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Venture Capital

Venture Capital

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Published by: Mirtha Alou on May 16, 2012
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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 equity. Read more: http://www.investopedia.com/terms/v/venturecapital.asp#ixzz1uVaBFLfP

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. Example of this invesment is Twitter. In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Venture capital is also associated with job creation (accounting for 2% of US GDP),[2] the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. Every year, there are nearly 2 million businesses created in the USA, and only 600–800 get venture capital funding. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.[3] It is also a way in which public and private actors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-hows of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.[4]

Venture capitalists

By investing in the pool format. researchers) or those with business training or deep industry experience. in which case the firm's managers are known as managing members. such as state and private pension funds. which typically invest in companies with proven revenue. As a consequence. Venture capital firms in the United States may also be structured as limited liability companies. the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm. Venture capital firms typically comprise small teams with technology backgrounds (scientists.A venture capitalist is a person or investment firm that makes venture investments. thereby differentiating VC from buy-out private equity. most venture capital investments are done in a pool format. Investors in venture capital funds are known as limited partners. . where several investors combine their investments into one large fund that invests in many different startup companies. By definition. This constituency comprises both high net worth individuals and institutions with large amounts of available capital. and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. thus adding skills as well as capital. Diagram of the structure of a generic venture capital fund Structure Venture capital firms are typically structured as partnerships. VCs also take a role in managing entrepreneurial companies at an early stage. and thereby potentially realizing much higher rates of returns.

Associates will often have worked for 1–2 years in another field. insurance companies. other positions at venture capital firms include: • Venture partners — Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved. venture capitalists come from either an operational or a finance background. and each firm is different. Others prefer investing in established companies that need support to go public or grow. Although the titles are not entirely uniform from firm to firm. Some prefer operating locally while others will operate nationwide or even globally. The amount of help a VC provides can vary from one firm to the next. Roles Within the venture capital industry. and often considered a "partner-track" position. • • • . called funds of funds Types Venture Capitalist firms differ in their approaches. an associate may move up to the "senior associate" position and potentially principal and beyond. the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". such as investment banking or management consulting.university financial endowments. There are multiple factors. broadly speaking. but. such as investment banking. VC expectations often vary. Some EIRs move on to executive positions within a portfolio company. Some may want a quicker public sale of the company or expect fast growth. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience. foundations. or fledgling companies. management consulting. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm although neither party is bound to work with each other. and pooled investment vehicles. Some invest solely in certain industries. Associate — This is typically the most junior apprentice position within a venture capital firm. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Principals will have been promoted from a senior associate position or who have commensurate experience in another field. Entrepreneur-in-residence (EIR) — EIRs are experts in a particular domain and perform due diligence on potential deals. After a few successful years. Principal — This is a mid-level investment professional position. Typical career backgrounds vary. or a market of particular interest to the strategy of the venture capital firm. Some of the factors that influence VC decisions include: • • • • Business situation: Some VCs tend to invest in new ideas.

In such a fund. and certain groups are able to command carried interest of 25–30% on their funds. Carried interest — a share of the profits of the fund (typically 20%). after which the focus is managing and making follow-on investments in an existing portfolio. Therefore. their mutual interest for returns will increase the firms motivation to increase profits. have more knowledge and experience. and to cut exposure to management and marketing risks of any individual firm or its product. the general partners receive an annual management fee equal to up to 2% of the committed capital. When there is an owner relation between the venture capital providers and receivers. so they know what works and what does not. • . What these venture capitals do are to facilitate and enable the start up phase. Compensation Main article: Carried interest Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement): • Management fees — an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations. Venture capitalists have invested in similar firms and projects before and. identify problems. The remaining 80% of the profits are paid to the fund's investors[29] Strong limited partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership. • • Structure of the funds Most venture capital funds have a fixed life of 10 years.[29] In a typical venture capital fund. The investing cycle for most funds is generally three to five years. a portfolio firm can initiate growth. and find recipes to overcome them. paid to the private equity fund’s management company as a performance incentive. with the possibility of a few years of extensions to allow for private companies still seeking liquidity. therefore. There are substantial penalties for a limited partner (or investor) that fails to participate in a capital call. This knowledge and experience are the outcomes of the experiments through the successes and failures from previous ventures. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance. through venture capital involvement. the investors have a fixed commitment to the fund that is initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments.Need of venture capital • There are entrepreneurs and many other people who come up with bright ideas but lack the capital for the investment. and how it works.

