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Intro
Various types of loans provided by banks
intro:-
Venture capital (VC) is al provided to early-stage, high-potential, growth startup companies. The
venture capital fundearns 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 and software. The typical venture capital investment occurs after the seed
fundinground as the first round of institutional capital to fund growth (also referred to as Series
round) in the interest of generating a return through an eventual reali!ation event, such as
an I"# or trade sale of the company. $enture capital is a type of private equity.
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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 mar(ets and
have not reached the point where they are able to secure a ban( loan or complete a debt offering. In
e)change for the high ris( 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).
$enture capital is also associated with +ob creation (accounting for ,- of .S /0"),
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the (nowledge
economy, and used as a pro)y measure of innovation within an economic sector or geography.
1very year, there are nearly , million businesses created in the .S, and 2334533 get venture
capital funding. ccording to the 6ational $enture 7apital ssociation, &&- of private sector +obs
come from venture bac(ed companies and venture bac(ed revenue accounts for ,&- of .S /0".
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It is also a way in which public and private sectors can construct an institution that systematically
creates networ(s for the new firms and industries, so that they can progress. This institution helps in
identifying and combining pieces of companies, li(e finance, technical e)pertise, (now-hows of
mar(eting and business models. #nce integrated, these enterprises succeed by becoming nodes in
the search networ(s for designing and building products in their domain.
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History%edit'
venture may be defined as a pro+ect prospective converted into a process with an adequate
assumed ris( and investment. :ith few e)ceptions, private equity in the first half of the ,3th century
was the domain of wealthy individuals and families. The :allenbergs, $anderbilts, :hitneys,
;oc(efellers, and :arburgs were notable investors in private companies in the first half of the
century. In &<85, =aurance S. ;oc(efeller helped finance the creation of both 1astern ir
=ines and 0ouglas ircraft, and the ;oc(efeller family had vast holdings in a variety of
companies. 1ric >. :arburg founded 1.>. :arburg ? 7o. in &<85, which would ultimately
become :arburg "incus, with investments in bothleveraged buyouts and venture capital.
The :allenberg family started Investor @ in &<&2 in Sweden and were early investors in several
Swedish companies such as @@, tlas 7opco, 1ricsson, etc. in the first half of the ,3th century.
Origins of modern private equity%edit'
@efore :orld :ar II (&<8<4&<9A), money orders (originally (nown as Bdevelopment capitalB)
remained primarily the domain of wealthy individuals and families. #nly after &<9A did BtrueB private
equity investments begin to emerge, notably with the founding of the first two venture capital firms in
&<92C merican ;esearch and 0evelopment 7orporation(;07) and D.E. :hitney ? 7ompany.
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/eorges 0oriot, the Bfather of venture capitalismB
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(and former assistant dean of Earvard @usiness
School), founded I6S10 in &<AF. long with ;alph Glanders and Harl 7ompton (former president
of >IT), 0oriot founded ;07 in &<92 to encourage private-sector investments in businesses run by
soldiers returning from :orld :ar II. ;07 became the first institutional private-equity investment
firm to raise capital from sources other than wealthy families, although it had several notable
investment successes as well.
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;07 is credited
%by whom?'
with the first tric( when its &<AF investment
of IF3,333 in 0igital 1quipment 7orporation (017) would be valued at over I8AA million after the
company*s initial public offering in &<25 (representing a return of over &,33 times on its investment
and an annuali!ed rate of return of &3&-).
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Gormer employees of ;07 went on to establish several prominent venture-capital firms
including /reyloc( "artners (founded in &<2A by 7harlie :aite and @ill 1lfers) and>organ, Eolland
$entures, the predecessor of Glagship $entures (founded in &<5, by Dames >organ).
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;07
continued investing until &<F&, when 0oriot retired. In &<F, 0oriot merged ;07 with Te)tron after
having invested in over &A3 companies.
Dohn Eay :hitney (&<394&<5,) and his partner @enno Schmidt (&<&84&<<<) founded D.E. :hitney
? 7ompany in &<92. :hitney had been investing since the &<83s, founding"ioneer "ictures in &<88
and acquiring a &A- interest in Technicolor 7orporation with his cousin 7ornelius $anderbilt
:hitney. Glorida Goods 7orporation proved :hitney*s most famous investment. The company
developed an innovative method for delivering nutrition to merican soldiers, later (nown as >inute
>aid orange +uice and was sold to The 7oca-7ola 7ompany in &<23. D.E. :hitney ?
7ompany continued to ma(e investments in leveraged buyout transactions and raised IFA3 million
for its si)th institutional private equity fund in ,33A.
