VC plays an important role in the national economy A venture capitalist (VC) is a person who provides equity financing to companies with

high growth potential. The money that a venture capitalist invests in a company is called venture capital. Venture capital firms are often limited partnerships that comprise a few venture capitalists. Each venture capital firm manages a venture fund, which is often comprised of a large pool of money--anywhere from $25 million to $1 billion--that the firm invests in growth companies. A venture capital fund consisting of third-party investments can finance enterprises that are too risky for debt financing. Venture capitalists invest in several projects at a time and most of them invest in large projects worth a few million. Most venture capitalists get their money from various institutional and pension fund investors. Like other investors, venture capitalists also go through a process of raising funds. They do this by raising funds from foundations, endowment funds and retirement funds. Venture capitalists then divest these funds into companies that they think will grow to make a profit. Most VCs try to invest in several businesses at a time to limit their risk. Venture capitalists look for big returns on their investments and are usually very selective about the projects in which they invest. There are several different types of venture capitalists. Some of them like to concentrate on providing seed money for a new business venture while others prefer to invest in companies that have already matured and are now in the expansion phase. Venture capitalists are also choosy about the business that they invest in. Some VCs are specific about investing only in technology companies while others don't mind investing in varied companies. Venture Capitalists like to remain part of the equation in the operation of the company business. Some venture capitalists like to know about the other sources of funding for a company. In many cases, venture capitalists look at the long-term picture and if the business grows according to the plan, it may receive several rounds of funding. However, business owners need to account for all the funding during the initial talks with venture capitalists. Many venture capitalists also like to become involved in the business, providing their experience and expertise in the industry. This is, in part, because venture capitalists are investing the money of other people or institutions. To obtain venture capitalist funding business owners need to show a clear business plan with a clear vision that shows the possibility of the company making a profit. In the United States, however, it is as common for a venture capitalist to sell a start-up to another firm as to offer it to the public through an initial public offering. For example, venturebacked firms were sold to other companies in 2000, 152 were sold in 2001, and were sold in 2002. By contrast, 275 venture-backed firms went public in 2000, 136 went public in 2001, and 77 went public in 2002. For a number of reasons, the greater use of venture capital in Europe over the last few years has not resulted in the same kind of dynamic start-ups that venture capitalists in the United States have helped nurture. First, much of what is classified as venture capital in Europe (and Asia) is dedicated to buyouts and workouts, as opposed to start-up and expansion financing. Second, venture capitalists in Europe tend to fund safer, more mature, and less dynamic companies than venture capitalists in the United States. Compared to their U.S. counterparts, most European institutional investors (outside of Britain and the Netherlands) are more wary of equity investments in start-up firms and prefer the relative safety of fixed income investments. In addition, while the United States has allowed pension funds to invest in private equity since 1979, some European and Asian countries prohibit pension funds from participating in the private equity market. Consequently, pension funds

supply more than 50% of venture capital raised in the United States compared to 25% in Europe and 5% in Japan. Because many European countries allow banks to lend money and make equity investments in the same company, banks are still the leading source of venture capital funding in Europe. In the United States, banks account for a much smaller percentage of venture capital financing because U.S. banking laws impose more restrictions on banks making equity investments in companies in their loan portfolios. Banks, particularly in Europe, however, are much more likely than venture capitalists to invest in relatively safe investments and normally do not bring the type of expertise needed to nurture young entrepreneurial companies. The United States will continue setting the standard in the venture capital business for many years to come. No other country offers entrepreneurs as welcoming an environment to do business. U.S. start-ups enjoy ready access to institutional financing, the world’s most liquid stock markets, a flexible labor market, a large pool of experienced managers trained in the world’s preeminent business schools, strong intellectual property rights protection, a favorable capital gains tax, a bankruptcy law that does not permanently stigmatize those who fail, and a regulatory environment that allows managers to take substantial ownership positions in their companies through stock options. In Europe, Britain will continue to outpace France, Germany, and other Continental economies in entrepreneurial activity. The government reduced high tax rates, promoted more flexible labor markets, and streamlined government regulations. It also has supported a number of new initiatives designed to encourage entrepreneurial activity, including a proposal to teach entrepreneurship in schools. In France and Germany, on the other hand, the new social democratic governments led by French Prime Minister and German Chancellor have put on hold many of the efforts by their predecessors to reduce high capital gains taxes, reform excessive and rigid regulatory environments, and restructure highly regulated labor markets and welfare systems. In sum, European and Asian governments will need to remove myriad regulatory impediments to entrepreneurs to foster venture capital activity on a par with the United States.

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