Venture capital
Encyclopedia
Venture capital is financial capital
provided to early-stage, high-potential, high risk, growth
startup companies
. The venture capital fund
makes money by owning equity
in the companies it invests in, which usually have a novel technology or business model
in high technology industries, such as biotechnology
, IT
, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round
) in the interest of generating a return through an eventual realization event, such as an IPO
or trade sale
of the company. Venture capital is a subset of private equity
. Therefore, all venture capital is private equity, but not all private equity is venture capital.
In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan
or complete a debt offering
. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 21% of US GDP), the knowledge economy, and used as a proxy measure of innovation
within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and only 600–800 get venture capital funding. According to the National Venture Capital Association
, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.
It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-hows of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.
With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines
and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg
founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus
, with investments in both leveraged buyouts and venture capital.
, money orders (originally known as "development capital") were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation
. (ARDC) and J.H. Whitney & Company
.
ARDC was founded by Georges Doriot
, the "father of venture capitalism" (former dean of Harvard Business School
and founder of INSEAD
), with Ralph Flanders
and Karl Compton (former president of MIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation
(DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return
of 101%).
Former employees of ARDC went on and established several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan). ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron
after having invested in over 150 companies.
J.H. Whitney & Company
was founded by John Hay Whitney
and his partner Benno Schmidt
. Whitney had been investing since the 1930s, founding Pioneer Pictures
in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney
. By far Whitney's most famous investment was in Florida Foods Corporation. The company developed an innovative method for delivering nutrition to American soldiers, which later came to be known as Minute Maid
orange juice and was sold to The Coca-Cola Company
in 1960. J.H. Whitney & Company
continues to make investments in leveraged buyout
transactions and raised $750 million for its sixth institutional
private equity fund
in 2005.
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 officially allowed the U.S. Small Business Administration
(SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.
During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962 by William Henry Draper III
and Franklin P. Johnson, Jr. In 1962 Bill Draper and Paul Wythes founded Sutter Hill Ventures
, and Pitch Johnson formed Asset Management Company
.
It is commonly noted that the first venture-backed startup is Fairchild Semiconductor
(which produced the first commercially practical integrated circuit), funded in 1959 by what would later become Venrock Associates
. Venrock was founded in 1969 by Laurance S. Rockefeller, the fourth of John D. Rockefeller's
six children as a way to allow other Rockefeller children to develop exposure to venture capital investments.
It was also in the 1960s that the common form of private equity fund
, still in use today, emerged. Private equity firms organized limited partnerships to hold investments in which the investment professionals served as general partner
and the investors, who were passive limited partners, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1.0–2.5% and a carried interest
typically representing up to 20% of the profits of the partnership.
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand Hill Road
, beginning with Kleiner, Perkins, Caufield & Byers
and Sequoia Capital
in 1972. Located, in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the many semiconductor
companies based in the Santa Clara Valley
as well as early computer
firms using their devices and programming and service companies.
Throughout the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association
(NVCA). The NVCA was to serve as the industry trade group
for the venture capital industry. Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund.
It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. With the passage of the Employee Retirement Income Security Act
(ERISA) in 1974, corporate pension funds were prohibited from holding certain risky investments including many investments in privately held companies. In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the "prudent man rule
," thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists.
, Apple Inc., Genentech
) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". The number of firms multiplied, and the capital managed by these firms increased from $3 billion to $31 billion over the course of the decade.
The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including General Electric
and Paine Webber
either sold off or closed these venture capital units. Additionally, venture capital units within Chemical Bank
and Continental Illinois National Bank
, among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders J.H. Whitney & Company
and Warburg Pincus
began to transition toward leveraged buyouts and growth capital
investments.
cousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in the venture capital industry remained limited throughout the 1980s and the first half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994.
After a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly on improving operations at their portfolio companies rather than continuously making new investments. Results would begin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. Yale School of Management Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in 1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting of the Internet bubble in 2000.
The late 1990s were a boom time for venture capital, as firms on Sand Hill Road
in Menlo Park
and Silicon Valley
benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial public offerings of stock for technology and other growth companies were in abundance, and venture firms were reaping large returns.
The Nasdaq
crash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many venture firms had been forced to write-off large proportions of their investments, and many funds were significantly "under water" (the values of the fund's investments were below the amount of capital invested). Venture capital investors sought to reduce size of commitments they had made to venture capital funds, and, in numerous instances, investors sought to unload existing commitments for cents on the dollar in the secondary market
. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers's MoneyTree Survey shows that total venture capital investments held steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in 2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The revival of an Internet
-driven environment in 2004 through 2007 helped to revive the venture capital environment. However, as a percentage of the overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
Venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble
), raised only $25.1 billion in 2006, a 2%-decline from 2005 and a significant decline from its peak.
Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb
, a fund may invest in one in four hundred opportunities presented to it, looking for the extremely rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. Of these qualities, funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3–7 years) that venture capitalists expect.
Because investments are illiquid and require the extended timeframe to harvest, venture capitalists are expected to carry out detailed due diligence
prior to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations
are favourable. Venture capitalists typically assist at four stages in the company's development:
Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether he wants a follow-up meeting. In addition, there are some new private online networks that are emerging to provide additional opportunities to meet investors.
This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-front capital requirements, which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. In turn, this explains why venture capital is most prevalent in the fast-growing technology and life sciences
or biotechnology
fields.
If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.
financing offered in Venture Capital, that roughly correspond to these stages of a company's development.
