Technology & Engineering
Venture Capital
Venture capital refers to funding provided by investors to startup companies and small businesses with potential for long-term growth. In exchange for the investment, venture capitalists typically receive equity in the company. This form of financing is often sought by technology and engineering firms to support research, development, and expansion efforts.
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eBook - ePubThe 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_1Begin Abstract1. Venture Capital: A Closer Look Behind the Curtain
End AbstractDarek Klonowski 1(1) Brandon University, Brandon, Manitoba, CanadaVenture 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
eBook - PDFVenture 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.
- Tan Chwee Huat, Kwan Kuen-Chor, Tan Chwee Huat, Kwan Kuen-Chor(Authors)
- 2014(Publication Date)
- Butterworth-Heinemann(Publisher)
Chapter 8 Venture Capital Ang Kong Hua and Tan Chwee Huat 8.01 Introduction Historically, Venture Capital refers to the funds invested in new undertak-ings by individuals or institutional investors who seek high rewards in re-turn for the high risks inherent in the new ventures. It involves the investment of long-term risk capital by financiers who expect to receive capital gains rather than or in addition to recurrent income such as interest or dividend. In recent years, a new generation of professional venture investors has emerged. The main focus of these professional investors is to provide seed, start-up and early-stage financing to new and young companies with growth potential. Increasingly, Venture Capitalists also fund the expan-sion of companies with proven viability but without access to stock markets or other institutional sources of funds. They also provide finance for management buyouts and for revitalizing ailing divisions of major corporations. A feature of venture investing is that the financier usually has a continuing involvement in the undertaking after making the investment. This does not mean interference in the management of the business, but the Venture Capitalist seeks to contribute to the growth of the business by his involvement and by exerting a level of influence on the direction and development of the business. A Venture Capital investment is not easily liquidated. It is not subject to repayment as with a bank loan or an overdraft. The financial rewards are realized only when the venture company is sold or gets listed on a stock exchange. The Venture Capitalist may lose part or all his investment if the venture fails. Although traditionally, Venture Capital or risk capital in a sense has been available for centuries, it was only during the last two decades or so that an institutionalized form of Venture Capital developed. The evol-ution of Venture Capital has been essentially an American phenomenon. 133
eBook - PDF- Nicole Gravagna, Peter K. Adams(Authors)
- 2013(Publication Date)
- For Dummies(Publisher)
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. They provide both liquid capi-tal and support for a company during a fundamental time in the growth of the business. Venture Capitalists are responsible for bringing together large amounts of money for an investment fund (called raising a fund), which is then used to invest in companies, hand-picked to become part of the VC’s (or VC firm’s) portfolio. The VC and his team choose companies that are capable of growing very large very fast, earning the VC firm many times its initial investment. Venture Capitalists know that not every company in their portfolio will pro-duce a huge return on investment, and so to tip the hand in their favor, VCs do two things: ✓ They invest in companies that have excellent odds of being successful venture-quality companies. ✓ They support the companies in their portfolio with resources like men-torship, board members, and strong management. Companies that work with Venture Capital give up an element of control in exchange for the opportunity. Most founders find the exchange worth it for the added capital, support, and connections that come with an investment of Venture Capital. 9 Chapter 1: Nothing Ventured, Nothing Gained: Venture Capital Basics Knowing what VC firms look for Venture Capital firms tend to specialize. They focus on a specific stage of company and one or two industries. A VC firm may focus on companies in the medical device field, for example, or maybe in clean energy. Because VCs deal with risky investments, they have to make sure that they understand their chosen industry and technologies inside and out.
eBook - ePub- Guy Fraser-Sampson(Author)
- 2011(Publication Date)
- Wiley(Publisher)
You will notice the words ‘if appropriate’. In these two words lie the further level of distinction between what Venture Capital actually is and what the misinformed believe it to be. Venture Capitalists are looking for a new application of an existing technology that addresses a commercially significant need or problem. Ideally, the entrepreneurs will have worked in an industry sector, and will there have experienced a particular problem to which they believe they now have the answer; this will, for example, be the classic model of a Venture-backed enterprise software company. Unfortunately, many ideas which are put forward for Venture funding are technology focused rather than commercially focused. As one former chairman of the Irish Software Association said a few years ago: ‘every year I see two hundred solutions in search of a problem’. The world is full of engineers who believe they can build a better mousetrap, but it is not the function of Venture Capital to support their endeavours unless somebody somewhere has a significant commercial interest in catching mice.The words ‘commercially significant’ also merit further consideration, since it is here that much of a Venture firm’s due diligence may take place. If any Venture company is to produce the sort of potential returns for its investors that the Venture model requires (we will see later that this is about 25 times capital invested), then it needs to be able to grow quickly to a significant size and thus the size of the potential market represented by the identified need or problem is crucial, as is the likely presence of any competitors. The word ‘size’ here not only refers to the totality of the market, but also the number of participants; a product or service for which there may only be a dozen customers worldwide (albeit any customer is likely to be prepared to pay large amounts of money for it) is clearly an inherently riskier proposition than one which can be marketed to tens of thousands.
