Venture capital (often abbreviated as VC) is a form of
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
financing
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
that is provided by venture capital firms or
funds
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
to
startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth (in terms of number of employees, annual revenue, scale of operations, etc). Venture capital firms or funds invest in these early-stage companies in exchange for
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
, or an ownership stake. Venture capitalists take on the risk of financing risky
start-ups in the hopes that some of the firms they support will become successful. Because
startups
A startup or start-up is a company or project undertaken by an Entrepreneurship, entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses t ...
face high uncertainty, VC investments have high rates of failure. The start-ups are usually based on an
innovative technology or
business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, social, ...
and they are usually from
high technology
High technology (high tech), also known as advanced technology (advanced tech) or exotechnology, is technology that is at the cutting edge: the highest form of technology available. It can be defined as either the most complex or the newest te ...
industries, such as
information technology
Information technology (IT) is the use of computers to create, process, store, retrieve, and exchange all kinds of data . and information. IT forms part of information and communications technology (ICT). An information technology system (I ...
(IT),
clean technology
Clean technology, in short cleantech, is any process, product, or service that reduces negative environmental impacts through significant energy efficiency improvements, the sustainable use of resources, or environmental protection activities. Cle ...
or
biotechnology
Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used b ...
.
![Startup Financing Cycle](https://upload.wikimedia.org/wikipedia/commons/e/e3/Startup_Financing_Cycle.png)
The typical venture capital investment occurs after an initial "
seed funding
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
" round. The first round of institutional venture capital to fund growth is called the
Series A round
A series A round (also known as series A financing or series A investment) is the name typically given to a company's first significant round of venture capital financing. The name refers to the class of preferred stock sold to investors in exchan ...
. Venture capitalists provide this financing in the interest of generating a
return
Return may refer to:
In business, economics, and finance
* Return on investment (ROI), the financial gain after an expense.
* Rate of return, the financial term for the profit or loss derived from an investment
* Tax return, a blank document or t ...
through an eventual "exit" event, such as the company selling shares to the public for the first time in an
initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
(IPO), or disposal of shares happening via a merger, via a sale to another entity such as a financial buyer in the
private equity secondary market
In finance, the private-equity secondary market (also often called private-equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private-equity and other alternative investment funds. Given t ...
or via a sale to a trading company such as a competitor.
In addition to
angel investing
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
,
equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
and other
seed funding
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
options, venture capital is attractive for new companies with limited operating history that are too small to raise
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
in the
public markets and have not reached the point where they are able to secure a
bank loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
or complete a
debt offering. In exchange for the high
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
that venture capitalists assume by investing in smaller and early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies' ownership (and consequently value). Start-ups like
Uber
Uber Technologies, Inc. (Uber), based in San Francisco, provides mobility as a service, ride-hailing (allowing users to book a car and driver to transport them in a way similar to a taxi), food delivery (Uber Eats and Postmates), package ...
,
Airbnb
Airbnb, Inc. ( ), based in San Francisco, California, operates an online marketplace focused on short-term homestays and experiences. The company acts as a broker and charges a commission from each booking. The company was founded in 2008 b ...
,
Flipkart
Flipkart Private Limited is an Indian e-commerce company, headquartered in Bengaluru, and incorporated in Singapore as a private limited company. The company initially focused on online book sales before expanding into other product categories ...
,
Xiaomi
Corporation (; ), commonly known as Xiaomi and registered as Xiaomi Inc., is a Chinese designer and manufacturer of consumer electronics and related software, home appliances, and household items. Behind Samsung, it is the second largest ma ...
&
Didi Chuxing
Didi may refer to:
Arts and entertainment
* "Didi" (song), a song by Khaled
* Didi, the principal character in ''Didi's Comedy Show'', a German comedy television show
* Didi Pickles, mother of Tommy and Dil in the cartoons ''Rugrats'' and ''All ...
are highly valued startups, commonly known as
Unicorns
The unicorn is a legendary creature that has been described since Classical antiquity, antiquity as a beast with a single large, pointed, spiraling horn (anatomy), horn projecting from its forehead.
In European literature and art, the unicor ...
where venture capitalists contribute more than financing to these early-stage firms; they also often provide strategic advice to the firm's executives on its
business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, social, ...
and marketing strategies.
Venture capital is also a way in which the
private
Private or privates may refer to:
Music
* " In Private", by Dusty Springfield from the 1990 album ''Reputation''
* Private (band), a Denmark-based band
* "Private" (Ryōko Hirosue song), from the 1999 album ''Private'', written and also recorde ...
and
public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
s can construct an institution that systematically creates
business network
A business network is a complex network of companies, working together to accomplish certain objectives. These objectives, which are strategic and operational, are adopted by business networks based on their role in the market. There are two categ ...
s for the new firms and industries so that they can progress and develop. This institution helps identify promising new firms and provide them with finance, technical expertise,
mentoring
Mentorship is the influence, guidance, or direction given by a mentor. A mentor is someone who teaches or gives help and advice to a less experienced and often younger person. In an organizational setting, a mentor influences the personal and p ...