Early venture capital and the growth of ilicon Valley%edit'
highway e)it for Sand Eill ;oad in>enlo "ar(, 7alifornia, where many @ay rea venture capital firms are based
#ne of the first steps toward a professionally managed venture capital industry was the passage of
the Small @usiness Investment ct of &<A5. The &<A5 ct officially allowed the ..S. Small @usiness
dministration (S@) to license private BSmall @usiness Investment 7ompaniesB (S@I7s) to help the
financing and management of the small entrepreneurial businesses in the .nited States.
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0uring the &<23s and &<F3s, venture capital firms focused their investment activity primarily on
starting and e)panding companies. >ore often than not, these companies were e)ploiting
brea(throughs in electronic, medical, or data-processing technology. s a result, venture capital
came to be almost synonymous with technology finance. n early :est 7oast venture capital
company was 0raper and Dohnson Investment 7ompany, formed in &<2,
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by :illiam Eenry 0raper
III and Gran(lin ". Dohnson, Dr. In &<2A, Sutter Eill $entures acquired the portfolio of 0raper and
Dohnson as a founding action. @ill 0raper and "aul :ythes were the founders, and "itch Dohnson
formed sset >anagement 7ompany at that time.
It is commonly noted that the first venture-bac(ed startup is Gairchild Semiconductor (which
produced the first commercially practical integrated circuit), funded in &<A< by what would later
become $enroc( ssociates.
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$enroc( was founded in &<2< by =aurance S. ;oc(efeller, the fourth
of Dohn 0. ;oc(efeller*s si) children as a way to allow other ;oc(efeller children to develop
e)posure to venture capital investments.
It was also in the &<23s that the common form of private equity fund, still in use today,
emerged. "rivate equity firms organi!ed limited partnerships to hold investments in which the
investment professionals served as general partner and the investors, who were passivelimited
partners, put up the capital. The compensation structure, still in use today, also emerged with limited
partners paying an annual management fee of &.34,.A- and a carried interest typically representing
up to ,3- 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 Eill ;oad, beginning with Hleiner, "er(ins, 7aufield?@yersand Sequoia
7apital in &<F,. =ocated in >enlo "ar(, 7, Hleiner "er(ins, Sequoia and later venture capital firms
would have access to the many semiconductor companies based in the Santa 7lara $alley as well
as early computer firms using their devices and programming and service companies.
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Throughout the &<F3s, 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 &<F8, with the number of new venture capital firms increasing, leading
venture capitalists formed the 6ational $enture 7apital ssociation(6$7). The 6$7 was to serve
as the industry trade group for the venture capital industry.
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$enture capital firms suffered a
temporary downturn in &<F9, when the stoc( mar(et crashed and investors were naturally wary of
this new (ind of investment fund.
It was not until &<F5 that venture capital e)perienced its first ma+or fundraising year, as the industry
raised appro)imately IFA3 million. :ith the passage of the 1mployee ;etirement Income Security
ct (1;IS) in &<F9, corporate pension funds were prohibited from holding certain ris(y investments
including many investments in privately heldcompanies. In &<F5, the .S =abor 0epartment rela)ed
certain of the 1;IS restrictions, under the Bprudent man rule,B
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thus allowing corporate pension
funds to invest in the asset class and providing a ma+or source of capital available to venture
capitalists.
!"#$s%edit'
The public successes of the venture capital industry in the &<F3s and early &<53s (e.g., 0igital
1quipment 7orporation, pple Inc., /enentech) gave rise to a ma+or proliferation of venture capital
investment firms. Grom +ust a few do!en firms at the start of the decade, there were over 2A3 firms
by the end of the &<53s, each searching for the ne)t ma+or Bhome runB. The number of firms
multiplied, and the capital managed by these firms increased from I8 billion to I8& billion over the
course of the decade.
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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 mar(et for initial public offerings cooled in the mid-&<53s before
collapsing after the stoc( mar(et crash in &<5F and foreign corporations, particularly from Dapan and
Horea, flooded early stage companies with capital.
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In response to the changing conditions, corporations that had sponsored in-house venture
investment arms, including /eneral 1lectric and "aine :ebber either sold off or closed these
venture capital units. dditionally, venture capital units within 7hemical @an( and 7ontinental Illinois
6ational @an(, among others, began shifting their focus from funding early stage companies toward
investments in more mature companies. 1ven industry founders D.E. :hitney ?
7ompany and :arburg "incus began to transition toward leveraged buyouts and growth
capital investments.
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Venture capital boom and the Internet %ubble%edit'
@y the end of the &<53s, venture capital returns were relatively low, particularly in comparison with
their emerging leveraged buyout cousins, due in part to the competition for hot startups, e)cess
supply of I"#s and the ine)perience of many venture capital fund managers. /rowth in the venture
capital industry remained limited throughout the &<53s and the first half of the &<<3s, increasing
from I8 billion in &<58 to +ust over I9 billion more than a decade later in &<<9.
fter a sha(eout of venture capital managers, the more successful firms retrenched, focusing
increasingly on improving operations at their portfolio companies rather than continuously ma(ing
new investments. ;esults would begin to turn very attractive, successful and would ultimately
generate the venture capital boom of the &<<3s. Jale School of >anagement "rofessor ndrew
>etric( refers to these first &A years of the modern venture capital industry beginning in &<53 as the
Bpre-boom periodB in anticipation of the boom that would begin in &<<A and last through the bursting
of the Internet bubble in ,333.