Between the first round and the fourth round, venture-backed companies may also seek to take venture debt
.
or LLC
) that primarily invests the financial capital
of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.
A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.
, in which case the firm's managers are known as managing members. 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 financial endowments, foundations, insurance
companies, and pooled investment vehicles, called funds of funds (FoF).
Some of the factors that influence VC decisions include:
or other corporate finance
experience.
Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:
have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. 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 initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a limited partner (or investor) that fails to participate in a capital call
.
It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed, and the 10-year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. This shows the difference between a venture capital fund management company and the venture capital funds managed by them.
(often referred to as a "two and 20" arrangement):
Because a fund may be run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.
Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up company otherwise unknown to them if the company can prove at least some of its claims about the technology 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 sweat equity
until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called "bootstrapping".
There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments typically in the $0 to $250,000 range and the amounts that most VC funds prefer to invest between $1 million to $2 million. This funding gap may be accentuated by the fact that some successful VC funds have been drawn to raise ever-larger funds, requiring them to search for correspondingly larger investment opportunities. This gap is often filled by sweat equity
and seed funding via angel investors as well as equity investment companies who specialize in investments in startup companies from the range of $250,000 to $1 million. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized venture capital funds.
Crowd funding
is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd funding models are also being applied for startup funding, for example, Grow VC. One of the reason to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, and return on investment
of many VC funds have been low or negative.
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. Offshore funding is provided via specialist venture capital trusts, which seek to utilise securitization in structuring hybrid multi-market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.
In addition to traditional venture capital and angel networks, groups have emerged, which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process.
Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.
Venture capital has been used as a tool for economic development
in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance
for small and medium enterprises (SMEs), which in most cases would not qualify for receiving bank loans.
In the year of 2008, while VC fundings were still majorly dominated by U.S. money ($28.8 billion invested in over 2550 deals in 2008), compared to international fund investments ($13.4 billion invested elsewhere), there has been an average 5% growth in the venture capital deals outside the USA, mainly in China
, Europe
, and Israel
. Geographical differences can be significant. For instance, in the U.K., 4% of British investment goes to venture capital, compared to about 33% in the U.S.
. The same numbers for all of 2010 were $23.4 billion in 3,496 deals. A National Venture Capital Association
survey found that a majority (69%) of venture capitalists predicted that venture investments in the U.S. would have leveled between $20–29 billion in 2007.
(SR&ED) investment tax credit program. The basic incentive available to any Canadian corporation performing R&D is a refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company, which might not be desirable. The SR&ED program does not restrict the export of any technology or intellectual property that may have been developed with the benefit of SR&ED tax incentives.
Canada also has a fairly unique form of venture capital generation in its Labour Sponsored Venture Capital Corporations (LSVCC)
. These funds, also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and offer tax breaks from government to encourage retail investors to purchase the funds. Generally, these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. However, innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada.
funds, exceeded €60 billion, of which €12.6 billion was specifically allocated to venture investment. The European Venture Capital Association includes a list of active firms and other statistics. In 2006, the top three countries receiving the most venture capital investments were the United Kingdom (515 minority stakes sold for €1.78 billion), France (195 deals worth €875 million), and Germany (207 deals worth €428 million) according to data gathered by Library House
.
European venture capital investment in the second quarter of 2007 rose 5% to €1.14 billion from the first quarter. However, due to bigger sized deals in early stage investments, the number of deals was down 20% to 213. The second quarter venture capital investment results were significant in terms of early-round investment, where as much as €600 million (about 42.8% of the total capital) were invested in 126 early round deals (which comprised more than half of the total number of deals). Private equity in Italy was 4.2 billion Euros in 2007.
industry played an important role in the booming high-tech sector. In 2008, venture capital investment in Israel rose 19 percent to $1.9 billion.
, information regarding an entrepreneur's business is typically confidential and proprietary. As part of the due diligence
process, most venture capitalists will require significant detail with respect to a company's business plan. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter into Non Disclosure Agreements because of the potential liability issues those agreements entail. Entrepreneurs are typically well-advised to protect truly proprietary intellectual property.
Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership agreement
.
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
provided to early-stage, high-potential, high risk, growth
Growth investing
Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios...
startup companies
Startup company
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...
. The venture capital fund
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
makes money by owning equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
in the companies it invests in, which usually have a novel technology or business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
in high technology industries, such as biotechnology
Biotechnology
Biotechnology is a field of applied biology that involves the use of living organisms and bioprocesses in engineering, technology, medicine and other fields requiring bioproducts. Biotechnology also utilizes these products for manufacturing purpose...
, IT
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round
Series A round
A Series A round is the name typically given to a company's first significant round of venture funding in the Silicon Valley model of startup company formation....
) in the interest of generating a return through an eventual realization event, such as an IPO
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
or trade sale
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
of the company. Venture capital is a subset of private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
. Therefore, all venture capital is private equity, but not all private equity is venture capital.
In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
or complete a debt offering
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 21% of US GDP), the knowledge economy, and used as a proxy measure of innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and only 600–800 get venture capital funding. According to the National Venture Capital Association
National Venture Capital Association
The National Venture Capital Association is the leading trade association representing the venture capital industry in the U.S. The NVCA represents the venture industry in public policy debates in Washington, DC, and promotes high professional standards, professional development, and interaction...
, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.
It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-hows of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.