, talent acquisition, strategic partnership, marketing "know-how", and
business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, social, ...
s. Once integrated into the business network, these firms are more likely to succeed, as they become "nodes" in the search networks for designing and building products in their domain. However, venture capitalists' decisions are often biased, exhibiting for instance overconfidence and illusion of control, much like entrepreneurial decisions in general.
History
Origins of modern venture capital
Before
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
(1939–1945) venture capital was primarily the domain of wealthy individuals and families.
J.P. Morgan, the
Wallenbergs, the
Vanderbilts
The Vanderbilt family is an American family who gained prominence during the Gilded Age. Their success began with the shipping and railroad empires of Cornelius Vanderbilt, and the family expanded into various other areas of industry and philanthr ...
, the
Whitneys, the
Rockefellers
The Rockefeller family () is an American industrial, political, and banking family that owns one of the world's largest fortunes. The fortune was made in the American petroleum industry during the late 19th and early 20th centuries by brot ...
, and the
Warburgs
The Warburg family is a prominent German and American banking family of German Jewish and originally Venetian Jewish descent, noted for their varied accomplishments in biochemistry, botany, political activism, economics, investment banking, law, p ...
were notable investors in private companies. In 1938,
Laurance S. Rockefeller helped finance the creation of both
Eastern Air Lines
Eastern Air Lines, also colloquially known as Eastern, was a major United States airline from 1926 to 1991. Before its dissolution, it was headquartered at Miami International Airport in an unincorporated area of Miami-Dade County, Florida.
Ea ...
and
Douglas Aircraft
The Douglas Aircraft Company was an American aerospace manufacturer based in Southern California. It was founded in 1921 by Donald Wills Douglas Sr. and later merged with McDonnell Aircraft in 1967 to form McDonnell Douglas; it then operated as ...
, and the Rockefeller family had vast holdings in a variety of companies.
Eric M. Warburg founded
E.M. Warburg & Co. in 1938, which would ultimately become
Warburg Pincus
Warburg Pincus LLC is a global private equity firm, headquartered in New York, with offices in the United States, Europe, Brazil, China, Southeast Asia and India. Warburg has been a private equity investor since 1966. The firm currently has over ...
, with investments in both
leveraged buyouts
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
and venture capital. The
Wallenberg family
The Wallenberg family is a prominent Swedish family, Europe's most powerful business dynasty. Wallenbergs are noted as bankers, industrialists, politicians, bureaucrats, diplomats and military. The Wallenberg sphere's holdings employ about 600 ...
started
Investor AB
Investor AB is a Swedish investment and ''de facto'' conglomerate holding company. It was founded in 1916 and is still controlled by the Wallenberg family through their Foundation Asset Management company FAM. The company owns a controlling st ...
in 1916 in Sweden and were early investors in several Swedish companies such as
ABB
ABB Ltd. is a Swedish- Swiss multinational corporation headquartered in Zürich, Switzerland. The company was formed in 1988 when Sweden's Allmänna Svenska Elektriska Aktiebolaget (ASEA) and Switzerland's Brown, Boveri & Cie merged to crea ...
,
Atlas Copco
Atlas Copco (Copco from Compagnie Pneumatique Commerciale) is a Swedish multinational industrial company that was founded in 1873. It manufactures industrial tools and equipment.
The Atlas Copco Group is a global industrial group of companies ...
, and
Ericsson
(lit. "Telephone Stock Company of LM Ericsson"), commonly known as Ericsson, is a Swedish multinational networking and telecommunications company headquartered in Stockholm. The company sells infrastructure, software, and services in informat ...
in the first half of the 20th century.
Only after 1945 did "true" venture capital investment firms begin to emerge, notably with the founding of
American Research and Development Corporation
American Research and Development Corporation (ARDC) was a venture capital and private equity firm founded in 1946 by Georges Doriot, Ralph Flanders, Merrill Griswold, and Karl Compton.
ARDC is credited with the first major venture capital ...
(ARDC) and
J.H. Whitney & Company in 1946.
Georges Doriot
Georges Frédéric Doriot (September 24, 1899 – June 1987) was a French-American known for his prolific careers in military, academics, business and education.
An émigré from France, Doriot became a professor of Industrial Management at Har ...
, the "father of venture capitalism", along with
Ralph Flanders
Ralph Edward Flanders (September 28, 1880 – February 19, 1970) was an American mechanical engineer, industrialist and politician who served as a Republican U.S. Senator from the state of Vermont. He grew up on subsistence farms in Vermont and R ...
and
Karl Compton
Karl Taylor Compton (September 14, 1887 – June 22, 1954) was a prominent American physicist and president of the Massachusetts Institute of Technology (MIT) from 1930 to 1948.
The early years (1887–1912)
Karl Taylor Compton was born in ...
(former president of
MIT
The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the m ...
) founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from sources other than wealthy families. Unlike most present-day venture capital firms, ARDC was a publicly-traded company. ARDC's most successful investment was its 1957 funding of
Digital Equipment Corporation
Digital Equipment Corporation (DEC ), using the trademark Digital, was a major American company in the computer industry from the 1960s to the 1990s. The company was co-founded by Ken Olsen and Harlan Anderson in 1957. Olsen was president unt ...
(DEC), which would later be valued at more than $355 million after its initial public offering in 1968. This represented a return of over 1200 times its investment and an
annualized rate of return of 101% to ARDC.