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The late &<<3s were a boom time for venture capital, as firms on Sand Eill ;oad in >enlo
"ar( and Silicon $alley benefited from a huge surge of interest in the nascent Internet and other
computer technologies. Initial public offerings of stoc( for technology and other growth companies
were in abundance, and venture firms were reaping large returns.
&rivate equity crash%edit'
The technology-heavy 6S0K 7ompositeinde) pea(ed at A,395 in >arch ,333 reflecting the high point of the dot-
com bubble.
The 6asdaq crash and technology slump that started in >arch ,333 shoo( virtually the entire
venture capital industry as valuations for startup technology companies collapsed. #ver the ne)t two
years, many venture firms had been forced to write-off large proportions of their investments, and
many funds were significantly Bunder waterB (the values of the fund*s investments were below the
amount of capital invested). $enture capital investors sought to reduce si!e of commitments they
had made to venture capital funds, and, in numerous instances, investors sought to unload e)isting
commitments for cents on the dollar in thesecondary mar(et. @y mid-,338, the venture capital
industry had shriveled to about half its ,33& capacity. 6evertheless, "ricewaterhouse7oopers*s
>oneyTreeSurvey
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shows that total venture capital investments held steady at ,338 levels through
the second quarter of ,33A.
lthough the post-boom years represent +ust a small fraction of the pea( levels of venture
investment reached in ,333, they still represent an increase over the levels of investment from &<53
through &<<A. s a percentage of /0", venture investment was 3.3A5- in &<<9, pea(ed at &.35F-
(nearly &< times the &<<9 level) in ,333 and ranged from 3.&29- to 3.&5,- in ,338 and ,339. The
revival of an Internet-driven environment in ,339 through ,33F helped to revive the venture capital
environment. Eowever, as a percentage of the overall private equity mar(et, venture capital has still
not reached its mid-&<<3s level, let alone its pea( in ,333.
$enture capital funds, which were responsible for much of the fundraising volume in ,333 (the height
of the dot-com bubble), raised only I,A.& billion in ,332, a ,--decline from ,33A and a significant
decline from its pea(.
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Funding%edit'
#btaining venture capital is substantially different from raising debt or a loan from a lender. =enders
have a legal right to interest on a loan and repayment of the capital, irrespective of the success or
failure of a business. $enture capital is invested in e)change for an equity sta(e in the business. s
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 Be)itsB by selling its
shareholdings when the business is sold to another owner.
$enture capitalists are typically very selective in deciding what to invest inL as a result, firms are
loo(ing for the e)tremely rare, yet sought after, qualities, such as innovative technology, potential for
rapid growth, a well-developed business model, and an impressive management team. #f these
qualities, funds are most interested in ventures with e)ceptionally high growth potential, as only such
opportunities are li(ely capable of providing the financial returns and successful e)it event within the
required timeframe (typically 84F years) that venture capitalists e)pect.
@ecause investments are illiquid and require the e)tended timeframe to harvest, venture capitalists
are e)pected to carry out detailed due diligence prior to investment. $enture capitalists also are
e)pected to nurture the companies in which they invest, in order to increase the li(elihood of
reaching an I"# stage when valuations are favourable. $enture capitalists typically assist at four
stages in the company*s developmentC
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Idea generationL
Start-upL
;amp upL and
1)it
@ecause there are no public e)changes 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 contactsL investor conferences and symposiaL and
summits where companies pitch directly to investor groups in face-to-face meetings, including a
variant (nown as BSpeed $enturingB, which is a(in to speed-dating for capital, where the investor
decides within &3 minutes whether he wants a follow-up meeting. In addition, there are some new
private online networ(s that are emerging to provide additional opportunities to meet investors.
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This need for high returns ma(es venture funding an e)pensive 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 e)plains 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 see( including a solid business plan, a good
management team, investment and passion from the founders, a good potential to e)it the
investment before the end of their funding cycle, and target minimum returns in e)cess of 93- per
year, it will find it easier to raise venture capital.
'inancing stages%edit'
There are typically si) stages of venture round financing offered in $enture 7apital, that roughly
correspond to these stages of a company*s development.
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Seed fundingC =ow level financing needed to prove a new idea, often provided by angel
investors. 7rowd funding is also emerging as an option for seed funding.