History
A venture may be defined as a project prospective of converted into a process with an adequate assumed risk and investment.With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines
Eastern Air Lines
Eastern Air Lines was a major United States airline that existed from 1926 to 1991. Before its dissolution it was headquartered at Miami International Airport in unincorporated Miami-Dade County, Florida.-History:...
and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg
Eric M. Warburg
Eric M. Warburg was a member of the prominent Warburg family of German-Jewish bankers. Although he was the founder of the small New York firm that later became Warburg Pincus, and a partner in M.M.Warburg & CO he is most known for his efforts to strengthen German-American relations, for which he...
founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus
Warburg Pincus
Warburg Pincus, LLC is an American private equity firm with offices in the United States, Europe, Brazil and Asia. It has been a private equity investor since 1966...
, with investments in both leveraged buyouts and venture capital.
Origins of modern private equity
Before World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, money orders (originally known as "development capital") were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation
American Research and Development Corporation
American Research and Development Corporation was a venture capital and private equity firm founded in 1946 by Georges Doriot, the "father of venture capitalism" , with Ralph Flanders and Karl Compton .ARDC is credited with the first major venture capital success story when its 1957 investment of...
. (ARDC) and J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
.
ARDC was founded by Georges Doriot
Georges Doriot
Georges F. Doriot was one of the first American venture capitalists. In 1946, he founded American Research and Development Corporation, the first publicly owned venture capital firm...
, the "father of venture capitalism" (former dean of Harvard Business School
Harvard Business School
Harvard Business School is the graduate business school of Harvard University in Boston, Massachusetts, United States and is widely recognized as one of the top business schools in the world. The school offers the world's largest full-time MBA program, doctoral programs, and many executive...
and founder of INSEAD
INSEAD
INSEAD is an international graduate business school and research institution. It has campuses in Europe , Asia , and the Middle East , as well as a research center in Israel...
), with Ralph Flanders
Ralph Flanders
Ralph Edward Flanders was an American mechanical engineer, industrialist and Republican U.S. Senator from the state of Vermont. He grew up on subsistence farms in Vermont and Rhode Island, became an apprentice first as a machinist, then as a draftsman, before training as a mechanical engineer...
and Karl Compton (former president of MIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC's significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation
Digital Equipment Corporation
Digital Equipment Corporation was a major American company in the computer industry and a leading vendor of computer systems, software and peripherals from the 1960s to the 1990s...
(DEC) would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return
Internal rate of return
The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
of 101%).
Former employees of ARDC went on and established several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan). ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC with Textron
Textron
Textron is a conglomerate that includes Bell Helicopter, E-Z-GO, Cessna Aircraft Company, and Greenlee, among others. It was founded by Royal Little in 1923 as the Special Yarns Company, and is headquartered at the Textron Tower in Providence, Rhode Island, United States.With total revenues of...
after having invested in over 150 companies.
J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
was founded by John Hay Whitney
John Hay Whitney
John Hay Whitney , colloquially known as "Jock" Whitney, was U.S. Ambassador to the United Kingdom, publisher of the New York Herald Tribune, and a member of the Whitney family.-Family:...
and his partner Benno Schmidt
Benno C. Schmidt, Sr.
Benno Charles Schmidt, Sr. was an American lawyer and venture capitalist who was active in New York City civic affairs and played an important role in the initiation of the War on Cancer....
. Whitney had been investing since the 1930s, founding Pioneer Pictures
Pioneer Pictures
Pioneer Pictures, Inc. was a Hollywood motion picture company, most noted for its early commitment to making color films. Pioneer was initially affiliated with RKO Pictures, whose production facilities in Culver City, California were used by Pioneer, and who distributed Pioneer's films...
in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney
Cornelius Vanderbilt Whitney
Cornelius Vanderbilt Whitney was an American businessman, film producer, writer, and government official, as well as the owner of a leading stable of thoroughbred racehorses....
. By far Whitney's most famous investment was in Florida Foods Corporation. The company developed an innovative method for delivering nutrition to American soldiers, which later came to be known as Minute Maid
Minute Maid
Minute Maid is a product line of beverages, usually associated with lemonade or orange juice, but now extends to soft drinks of many kinds, including Hi-C...
orange juice and was sold to The Coca-Cola Company
The Coca-Cola Company
The Coca-Cola Company is an American multinational beverage corporation and manufacturer, retailer and marketer of non-alcoholic beverage concentrates and syrups. The company is best known for its flagship product Coca-Cola, invented in 1886 by pharmacist John Stith Pemberton in Columbus, Georgia...
in 1960. J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
continues to make investments in leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
transactions and raised $750 million for its sixth institutional
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
private equity fund
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
in 2005.
Early venture capital and the growth of Silicon Valley
Small Business Administration
The Small Business Administration is a United States government agency that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses...
(SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.
During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962 by William Henry Draper III
William Henry Draper III
William Henry Draper III is a prominent American venture capitalist.-Early life and career:Draper was born in White Plains, New York, the son of Katherine and banker and diplomat William Henry Draper, Jr. He attended Yale University with George H. W. Bush, graduated in 1950, the year after George...
and Franklin P. Johnson, Jr. In 1962 Bill Draper and Paul Wythes founded Sutter Hill Ventures
Sutter Hill Ventures
Sutter Hill Ventures is a private equity firm focused on venture capital investments in technology-based start-up companies. The firm is based in Palo Alto, CA....
, and Pitch Johnson formed Asset Management Company
Asset management company
An Asset Management Company is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives...
.