Former employees of ARDC went on to establish several prominent venture capital firms including
Greylock Partners
Greylock Partners is one of the oldest venture capital firms, founded in 1965, with committed capital of over $3.5 billion under management. The firm focuses on early-stage companies in the consumer, enterprise software and infrastructure as wel ...
, founded in 1965 by Charlie Waite and Bill Elfers; Morgan, Holland Ventures, the predecessor of Flagship Ventures, founded in 1982 by James Morgan; Fidelity Ventures, now Volition Capital, founded in 1969 by Henry Hoagland; and
Charles River Ventures
Charles River Ventures (CRV) is a venture capital firm focused on early-stage investments in technology. The firm was founded in 1970 to commercialize research that came out of MIT. Its name comes from the Charles River.
History
The firm has ra ...
, founded in 1970 by Richard Burnes. ARDC continued investing until 1971, when Doriot retired. In 1972 Doriot merged ARDC with
Textron
Textron Inc. is an American industrial conglomerate based in Providence, Rhode Island. Textron's subsidiaries include Arctic Cat, Bell Textron, Textron Aviation (which itself includes the Beechcraft, and Cessna brands), and Lycoming Engines. ...
after having invested in over 150 companies.
John Hay Whitney
John Hay Whitney (August 17, 1904 – February 8, 1982) was U.S. Ambassador to the United Kingdom, publisher of the ''New York Herald Tribune'', and president of the Museum of Modern Art. He was a member of the Whitney family.
Early life
Whit ...
(1904–1982) and his partner
Benno Schmidt (1913–1999) founded
J.H. Whitney & Company in 1946. Whitney had been investing since the 1930s, founding
Pioneer Pictures
Pioneer Pictures, Inc. was a Hollywood motion picture company, most noted for its early commitment to making color films. Pioneer was initially affiliated with RKO Pictures, whose production facilities in Culver City, California were used by Pio ...
in 1933 and acquiring a 15% interest in
Technicolor Corporation
Technicolor is a series of color motion picture processes, the first version dating back to 1916, and followed by improved versions over several decades.
Definitive Technicolor movies using three black and white films running through a special ...
with his cousin
Cornelius Vanderbilt Whitney
Cornelius "Sonny" Vanderbilt Whitney (February 20, 1899 – December 13, 1992) was an American businessman, film producer, government official, writer and philanthropist. He was also a polo player and the owner of a significant stable of Thorough ...
. Florida Foods Corporation proved Whitney's most famous investment. The company developed an innovative method for delivering nutrition to American soldiers, later known as
Minute Maid
Minute Maid is a product line of beverages, usually associated with lemonade or orange juice, but which now extends to soft drinks of different kinds, including Hi-C. Minute Maid is sold under the Cappy brand in Central Europe and under the bra ...
orange juice and was sold to
The Coca-Cola Company
The Coca-Cola Company is an American multinational beverage corporation founded in 1892, best known as the producer of Coca-Cola. The Coca-Cola Company also manufactures, sells, and markets other non-alcoholic beverage concentrates and syrups, ...
in 1960.
J.H. Whitney & Company continued to make investments in
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...
transactions and raised $750 million for its sixth
institutional
Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
private-equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
in 2005.
Early venture capital and the growth of Silicon Valley
![SandHillRoad](https://upload.wikimedia.org/wikipedia/commons/5/56/SandHillRoad.jpg)
One of the first steps toward a professionally managed venture capital industry was the passage of the
Small Business Investment Act of 1958
The United States Small Business Administration (SBA) is an Independent agencies of the United States government, independent agency of the United States government that provides support to Entrepreneurship, entrepreneurs and small businesses. Th ...
. The 1958 Act officially allowed the U.S.
Small Business Administration
The United States Small Business Administration (SBA) is an independent agency of the United States government that provides support to entrepreneurs and small businesses. The mission of the Small Business Administration is "to maintain and stren ...
(SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. The Small Business Investment Act of 1958 provided tax breaks that helped contribute to the rise of private-equity firms.
During the 1950s, putting a venture capital deal together may have required the help of two or three other organizations to complete the transaction. It was a business that was growing very rapidly, and as the business grew, the transactions grew exponentially.
During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance. An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962 by
William Henry Draper III
William Henry Draper III (born January 1, 1928) is an American venture capitalist.
Early life
Draper was born on January 1, 1928, in White Plains, New York, the son of Katherine Louise (née Baum) and banker, general, and diplomat William Henry ...
and Franklin P. Johnson, Jr. In 1965,
Sutter Hill Ventures
Sutter Hill Ventures is an American private equity firm focused on venture capital investments in technology-based start-up companies. Founded in 1964, Sutter Hill is one of the oldest venture capital firms still in operation. Based in Palo Alto ...
acquired the portfolio of Draper and Johnson as a founding action. Bill Draper and Paul Wythes were the founders, and Pitch Johnson formed Asset Management Company at that time.
It was also in the 1960s that the common form of
private-equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
, still in use today, emerged.
Private-equity firm
A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leve ...
s organized
limited partnership
A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
s to hold investments in which the investment professionals served as
general partner General partner is a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the partnership's debts an ...
and the investors, who were passive
limited partners
A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1.0–2.5% and a
carried interest
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhanc ...
typically representing up to 20% of the profits of the partnership.