Start-upC 1arly stage firms that need funding for e)penses associated with mar(eting and
product development
/rowth (Series round)C 1arly sales and manufacturing funds
Second-;oundC :or(ing capital for early stage companies that are selling product, but not
yet turning a profit
1)pansion C lso called >e!!anine financing, this is e)pansion money for a newly profitable
company
1)it of venture capitalist C lso called bridge financing, 9th round is intended to finance the
Bgoing publicB process
@etween the first round and the fourth round, venture-bac(ed companies may also see( to
ta(e venture debt.
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Firms and funds%edit'
Venture capitalists%edit'
venture capitalist is a person who ma(es venture investments, and these venture capitalists are
e)pected to bring managerial and technical e)pertise as well as capital to their investments.
venture capital fund refers to a pooled investment vehicle (in the .nited States, often an =" or ==7)
that primarily invests the financial capital of third-party investors in enterprises that are too ris(y for
the standard capital mar(ets or ban( loans. These funds are typically managed by a venture capital
firm, which often employs individuals with technology bac(grounds (scientists, researchers),
business training andMor deep industry e)perience.
core s(ill within $7 is the ability to identify novel technologies that have the potential to generate
high commercial returns at an early stage. @y definition, $7s also ta(e a role in managing
entrepreneurial companies at an early stage, thus adding s(ills as well as capital, thereby
differentiating $7 from buy-out private equity, which typically invest in companies with proven
revenue, and thereby potentially reali!ing much higher rates of returns. Inherent in reali!ing
abnormally high rates of returns is the ris( of losing all of one*s investment in a given startup
company. s 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. @y investing in the pool format, the investors are spreading out their ris( to many
different investments versus ta(ing the chance of putting all of their money in one start up firm.
0iagram of the structure of a generic venture capital fund
tructure%edit'
$enture 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.
$enture capital firms in the .nited States may also be structured as limited liability companies, in
which case the firm*s managers are (nown as managing members. Investors in venture capital funds
are (nown 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, insurancecompanies, and pooled investment vehicles,
called funds of funds.
(ypes%edit'
$enture 7apitalist firms differ in their approaches. There are multiple factors, and each firm is
different.
Some of the factors that influence $7 decisions includeC
@usiness situationC Some $7s tend to invest in new ideas, or fledgling companies. #thers
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.
$7 e)pectations often vary. Some may want a quic(er public sale of the company or e)pect
fast growth. The amount of help a $7 provides can vary from one firm to the ne)t.
)oles%edit'
:ithin the venture capital industry, the general partners and other investment professionals of the
venture capital firm are often referred to as Bventure capitalistsB or B$7sB. Typical career
bac(grounds vary, but, broadly spea(ing, venture capitalists come from either an operational or a
finance bac(ground. $enture capitalists with an operational bac(ground (operating partner) tend to
be former founders or e)ecutives of companies similar to those which the partnership finances or will
have served as management consultants. $enture capitalists with finance bac(grounds tend to
have investment ban(ing or other corporate finance e)perience.
lthough the titles are not entirely uniform from firm to firm, other positions at venture capital firms
includeC
&osition )ole
$enture
partners
$enture partners are e)pected to source potential investment opportunities (Bbring
in dealsB) and typically are compensated only for those deals with which they are
involved.
"rincipal
This is a mid-level investment professional position, and often considered a
Bpartner-trac(B position. "rincipals will have been promoted from a senior
associate position or who have commensurate e)perience in another field, such
as investment ban(ing, management consulting, or a mar(et of particular interest
to the strategy of the venture capital firm.
ssociate
This is typically the most +unior apprentice position within a venture capital firm.
fter a few successful years, an associate may move up to the Bsenior associateB
position and potentially principal and beyond. ssociates will often have wor(ed
for &4, years in another field, such as investment ban(ing or management
consulting.
1ntrepreneur-
in-residence
1ntrepreneurs-in-residence (1I;s) are e)perts in a particular domain and
perform due diligence on potential deals. 1I;s are engaged by venture capital
firms temporarily (si) to &5 months) and are e)pected to develop and pitch startup
ideas to their host firm although neither party is bound to wor( with each other.
Some 1I;s move on to e)ecutive positions within a portfolio company.
tructure of the funds%edit'
>ost venture capital funds have a fi)ed life of &3 years, with the possibility of a few years of
e)tensions to allow for private companies still see(ing liquidity. The investing cycle for most funds is
generally three to five years, after which the focus is managing and ma(ing follow-on investments in
an e)isting portfolio. This model was pioneered by successful funds in Silicon $alley through the
&<53s to invest in technological trends broadly but only during their period of ascendance, and to cut
e)posure to management and mar(eting ris(s of any individual firm or its product.
In such a fund, the investors have a fi)ed commitment to the fund that is initially unfunded and
subsequently Bcalled downB by the venture capital fund over time as the fund ma(es its investments.
There are substantial penalties for a limited partner (or investor) that fails to participate in a capital
call.