It is commonly noted that the first venture-backed startup is Fairchild Semiconductor
Fairchild Semiconductor
Fairchild Semiconductor International, Inc. is an American semiconductor company based in San Jose, California. Founded in 1957, it was a pioneer in transistor and integrated circuit manufacturing...
(which produced the first commercially practical integrated circuit), funded in 1959 by what would later become Venrock Associates
Venrock Associates
Venrock, a compound of "Venture" and "Rockefeller", is a pioneering venture capital firm formed in 1969 to build upon the successful investing activities of the Rockefeller family that began in the late 1930s. It has offices in Palo Alto, California, New York City, Cambridge, Massachusetts, and...
. Venrock was founded in 1969 by Laurance S. Rockefeller, the fourth of John D. Rockefeller's
John D. Rockefeller, Jr.
John Davison Rockefeller, Jr. was a major philanthropist and a pivotal member of the prominent Rockefeller family. He was the sole son among the five children of businessman and Standard Oil industrialist John D. Rockefeller and the father of the five famous Rockefeller brothers...
six children as a way to allow other Rockefeller children to develop exposure to venture capital investments.
It was also in the 1960s that the common form of private equity fund
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
, still in use today, emerged. Private equity firms organized limited partnerships to hold investments in which the investment professionals served as general partner
General partner
General partner is a legal term used to describe a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the business's debts and obligations.General...
and the investors, who were passive limited partners, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1.0–2.5% and a carried interest
Carried interest
Carried interest or carry, in finance, specifically in alternative investment management, is a share of the profits of a successful investment partnership that is paid to the investment manager of the partnership as a form of compensation that is designed as an incentive to the manager to maximize...
typically representing up to 20% of the profits of the partnership.
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand Hill Road
Sand Hill Road
Sand Hill Road is a road in Menlo Park, California, notable for its concentration of venture capital companies. Its significance as a symbol of private equity in the United States may be compared to that of Wall Street in the stock market...
, beginning with Kleiner, Perkins, Caufield & Byers
Kleiner, Perkins, Caufield & Byers
Kleiner Perkins Caufield & Byers ' is a world-leading venture capital firm located on Sand Hill Road in Menlo Park in Silicon Valley. The Wall Street Journal has called it one of the "largest and most established" venture capital firms in the world...
and Sequoia Capital
Sequoia Capital
Sequoia Capital is a Californian venture capital firm located on Sand Hill Road in Menlo Park, California. The Wall Street Journal has called Sequoia Capital "one of the highest-caliber venture firms", and noted that it is "one of Silicon Valley's most influential venture-capital firms"...
in 1972. Located, in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the many semiconductor
Semiconductor
A semiconductor is a material with electrical conductivity due to electron flow intermediate in magnitude between that of a conductor and an insulator. This means a conductivity roughly in the range of 103 to 10−8 siemens per centimeter...
companies based in the Santa Clara Valley
Santa Clara Valley
The Santa Clara Valley is a valley just south of the San Francisco Bay in Northern California in the United States. Much of Santa Clara County and its county seat, San José, are in the Santa Clara Valley. The valley was originally known as the Valley of Heart’s Delight for its high concentration...
as well as early computer
Computer
A computer is a programmable machine designed to sequentially and automatically carry out a sequence of arithmetic or logical operations. The particular sequence of operations can be changed readily, allowing the computer to solve more than one kind of problem...
firms using their devices and programming and service companies.
Throughout the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association
National Venture Capital Association
The National Venture Capital Association is the leading trade association representing the venture capital industry in the U.S. The NVCA represents the venture industry in public policy debates in Washington, DC, and promotes high professional standards, professional development, and interaction...
(NVCA). The NVCA was to serve as the industry trade group
Industry trade group
A trade association, also known as an industry trade group, business association or sector association, is an organization founded and funded by businesses that operate in a specific industry...
for the venture capital industry. Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund.
It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. With the passage of the Employee Retirement Income Security Act
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
(ERISA) in 1974, corporate pension funds were prohibited from holding certain risky investments including many investments in privately held companies. In 1978, the US Labor Department relaxed certain of the ERISA restrictions, under the "prudent man rule
Prudent man rule
The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court decision, Harvard College v. Amory 9 Pick. 446...
," thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists.
1980s
The public successes of the venture capital industry in the 1970s and early 1980s (e.g., Digital Equipment CorporationDigital Equipment Corporation
Digital Equipment Corporation was a major American company in the computer industry and a leading vendor of computer systems, software and peripherals from the 1960s to the 1990s...
, Apple Inc., Genentech
Genentech
Genentech Inc., or Genetic Engineering Technology, Inc., is a biotechnology corporation, founded in 1976 by venture capitalist Robert A. Swanson and biochemist Dr. Herbert Boyer. Trailing the founding of Cetus by five years, it was an important step in the evolution of the biotechnology industry...
) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". The number of firms multiplied, and the capital managed by these firms increased from $3 billion to $31 billion over the course of the decade.
The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987 and foreign corporations, particularly from Japan and Korea, flooded early stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
and Paine Webber
Paine Webber
Paine Webber and Company was an American stock brokerage and asset management firm that was acquired by the Swiss bank UBS AG in 2000. The company was founded in 1880 in Boston, Massachusetts, by William Alfred Paine and Wallace G. Webber. Operating with two employees, they leased premises at 48...
either sold off or closed these venture capital units. Additionally, venture capital units within Chemical Bank
Chemical Banking
Chemical Bank was a bank with headquarters in New York City from 1824 until 1996. The bank operated as the primary subsidiary of the Chemical Banking Corporation, a bank holding company established in 1988. At the end of 1995, Chemical was the third largest bank in the U.S...
and Continental Illinois National Bank
Continental Illinois National Bank and Trust Company
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest bank in the United States as measured by deposits with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to...
