_article_detail.jsp?article_id=2509903&cat_id=0&ht_type=7

 

 

 

About the Venture Capitalist Industry:

 

Small firms:

 

I recently went to the websites of about 20 different Venture Capitalists, and reviewed the “about us” section to see the profiles of the people that worked at these firms. What I found is that most of the VC firms are very small (2-3 partners + 2-3 associates). It was very rare to find any office that employed more than 5 people total. At some of the larger firms, it was possible to find an “analyst” position, but that was very rare.

 

Fund raising:

 

The venture capitalists first priority is to raise capital for their funds (make sure they have a job), and the second priority is to find companies to invest in (generate enough return so that the investors stay happy and invest more in the future). In essence, the VC is a glorified middle man for investors that want to invest in risky but potentially high reward starup companies. The money for those investments typically comes from institutional investors (retirement funds, insurance, etc) and some wealthy individual investors. The typical VC firm is structured so that the top level managers interact with the investors, and spend a large portion their fund raising and managing the investments.

 

see more:  Venture Capital Fund Raising

 

Managed investments:

 

Another interesting thing about Venture Capital firms is that they typically invest in companies with a 5-10 year target for investing. They not only give the money, but they also take an integral role in managing the companies in which they invest. Typically, a VC will put one of their partners on the target company’s board of directors, and they will exercise a lot of control over the direction of the company. Not only to VCs invest money, but they also invest a lot of time into the company. Again, this is a big time-consumer for the top managers at the VC firm.

 

Research:

 

As a result of the nature of the business (small company + fund raising + time commitment to existing portfolio companies), you can easily see that VC’s typically have very limited resources dedicated to reading and reviewing new business plans.

 

 

 

 

Venture Capital management

 

 

Venture Capital is a type of private equity capital typically provided by outside investors for financing new, growing, or struggling businesses. Venture capital investments are generally high-risk investments but offer the potential for above-average returns and/or a percentage of ownership of the company. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

 

Roles within a venture capital firm

 

Venture capital general partners (also known in this case as "venture capitalists" or "VCs") are the executives in the firm, in other words the investment professionals. Typical career backgrounds vary, but many are former chief executives at firms similar to those which the partnership finances.

 

Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university endowments, insurance companies, and pooled investment vehicles.

 

Other positions at venture capital firms include venture partners and entrepreneur-in-residence (EIR). Venture partners "bring in deals" and receive income only on deals they work on (as opposed to general partners who receive income on all deals). EIRs are experts in a particular domain and perform due dilligence on potential deals. EIRs are engaged by VC firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR's move on to roles such as Chief Technology Officer (CTO) at a portfolio company.

 

Structure of the funds

 

Most venture capital funds have a fixed life of 10 to 15 years. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

 

In such a fund, the investors have a fixed commitment to the fund that is "called down" by the VCs over time as the fund makes its investments.

 

 

 

 

 

 

Regulation issues

 

Sarbanes Oxley is often reported for increasing costs and potential liability for public companies, making it more difficult for young companies to go public.

 

 

The U.S. House of Representatives passes VC tax — It will change the carried interest from a capital gains to ordinary income, thereby lifting tax to about 35 percent on VCs and other private equity professionals. It is not expected to pass the Senate, however, and President Bush has suggested he would veto it.

 

 

 

Too many VC firms?

 

A legacy of the Internet Bubble was that too many venture capital firms were created at its height, with a glut of firms and capital helping to drive up purchase prices for companies to unsustainable, unprofitable levels. In 2000, the height of the market, there were nearly 1,200 venture capital firms in existence in the U.S. according to the NVCA. By 2007, that number had decreased to 844, down an additional 40 since the previous year.  Of the remaining firms, 244 of these firms, or some 27% of the total, did not make a new investment in 2007.

 

 

 

Do Mid-Market PE/VC funds out-perform small & big ones?

see GloboTrends mid-market private equity

a great article from Daniel Primack of peHUB:

 

some unpublished research by Josh Lerner (HBS) and Antoinette Schoar (MIT Sloan). They looked at how changes to fund size and firm size affect returns, and found that there is an apparent relationship.