eBook - PDF- John B. Vinturella, Suzanne M. Erickson(Authors)
- 2003(Publication Date)
- Academic Press(Publisher)
p. 465. Venture Capital 195 them greater comfort with the venture in that they are better equipped to offer guidance to the management team and better able to assess the risks involved. Investors often look for companies they can leverage off of other portfolio companies that they hold. Synergies between portfolio companies (complementary technologies, for example) will increase the likelihood of a firm being funded. Investors will often require that management accept a significant amount of risk as part of the deal. In most cases, provisions are made specifying under what circumstances the investor could take charge of the business. Venture Capitalists are easier to locate than angel investors; the major firms are listed on the National Venture Capital Association (NVCA) web site (www.nvca.org). NVCA also provides links to Venture Capital organiza-tions around the world. While in the United States the highest concentra-tions of Venture Capitalists occur in Silicon Valley, the Northeast, and around Austin, Texas, there are Venture Capital funds operating across the country in many different states. Most funds will explain their investment focus (e.g., biotechnology, high-tech, retail, on their web sites). It pays to pre-screen Venture Capitalists to make sure you do not waste time on a firm with no interest in your industry. CREDIBLE FINANCIAL PROPOSALS A MOUNT AND S TAGING OF I NVESTMENT Few investment opportunities are so compelling that the amount that can be raised is unlimited. Generally, the business plan describes and attempts to justify the amount of money the management team feels is necessary to achieve the stated objectives and how these funds will be used. It cannot be taken for granted that these projections will be accepted in total by the prospective investors, or that investors will provide all that is needed at the outset.
- John E. Butler, Andy Lockett, Deniz Ucbasaran(Authors)
- 2017(Publication Date)
- Information Age Publishing(Publisher)
An investment-based growth strategy emphasizes technology acquisition by moving up the technology ladder, as well as the accumulation of physical and human capital. Finally, for econo-mies that transition to an innovation-driven growth strategy, a creative workforce and a strong entrepreneurial culture are critical components of an innovation-driven economic growth strategy. In order to remain com-petitive, countries at the technological frontier must continually add more value to the goods and services that they produce and introduce new prod-ucts and ideas. By funding, catalyzing and accelerating technological progress, Venture Capital can play an important role in an innovation-driven growth strategy. In essence, Venture Capital combines the provision of finance with active support and mentoring of young startup companies. Investors in Venture Capital do so for various reasons, such as diversification, low correlation with public market returns, and the potential for high risk-adjusted returns. As for entrepreneurs, they turn to Venture Capital to finance the development of new ideas and technologies and gain access to professional management skills and strategic support by experienced Venture Capital-ists. Unlike angel investors, who provide seed financing but typically do not have the operational infrastructure to monitor companies, Venture Capital-ists can play a multifaceted role in forging linkages among a diverse set of agents—investment banks, universities and entrepreneurial companies— that are critical to the innovation process. As a model of innovation and new firm creation, the Venture Capital model overcomes some of the disadvantages of sporadic individual entre-preneurship and the inertia sometimes observed in corporate-based inno-vation. Kortum and Lerner (2000) examined the impact of Venture Capital on patented inventions in the United States across 20 industries over three decades.
eBook - PDFKick-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’.