It can ta(e anywhere from a month or so to several years for venture capitalists to raise money from
limited partners for their fund. t the time when all of the money has been raised, the fund is said to
be closed, and the &3-year lifetime begins. Some funds have partial closes when one half (or some
other amount) of the fund has been raised. Thevintage year generally refers to the year in which the
fund was closed and may serve as a means to stratify $7 funds for comparison. This
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shows the
difference between a venture capital fund management company and the venture capital funds
managed by them.
Grom investors* point of view, funds can beC (&) traditionalNwhere all the investors invest with equal
termsL or (,) asymmetricNwhere different investors have different terms. Typically the asymmetry is
seen in cases where there*s an investor that has other interests such as ta) income in case of public
investors.
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Compensation%edit'
Main article: Carried interest
$enture capitalists are compensated through a combination of management fees and carried
interest (often referred to as a Btwo and ,3B arrangement)C
&ayment Implementation
>anagement
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.
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In a typical venture capital fund,
the general partners receive an annual management fee equal to up to ,- of the
committed capital.
7arried
interest
a share of the profits of the fund (typically ,3-), paid to the private equity fundOs
management company as a performance incentive. The remaining 53- of the
profits are paid to the fund*s investors
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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 ,A483- on
their funds.
@ecause a fund may run out of capital prior to the end of its life, larger venture capital firms usually
have several overlapping funds at the same timeL doing so lets the larger firm (eep specialists in all
stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail
with their initial industry contactsL by the time the fund cashes out, an entirely new generation of
technologies and people is ascending, whom the general partners may not (now 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 (now.
*lternatives%edit'
@ecause of the strict requirements venture capitalists have for potential investments, many
entrepreneurs see( 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.
Gurthermore, many venture capital firms will only seriously evaluate an investment in a start-up
company otherwise un(nown to them if the company can prove at least some of its claims about the
technology andMor mar(et potential for its product or services. To achieve this, or even +ust to avoid
the dilutive effects of receiving funding before such claims are proven, many start-ups see( 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 BbootstrappingB.
There has been some debate since the dot com boom that a Bfunding gapB has developed between
the friends and family investments typically in the I3 to I,A3,333 range and the amounts that most
$7 funds prefer to invest between I& million to I, million.
%citation needed'
This funding gap may be
accentuated by the fact that some successful $7 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 fundingvia angel investors as well as equity investment companies who
speciali!e in investments in startup companies from the range of I,A3,333 to I& million. The
6ational $enture 7apital ssociation estimates that the latter now invest more than I83 billion a year
in the .S in contrast to the I,3 billion a year invested by organi!ed venture capital funds.
%citation needed'
7rowd funding is emerging as an alternative to traditional venture capital. 7rowd funding is an
approach to raising the capital required for a new pro+ect or enterprise by appealing to large
numbers of ordinary people for small donations. :hile such an approach has long precedents in the
sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film
ma(ers, now that social media and online communities ma(e 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 such as those listed at 7omparison of crowd funding services. #ne of the
reasons to loo( for alternatives to venture capital is the problem of the traditional $7 model. The
traditional $7s are shifting their focus to later-stage investments, and return on investment of many
$7 funds have been low or negative.
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In 1urope and India, >edia for equity is a partial alternative to venture capital funding. >edia for
equity investors are able to supply start-ups with often significant advertising campaigns in return for
equity.
In industries where assets can be securiti!ed effectively because they reliably generate future
revenue streams or have a good potential for resale in case of foreclosure, businesses may more
cheaply be able to raise debt to finance their growth. /ood e)amples would include asset-intensive
e)tractive industries such as mining, or manufacturing industries. #ffshore funding is provided via
specialist venture capital trusts, which see( to utilise securiti!ation in structuring hybrid multi-mar(et
transactions via an S"$ (special purpose vehicle)C a corporate entity that is designed solely for the
purpose of the financing.
In addition to traditional venture capital and angel networ(s, groups have emerged, which allow
groups of small investors or entrepreneurs themselves to compete in a privati!ed business plan
competition where the group itself serves as the investor through a democratic process.
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=aw firms are also increasingly acting as an intermediary between clients see(ing venture capital
and the firms providing it.
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#ther forms include $enture ;esources, that see( to provide non-monitary support to launch a new
venture.
Geographical differences%edit'
$enture capital, as an industry, originated in the .nited States, and merican firms have traditionally
been the largest participants in venture deals with the bul( of venture capital being deployed in
merican companies. Eowever, increasingly, non-.S venture investment is growing, and the
number and si!e of non-.S venture capitalists have been e)panding.
$enture 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 (S>1s), which in most cases
would not qualify for receiving ban( loans.
In the year of ,335, while $7 funding were still ma+orly dominated by ..S. money (I,5.5 billion
invested in over ,AA3 deals in ,335), compared to international fund investments (I&8.9 billion
invested elsewhere), there has been an average A- growth in the venture capital deals outside the
.S, mainly in 7hina and 1urope.
