Venture Capital Market

12 Key excerpts on "Venture Capital Market"

• 

  eBook - ePub

  The Venture Capital Deformation

  Value Destruction throughout the Investment Process

  • Darek Klonowski(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  © The Author(s) 2018 Darek Klonowski The Venture Capital Deformation https://doi.org/10.1007/978-3-319-70323-7_1

  Begin Abstract

  1. Venture Capital: A Closer Look Behind the Curtain

  Darek Klonowski 1 

  (1) Brandon University, Brandon, Manitoba, Canada

   

  End Abstract

  Venture Capital: Definitions, Characteristics, and Forms

  Although the definition of venture capital has evolved over time, it can be broadly defined as the provision of capital and know-how by institutional investors to entrepreneurial firms. English language dictionaries describe venture capital as a business endeavor involving chance, risk, or even danger, and outline venture capital as money invested or earmarked for acquisition of shares, especially those of new and speculative entrepreneurial firms. Webster’s dictionary, for example, predominantly defines venture capital as a very risky investment. The Collins English Dictionary characterizes venture capital as financing directed toward potentially high-return investment opportunities, which may be totally lost. On the other hand, business dictionaries (such as the Cambridge Business English Dictionary , or A Dictionary of Business and Management ) categorize venture capital as a search for significantly above-average and long-term investment returns achieved through equity ownership with risky start-ups and emerging or expanding firms.

  It is important to differentiate between the various financial terminologies used to describe the act of investing into private firms. Let’s present the key variations among definitions used in Europe and the United States (the US)—the major Venture Capital Markets. The National Venture Capital Association (NVCA) in the United States defines venture capital as a method of financing early-stage entrepreneurial firms within the fastest growing sectors of the economy. The term “venture capitalist” normally describes a financial institution focused on investing into early-stage and expanding entrepreneurial firms. The phrase “private equity” defines larger expansion transactions and buyout deals. Private equity may also refer to investment cases related to infrastructure, real estate, distressed situations (such as debt restructuring), explicit sectors of the economy (natural resources, infrastructure, energy, military, and health services), or government-owned firms. US institutional investors have historically preferred to invest in early-stage entrepreneurial firms; hence, their investments have been regarded as venture capital. In contrast, Invest Europe (IE), formerly known as the European Private Equity and Venture Capital Association (EVCA) , defines private equity as equity provided to entrepreneurial firms not quoted on a public stock exchange. Consistent with IE’s definitions, the terms venture capital and private equity mean financing used to develop new and innovative products and services, support working capital needs, make acquisitions, or strengthen the firm’s balance sheet. Financing from private equity can be utilized to address ownership and management issues through the implementation of leveraged buyout transactions. Venture capital, on the other hand, is broadly defined by IE as capital co-invested alongside the entrepreneur for the purpose of providing capital and know-how to firms in the early stages of development (including seed, start-up, and first-stage expansion). IE defines venture capital as a subset of private equity where investments are made during the early stages of new venture development. European investors have historically pursued later-stage expansion deals and therefore prefer using the term private equity to signify investments in private firms. To simplify matters, this book uses the term venture capital as the primary description of investing into private firms. This means that we include private equity

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Venture Capital, Islamic Finance and SMEs

  Valuation, Structuring and Monitoring Practices in India

  • M. Durrani, G. Boocock(Authors)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Once investments have been made, venture capitalists contribute their business experience and industry knowledge gained from helping other young companies. Entrepreneurs with a technical orientation but little or no general management experience often require assistance in establishing appropriate managerial systems and controls (Ehrlich et al., 1994). This expertise and guidance across a whole range of issues has added value to many projects in the US and Western Europe (Fenn and Liang, 1998), and there is great potential for repeating this process in the emerging market economies. This chapter offers an introduction to venture capital; theoretical issues are left to later chapters. It opens with a definition of VC then presents a brief history of this concept. The main types of investor are discussed, before the global spread of VC is considered. The final section draws together these themes by summarizing the macroeco- nomic impact of VC and exploring how and why governments have supported the development of national VC industries. 4.2 Definition of venture capital Shilson (1984, p.208) defines VC as: ‘an activity by which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain long term capital gains’. 36 Venture Capital, Islamic Finance and SMEs The original ethos of VC was support for high-growth, high-risk ventures (typically new companies and/or technologies). The following characteristics emerged as the bedrock of this form of finance: • Equity-based financing; • Funding linked to managerial assistance; • Rewards through capital gains rather than running (dividend) yields; • Investment in young and start-up companies hence … • Long-term, patient investment. VC still comprises longer-term finance in unquoted companies where the primary reward is an eventual capital gain.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Crowdfunding for SMEs