, among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders J.H. Whitney & Company
J.H. Whitney & Company
J.H. Whitney & Company is a venture capital firm in the U.S., founded in 1946 by John Hay Whitney and his partner Benno Schmidt. Today the firm focuses primarily on leveraged buyouts, turnarounds, acquisitions, and recapitalizations of more mature companies particularly those it considers to be in...
and Warburg Pincus
Warburg Pincus
Warburg Pincus, LLC is an American private equity firm with offices in the United States, Europe, Brazil and Asia. It has been a private equity investor since 1966...
began to transition toward leveraged buyouts and growth capital
Growth capital
Growth capital is a type of private equity investment, most often a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.Companies...
investments.
The venture capital boom and the Internet Bubble (1995 to 2000)
By the end of the 1980s, venture capital returns were relatively low, particularly in comparison with their emerging leveraged buyoutLeveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
cousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in the venture capital industry remained limited throughout the 1980s and the first half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994.
After a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly on improving operations at their portfolio companies rather than continuously making new investments. Results would begin to turn very attractive, successful and would ultimately generate the venture capital boom of the 1990s. Yale School of Management Professor Andrew Metrick refers to these first 15 years of the modern venture capital industry beginning in 1980 as the "pre-boom period" in anticipation of the boom that would begin in 1995 and last through the bursting of the Internet bubble in 2000.
The late 1990s were a boom time for venture capital, as firms on Sand Hill Road
Sand Hill Road
Sand Hill Road is a road in Menlo Park, California, notable for its concentration of venture capital companies. Its significance as a symbol of private equity in the United States may be compared to that of Wall Street in the stock market...
in Menlo Park
Menlo Park, California
Menlo Park, California is a city at the eastern edge of San Mateo County, in the San Francisco Bay Area of California, in the United States. It is bordered by San Francisco Bay on the north and east; East Palo Alto, Palo Alto, and Stanford to the south; Atherton, North Fair Oaks, and Redwood City...
and Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...
benefited from a huge surge of interest in the nascent Internet and other computer technologies. Initial public offerings of stock for technology and other growth companies were in abundance, and venture firms were reaping large returns.
The private equity crash (2000 to 2003)
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
crash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many venture firms had been forced to write-off large proportions of their investments, and many funds were significantly "under water" (the values of the fund's investments were below the amount of capital invested). Venture capital investors sought to reduce size of commitments they had made to venture capital funds, and, in numerous instances, investors sought to unload existing commitments for cents on the dollar in the secondary market
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers's MoneyTree Survey shows that total venture capital investments held steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in 2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The revival of an Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
-driven environment in 2004 through 2007 helped to revive the venture capital environment. However, as a percentage of the overall private equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
Venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
), raised only $25.1 billion in 2006, a 2%-decline from 2005 and a significant decline from its peak.
Funding
Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholdings when the business is sold to another owner.Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb
Rule of thumb
A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination...
, a fund may invest in one in four hundred opportunities presented to it, looking for the extremely rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. Of these qualities, funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3–7 years) that venture capitalists expect.
Because investments are illiquid and require the extended timeframe to harvest, venture capitalists are expected to carry out detailed due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
prior to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations
Valuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...
are favourable. Venture capitalists typically assist at four stages in the company's development:
- Idea generationBusiness ideaA business idea is a concept which can be used for commercial purposes.It typically centers around a commodity or service that can be sold for money, according to a unique model.There are several methods for developing and testing a business idea...
; - Start-upStartup companyA startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...
; - Ramp upRamp upRamp up is a term used in economics and business to describe an increase in firm production ahead of anticipated increases in product demand. Alternatively, ramp up describes the period between product development, and maximum capacity utilization, characterized by product and process...
; and - ExitExit Strategy"Exit Strategy" is the fifty-second episode aired of TV comedy series Arrested Development.-Synopsis:Michael Bluth is preparing his sister for her upcoming deposition in the case against their father. But she can not focus on the task at hand, as she had a lot to drink the night before...
Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether he wants a follow-up meeting. In addition, there are some new private online networks that are emerging to provide additional opportunities to meet investors.
This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-front capital requirements, which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. In turn, this explains why venture capital is most prevalent in the fast-growing technology and life sciences
Life sciences
The life sciences comprise the fields of science that involve the scientific study of living organisms, like plants, animals, and human beings. While biology remains the centerpiece of the life sciences, technological advances in molecular biology and biotechnology have led to a burgeoning of...
or biotechnology
Biotechnology
Biotechnology is a field of applied biology that involves the use of living organisms and bioprocesses in engineering, technology, medicine and other fields requiring bioproducts. Biotechnology also utilizes these products for manufacturing purpose...
fields.
If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.
Financing stages
There are typically six stages of venture roundVenture round
A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies...
financing offered in Venture Capital, that roughly correspond to these stages of a company's development.
- Seed Money: Low level financing needed to prove a new idea, often provided by angel investors. Crowd fundingCrowd fundingCrowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations...
is also emerging as an option for seed funding. - Start-up: Early stage firms that need funding for expenses associated with marketing and product development
- First-Round (Series A roundSeries A roundA Series A round is the name typically given to a company's first significant round of venture funding in the Silicon Valley model of startup company formation....