eBook - ePubRaising Capital
Get the Money You Need to Grow Your Business
- Andrew Sherman(Author)
- 2012(Publication Date)
- AMACOM(Publisher)
CEO ’s “burning platform,” key agenda, and top priorities. How does your business plan solve a problem or create an opportunity for this particular strategic investor? What’s in it for the investor? What long-term sustainable competitive advantage will your technology, product, service team, or channel help the investor build and maintain?The corporate Venture Capital divisions are among the fastest-growing segments of the Venture Capital industry as the larger technology companies try to find more creative ways to engage in deals with their more nimble counterparts and deploy the nearly $2.1 trillion that was sitting on the sidelines as of the fall of 2011. In 1996, there were only 49 companies making Venture Capital investments via formal “stand-alone” investment divisions; by 1999, there were nearly two hundred, accounting for more than 15 percent of all Venture Capital investments. However, by 2001, corporate Venture Capital funds had become much more cautious and focused on highly strategic deal flow and smaller investment commitments. Many suffered painful write-offs of their investments in companies that had failed or had dropped significantly in value. For example, Intel’s Venture Capital division invested $1.3 billion in 300 start-ups in 2000, but that figure had dropped by more than half in 2004. While not approaching the levels seen in 2000, from 2004 to 2008, corporate Venture Capital has represented approximately 7 to 10 percent of all Venture Capital investments, with between $1.5 billion and $2.6 billion invested each year. In 2009, total corporate investment in Venture Capital fell to its lowest level since 2003 ($1.3 billion). In 2010, there was gradual improvement in corporate Venture Capital transactions, with approximately $1.9 billion being invested as well as the entry of new players into the market, such as ABB Technology Ventures, a division of ABB
eBook - PDF- Duncan MacVicar, Darwin Throne(Authors)
- 2013(Publication Date)
- Butterworth-Heinemann(Publisher)
The return a Venture Capitalist seeks is about ten times the amount invested within five or six years from the investment. This return may seem oudandish, but the high failure rate of start-up companies causes it to average out about right. In the heyday of Venture Capital—the early 1980s—only 5% of invest-ments actually made returns of ten times or greater. In your business plan, the Venture Capitalist will look for three important points beyond finances: management team, strategy, and technological edge. Of these three, the management team is by far the most important, so be prepared to undergo considerable grill-ing from Venture Capitalists on the qualifications of your manage-ment team. They will be looking for related management experi-ence and perhaps training inside big companies. You should check your team's references yourself to insure only positive re-sponses. You should also insure that the CEO identified in your plan is of suf-ficient stature to satisfy the Venture Capitalists' tough requirements. This news is not all bad, since Venture Capitalists are an excellent source of contacts to help you fill key positions on your team. Advantages of Venture Capital Funding Venture Capital firms have access to large sums of money. It is best to have initial investors who are capable of larger investments in future rounds, so Venture Capital firms are ideal in this regard. If a Venture Capitalist cannot commit additional funds later on, he or she can often find other venture firms to assist. Venture Capital firms offer prestige to their portfolio companies. This is especially true of the larger, well-known firms. Prestige can 68 Managing High-Tech Start-ups mean a lot to a start-up company when it comes to borrowing money, entering into a lease, or incurring other financial obli-gations. It can also have a beneficial effect in relationships with customers, vendors, or other business partners.
eBook - PDFAccelerating Energy Innovation
Insights from Multiple Sectors
- Rebecca M. Henderson, Richard G. Newell, Rebecca M. Henderson, Richard G. Newell(Authors)
- 2011(Publication Date)
- University of Chicago Press(Publisher)
7.2.2 The Tools of Venture Capital Where, then, does the Venture Capital advantage come from? To address the information problems delineated in the preceding, Venture Capital inves-tors employ a variety of mechanisms, which seem to be critical in boosting innovation. The first of these is the screening process that Venture Capital investors use in selecting investment opportunities. This process is typically far more e ffi cient than the process that other funders of high-risk projects, such as corporate research and development (R&D) laboratories and government grant makers, typically use. For instance, most large, mature corporations tend to look at their existing lines of business when choosing projects to fund. Technologies outside the firm’s core market, or projects that raise inter-nal political tensions, often get shelved. In fact, many successful venture-backed start-ups are launched by employees who leave when their companies decline to pursue what these employees see as a promising technology. Numerous studies have documented that typical Venture Capital fund managers use an exhaustive process to assess the large number of business plans they receive each year. One of the pioneering studies (Wells 1974) described a typical process: 1) Conversations with Venture Capitalists that ask[ed firm] to look at company; 2) Checked personal references of controller, vice-president, and president; 3) Met with company’s founders and controller; 4) Con-versation with loan o ffi cer at major insurance company. The insurance company’s loan committee had turned down company’s request for fi-nancing even though the loan o ffi cer recommended it; 5) Conversation with company’s accountant . . . ; 6) Conversation with local banker who slightly knew the company; 7) Conversation with banker who handles company’s account; 8) Telephone conversation with director of company; 9) Talked to about 30 users; 10) Talked to two suppliers; 11) Talked to two competitors.
eBook - PDF- 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.
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