%88'
/eographical differences can be significant. Gor instance, in
the .H, 9- of @ritish investment goes to venture capital, compared to about 88- in the ..S.
%89'
+nited tates%edit'
$enture capitalists invested some I,<.& billion in 8,FA, deals in the ..S. through the fourth quarter
of ,3&&, according to a report by the 6ational $enture 7apital ssociation. The same numbers for all
of ,3&3 were I,8.9 billion in 8,9<2 deals.
%8A'
6ational $enture 7apital ssociation survey found that
a ma+ority (2<-) of venture capitalists predicted that venture investments in the ..S. would have
leveled between I,34,< billion in ,33F.
%citation needed'
ccording to a report by 0ow Dones $entureSource, venture capital funding fell to I2.9 billion in the
.S in the first quarter of ,3&8, an &&.5- drop from the first quarter of ,3&,, and a ,3.5- decline
from ,3&&. $enture firms have added I9., billion into their funds this year, down from I2.8 billion in
the first quarter of ,3&8, but up from I,.2 billion in the fourth quarter of ,3&,.
%82'
,e-ico%edit'
The $enture 7apital industry in >e)ico, is a fast growing sector in the country that, with the support
of institutions and private funds, is estimated to reach .SI&33 billion invested by ,3&5.
%8F'
Technology in Israel
Israel%edit'
In Israel, high-tech entrepreneurship and venture capital have flourished well beyond the country*s
relative si!e. s it has very little natural resources and, historically has been forced to build its
economy on (nowledge-based industries, its $7 industry has rapidly developed, and nowadays has
about F3 active venture capital funds, of which &9 international $7s with Israeli offices, and
additional ,,3 international funds which actively invest in Israel. In addition, as of ,3&3, Israel led the
world in venture capital invested per capita. Israel attracted I&F3 per person compared to IFA in the
.S.
%85'
bout two thirds of the funds invested were from foreign sources, and the rest domestic. In
,3&8, :i).com +oined 2, other Israeli firms on the 6asdaq.
%8<'
;ead more about $enture capital in
Israel.
Canada%edit'
7anadian technology companies have attracted interest from the global venture capital community
partially as a result of generous ta) incentive through the Scientific ;esearch and 1)perimental
0evelopment (S;?10) investment ta) credit program.
%citation needed'
The basic incentive available to any
7anadian corporation performing ;?0 is a refundable ta) credit that is equal to ,3- of BqualifyingB
;?0 e)penditures (labour, material, ;?0 contracts, and ;?0 equipment). n enhanced 8A-
refundable ta) credit of available to certain (i.e. small) 7anadian-controlled private corporations
(77"7s). @ecause the 77"7 rules require a minimum of A3- 7anadian ownership in the company
performing ;?0, foreign investors who would li(e to benefit from the larger 8A- ta) credit must
accept minority position in the company, which might not be desirable. The S;?10 program does
not restrict the e)port of any technology or intellectual property that may have been developed with
the benefit of S;?10 ta) incentives.
7anada also has a fairly unique form of venture capital generation in its =abour Sponsored $enture
7apital 7orporations (=S$77). These funds, also (nown as ;etail $enture 7apital or =abour
Sponsored Investment Gunds (=SIG), are generally sponsored by labor unions and offer ta)
brea(s from government to encourage retail investors to purchase the funds. /enerally, these ;etail
$enture 7apital funds only invest in companies where the ma+ority of employees are in 7anada.
Eowever, innovative structures have been developed to permit =S$77s to direct in 7anadian
subsidiaries of corporations incorporated in +urisdictions outside of 7anada.
wit.erland%edit'
>any Swiss start-ups are university spin-offs, in particular from its federal institutes of technology
in =ausanne and Purich.
%93'
ccording to a study by the =ondon School of 1conomics analysing
&83 1TE Purich spin-offs over &3 years, about <3- of these start-ups survived the first five critical
years, resulting in an average annual I;; of more than 98-.
%9&'
Europe%edit'
1urope has a large and growing number of active venture firms. 7apital raised in the region in ,33A,
including buy-out funds, e)ceeded Q23 billion, of which Q&,.2 billion was specifically allocated to
venture investment. The 1uropean $enture 7apital ssociation
%9,'
includes a list of active firms and
other statistics. In ,332, the top three countries receiving the most venture capital investments were
the .nited Hingdom (A&A minority sta(es sold for Q&.F5 billion), Grance (&<A deals worth Q5FA
million), and /ermany (,3F deals worth Q9,5 million) according to data gathered by =ibrary Eouse.