): Early sales and manufacturing funds - Second-Round: Working capitalWorking capitalWorking capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
for early stage companies that are selling product, but not yet turning a profit - Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company
- Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process
Between the first round and the fourth round, venture-backed companies may also seek to take venture debt
Venture debt
Venture debt or venture lending is a type of debt financing provided to venture-backed companies by specialised banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Unlike traditional bank lending, venture debt is available to startups and growth...
.
Venture capitalists
A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LPLimited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
or LLC
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
) that primarily invests the financial capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
of third-party investors in enterprises that are too risky for the standard capital markets or bank loans
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.
A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.
Structure
Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companiesLimited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
, in which case the firm's managers are known as managing members. 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 financial endowments, foundations, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies, and pooled investment vehicles, called funds of funds (FoF).
Types
Venture Capitalist firms differ in their approaches. There are multiple factors, and each firm is different.Some of the factors that influence VC decisions include:
- Business situation: Some VCs tend to invest in new ideas, or fledgling companies. Others prefer investing in established companies that need support to go public or grow.
- Some invest solely in certain industries.
- Some prefer operating locally while others will operate nationwide or even globally.
- VC expectations often vary. Some may want a quicker public sale of the company or expect fast growth. The amount of help a VC provides can vary from one firm to the next.
Roles
Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but, broadly speaking, venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment bankingInvestment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
or other corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
experience.
Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:
- Venture partners — Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved.
- Principal — This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field, such as investment bankingInvestment bankingAn investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
,management consultingManagement consultingManagement consulting indicates both the industry and practice of helping organizations improve their performance primarily through the analysis of existing organizational problems and development of plans for improvement....
, or a market of particular interest to the strategy of the venture capital firm.
- Associate — This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field, such as investment bankingInvestment bankingAn investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
or management consultingManagement consultingManagement consulting indicates both the industry and practice of helping organizations improve their performance primarily through the analysis of existing organizational problems and development of plans for improvement....
.
- Entrepreneur-in-residence (EIR) — EIRs are experts in a particular domain and perform due diligenceDue diligence"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
on potential deals. EIRs are engaged by venture capital 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 EIRs move on to executive positions within a portfolio company.
Need of venture capital
- There are entrepreneurs and many other people who come up with bright ideas but lack the capital for the investment. What these venture capitals do are to facilitate and enable the start up phase.
- When there is an owner relation between the venture capital providers and receivers, their mutual interest for returns will increase the firms motivation to increase profits.
- Venture capitalists have invested in similar firms and projects before and, therefore, have more knowledge and experience. This knowledge and experience are the outcomes of the experiments through the successes and failures from previous ventures, so they know what works and what does not, and how it works. Therefore, through venture capital involvement, a portfolio firm can initiate growth, identify problems, and find recipes to overcome them.
Structure of the funds
Most venture capital fundsPrivate equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley
Silicon Valley
Silicon Valley is a term which refers to the southern part of the San Francisco Bay Area in Northern California in the United States. The region is home to many of the world's largest technology corporations...
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 initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a limited partner (or investor) that fails to participate in a capital call
Capital call
A capital call is a legal right of an investment firm or an insurance firm to demand a portion of the money promised to it by an investor...
.
It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed, and the 10-year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. This shows the difference between a venture capital fund management company and the venture capital funds managed by them.
Compensation
Venture capitalists are compensated through a combination of management fees and carried interestCarried interest
Carried interest or carry, in finance, specifically in alternative investment management, is a share of the profits of a successful investment partnership that is paid to the investment manager of the partnership as a form of compensation that is designed as an incentive to the manager to maximize...
(often referred to as a "two and 20" arrangement):
- Management fees — an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations. In a typical venture capital fund, the general partners receive an annual management fee equal to up to 2% of the committed capital.
- Carried interest — a share of the profits of the fund (typically 20%), paid to the private equity fund’s management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors Strong limited partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 25–30% on their funds.
Because a fund may be run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.
Main alternatives to venture capital
Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek seed 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 company otherwise unknown to them if the company can prove at least some of its claims about the technology 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 sweat equity
Sweat equity
Sweat equity is a term that refers to a party's contribution to a project in the form of effort --- as opposed to financial equity, which is a contribution in the form of capital....
until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called "bootstrapping".
There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments typically in the $0 to $250,000 range and the amounts that most VC funds prefer to invest between $1 million to $2 million. This funding gap may be accentuated by the fact that some successful VC funds have been drawn to raise ever-larger funds, requiring them to search for correspondingly larger investment opportunities. This gap is often filled by sweat equity
Sweat equity
Sweat equity is a term that refers to a party's contribution to a project in the form of effort --- as opposed to financial equity, which is a contribution in the form of capital....
and seed funding via angel investors as well as equity investment companies who specialize in investments in startup companies from the range of $250,000 to $1 million. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized venture capital funds.
Crowd funding
Crowd funding
Crowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations...
is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd funding models are also being applied for startup funding, for example, Grow VC. One of the reason to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, and return on investment
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
of many VC funds have been low or negative.
In industries where assets can be securitized
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
, 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. Offshore funding is provided via specialist venture capital trusts, which seek to utilise securitization in structuring hybrid multi-market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.
In addition to traditional venture capital and angel networks, groups have emerged, which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process.
Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.