 

Lerner and Schoar first took the universe of all mature VC and buyout funds (those raised through 1999), and discovered an inverted U-shaped relationship. Basically, mid-sized funds outperformed both small and large-sized funds. Peak performance was at around $300 million (note: the researched time period is admittedly dated).

 

They then broke out the types of funds, and found that the inverted U-shape is sharper and most statistically significant for VC funds than for buyout funds. In this breakdown, the peak VC size was $280 million compared to $1.2 billion for buyout funds.

 

So is the answer to have a mid-sized fund? Well, not exactly, Lerner and Schoar didn’t actually find too much performance variance based purely on size. Sure there was peak performance, but it didn’t vary too much from the high and low-end quartile benchmarks. For example, a $5 billion buyout fund had a predicted return of just 1.2% lower than a $2 billion buyout fund.

 

What is important, however, is the rate at which a firm’s fund sizes grow. Lerner writes: “We find that growth has a substantial negative effect on growth: A doubling of fund size, all else being equal, leads to a fall in IRR of -5.3%. This analysis suggests that a group that had a 25% IRR in its $1 billion dollar third fund could expect a return of only a little below 20% if it went and raised a $2 billion fund next.”

The related chart is fairly remarkable, in that the negative correlation between fund size growth and performance resembles a very steep hill.

 

So what is ultimately important for firms like USV and Benchmark isn’t purely the number of dollars in their current funds, but rather how that compares to the dollars in its past and future funds.

 

source: Daniel Primack of peHUB

 

 

Options & VC finance

 

please see our discusson on real options

 

 

 

Smaller funds for internet startups

 

TechStars

 

 

 

Associations

 

National Venture Capital Association

 

 

 

 

What is Venture Capital?

 

Venture Capital companies are usually formed with the goal of investing in young and promising businesses. Starting a business is usually a costly initiative which individuals or even a small group are not incapable of financing. Venture capitalists are people or companies who decide to invest in those businesses and in return are usually awarded with shares in the company.

Venture capital investments are risky since the target of investing is usually a recently formed company or start up who hasn't yet had the chance in formulate a sound business plan or even an actual product. The best way to describe what is venture capital would be "a high risk high reward investment".

 

Venture capital investors are usually wealthy business men with vast expertise in various business industries. These type of investments are not suitable for the average person, both because of the risks involved and the amount of equity needed.

 

Entrepreneurs both love and hate venture capitalists. They love them because venture capital is sometimes the only way to get a business started up out of a promising idea. On the other hand, the vast amount of money given as venture capital usually usually awards the investor a say in the company's road map and actions.

 

 

 

Funding foresight

While investment banks shift money from one party to another, venture capital firms ("VCs") are dedicated to investing their own capital in new companies in return for a hefty share of stock and future profits. These venture capitalists are more than financiers; they provide guidance, services and support to the fledgling business, and expect to be treated as partners. While not all VC activities are centered on new companies, and investors can be found seeking relationships with established firms, the majority of the industry concentrates on bringing new ideas to market. The "father of venture capital," Georges Doriot, co-founded the first modern VC firm - American Research and Development - in 1946, but VC did not become really popular until the 1970s. Today, the industry is popular among business school students - the intellectual stimulation and potential for tremendous earnings attracts the cream of the crop of MBA programs across the country.

 

 

More venture company information

 

 

 

 

 

International investing

 

see our main page on emerging markets for more

 

Private equity and venture capital in Emerging Markets

Private-equity funds focused on emerging markets raised a record $59 billion in new capital in 2007. This figure represents a 78% jump from the $33 billion raised the prior year. More than $118 billion has been raised in emerging-market funds in the last three years. MarketWatch (02/29)

 

 

 

 

 

 

Wikipedia Definition

 

Venture capital is capital typically provided by outside investors for financing of new, growing or struggling businesses. Venture capital investments generally are high risk investments but offer the potential for above average returns. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership ) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans .

 

 

History

 

General Georges Doriot is considered to be the father of venture capital industry. In 1946 he founded American Research and Development Corporation (AR&D), whose biggest success was Digital Equipment Corporation. When Digital Equipment went public in 1968 it provided AR&D with 101% annualized Return on Investment (ROI). ARD's $70,000 USD investment in Digital Corporation in 1959 had a market value of $37 million USD in 1968. The first venture-backed startup is generally considered to be Fairchild Semiconductor, funded in 1959 by Venrock Associates. Before World War II, venture capital investments were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act authorized the U.S. Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to provide financing and management assistance to small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. The goal of the SBIC program was, and still is, to stimulate the U.S. economy in general, and small businesses in particular, by facilitating the flow of capital to pioneering small concerns.

 

Venture capital is a phenomenon most closely associated with the United States and technologically innovative ventures. Due to structural restrictions imposed on American banks in the 1930s there was no private merchant banking industry in the United States, a situation that was quite unique in developed nations. As late as the 1980s Lester Thurow, a noted economist, decried the inability of the USA's financial regulation framework to support any merchant bank other than one that is run by the United States Congress in the form of federally funded projects. These, he argued, were massive in scale, but also politically motivated, too focused on defense, housing and such specialized technologies as space exploration, agriculture, and aerospace. US investment banks were confined to handling large M&A transactions, the issue of equity and debt securities, and, often, the breakup of industrial concerns to access their pension fund surplus or sell off infrastructural capital for big gains.

 

Not only was the lax regulation of this situation very heavily criticized at the time, this industrial policy was not in line with that of other industrialized rivals—notably Germany and Japan which at that time were gaining world markets in automotive and consumer electronics. There was a general feeling that the United States was in an economic decline.

 

However, those nations were also becoming somewhat more dependent on central bank and elite academic judgement, rather than the more populist and consumerist way that priorities were set by government and private investors in the United States—a model that proved to have some advantages when the public's attention was strongly activated by the successful IPO of Netscape and other Internet-related firms. This highlighted the nearly invisible role that Silicon Valley had played in the sustaining of American economic innovation.

 

The dotcom boom

 

Due almost entirely to the dotcom boom , the late 1990s were a boom time for the globally-renowned VC firms on Sand Hill Road in the San Francisco Bay Area . IPO s were taking truly irrational leaps, and access to "friends and family" shares was becoming a major determiner of who would benefit from any such IPO; the ordinary investor rarely got a chance to invest at the strike price in this period.

 

The NASDAQ crash and technology slump that started in March 2000, and the resulting catastrophic losses on overvalued, non-performing startups , shook VC funds deeply. By 2003 many VCs were focused on writing off companies they funded just a few years earlier, and many funds were "under water"; that is, the market value of their portfolio companies were less than the invested value. Venture capital investors sought to reduce the large commitments they have made to venture capital funds. As of mid-2003, the conventional wisdom was that the venture capital industry would shrink to about half its present capacity in the following few years. However, PricewaterhouseCoopers' MoneyTree Survey shows total venture capital investments holding steady at 2003 levels through Q2 2005. The revival of an Internet-driven environment (thanks to deals such as eBay 's purchase of Skype , the News Corporation 's purchase of MySpace , and the very-successful Google IPO) has helped to revive the VC environment.

 

Non-US VCs

 

US firms have traditionally been the biggest participants in venture deals, but non-US venture investment is growing. Europe has a large and growing number of active venture firms. Capital raised in the region in 2005, including buy-out funds , exceeded €60bn, of which €12.6bn was specifically for venture investment. The European Venture Capital Association includes a list of active firms and other statistics. Canadian companies are often linked to American firms, but have established many exceptional Venture Capital Funds.

 

The investment of venture capitalists in Indian industries in the first half of 2006 is $3billion and is expected to reach $6billion at the end of the year. In China, venture funding more than doubled from $420 million in 2002 to almost $1 billion in 2003. For the first half of 2004, venture capital investment rose 32% from 2003. By 2005, lead by a wave of successful IPOs on the NASDAQ and revised government regulations, China-dedicated funds raised US$4 billion in committed capital.