  A European Perspective

  • Roberto Bottiglia, Flavio Pichler, Roberto Bottiglia, Flavio Pichler(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Unlike the investors described previously, this category is made up of professional investing institutions, raising and investing funds under the supervision of financial regulation. These investing institutions, not rarely listed on the capital markets, are professionally managed by qualified asset managers and are subject to tight information disclosure requirements. They include pension funds, investment banks, commercial trusts, endowment funds and hedge funds.

  6.4.1 Venture Capital Firms

  Venture capital is a large segment of the equity financing industry, alongside private equity and capital markets. Such firms are institutional investors focused on start-up companies as their preferred asset class in which to invest the capital they raise. The most widespread legal structure adopted all over the world is by far constituted by mutual investment funds and closed-end funds, which are managed by dedicated management companies.

  Another common legal structure allowing venture capital activity is the ‘limited partnership’, where general partners manage the capital raised and the investment/divestment process and limited partners just provide capital as financial investors.

  Venture capitalists focus most on high-tech, entrepreneurial ventures with the potential for high growth in domestic and international markets. For this reason, they usually operate individually in the start-up stage and on a collective basis in the seed stage (through syndicate/club deals).

  The high profitability expectations in terms of internal rate of return (IRR), which compensates for the intrinsic high operating risk of the target investment, is pursued by supporting companies in their value creation path (a ‘hands-on’ approach). This implies, among others, sharing relationships with the business and financial community, supporting the board in making strategic decisions, opening new markets, involving better quality company managers and stimulating growth strategies through mergers and acquisitions.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Venture Capital For Dummies

  • Nicole Gravagna, Peter K. Adams(Authors)
  • 2013(Publication Date)
  • For Dummies

    (Publisher)

  In this book, you discover which companies benefit most from venture capi-tal, how venture capital works, how to connect with VCs, and when the time comes, how to pitch to investors. We also describe the whole start-up funding landscape and explain how to navigate it wisely. This chapter introduces you to venture capital and provides a general overview. Consider it your gateway to this exciting world. Understanding Venture Capital and Venture Capitalists Venture capital is a very specific type of investment for a very unique type of company. Venture capital–backed companies are expected to grow extremely fast — much faster than other companies. In addition, VC-backed companies 8 Part I: Getting Started with Venture Capital are sold after five or seven years in an acquisition or on the stock market in an initial public offering (IPO). VC-backed companies have the potential to make millions (billions?) of dol-lars for investors and founders. Because of the huge windfall possibilities, a lot of people are interested in creating companies that are attractive to VCs. Nevertheless, venture capital is not a necessary part of building or growing your business. In fact, companies can do very well without venture capital and the involvement of venture capitalists. Technically speaking, venture capital is just like any other investment, an asset class. Venture capital investments are high risk and also potentially high return. Not all investors want to be involved with venture capital (sometimes called risk capital ) because of the level of risk involved. The following sections introduce you to the venture capitalists — the people who invest the money in start-up businesses — and the kinds of companies that are prefect for venture capital. Introducing venture capitalists Venture capitalists are the professional investors who give start-up companies money in exchange for equity in the company.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Kick-starter.com