Geographical differences
Venture capital, as an industry, has originated in the United States, and American firms have traditionally been the largest participants in venture deals, and the bulk of venture capital has been deployed in American companies. However, increasingly, non-US venture investment is growing, and the number and size of non-US venture capitalists have been expanding.Venture capital has been used as a tool for economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance
Access to finance
Access to finance refers to the possibility that individuals or enterprises can access financial services, including credit, deposit, payment, insurance, and other risk management services...
for small and medium enterprises (SMEs), which in most cases would not qualify for receiving bank loans.
In the year of 2008, while VC fundings were still majorly dominated by U.S. money ($28.8 billion invested in over 2550 deals in 2008), compared to international fund investments ($13.4 billion invested elsewhere), there has been an average 5% growth in the venture capital deals outside the USA, mainly in China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
, Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, and Israel
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
. Geographical differences can be significant. For instance, in the U.K., 4% of British investment goes to venture capital, compared to about 33% in the U.S.
United States
Venture capitalists invested some $21.2 billion in 2,725 deals in the U.S. through the third quarter of 2011, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson FinancialThomson Financial
Thomson Financial was an arm of The Thomson Corporation, which was one of the world's leading information companies, focused on providing integrated information solutions to business and professional customers...
. The same numbers for all of 2010 were $23.4 billion in 3,496 deals. A National Venture Capital Association
National Venture Capital Association
The National Venture Capital Association is the leading trade association representing the venture capital industry in the U.S. The NVCA represents the venture industry in public policy debates in Washington, DC, and promotes high professional standards, professional development, and interaction...
survey found that a majority (69%) of venture capitalists predicted that venture investments in the U.S. would have leveled between $20–29 billion in 2007.
Canada
Canadian technology companies have attracted interest from the global venture capital community as a result, in part, of generous tax incentive through the Scientific Research and Experimental DevelopmentScientific Research and Experimental Development Tax Credit Program
The Scientific Research and Experimental Development Tax Incentive Program provides tax incentives to Canadian businesses to support applied research and experimental development conducted in Canada.-Background:Introduced in the 1980s, the SR&ED program is intended to...
(SR&ED) investment tax credit program. The basic incentive available to any Canadian corporation performing R&D is a refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company, which might not be desirable. The SR&ED program does not restrict the export of any technology or intellectual property that may have been developed with the benefit of SR&ED tax incentives.
Canada also has a fairly unique form of venture capital generation in its Labour Sponsored Venture Capital Corporations (LSVCC)
Labour Sponsored Venture Capital Corporation
A labour-sponsored venture capital corporation ', known alternately as labour-sponsored investment fund ' or simply retail venture capital, is a fund managed by investment professionals and invested in small to mid-sized Canadian companies...
. These funds, also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and offer tax breaks from government to encourage retail investors to purchase the funds. Generally, these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. However, innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada.
Europe
Europe has a large and growing number of active venture firms. Capital raised in the region in 2005, including buy-outLeveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
funds, exceeded €60 billion, of which €12.6 billion was specifically allocated to venture investment. The European Venture Capital Association includes a list of active firms and other statistics. In 2006, the top three countries receiving the most venture capital investments were the United Kingdom (515 minority stakes sold for €1.78 billion), France (195 deals worth €875 million), and Germany (207 deals worth €428 million) according to data gathered by Library House
Library House
The Library House Ltd was a business information and consulting company based in Cambridge, England, founded in 2002 by Doug Richard and John Snyder....
.
European venture capital investment in the second quarter of 2007 rose 5% to €1.14 billion from the first quarter. However, due to bigger sized deals in early stage investments, the number of deals was down 20% to 213. The second quarter venture capital investment results were significant in terms of early-round investment, where as much as €600 million (about 42.8% of the total capital) were invested in 126 early round deals (which comprised more than half of the total number of deals). Private equity in Italy was 4.2 billion Euros in 2007.
Israel
Israel’s venture capital industry has rapidly developed from the early 1990s, and has about 70 active venture capital funds, of which 14 are international VCs with Israeli offices. Israel's thriving venture capital and Business incubatorBusiness incubator
Business incubators are programs designed to accelerate the successful development of entrepreneurial companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts...
industry played an important role in the booming high-tech sector. In 2008, venture capital investment in Israel rose 19 percent to $1.9 billion.
Asia
- IndiaIndiaIndia , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
is fast catching up with the West in the field of venture capital and a number of venture capital funds have a presence in the country (IVCAIndian Venture Capital AssociationThe Indian Private Equity and Venture Capital Association was established in 1993 and is based in New Delhi, the capital of India. IVCA is a member based national organization that represents Venture capital and Private equity firms, promotes the industry within India and throughout the world and...
). In 2006, the total amount of private equity and venture capital in India reached US$7.5 billion across 299 deals. In the Indian context, venture capital consists of investing in equity , quasi equity and/or conditional loan in order to promote unlisted , high risk or high tech firms driven by technically or professionally qualified entrepreneurs. It is also defined as ‘providing seed’ ,’ start up and first stage financing’ . It is also seen as financing companies that have demonstrated extraordinary business potential. Venture capital refers to capital investment ; equity and debt ;both of which carry indubitable risk. The risk anticipated is very high. The venture capital industry follows the concept of “high risk, high return” Innovative entrepreneurship, knowledge based ideas and human capital intensive enterprises have taken the front seat as venture capitalists invest in risky finance to encourage innovation.
- ChinaChinaChinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
is also starting to develop a venture capital industry (CVCAChina Venture Capital AssociationChina Venture Capital Association is a Venture Capital industry trade group that itself says "promotes the interest and the development of venture capital and private equity industry in the Greater China Region."...