The growth of the venture capital industry was fueled by the emergence of the independent investment firms on
Sand Hill Road
Sand Hill Road, often shortened to just "Sand Hill" or "SHR", is an arterial road in western Silicon Valley, California, running through Palo Alto, Menlo Park, and Woodside, notable for its concentration of venture capital companies. The road h ...
, beginning with
Kleiner Perkins
Kleiner Perkins, formerly Kleiner Perkins Caufield & Byers (KPCB), is an American venture capital firm which specializes in investing in incubation, early stage and growth companies. Since its founding in 1972, the firm has backed entrepreneurs ...
and
Sequoia Capital
Sequoia Capital is an American venture capital firm. The firm is headquartered in Menlo Park, California, and specializes in seed stage, early stage, and growth stage investments in private companies across technology sectors. , Sequoia's total a ...
in 1972. Located in
Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the many
semiconductor
A semiconductor is a material which has an electrical resistivity and conductivity, electrical conductivity value falling between that of a electrical conductor, conductor, such as copper, and an insulator (electricity), insulator, such as glas ...
companies based in the
Santa Clara Valley
The Santa Clara Valley is a geologic trough in Northern California that extends 90 miles (145 km) south–southeast from San Francisco to Hollister. The longitudinal valley is bordered on the west by the Santa Cruz Mountains and on the east ...
as well as early
computer
A computer is a machine that can be programmed to Execution (computing), carry out sequences of arithmetic or logical operations (computation) automatically. Modern digital electronic computers can perform generic sets of operations known as C ...
firms using their devices and programming and service companies.
Throughout the 1970s, a group of private-equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association (NVCA). The NVCA was to serve as the
industry trade group
A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by businesses that operate in a specific industry. An industry trade association partici ...
for the venture capital industry. Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund.
It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. With the passage of the
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax eff ...
(ERISA) in 1974, corporate pension funds were prohibited from holding certain risky investments including many investments in
privately held
A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...
companies. In 1978, the
US Labor Department relaxed certain restrictions of the ERISA, under the "
prudent man rule The prudent man rule is based on common law stemming from the 1830 Massachusetts court formulation, '' Harvard College v. Amory'' The prudent man rule, written by Massachusetts Justice Samuel Putnam (1768-1853), directs trustees "to observe how men ...
", thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists.
1980s
The public successes of the venture capital industry in the 1970s and early 1980s (e.g.,
Digital Equipment Corporation
Digital Equipment Corporation (DEC ), using the trademark Digital, was a major American company in the computer industry from the 1960s to the 1990s. The company was co-founded by Ken Olsen and Harlan Anderson in 1957. Olsen was president unt ...
,
Apple Inc.
Apple Inc. is an American multinational technology company headquartered in Cupertino, California, United States. Apple is the largest technology company by revenue (totaling in 2021) and, as of June 2022, is the world's biggest company ...
,
Genentech
Genentech, Inc., is an American biotechnology corporation headquartered in South San Francisco, California. It became an independent subsidiary of Roche in 2009. Genentech Research and Early Development operates as an independent center within R ...
) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". The number of firms multiplied, and the capital managed by these firms increased from $3 billion to $31 billion over the course of the decade.
[POLLACK, ANDREW. ]
Venture Capital Loses Its Vigor
" New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
, October 8, 1989.
The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors affected returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987, and foreign corporations, particularly from
Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
and
Korea
Korea ( ko, 한국, or , ) is a peninsular region in East Asia. Since 1945, it has been divided at or near the 38th parallel, with North Korea (Democratic People's Republic of Korea) comprising its northern half and South Korea (Republic o ...
, flooded early-stage companies with capital.
In response to the changing conditions, corporations that had sponsored in-house venture investment arms, including
General Electric
General Electric Company (GE) is an American multinational conglomerate founded in 1892, and incorporated in New York state and headquartered in Boston. The company operated in sectors including healthcare, aviation, power, renewable energ ...
and
Paine Webber
PaineWebber & Co. was an American investment bank and stock brokerage firm that was acquired by the Swiss bank UBS in 2000. The company was founded in 1880 in Boston, Massachusetts, by William Alfred Paine and Wallace G. Webber. Operating with t ...
either sold off or closed these venture capital units. Additionally, venture capital units within
Chemical Bank
Chemical Bank was a bank with headquarters in New York City from 1824 until 1996. At the end of 1995, Chemical was the third-largest bank in the U.S., with about $182.9 billion in assets and more than 39,000 employees around the world.
Beginning ...
and
Continental Illinois National Bank
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest commercial bank in the United States as measured by deposits, with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ...
, among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry founders
J.H. Whitney & Company and
Warburg Pincus
Warburg Pincus LLC is a global private equity firm, headquartered in New York, with offices in the United States, Europe, Brazil, China, Southeast Asia and India. Warburg has been a private equity investor since 1966. The firm currently has over ...
began to transition toward
leveraged buyouts
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
and
growth capital
Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new mark ...
investments.
Venture capital boom and the Internet Bubble
By the end of the 1980s, venture capital returns were relatively low, particularly in comparison with their emerging
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...
cousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in the venture capital industry remained limited throughout the 1980s and the first half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994.