%98'
1uropean venture capital investment in the second quarter of ,33F rose A- to Q&.&9 billion from the
first quarter. Eowever, due to bigger si!ed deals in early stage investments, the number of deals was
down ,3- to ,&8. The second quarter venture capital investment results were significant in terms of
early-round investment, where as much as Q233 million (about 9,.5- of the total capital) were
invested in &,2 early round deals (which comprised more than half of the total number of deals).
%99'
In ,33F, private equity in Italy was Q9.,@.
%citation needed'
In ,3&,, in Grance, according to a study
%9A'
by GI7 (the Grench ssociation of $7 firms), Q2.&@ have
been invested through &,A95 deals (8<- in new companies, 2&- in new rounds).
study published in early ,3&8 showed that contrary to popular belief, 1uropean startups bac(ed by
venture capital do not perform worse than .S counterparts.
%92'
1uropean venture bac(ed firms have
an equal chance of listing on the stoc( e)change, and a slightly lower chance of a Btrade saleB
(acquisition by other company).
In contrast to the .S, 1uropean media companies and also funds have been pursuing a media for
equity business model as a form of venture capital investment.
=eading early-stage venture capital investors in 1urope include >ar( Tlus!c! of >angrove 7apital
"artners and 0anny ;imer of Inde) $entures, both of which were named onForbes >aga!ine*s
>idas =ist of the world*s top dealma(ers in technology venture capital in ,33F.
%9F'
*sia%edit'
India is fast catching up with the :est in the field of venture capital and a number of venture capital
funds have a presence in the country (I$7). In ,332, the total amount of private equity and venture
capital in India reached IF.A billion across ,<< deals.
%95'
In the Indian conte)t, venture capital
consists of investing in equity, quasi-equity, or conditional loans in order to promote unlisted, high-
ris(, or high-tech firms driven by technically or professionally qualified entrepreneurs. It is also
defined as Bproviding seedB, Bstart-up and first-stage financingB.
%9<'
It is also seen as financing
companies that have demonstrated e)traordinary business potential. $enture capital refers to capital
investmentL equity and debt Lboth of which carry indubitable ris(. The ris( anticipated is very high.
The venture capital industry follows the concept of Rhigh ris(, high returnS, innovative
entrepreneurship, (nowledge-based ideas and human capital intensive enterprises have ta(en the
front seat as venture capitalists invest in ris(y finance to encourage innovation.
%A3'
7hina is also starting to develop a venture capital industry (7$7).
$ietnam is e)periencing its first foreign venture capitals, including I0/ $enture $ietnam
(I&33 million) and 0GD $inacapital (I8A million)
%A&'
,iddle East and /orth *frica%edit'
The >iddle 1ast and 6orth frica (>16) venture capital industry is an early stage of development
but growing. The >16 "rivate 1quity ssociation /uide to $enture 7apital for entrepreneurs lists
$7 firms in the region, and other resources available in the >16 $7 ecosystem. 0iaspora
organi!ation Tech:adi aims to give >16 companies access to $7 investors based in the .S.
outhern *frica%edit'
This section does not cite any references or sources. "lease help improve this
section by adding citations to reliable sources. .nsourced material may be challenged
and removed. (March 2014)
The Southern frican venture capital industry is developing.
South frica, with the help of the South frican /overnment and ;evenue Service, has reali!ed the
necessity to follow the international trend of using ta) efficient vehicles to propel economic growth
and +ob creation through venture capital. Section &, D of the Income Ta) ct was updated to include
$enture 7apital 7ompanies allowing a ta) efficient structure similar to $7T*s in the .H. Section &, D
provides investors the opportunity to invest in $enture 7apital through a ta) efficient structure.
0espite the above structure /overnment needs to ad+ust regulation around intellectual property,
e)change control and other legislation to ensure that $enture 7apital succeeds in South frica.
7urrently, there are not many $enture 7apital Gunds in operation and it is a small community
however funds are available. Gunds are difficult to come by and very few firms have managed to get
funding despite demonstrating tremendous growth potential.
The ma+ority of the venture capital in Southern frica is centered around South frica and Henya.
Definition of 'Venture Capital'
Money provided by investors to startup firms and small businesses with
perceived long-term growth potential. This is a very important source of funding
for startups that do not have access to capital markets. It typically entails high
risk for the investor, but it has the potential for above-average returns.
Investopedia explains 'Venture Capital'
Venture capital can also include managerial and technical expertise. Most
venture capital comes from a group of wealthy investors, investment banks and
other financial institutions that pool such investments or partnerships. This form
of raising capital is popular among new companies or ventures with limited
operating history, which cannot raise funds by issuing debt. The downside for
entrepreneurs is that venture capitalists usually get a say in company decisions,
in addition to a portion of the euity.
Advantages and Disadvantages of
VC Financing
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While VC financing provides the benefit of significant
resources, costs include loss of ownership and autonomy.