).
- VietnamVietnamVietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
is experiencing its first foreign venture capitals, including IDG Venture Vietnam ($100 million) and DFJ Vinacapital ($35 million)
Middle East and North Africa
The Middle East and North Africa (MENA) venture capital industry is an early stage of development but growing. The MENA Private Equity Association Guide to Venture Capital for entrepreneurs lists VC firms in the region, and other resources available in the MENA VC ecosystem.Confidential information
Unlike public companiesPublic company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
, information regarding an entrepreneur's business is typically confidential and proprietary. As part of the due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
process, most venture capitalists will require significant detail with respect to a company's business plan. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter into Non Disclosure Agreements because of the potential liability issues those agreements entail. Entrepreneurs are typically well-advised to protect truly proprietary intellectual property.
Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership agreement
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
.
Popular culture
- Robert von Goeben and Kathryn Siegler produced a comic strip called The VC between the years 1997-2000 that parodied the industry, often by showing humorous exchanges between venture capitalists and entrepreneurs. Von Goeben was a partner in Redleaf Venture Management when he began writing the strip.
- Mark CogginsMark CogginsMark Coggins is the American author of a series of novels featuring private eye protagonist AugustRiordan. He was born in New Mexico in 1957 and attended Stanford University, where he earned an...
' 2002 novel Vulture Capital features a venture capitalist protagonist who investigates the disappearance of the chief scientist in a biotech firm in which he has invested. Coggins also worked in the industry and was co-founder of a dot-com startup. In the DilbertDilbertDilbert is an American comic strip written and drawn by Scott Adams. First published on April 16, 1989, Dilbert is known for its satirical office humor about a white-collar, micromanaged office featuring the engineer Dilbert as the title character...
comic strip, a character named 'Vijay, the World's Most Desperate Venture Capitalist' frequently makes appearances, offering bags of cash to anyone with even a hint of potential. In one strip, he offers two small children with good math grades money based on the fact that if they marry and produce an engineer baby he can invest in the infant's first idea. The children respond that they are already looking for mezzanine funding.
- Drawing on his experience as reporter covering technology for the New York Times, Matt RichtelMatt RichtelMatt Richtel is an American writer and journalist for The New York Times. He was awarded the 2010 Pulitzer Prize for National Reporting for a series on distracted driving....
produced the 2007 novel Hooked, in which the actions of the main character's deceased girlfriend, a Silicon Valley venture capitalist, play a key role in the plot.
- In the TV series Dragons' DenDragons' DenDragons' Den is a series of reality television programmes featuring entrepreneurs pitching their business ideas in order to secure investment finance from a panel of venture capitalists. The show originated in Japan as "Manē no Tora"...
, various startup companies pitch their business plans to a panel of venture capitalists.
- In the 2005 movie, Wedding CrashersWedding CrashersWedding Crashers is a 2005 American comedy film directed by David Dobkin. It stars Owen Wilson and Vince Vaughn, with Christopher Walken, Rachel McAdams, Isla Fisher, Bradley Cooper, Diora Baird, Jane Seymour, and an uncredited Will Ferrell....
, Jeremy Grey (Vince Vaughn) and John Beckwith (Owen Wilson) are two bachelors who create appearances to play at different weddings of complete strangers, and a large part of the movie follows them posing as venture capitalists from New Hampshire.
- A documentary, Something VenturedSomething VenturedSomething Ventured is a 2011 documentary film investigating the emergence of American venture capitalism in the mid-20th Century. Something Ventured follows the stories of the venture capitalists who worked with entrepreneurs to start and build companies like Apple, Intel, Genentech, Cisco, Atari,...
, chronicled the recent history of American technology venture capitalists.
See also
- Venture capital financingVenture capital financingVenture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round in the interest of generating a return through an...
- Corporate Venture CapitalCorporate Venture CapitalFrom September 2007 to April 2009, the financial services industry dominated the headlines and had a disproportionate impact on the world we live in. Given the profound effect that the financial services industry has on all areas of the global economy, it is important to understand this industry...
- History of private equity and venture capitalHistory of private equity and venture capitalThe history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital...
- List of venture capital firms
- Adventure capitalAdventure capitalAdventure Capital is a term usually associated with providing venture capital in the context of humanitarian aid and development. A common component is the investment in funds that use microfinance or microcredit to provide development assistance to the poor....
- Angel investorAngel investorAn angel investor or angel is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity...
- Crowd fundingCrowd fundingCrowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations...
- Enterprise Capital FundEnterprise Capital FundAccording to the Department for Business, Enterprise and Regulatory Reform , Enterprise Capital Funds were established in the UK to address a market weakness in the provision of equity finance to Small and medium enterprises...
a type of Venture Capital fund in the UK - IPO
- M&A
- National Venture Capital AssociationNational Venture Capital AssociationThe National Venture Capital Association is the leading trade association representing the venture capital industry in the U.S. The NVCA represents the venture industry in public policy debates in Washington, DC, and promotes high professional standards, professional development, and interaction...
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- Private equity secondary marketPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
- Seed funding
- Sweat equitySweat equitySweat equity is a term that refers to a party's contribution to a project in the form of effort --- as opposed to financial equity, which is a contribution in the form of capital....
- Social Venture CapitalSocial Venture CapitalSocial venture capital is a form of venture capital investing that provides capital to businesses deemed socially and environmentally responsible. These investments are intended to both provide attractive returns to investors and to provide market-based solutions to social and environmental issues...