The advent of the
World Wide Web
The World Wide Web (WWW), commonly known as the Web, is an information system enabling documents and other web resources to be accessed over the Internet.
Documents and downloadable media are made available to the network through web se ...
in the early 1990s reinvigorated venture capital as investors saw companies with huge potential being formed.
Netscape
Netscape Communications Corporation (originally Mosaic Communications Corporation) was an American independent computer services company with headquarters in Mountain View, California and then Dulles, Virginia. Its Netscape web browser was onc ...
and
Amazon (company)
Amazon.com, Inc. ( ) is an American multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It has been referred to as "one of the most influential economi ...
were founded in 1994, and
Yahoo!
Yahoo! (, styled yahoo''!'' in its logo) is an American web services provider. It is headquartered in Sunnyvale, California and operated by the namesake company Yahoo Inc., which is 90% owned by investment funds managed by Apollo Global Man ...
in 1995. All were funded by venture capital.
Internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
IPOs—AOL in 1992; Netcom in 1994; UUNet, Spyglass and Netscape in 1995; Lycos, Excite, Yahoo!, CompuServe, Infoseek, C/NET, and E*Trade in 1996; and Amazon, ONSALE, Go2Net, N2K, NextLink, and SportsLine in 1997—generated enormous returns for their venture capital investors. These returns, and the performance of the companies post-IPO, caused a rush of money into venture capital, increasing the number of venture capital funds raised from about 40 in 1991 to more than 400 in 2000, and the amount of money committed to the sector from $1.5 billion in 1991 to more than $90 billion in 2000.
The bursting of the
Dot-com bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compo ...
in 2000 caused many venture capital firms to fail and financial results in the sector to decline.
Private equity crash
The
Nasdaq
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
crash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many venture firms had been forced to write-off large proportions of their investments, and many funds were significantly "
under water" (the values of the fund's investments were below the amount of capital invested). Venture capital investors sought to reduce the size of commitments they had made to venture capital funds, and, in numerous instances, investors sought to unload existing commitments for cents on the dollar in the
secondary market
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the s ...
. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless,
PricewaterhouseCoopers' MoneyTree Survey shows that total venture capital investments held steady at 2003 levels through the second quarter of 2005.
Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in 2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The revival of an
Internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
-driven environment in 2004 through 2007 helped to revive the venture capital environment. However, as a percentage of the overall private-equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.
Venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the
dot-com bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compo ...
), raised only $25.1 billion in 2006, a 2% decline from 2005 and a significant decline from its peak. The decline continued till their fortunes started to turn around in 2010 with $21.8 billion invested (not raised). The industry continued to show phenomenal growth and in 2020 hit $80 billion in fresh capital.
Financing
Obtaining venture capital is substantially different from raising debt or a loan. Lenders have a legal right to interest on a loan and repayment of the capital irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. The return of the venture capitalist as a shareholder depends on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholdings when the business is sold to another owner.
Venture capitalists are typically very selective in deciding what to invest in, with a Stanford survey of venture capitalists revealing that 100 companies were considered for every company receiving financing. Ventures receiving financing must demonstrate an excellent management team, a large potential market, and most importantly high growth potential, as only such opportunities are likely capable of providing financial returns and a successful exit within the required time frame (typically 3–7 years) that venture capitalists expect.
Because investments are
illiquid
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between th ...
and require the extended time frame to harvest, venture capitalists are expected to carry out detailed
due diligence
Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
It can be a l ...
prior to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an
IPO
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
stage when
valuations are favourable. Venture capitalists typically assist at four stages in the company's development:
*
Idea generation;
*
Start-up;
*
Ramp-up Ramp-up is a term used in economics and business to describe an increase in a firm's production ahead of anticipated increases in product demand. Alternatively, ramp-up describes the period from completed initial product development to maximum cap ...
; and
*
Exit
Exit(s) may refer to:
Architecture and engineering
* Door
* Portal (architecture), an opening in the walls of a structure
* Emergency exit
* Overwing exit, a type of emergency exit on an airplane
* Exit ramp, a feature of a road interchange
...
Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private-equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether he wants a follow-up meeting. In addition, some new private online networks are emerging to provide additional opportunities for meeting investors.
[Cash-strapped entrepreneurs get creative, BBC News](_blank)
.
This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-front
capital requirement
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...
s, which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. In turn, this explains why venture capital is most prevalent in the fast-growing
technology
Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
and
life sciences
This list of life sciences comprises the branches of science that involve the scientific study of life – such as microorganisms, plants, and animals including human beings. This science is one of the two major branches of natural science, the ...
or
biotechnology
Biotechnology is the integration of natural sciences and engineering sciences in order to achieve the application of organisms, cells, parts thereof and molecular analogues for products and services. The term ''biotechnology'' was first used b ...
fields.
If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.
Financing stages
There are typically six stages of
venture round
A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the ...
financing offered in venture capital, that roughly correspond to these stages of a company's development.
*
Seed funding
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
: The earliest round of financing needed to prove a new idea, often provided by
angel investor
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
s.
Equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
is also emerging as an option for seed funding.
* Start-up: Early stage firms that need funding for expenses associated with marketing and product development.