  The definitive European Internet start-up guide

  • S. Harpin(Author)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  These preferences include the amount of capital you require, your industry sector and location, and your company’s investment stage. Investment stages range from seed, start-up, early stage, and expansion to MBI, MBO and rescue/turnaround situations. How venture capital works VCs provide equity capital for high-risk business opportunities. They hope to acquire extraordinary returns on their investments, primarily through the appreciation of the underlying value of their equity (that is, their stake in an entrepreneur’s business). If you want to use venture money, then you will have to prove high growth potential. The recent focus of venture money in the technology industries reflects the fact that high growth potential is obvi- ously greater in a high growth market. VCs raise money in many different ways. The most common is from a set of limited partners such as pension funds, insurance companies and major companies. They will put all of this money together, call it a fund and invest the money on their behalf, seeking returns of over 40%, with individual Internet investments doubling every year. Investors in the fund, the ‘limited partners’, will receive up to 80% of the economic benefit while the general partners, the VCs themselves, share the remaining 20%. In addition the VC will take a management fee of 1–3% of the fund. To achieve these incomes the general partners have to limit the number of failures in their investment portfolio. We can explain this using the ‘5,000, 30, 10 and 1’ rule. Of the 5,000 business plans reviewed, 30 are evaluated more closely and perhaps ten are invested in of which one becomes a successful Initial Public Offering (IPO). The others may be acquired, the management may buy out the VC or they may fail. While VCs recognise that some investments may become ‘dogs’, they never invest in a bad deal and always seek the ‘pearls’.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Venture Capital in the Changing World of Entrepreneurship

  • John E. Butler, Andy Lockett, Deniz Ucbasaran(Authors)
  • 2017(Publication Date)
  • Information Age Publishing

    (Publisher)

  The contribution of venture capitalists in the innovation and entrepre-neurial process lies in the fact that they play a key role in forging linkages among a diverse set of organizations—investment banks, universities, large 52 W.T.H. KOH corporations, entrepreneurial companies—that are critical to the innova-tion process (Florida & Kenny, 1988). This intricate set of overlapping net-works allows venture capitalists to tap into a rich channel of information flow, and enables them to manage many of the risks associated with enter-prise formation. It is this informational access within the industry networks that allows venture capitalists to reduce the informational asymmetries in the investment process, thereby lowering the risk barriers for undertaking private investments. As a result of their participation in different industry networks, venture capitalists are well positioned to spot and create nascent investment oppor-tunities in different sectors of the economy. Partners and other investment officers in venture capital firms are often experienced managers who have run companies or were former entrepreneurs who had successfully founded companies. By participating in scientific breakthroughs and the formation of new companies, venture capitalists catalyze and accelerate technological progress. The importance of venture capital in the economic growth process can be seen in the contribution of Silicon Valley—a global venture capital hub—to the U.S. economy. As of 1999, the U.S. venture capital firm Kleiner, Perkins, Caufield, and Byers (as reported in Kenny et al., 2002) reported that the portfolio firms that it had funded since its inception in 1973 had a total market capitalization of $657 billion, revenue of $93 bil-lion, and employed 252,000 people. According to a study by Barry, Muscarella, Peavy, and Vetsuypens (1990), 30% of the market value of firms going public between 1978 and 1987 had received venture capital financing.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Venture Capital Law in China

  • Lin Lin(Author)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  1 An Introduction to the Venture Capital Market in China 1.1 The Engineering Problem Venture capital (VC) is widely recognised as a powerful engine that can drive a nation’ s innovation, job creation, knowledge economy, and eco- nomic growth. 1 Governments around the world, such as Germany, 2 Australia, 3 Japan, 4 Israel, 5 Chile, 6 Taiwan, 7 and Singapore, 8 have tried to 1 See J. Lerner, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – And What to Do About It (New Jersey: Princeton University Press, 2009), Chapter 3. R. J. Gilson, ‘Engineering a Venture Capital Market: Lessons from the American Experience’, Stanford Law Review, 55(1067) (2003), 1068–1107. On the importance of VC, see generally P. A. Gomers and J. Lerner, The Money of Invention: How Venture Capital Creates New Wealth (Cambridge, MA: Harvard Business Review Press, 2001); Marco Da Rin et al., ‘The Law and Finance of Venture Capital Financing in Europe: Findings from the RICAFE Research Project’, European Business Organisation Law Review, 7 (2006), 525–547. 2 See R. J. Gilson, supra note 1, at pp. 1094–1096. 3 See ‘The Treasury and the Department of Industry, Innovation, Science, Research and Tertiary Education of Australia, Review of Venture Capital and Entrepreneurial Skills’ (2012), available at http://ict-industry-reports.com.au/wp-content/uploads/sites/4/2013/ 09/2012-Venture-Capital-and-Entrepreneurial-Skills-DIISRTE-Dec-2012.pdf. 4 See Zenichi Shishido (2009) ‘Why Japanese Entrepreneurs Don’t Give Up Control to Venture Capitalists’, online: SSRN, http://bit.ly/2w8JrdA. 5 See R. J. Gilson, supra note 1, at p. 109. See also J. Lerner, supra note 1. (New Jersey: Princeton University Press, 2009). 6 See R. J. Gilson, ibid., at p. 1098. 7 Christopher J.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Patterns of Entrepreneurship Management