 

Alternatives to venture capital

 

Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek initial funding from angel investors , who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur.

 

Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up otherwise unknown to them if the company can prove at least some of its claims about the technlogy and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance until they reach a point where they can credibly approach outside capital providers such as VCs or angels. This practice is called "bootstrapping".

 

In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries.

 

 

References

 

 

* Campbell, Katherine. Smarter Ventures: A Survivor's Guide to Venture Capital Through the New Cycle. Financial Times Management Press. ISBN 0273654039

 

External links

 

 

* The Venture Capital Directory - International directory of venture capital firms.

* American Venture Magazine

* National Venture Capital Association

* Private Equity Exchange

* Venture Capital Glossary

* Ricafe2 - A Research programme sponsored by the European Commission analysing venture capital.

* National Association of Seed and Venture Funds

 

 

 

 

Links

 

External:

 

 

 

Internal

 

see also: 

private equity trends

Private equity and venture capital in Emerging Markets

private equity and economic development

 

 

 

trends

 

 

Pages names with "Venture Capital"

 

More pages wtih subject "Venture Capital"

 

 

Private Equity

 

 

More related links:

 

 

 

 

 

 

 

 

Books for fund raising

 

Book ReviewsTo draw funding from VCs, you must learn to think like a VC. “Venture Capital: The Definitive Guide for Entrepreneurs, Investors and Practioners,” can give you that insight.

By Joel Cardis, Sam Kirschner, Stanley Richelson, Jason Kirschner and Hildy Richelson 

Published by John Wiley & Sons

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“Nanotechnology: A Gentle Introduction to the Next Big Idea”

By Mark A. Ratner & Daniel Ratner

Published by Prentice Hall

"Nanotechnology: A Gentle Introduction to the Next Big Idea”explains why this scientific breakthrough could be fertile grounds for investors....(read entire review)

 

 


You Need to Be a Little Crazy: The Truth About Starting and Growing Your Business                                                                     

By Barry Moltz

Launching a startup takes a solid business plan, funding and a dab of craziness. Barry Moltz explains how to tap your craziness to become a successful entrepreneur in “You Need to Be a Little Crazy: The Truth About Starting and Growing Your Business....(read entire review)

 

 

 


When Venture Capitalists Say No – Creative Financing Strategies & Resources

By Ron Peterson

When VCs say no to a deal, startups need to get creative. Author Ron Peterson shows how to develop creative financing strategies in his new book When Venture Capitalists Say No – Creative Financing Strategies & Resources.....(read entire review)

 

 


Venture Capital Due Diligence

By Justin Camp

Doing due diligence involves being a financial private eye. Find the clues that can predict success for an investment opportunity....(read entire review)

 

 


Venture Capital Investing: The Complete Handbook for Investing in Small Private Businesses for Outstanding Profits

By David Gladstone

Investing in small companies can reap big profits, if you know how to pick the winners. David Gladstone's "Venture Capital Investing: The Complete Handbook for Investing in Small Private Businesses for Outstanding Profits," explains that the organization of a company is often a predictor of success....(read entire review)

 

 


Not Just a Living

By Mark Henrick

Mark Henrick’s book, “Not Just a Living,” examines how being an entrepreneur demands not only a great business idea, commitment and finding funding but also a lifestyle decision. Learn how to balance it all in this entertaining book...(read entire review)

 

 


Angel Financing: How to Find and Invest Private Equity

By Gerald A. Benjamin, Joel Margulis

The search for angel investors is always a challenge. "Angel Financing: How to Find and Invest Private Equity" offers entrepreneurs a strategy to make the search more efficient and successful.....(read entire review)

 

 


Judo Strategy Can Give Businesses of All Sizes a Fighting Chance

By David Yoffie and Mary Kwak  

Regardless of the size of your business, read “Judo Strategy” by Harvard Professor David Yoffie and Mary Kwak to learn how to throw the competition....(read entire review)