* Growth (
Series A round
A series A round (also known as series A financing or series A investment) is the name typically given to a company's first significant round of venture capital financing. The name refers to the class of preferred stock sold to investors in exchan ...
): Early sales and manufacturing funds. This is typically where VCs come in. Series A can be thought of as the first institutional round. Subsequent investment rounds are called Series B, Series C and so on. This is where most companies will have the most growth.
* Second round:
Working capital
Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
for early stage companies that are selling product, but not yet turning a profit. This can also be called Series B round and so on.
* Expansion: Also called
mezzanine financing
In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typicall ...
, this is expansion money for a newly profitable company.
* Exit of venture capitalist: VCs can exit through secondary sale or an IPO or an acquisition. Early stage VCs may exit in later rounds when new investors (VCs or private-equity investors) buy the shares of existing investors. Sometimes a company very close to an IPO may allow some VCs to exit and instead new investors may come in hoping to profit from the IPO.
* Bridge financing is when a startup seeks funding in between full VC rounds. The objective is to raise a smaller amount of money to "bridge" the gap when current funds are expected to run out prior to planned future funding, intended to meet short-term working capital needs.
Between the first round and the fourth round, venture-backed companies may also seek to take
venture debt Venture debt or venture lending (related: "venture leasing") is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Ventur ...
.
Firms and funds
Venture capitalist
A venture capitalist or sometimes simply capitalist, is a person who makes capital investments in companies in exchange for an
equity stake
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
. The venture capitalist is often expected to bring managerial and technical expertise, as well as capital, to their investments. A venture capital fund refers to a
pooled investment
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
vehicle (in the United States, often an
LP or
LLC) that primarily invests the
financial capital
Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide ...
of third-party investors in enterprises that are too risky for the standard
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
s or
bank loans. These funds are typically managed by a venture capital firm, which often employs individuals with technology backgrounds (scientists, researchers), business training and/or deep industry experience.
A core skill within VC is the ability to identify novel or disruptive technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments instead of taking the chance of putting all of their money in one start up firm.
Structure
Venture capital firms are typically structured as
partnerships
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, business entity, businesses, interest-based organizations, schoo ...
, the
general partners
A general partnership, the basic form of partnership under common law, is in most countries an association of persons or an unincorporated company with the following major features:
*Must be created by agreement, proof of existence and estoppel. ...
of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as
limited liability companies
A limited liability company (LLC for short) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a ...
, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as
limited partners. This constituency comprises both high-net-worth individuals and institutions with large amounts of available capital, such as state and private
pension fund
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.
Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...
s, university
financial endowment
A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of financial, real estate, or other investments for a specific purpose according to the will of its founders and donors. Endowments are o ...
s, foundations,
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
companies, and
pooled investment
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...
vehicles, called
funds of funds.
Types
Venture capitalist firms differ in their motivations and approaches. There are multiple factors, and each firm is different.
Venture capital funds are generally three in types:
* 1. Angel investors
* 2. Financial VCs
* 3. Strategic VCs
Some of the factors that influence VC decisions include:
* Business situation: Some VCs tend to invest in new, disruptive ideas, or fledgling companies. Others prefer investing in established companies that need support to go public or grow.
* Some invest solely in certain industries.
* Some prefer operating locally while others will operate nationwide or even globally.
* VC expectations can often vary. Some may want a quicker public sale of the company or expect fast growth. The amount of help a VC provides can vary from one firm to the next. There are also estimates on how big of an exit a VC will expect for your company (i.e. if the size of the VC fund is $20M, estimate that they'll at least want you to exit for the size of the fund.
Roles
Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but, broadly speaking, venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background (
operating partner An operating partner is a title used by venture capital (VC) and private equity (PE) firms to describe a role dedicated to working with privately held companies to increase value. The role was created by large-capitalization private equity groups wh ...
) tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have
investment banking
Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated wit ...
or other
corporate finance
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
experience.
Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:
Structure of the funds
Most
venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in
Silicon Valley
Silicon Valley is a region in Northern California that serves as a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical areas San Mateo County ...
through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.
In such a fund, 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. There are substantial penalties for a limited partner (or investor) that fails to participate in a
capital call
A capital call (also known as a draw down or a capital commitment) is a legal right of an investment firm or an insurance firm to demand a portion of the money promised to it by an investor. A capital call fund would be the money that had been com ...
.
It can take anywhere from a month to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10-year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. The
vintage year Vintage year in the private equity and venture capital industries refers to the year in which a fund began making investments or, more specifically, the date in which capital was deployed to a particular company or project. This metric is useful for ...
generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison.
From an investor's point of view, funds can be: (1)
traditional
A tradition is a belief or behavior (folk custom) passed down within a group or society with symbolic meaning or special significance with origins in the past. A component of cultural expressions and folklore, common examples include holidays or ...
—where all the investors invest with equal terms; or (2)
asymmetric—where different investors have different terms. Typically asymmetry is seen in cases where investors have opposing interests, such as the need to not have unrelated business taxable income in the case of public tax-exempt investors.