many venture capital firms will only seriously evaluate an investment in a start-up company otherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. by the time the fund cashes out. One of the reason to look for alternatives to venture capital is the problem of the traditional VC model. or manufacturing industries. or may have a prior relationship with the entrepreneur. This practice is called "bootstrapping". There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments typically in the $0 to $250. larger venture capital firms usually have several overlapping funds at the same time. Grow VC. and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know. Furthermore. The traditional VCs are shifting their focus to later-stage investments.000 to $1 million. This gap is often filled by sweat equity and seed funding via angel investors as well as equity investment companies who specialize in investments in startup companies from the range of $250. for example. or even just to avoid the dilutive effects of receiving funding before such claims are proven. businesses may more cheaply be able to raise debt to finance their growth. While such an approach has long precedents in the sphere of charity. many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. which seek to utilise securitization in structuring hybrid multi- . To achieve this. many entrepreneurs seek seed funding from angel investors. doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized venture capital funds. This funding gap may be accentuated by the fact that some successful VC funds have been drawn to raise ever-larger funds. whom the general partners may not know well. Some crowd funding models are also being applied for startup funding. requiring them to search for correspondingly larger investment opportunities. an entirely-new generation of technologies and people is ascending. Offshore funding is provided via specialist venture capital trusts.000 range and the amounts that most VC funds prefer to invest between $1 million to $2 million. Main alternatives to venture capital Because of the strict requirements venture capitalists have for potential investments. it is receiving renewed attention from entrepreneurs such as independent film makers.[24][30] In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure. and return on investment of many VC funds have been low or negative. [citation needed] Crowd funding is emerging as an alternative to traditional venture capital. who may be more willing to invest in highly speculative opportunities. Good examples would include asset-intensive extractive industries such as mining.Because a fund may be run out of capital prior to the end of its life. Smaller firms tend to thrive or fail with their initial industry contacts. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost.

725 deals in the U.8 billion invested in over 2550 deals in 2008). About two thirds of the funds invested were from foreign sources.K. and the bulk of venture capital has been deployed in American companies. groups have emerged.[31] Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it. However..[citation needed] Israel As of 2010.2 billion in 2. In the year of 2008. non-US venture investment is growing. In many of these regions. Canada Canadian technology companies have attracted interest from the global venture capital community as a result. compared to international fund investments ($13. 4% of British investment goes to venture capital. of generous tax incentive through the Scientific Research and Experimental .[35] The same numbers for all of 2010 were $23. For instance. mainly in China and Europe. in the U. which in most cases would not qualify for receiving bank loans.S. as an industry. and the rest domestic. there has been an average 5% growth in the venture capital deals outside the USA. money ($28. In addition to traditional venture capital and angel networks. and the number and size of non-US venture capitalists have been expanding. compared to about 33% in the U. according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial. through the third quarter of 2011.S. has originated in the United States. Israel attracted $170 per person compared to $75 in the USA [36].[35] A National Venture Capital Association survey found that a majority (69%) of venture capitalists predicted that venture investments in the U. venture capital plays a role in facilitating access to finance for small and medium enterprises (SMEs).4 billion in 3. while VC fundings were still majorly dominated by U.market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.4 billion invested elsewhere).[33] Geographical differences can be significant. and American firms have traditionally been the largest participants in venture deals. which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process. Israel led the world in venture capital invested per capita. Venture capital has been used as a tool for economic development in a variety of developing regions.S. increasingly.[34] United States Venture capitalists invested some $21. would have leveled between $20–29 billion in 2007. with less developed financial sectors.S. in part.[32] Geographical differences Venture capital.496 deals.

In 2006. Venture capital refers to capital investment . innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada. exceeded €60 billion. where as much as €600 million (about 42.78 billion). Asia Further information: Indian Venture Capital Association and China Venture Capital Association • India is fast catching up with the West in the field of venture capital and a number of venture capital funds have a presence in the country (IVCA). the top three countries receiving the most venture capital investments were the United Kingdom (515 minority stakes sold for €1.both of which carry indubitable risk. including buy-out funds. Canada also has a fairly unique form of venture capital generation in its Labour Sponsored Venture Capital Corporations (LSVCC). The SR&ED program does not restrict the export of any technology or intellectual property that may have been developed with the benefit of SR&ED tax incentives. venture capital consists of investing in equity. However.[citation needed] The basic incentive available to any Canadian corporation performing R&D is a refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour. Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D. equity and debt . The venture capital industry follows the concept of “high risk. France (195 deals worth €875 million). It is also defined as ‘providing seed’.5 billion across 299 deals. In 2006. are generally sponsored by labor unions and offer tax breaks from government to encourage retail investors to purchase the funds. However.[39] Private equity in Italy was 4.[41] It is also seen as financing companies that have demonstrated extraordinary business potential.8% of the total capital) were invested in 126 early round deals (which comprised more than half of the total number of deals).14 billion from the first quarter. the total amount of private equity and venture capital in India reached US$7.2 billion Euros in 2007.[38] European venture capital investment in the second quarter of 2007 rose 5% to €1. Europe Europe has a large and growing number of active venture firms. An enhanced 35% refundable tax credit of available to certain (i. these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. high risk or high tech firms driven by technically or professionally qualified entrepreneurs. which might not be desirable. These funds. and R&D equipment). The European Venture Capital Association[37] includes a list of active firms and other statistics. The second quarter venture capital investment results were significant in terms of early-round investment. and Germany (207 deals worth €428 million) according to data gathered by Library House. high return” Innovative .6 billion was specifically allocated to venture investment.e.’ start up and first stage financing’ . quasi equity and/or conditional loan in order to promote unlisted. The risk anticipated is very high.Development (SR&ED) investment tax credit program. Capital raised in the region in 2005. small) Canadian-controlled private corporations (CCPCs). material. Generally. of which €12. due to bigger sized deals in early stage investments. foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company. the number of deals was down 20% to 213. also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF). R&D contracts.[40] In the Indian context.