  • Jack M. Kaplan, Jack McGourty(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  If the company is successful and achieves a high value upon exit, then everyone wins. If the VC firm fails to help the company and does not make sure that the management is well motivated, they and their investors lose too. So negotiating with a VC firm becomes easier if the entrepreneur understands 228 EQUITY FINANCING FOR HIGH GROWTH these motivations and realizes that the aim is to make the pie bigger for everyone rather than to make the entrepreneur’s slice smaller. Venture capital firms look for generally larger deals and more impressive returns than angel investors. Also, angels will invest in the early stages of a company, whereas venture capitalists usually do not invest until a product or service can be demonstrated or a prototype is ready for commercialization. Some venture capital firms specialize in very early-stage fund- ing, but this is the exception rather than the rule. Many venture capital firms want to invest where the time horizon is relatively short, since they must liquidate their investments and pro- vide cash returns to their investors over a comparatively short period of time. Some venture capital firms focus on specific industries or stages of investment, such as bridge financing. In addition to raising capital, venture capitalists can be a valuable asset to the company in terms of their contacts, market expertise, and business strategy. As with angels, it is imperative to locate potential investors whose skills, experience, and reputation complement the entrepre- neur and the company. The most critical element in a successful venture capital relationship is the close alignment of the entrepreneurs’ objectives with those of the venture capitalists.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Managing High-Tech Start-Ups

  • Duncan MacVicar, Darwin Throne(Authors)
  • 2013(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  Capital availability is also subject to the general financial cli-mate. For instance, as the 1980s came to a close, the U.S. banking system was straining to stay profitable and federal regulators were scrutinizing bank activities very closely. This situation limited banks' lending activities, which allowed many venture capitalists to assume an investment banking role by funding later stage businesses. As a result, the amount of money available for start-ups was significantly reduced. The business plan is your selling tool for raising money. It should describe the financial expectations for the company in detail in a form that is according to generally accepted accounting principles (GAAP). Most investors recognize that the financial projections are not cast in concrete, but they should reflect the most probable scenario you can imagine. The dominant focus of most business plans is on the market and product, but experienced investors place their bets on people more than product ideas. History has repeatedly shown that good people can take a mediocre product and make a successful business; inca-pable people can take even the best of ideas down the tube. So if you think you have a great new idea and are having trouble raising the money to finance it, take a close look at the founding team. You may have to make some changes. Be sure that you understand the capital structure that you want to establish for your company. How much equity and how much debt financing are you going to need? What classes of stock are you going to issue? You will usually want more than one class of stock so that insiders can receive stock options at a lower price than investors paid. This can Funding Your Venture 59 be handled with preferred stocks of different classes and a common class. Get help from your attorney and accountant to determine the best structure. If it is not done right, you may have trouble raising money in later rounds of financing.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Technological Entrepreneurship

  • Philip Phan(Author)
  • 2001(Publication Date)
  • Information Age Publishing

    (Publisher)

  Domestic venture capital firms may be better placed to offer closer involvement to enable such entrepreneurs to establish their businesses. Foreign venture capital firms may be better positioned to provide more strategic growth assistance once the business has become established, such as through iden-tifying potential acquisitions. These differences have clear implications for entrepreneurs in technology-based ventures since this heterogeneity of pro-vision suggests a need for care in selecting venture capital partners whose style of involvement meet their needs. There may be a significant role for intermediaries in aiding entrepreneurs in this search process. For researchers, the results of the study provide further evidence of dif-ferences between Venture Capital Markets and highlight the dangers of over-generalization both from one market to another and within markets. These differences apply not just to comparisons between developed and undeveloped economies, but also within broader geographical areas. The findings highlight the need to consider the behavior of different types of venture capital firms, especially with respect to foreign and domestic play-ers within a particular country. This study has focused solely upon India. The small size of the Indian venture capital firm population means that, although the study obtained a high response rate, the findings need to be seen as exploratory. Neverthe-less, the results do suggest a number of opportunities for further research. Further research might usefully test whether these findings are generaliz-able to other developing and developing markets. As seen earlier, there are significant differences between the countries of Asia with respect to GDP per capita, stock and Venture Capital Market development and legal and financial systems.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Comparative Corporate Governance in China