KEY POINTS
With VC financing, companies can acuire large sums of capital that
!ould not "e possi"le through "an) loans or other conventional methods#
Venture capitalists provide expertise and industry connections that can
"e extremely valua"le#
$ccounting and legal costs ma%e securing a VC deal a difficult process# If
a deal is secured, VC investors !ill "e highly involved in deciding on the
company's strategic direction#
TERM
venture capital
&oney invested in an innovative enterprise in !hich "oth the potential for
profit and the ris) of loss are considera"le#
$dvantages' (he primary advantage of venture capita$ *nancing is an a"ility
for company expansion that !ould not "e possi"le through "an% loans or
other methods# (his is essential for start)ups !ith limited operating histories
and high upfront costs# In addition, repayment of VC investors isn't
necessarily an o"ligation li%e it !ould "e for a "an% loan# *ather, investors are
shouldering theinvest%ent ris% "ecause they "elieve in the company's future
success#
In addition to financial capital, venture capitalists provide valua"le expertise,
advice and industry connections# $ stipulation of many VC deals includes
appointing a venture capitalist as a mem"er of the company's "oard# (his !ay,
the VC firm has intimate involvement in the direction of the company#
Venture capital is also associated !ith +o" creation ,accounting for -. of /0
GD12, the %no!ledge economy, and used as a pro+! measure of innovation
!ithin an economic sector or geography#
Disadvantages' 0ecuring a VC deal can "e a difficult process due to accounting
and legal costs a firm must shoulder# (he start)up company must also give up
some o!nership sta%e to the VC company investing in it# (his results in a
partial loss of autonomy that finds venture capitalists involved in decision)
ma%ing processes# VC deals also come !ith stipulations and restrictions in
composition of the start)up's management team, employee salary and other
factors# Furthermore, !ith the VC firm literally invested in the company's
success, all "usiness operations !ill "e under constant scrutiny# (he loss of
control varies depending on the terms of the VC deal#
"ros ? 7ons of $enture 7apitalist Gunding
rguably, the largest obstacle that lies in the path between a simple idea and a profitable"usiness
is cash. 1very new "usiness needs it, but depending on the state of the economy and the
perceived strength of the idea, whether you*ll obtain cash to move your idea off the drawing board is
often a great un(nown. #ne of the most venerated paths to securing startup funds is wor(ing
through investors such as venture capitalist firms or angel investors.
$enture capitalist firms, put simply, are corporations that ma(e calculated investments in the
startup companies that show the best potential of turning a profit. >ost firms of this nature focus on a
specific industry, so finding one that suits your particular business planshouldn*t be difficult.
Eowever, funding may come with stipulations that you may or may not be willing to obligate yourself
to. So be sure you*re very clear on all the terms before accepting investment funds.
Similarly, ngel investors offer startup funds, but on a much smaller scale. They are often private
individuals or small capital groups that invest smaller amounts of cash, but still more than your
average small business loan. Gurthermore, ngel investors are less regulated than venture capitalist
firms.
@oth types of investment groups encompass similar ris(s and rewards. @elow are some pros and
cons to consider before you decide whether to see( startup capital though such investors.
&ro
7ash 4 #bviously. $enture capitalist dollars far surpass most of what you can acquire via debt
capital or other financing venues. These companies have portfolios that range into the billions of
dollars. n influ) of high dollar figures into a fast growing corporation can mean the difference
between success and failure.
It*s not a loan 4 :al(ing down to your local ban( or credit union and ta(ing out a small business loan
may be more convenient and immediate, but it*s li(ely that your neighborhood branch cannot loan
you the amount of money you need to weather the storm should you fall on down times. dditionally,
should your loans go into default, itOs the start of a tic(ing time bomb to ban(ruptcy. $enture capitalist
dollars have no repay schedule. ;ather these monies are an investment that is repaid by the
profits !our co%pan! generates. This eliminates repayment of debt as a cost of doing business.
Con
7ontrol 4 Jou may lose it, depending on how much cash you accept and how early on in the process
you acquire the venture capital. #n occasion, angel investors will invest cash in a concept before it*s
an actual company in e)change for a good deal of control over how the formed corporation is
managed. s( yourself before you accept an offer of IA33,333 if it*s worth 23- of your company.
This equals the total loss of control.
"rofit Share 4 The very nature of ta(ing money from outside sources means you will see a drastic
cut in the percentage of the profits your company will (eep for itself if it does succeed. @efore ta(ing
investment dollars from an angel investor or $7 firm, consider if your company will receive more or
less money when all parties have been paid their share. It*s not unheard of for a company to forgo
high dollar investment, counting on smaller scale success to generate more income than they would
actually receive after paying out their obligation to investors.
ummary
There are definitely pros and cons of wor(ing with venture capitalist firms and angel investors, and
the bottom line can be summari!ed li(e thisC Jou get the needed cash, but you run the ris( of losing
control of your company. =oo( over your "usiness p$an and carefully decide whether this option
suits !our "usiness
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