Investment Decision Process
The decision process to fund a company is elusive. One study report in the
Harvard Business Review
''Harvard Business Review'' (''HBR'') is a general management magazine published by Harvard Business Publishing, a wholly owned subsidiary of Harvard University. ''HBR'' is published six times a year and is headquartered in Brighton, Massach ...
states that VCs rarely use standard financial analytics.
First, VCs engage in a process known as "generating deal flow," where they reach out to their network to source potential investments.
The study also reported that few VCs use any type of financial analytics when they assess deals; VCs are primarily concerned about the cash returned from the deal as a multiple of the cash invested.
According to 95% of the VC firms surveyed, VCs cite the founder or founding team as the most important factor in their investment decision.
Other factors are also considered, including intellectual property rights and the state of the economy. Some argue that the most important thing a VC looks for in a company is high-growth.
The funding decision process has spawned bias in the form of a large disparity between the funding men and minority groups, such as women and people of color.
In 2021, female founders only received 2% of VC funding in the United States.
Some research studies have found that VCs evaluate women differently and are less likely to fund female founders.
Compensation
Venture capitalists are compensated through a combination of management fees and
carried interest
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhanc ...
(often referred to as a "two and 20" arrangement):
Because a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely new generation of technologies and people is ascending, whom the general partners may not know well, 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.
Alternatives
Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek
seed funding
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
from
angel investors
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
, who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur. Additionally, entrepreneurs may seek alternative financing, such as
revenue-based financing Revenue-based financing or royalty-based financing (RBF) is a type of financial capital provided to small or growing businesses in which investors inject capital into a business in return for a fixed percentage of ongoing gross revenues, with paymen ...
, to avoid giving up equity ownership in the business. For entrepreneurs seeking more than just funding, startup studios can be an appealing alternative to venture capitalists, as they provide operational support and an experienced team.
Furthermore, many venture capital firms will only seriously evaluate an investment in a
start-up company
A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend t ...
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. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance
sweat equity Sweat equity is a non-monetary benefit that a company's stakeholders give in labor and time, rather than a monetary contribution, that benefit the company. Sweat equity is rewarded in the form of sweat equity shares. These are shares given out by a ...
until they reach a point where they can credibly approach outside capital providers such as venture capitalists or
angel investors
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
. This practice is called "
bootstrapping
In general, bootstrapping usually refers to a self-starting process that is supposed to continue or grow without external input.
Etymology
Tall boots may have a tab, loop or handle at the top known as a bootstrap, allowing one to use fingers ...
".
Equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
is emerging as an alternative to traditional venture capital. Traditional
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
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. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some
equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
models are also being applied specifically for startup funding, such as those listed at
Comparison of crowd funding services
Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." Mollick, E. (2014). ''The dynamics of crowdfunding: A ...
. One of the reasons to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, and
return on investment
Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...
of many VC funds have been low or negative.
In Europe and India,
Media for equity is a partial alternative to venture capital funding. Media for equity investors are able to supply start-ups with often significant advertising campaigns in return for equity. In Europe, an investment advisory firm offers young ventures the option to exchange equity for services investment; their aim is to guide ventures through the development stage to arrive at a significant funding, mergers and acquisition, or other exit strategy.
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
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Formally, a mortg ...
, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries. Offshore funding is provided via specialist venture capital trusts, which seek to use securitization in structuring hybrid multi-market transactions via an SPV (
special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.
In addition to traditional venture capital and angel networks, groups have emerged, 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.
Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.
Other forms include venture resources that seek to provide non-monetary support to launch a new venture.
Role in employment
Every year, there are nearly 2 million businesses created in the US, but 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.
Gender disparities
In 2020 female founded companies raised only 2.8% of capital investment from venture capital, the highest amount recorded.
Babson College
Babson College is a private business school in Wellesley, Massachusetts. Established in 1919, its central focus is on entrepreneurship education. It was founded by Roger W. Babson as an all-male business institute, but became coeducational i ...
's Diana Report found that the number of women
partner
Partner, Partners, The Partner, or, The Partners may refer to:
Books
* ''The Partner'' (Grisham novel), by John Grisham, 1997
* ''The Partner'' (Jenaro Prieto novel), 1928
* ''The Partners'' (book), a 1983 book by James B. Stewart
* ''Partner'' (m ...
s in VC firms decreased from 10% in 1999 to 6% in 2014. The report also found that 97% of VC-funded businesses had male
chief executive
A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...
s, and that businesses with all-male teams were more than four times as likely to receive VC funding compared to teams with at least one woman.
Currently, about 3 percent of all venture capital is going to woman-led companies. More than 75% of VC firms in the US did not have any female venture capitalists at the time they were surveyed.
It was found that a greater fraction of VC firms had never had a woman represent them on the board of one of their
portfolio companies. In 2017 only 2.2% of all VC funding went to female founders.
For comparison, a UC Davis study focusing on large public companies in California found 49.5% with at least one female
board seat.
When the latter results were published, some ''
San Jose Mercury News
''The Mercury News'' (formerly ''San Jose Mercury News'', often locally known as ''The Merc'') is a morning daily newspaper published in San Jose, California, in the San Francisco Bay Area. It is published by the Bay Area News Group, a subsidiar ...