Generally the climate for venture capital industry is poor. information regarding an entrepreneur's business is typically confidential and proprietary. they do not typically enter into Non Disclosure Agreements because of the potential liability issues those agreements entail. most venture capitalists will require significant detail with respect to a company's business plan. knowledge based ideas and human capital intensive enterprises have taken the front seat as venture capitalists invest in risky finance to encourage innovation. including IDG Venture Vietnam ($100 million) and DFJ Vinacapital ($35 million)[43] Middle East and North Africa The Middle East and North Africa (MENA) venture capital industry is an early stage of development but growing. As part of the due diligence process. Funds are difficult to come by and very few firms have managed to get fundings despite demonstrating tremendous growth potential. Entrepreneurs are typically well-advised to protect truly proprietary intellectual property.[46] • .entrepreneurship. Vietnam is experiencing its first foreign venture capitals. but as a matter of business practice.[44] Von Goeben was a partner in Redleaf Venture Management when he began writing the strip. Coggins also worked in the industry and was co-founder of a dot-com startup. The MENA Private Equity Association Guide to Venture Capital for entrepreneurs lists VC firms in the region. and other resources available in the MENA VC ecosystem. mostly centered in South Africa. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. often by showing humorous exchanges between venture capitalists and entrepreneurs. Confidential information Unlike public companies. Popular culture • Robert von Goeben and Kathryn Siegler produced a comic strip called The VC between the years 1997-2000 that parodied the industry. Southern Africa The Southern African venture capital industry is an early stage of development. Most venture capitalists treat information confidentially. Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership agreement.[45] Mark Coggins' 2002 novel Vulture Capital features a venture capitalist protagonist who investigates the disappearance of the chief scientist in a biotech firm in which he has invested.[42] • • China is also starting to develop a venture capital industry (CVCA).

In the 2005 movie. The microblogging giant also reiterated its latest milestone of one million registered apps as of July compared to 150. offering bags of cash to anyone with even a hint of potential. in which the actions of the main character's deceased girlfriend. the World's Most Desperate Venture Capitalist' frequently makes appearances. although this is the one spot where Twitter left out any numbers: Now we have an opportunity to expand Twitter’s reach with a significant round of funding led by the venture firm DST Global. a character named 'Vijay. . Matt Richtel produced the 2007 novel Hooked. including a new average of over 200 million Tweets per day compared to 65 million at this time last year. The children respond that they are already looking for mezzanine funding. A documentary. 11:17am PDT Summary: Last month. it just went up. in which Venture Capitalists ("Sharks") invest in Entrepreneurs.• In the Dilbert comic strip. reports circulated that Twitter could be worth approximately $7 billion. But the big announcement had to do with money. Twitter confirmed some new stats on its official blog this morning. play a key role in the plot. with the participation of several of our existing investors. Whatever the real number is. chronicled the recent history of American technology venture capitalists. Drawing on his experience as reporter covering technology for the New York Times. In one strip. hire more great people and invest in international expansion.000 just one year ago. In the ABC Reality Show "Shark Tank". Last month. Whatever the real number is. • • • • • Twitter completes 'significant' round of venture capital funding By Rachel King | August 1.[47] In the TV series Dragons' Den. Jeremy Grey (Vince Vaughn) and John Beckwith (Owen Wilson) are two bachelors who create appearances to play at different weddings of complete strangers. Wedding Crashers. We will use these resources to aggressively innovate. Something Ventured. he offers two small children with good math grades money based on the fact that if they marry and produce an engineer baby he can invest in the infant's first idea. it just went up. various startup companies pitch their business plans to a panel of venture capitalists. reports circulated that Twitter could be worth approximately $7 billion. 2011. a Silicon Valley venture capitalist. and a large part of the movie follows them posing as venture capitalists from New Hampshire.

