Definition and The Nature of Venture Capital Business
Venture capital is a specific type of private equity investing. The venture capital fund makes money by owning equity in the companies it invests in. 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. 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. Characteristics of Venture Capital Financing
1. Join the investment equity in a company that financed directly in the form of subordinated debt or convertible bonds 2. Investors (venture capital firms) are generally involved in the management company funded (investee company) 3. Duration of investment 5-10 years
4. Investor profits in the form of capital gains, dividends or interest 5. Business prospects (high return on investment)
6. Usually the investment risk is high
I think venture capital as investing money into small, personal technological innovation organizations anticipating fast development. But there is no official meaning of what kind of deal a venture investor can or can not do. They purchase business spinouts, make use of buyouts, community inventory, and just about anything else they think they can convert money on. Still there are some rules that succeed and you can get a feeling of what kind of companies venture investors look for.
Brief History and Growth of Venture Capital Industry
Prior to World War II, venture capital was primarily the domain of wealthy investors and families. In 1958, the US government passed the Small Business Investment Act of 1958 which allowed the Small Business Administration to license private small business investment companies (SBICs) to spur entrepreneurial activity. In 1946, Georges Doriot, a former dean of Harvard Business School, founded the American Research and Development Corporation (ARDC) with Ralph Flanders and Karl Compton (former president of MIT). Its goal was to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC was significant because it was the first institutional private equity investment firm that raised capital from sources other than wealthy families. Among its early success stories was a $70,000 investment in Digital Equipment Corporation (DEC) which would be valued at over $355 million after the company’s initial public offering in 1968. Former employees of ARDC went on to found other prominent venture capital firms. The DEC investment was a precursor to the explosive growth of venture capital in Silicon Valley, California, in the 1960s and onward. Venture capital firms based in Menlo Park, California, such as Kleiner, Perkins, Caufield & Byers and Sequoia Capital, focused their attention on breakthrough technologies in electronics, medical technology and data-processing. Venture capital came to be almost synonymous with high tech. It served to launch many familiar brand names, including Apple, Cisco, Compaq, Electronic Arts, Federal Express, Genentech and others. The highly public success of the venture capital industry in California in the 1970s spawned a proliferation of other firms. By the end of the 1980s, there were more than 650 venture capital firms managing over $31 billion in capital. However, by the end...