 

 

 


Building The Awesome Organization

By Katherine Catlin and Jana Matthews

Building the awesome organization is not a dream, but can be definite reality. Read how in the intriguing book, "Building the Awesome Organization." Learn the basic steps to achieve this goal. This timely book makes for great summer reading....(read entire review)

 

 


The Biotech Investor's Bible

By George Wolff

 

Get the closest thing to the gospel truth from the Biotech Investor's Bible. It's a must read for every investor who should be aware of the financial opportunities in the biotechnology markets...(read entire review)

 


Finding Money: The Small Business Guide to Financing

By Kate Lister and Tom Harnish

Lenders want to lend and investors want to invest. Entrepreneurs need to find the right investors and how to pitch them for money. Finding Money: The Small Business Guide to Financing gives entrepreneurs an insiders look into how investors evaluate business opportunities...(read entire review)

 

 


The Phoenix Effect:

9 Revitalizing Strategies No Business Can Do Without

By Carter Pate and Harlan Platt

Every business can use a dash of revitalizing - whether a struggling one or a healthy business. Discover the nine revitalizing strategies that make companies hum...(read entire review)

 


Starting Up and Advising an Emerging Massachusetts Business

Edited by Lawrence H. Gennari

Don’t let the title, “Starting Up and Advising an Emerging Massachusetts Business,” fool you, the book edited by Lawrence H. Gennari offers sound  advice on launching a business anywhere...(read entire review)

 

 


The Angel Investor’s Handbook: How to Profit from Early-Stage Investing

By Gerald A. Benjamin, Joel Margulis

If you’ve considered getting into the exciting, but risky world of angel investing, check out the Angel Investor’s Handbook: How to Profit from Early-State Investing by Gerald A. Benjamin and Joel Margulis. This detailed work can help potential investors identify winning businesses and avoid losers. ...(read entire review)

 

 


Good to Great: 

A Fresh Look at Management Practices

By Jim Collins

 

Good to Great is a fresh look at management strategy and practice; and many of the findings shake up our accepted techniques. An iconoclastic work, it offers several  key concepts that fly in the face of modern business culture and have upset previously unquestioned management assumptions...(read entire review)

 


Unleashing the Ideavirus

By Seth Godin

Published by Do You Zoom, Inc.

What's an Ideavirus? Godin says an Ideavirus is a fashionable idea that spreads through a section of the population, teaching, changing and influencing everyone it comes in touch with...  (read entire review)

 


Going Solo, The Best Resources for Entrepreneurs & Freelancers

Stanley I. Mason Jr. - Editor

Published by Resource Pathways Guidebook

 

Stanley  Mason Jr., the editor of Going Solo, was pilot during WWII and used to fly over towns and think about how many people operated their own small businesses. Even the large companies started out as small ones. That epiphany drove Mason to become an entrepreneur for the last 30 years...(read entire review)

 


 

Financing & Building an E-Commerce Venture

By Marc Kramer

Many books deal with how to write a business plan or build a successful management team or how to raise venture capital. But Financing & Building an E-Commerce Venture takes the reader through the entire gamut of launching an e-business...(read entire review)

 

 


 

'Angel Investing', by Mark Osnabrugge and Robert J. RobinsonAngel Investing - Hatching Start-up Funds with Start-up Companies

by Mark Van Osnabrugge and Robert J. Robinson

Angel Investing offers an authoritative guide for the entrepreneur seeking capital and the private investor looking for a better return on investments of $100,000 or more. It is a comprehensive guide on the emerging form of financing, complete with stories of investors and companies that have led the way in angel investing... 

(read entire review)

 


DONE DEALS - Venture Capitalists Tell Their Stories

Edited By Udayan Gupta, Harvard Business School Press

In Done Deals, journalist Udayan Gupta explores the history of Venture Capital as told through the eyes of some of the industry's most influential players... 

(read entire review)

 

 

 

 

 

 

 

 

 

 

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