  Political Economy and Legal Infrastructure

  • Guanghua Yu(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  143 ACE-Net is a nation-wide internet-based listing service that provides information about small and growing companies seeking equity capital from US$250,000 to US$5 million to qualified angel investors. This system is managed by a network of non-profit, mostly university-based operators. Under this system, a qualified angel investor gets a password through which he can receive information on the issuance of shares by small companies in the state where the investor lives. These angel investors are able to contact the issuers directly to purchase the shares. The Security Exchange Commission exempted the network to register as a national securities exchange. Those non-profit network operators do not have to register as broker dealers. This example and the developed over the counter (OTC) market illustrates that a developed OTC market is very important to the development of a Venture Capital Market. National securities exchanges alone with very high listing requirements are not able to help the development of an efficient Venture Capital Market.

  Fourth, the lesson from the South Korean experience shows that South Korean law cannot efficiently promote the Venture Capital Market, proving that it is important to know what the incentive and monitoring contractual arrangements are between venture capitalists and venture capital fund providers and also between venture capitalists and venture entrepreneurs. Typically, the documentation includes a shareholders’ agreement that sets out the specific powers and rights that the private equity investors should have and the conditions that need to be satisfied. In many cases, the agreement is quite different from the usual joint venture/shareholders agreement between two commercial parties.144 The Chinese government can also promote standard contract terms in venture capital financing by making the forms available on the Internet.145

  Conclusion

  In this chapter an examination has been made of the current direction in which the Chinese government has tried to develop a stock market oriented Venture Capital Market. New incentive schemes are being developed there. However, the task to remove artificial barriers for the establishment of an efficient capital market through legal means is still large. Deregulating the entrance restrictions of capital market players and establishing ex post monitoring devices to penalize misconduct are indispensable towards the development of an efficient capital market. Furthermore, a series of concomitant legal and social practices rather than direct government involvement in venture capital investment should be nurtured as well. The burden on the Chinese government is very large and the road before the government is also long to build an efficient Venture Capital Market. The construction and operation of an efficient Venture Capital Market requires the necessary institutions within which a Venture Capital Market can operate. Some of the institutions are easy to build while others may require decades’ worth of effort. The experience of other countries in the establishment and operation of Venture Capital Markets holds lessons for China in the sense that some of the institutions can be transplanted. Other institutions such as the court system, civil remedies, procedural rules like discovery and class action, however, are very hard to replicate.146

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  What Every Engineer Should Know About Starting a High-Tech Business Venture

  • Eric Koester, Philip A. Laplante(Authors)
  • 2009(Publication Date)
  • CRC Press

    (Publisher)

  This process of raising capital from institutional investors will likely prove to be time consuming, frustrating, intense, and, hopefully, successful. With nearly 800 venture capital firms, there are numerous opportunities to fi nd fund-ing. However, targeting the best choices for the business will provide the strongest opportunities. ACCORDING TO VENTURE CAPITALISTS What is the most common reason why you have declined to invest in a company? Lack of an experienced, complete management team — 40% • Company does not fit VCs investment criteria, the industry(ies) on which the • VC focuses, or the geographic area the VC invests within — 17% Size of the market the company was in, or the need in the market that the • product serves, was too small — 13% Company has no competitive advantage or has a noncompelling technology • — 13% Unclear business execution strategy — 10% • Company is too small and will not grow large enough — 10% • Company is too early stage — 8% • Target industry has no barriers to entry for competitors — 6% • Risk is too high relative to the projected return — 6% • Company has low margins or the industry is facing margin pressure — 4% • Entrepreneur put too high a valuation on his company’s stock — 4% • Other common reasons included the following: • Company is not profitable ° Company faces huge, entrenched competitors ° Entrepreneur was not referred to the VC firm ° Venture Capital 253 Entrepreneur did a poor job presenting the company in a meeting ° Entrepreneur viewed the VC only as a source of money, not as a value ° added partner Source: Profit Dynamics Inc. The Fundraising Process One of the most difficult decisions a business must make is deciding when to begin the fundraising process.

  Sign up to read

  Learn more about book