There have also been other reports in July that place Twitter’s valuation even higher at $8 billion or more. it will probably mean a lot more sales people and advertising and it definitely means that if anyone is going to acquire Twitter. this brings company's total financing to $360 million. the Twitter company blog made a formal announcement." Minutes after Swisher posted. Twitter has not made any hints at declaring an IPO any time soon. it will need to be for multiple billions of dollars. Get ready to see what Twitter looks like with a well-heeled foot on the gas. primarily from famous VC firm Kleiner Perkins. The company is also rumored (though they deny it) to be opening an office in New York City. It's no co-incidence that this giant round of funding has been announced within weeks of Twitter's having promoted business-oriented Dick Costolo to CEO. Twitter. More likely the company will file to go public on the stock market. Kara Swisher reports in a big AllThingsD scoop today. Now With 125% More Venture Capital Twitter has raised an additional $200 million in venture capital. As Swisher explains.Despite all of this money lying around. advertising capital of the world. 125% more than all previous rounds of investment in Twitter combined. "[recent addition] Currie has deep financial and IPO experience. Twitter will now also add some new members to its Board of Directors: Flipboard's Mike McCue and former DoubleClick head David Rosenblatt. McCue is a well-connected and innovative entrepreneur and Rosenblatt brings much needed online advertising heft. . depending on Twitter’s previous round of fundraising. What on earth will it do with all that money? It will attempt to become the communications platform it has always wanted to be. Along with the money. announced the commercial availability of its user data and unveiled the beginnings of a wide open advertising platform. That post included some other numbers: Twitter says it added 100 million new users this year and grew its staff from 130 to 350 people. That will probably mean acquisitions. so it’s anyone’s guess at this point.

Alot will depend on what you are offering and how risky it is. As the U. • What is capital venture? A company that specializes in funding young companies that has some tech/business edge and potential. If you are looking for some free resources and. For . new start-ups and new existing businesses that would probably have gotten venture capital funding were hit hard. is it going to be a short term investment or are they in for the long haul? These are just a few things you must have in writing before accepting any offer of capital. the venture capital industry is recovering and is helping our entrepreneurial sector and new businesses recover. what their terms are. economy pulls out of the Great Recession. Every year does not see the same venture capital investment levels in the same industries. your experience etc for them to even consider your needs. do they have the financial resources to back you when you really need to grow. • What are examples of capital? London. Also you will want to be in control of your own business not the venture capitalist.. Venture capital is also called seed money The Great Recession hit venture capital investment hard. Good ideas fail in that first meeting mainly because of the difficulty to illustrate your idea. Because venture capital investment was hit hard.S. • How do you get venture capital? It is crucial to learn how to pitch your idea clearly.. the capital of England and the United Kingdom • What is venture capital? Venture Capital are funds made available for startup firms and small businesses with exceptional growth potential. Venture capital investment varies from industry to industry and between economic sectors based on economic activity.What is example of venture capital? Relevant answers: • Is the venture capital a risky capital? Answer: It depends on the source.

S. life sciences companies tend to receive more late stage venture capital. Even at that level. That is a good comment on the future of the U. right before the Great Recession. first round venture capital investment is down because venture capitalists fear that there is considerable uncertainty about whether or not drugs and medical devices can be moved through the FDA approval process in a timely manner. as you will read below. For example. and IT services.4 billion. Largest Venture Capital Investments in 2011 Software and biotechnology were the two industries with the largest venture capital investments in 2011. There are a number of reasons that venture capital investment deals were larger in 2011. The Internet-specific companies came in next. venture capital investment was at $29. As a result.4 billion. The deals in 2011 were up only 4% over 2010. What changed in the intervening years? Venture Capital Investment in 2011 Venture capital investment in 2011 was up 22% over 2010 at $28. In 2011. Next on the list is medical devices with an increase in investment of 20% and clean technology industry at 12%. media and entertainment. it was not as high as venture capital investment in 2007 and 2008. in the life sciences industry. in 2007. electronics. up from 2010. There were 1.159 venture capital deals in 2011. Industry sectors receiving the biggest dollar increases were consumer products. 49% of deals were seed and early stage which is the highest percentage since 1995. which means that the deals in 2011 were considerably larger. software was one industry with the largest venture capital investment. The venture capital industry is substantially recovering since the Great Recession . venture capital investment in software was flat. . economy.very good news for our business community. Software increased by 38% and biotechnology by 22%.example. In 2011. In 2007.

I am not sure this is particularly good news if you are trying to forecast the future for entrepreneurial and start-up company ventures. It seems that venture capitalists are betting more heavily on better established companies at the present time. which is good news for start-ups. the next stage of funding. early-stage funding. received more than one-quarter of venture capital money in 2011. Source of Statistics is the PricewaterhouseCoopers/National Venture Capital Association Money Tree Report . On the other hand.Start-up companies needing seed-stage money were hard-pressed to get it in 2011 as venture capital investment in seed-stage deals decreased by a large margin. Expansion stage funding for companies received one-third of venture capital investment in 2011 which is certainly a good comment on the future of the economy and late stage deals received another third.

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