'' readers dismissed the possibility that sexism was a cause. In a follow-up ''
Newsweek
''Newsweek'' is an American weekly online news magazine co-owned 50 percent each by Dev Pragad, its president and CEO, and Johnathan Davis (businessman), Johnathan Davis, who has no operational role at ''Newsweek''. Founded as a weekly print m ...
'' article,
Nina Burleigh
Nina D. Burleigh is an American writer and investigative journalist, the daughter of author Robert Burleigh. She writes books, articles, essays and reviews. Burleigh is a supporter of secular liberalism, and is known for her interest in issues of ...
asked "Where were all these offended people when women like
Heidi Roizen published accounts of having a venture capitalist stick her hand in his pants under a table while a deal was being discussed?"
Geographical differences
Venture capital, as an industry, originated in the United States, and American firms have traditionally been the largest participants in venture deals with the bulk of venture capital being deployed in American companies. However, increasingly, non-US venture investment is growing, and the number and size of non-US venture capitalists have been expanding.
Venture capital has been used as a tool for
economic development
In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and o ...
in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating
access to finance Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services.Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). ''Finance for All? ...
for
small and medium enterprises
Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel and revenue numbers fall below certain limits. The abbreviation "SME" is used by international organizations such as the World Bank ...
(SMEs), which in most cases would not qualify for receiving bank loans.
In the year of 2008, while VC funding were still majorly dominated by U.S. money ($28.8 billion invested in over 2550 deals in 2008), compared to international fund investments ($13.4 billion invested elsewhere), there has been an average 5% growth in the venture capital deals outside the US, mainly in
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
and
Europe
Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...
.
Geographical differences can be significant. For instance, in the UK, 4% of British investment goes to venture capital, compared to about 33% in the U.S.
VC funding has been shown to be positively related to a country's
individualistic culture Individualistic cultures are characterized by individualism, which is the prioritization or emphasis of the individual over the entire group. In individualistic cultures people are motivated by their own preference and viewpoints. Individualistic cu ...
. According to economist
Jeffrey Funk
Jeffrey may refer to:
* Jeffrey (name), including a list of people with the name
* ''Jeffrey'' (1995 film), a 1995 film by Paul Rudnick, based on Rudnick's play of the same name
* ''Jeffrey'' (2016 film), a 2016 Dominican Republic documentary film
...
however more than 90% of US startups valued over $1 billion lost money between 2019–2020 and return on investment from VC barely exceed return from public stock markets over the last 25 years.
United States
![Venture capital by state](https://upload.wikimedia.org/wikipedia/commons/e/ee/Venture_capital_by_state.png)
Venture capitalists invested some $29.1 billion in 3,752 deals in the U.S. through the fourth quarter of 2011, according to
report by the National Venture Capital Association The same numbers for all of 2010 were $23.4 billion in 3,496 deals.
According to a report by Dow Jones VentureSource, venture capital funding fell to $6.4 billion in the US in the first quarter of 2013, an 11.8% drop from the first quarter of 2012, and a 20.8% decline from 2011. Venture firms have added $4.2 billion into their funds this year, down from $6.3 billion in the first quarter of 2013, but up from $2.6 billion in the fourth quarter of 2012.
Australia and New Zealand
In Australia and New Zealand, there are more than one hundred active VC funds, syndicates, or angel investors making VC-style investments.
The State of Startup Funding report found that in 2021, over AUD $10 billion AUD was invested into Australian and New Zealand startups across 682 deals. This represents a 3x increase from the $3.1 billion that was invested in 2020.
Some notable Australian and New Zealand startup success stories include graphic design company
Canva
Canva is an Australian graphic design platform that is used to create social media graphics and presentations. The app includes readymade templates for users to use, and the platform is free and offers paid subscriptions such as Canva Pro and ...
, financial services provider
Airwallex, New Zealand payments provider Vend (acquired by Lightspeed), rent-to-buy company
OwnHome, and direct-to-consumer propositions such as
Eucalyptus
''Eucalyptus'' () is a genus of over seven hundred species of flowering trees, shrubs or mallees in the myrtle family, Myrtaceae. Along with several other genera in the tribe Eucalypteae, including '' Corymbia'', they are commonly known as euca ...
(a house of direct-to-consumer telehealth brands), and
Lyka (a pet wellness company).
In 2022, the largest Australian funds are
Blackbird Ventures
Blackbird, blackbirds, black bird or black birds may refer to:
Birds
Two groups of birds in the parvorder Passerida:
* New World blackbirds, family Icteridae
* Old World blackbirds, any of several species belonging to the genus ''Turdus'' in the ...
,
Square Peg Capital, and
Airtree Ventures. These three funds have more than $1 billion AUD under management across multiple funds. These funds have funding from institutional capital, including AustralianSuper and Hostplus, family offices, and sophisticated individual high-net-wealth investors.
Outside of the 'Big 3', other notable institutional funds include
AfterWork Ventures, Artesian, Folklore Ventures, Equity Venture Partners, Our Innovation Fund, Investible, Main Sequence Ventures (the VC arm of the CSIRO), and Tenacious Ventures.
As the number of capital providers in the Australian and New Zealand ecosystem has grown, funds have started to specialise and innovate to differentiate themselves. For example, Tenacious Ventures is a $35 million specialised agritech fund, while AfterWork Ventures is a 'community-powered fund' that has coalesced a group of 120 experienced operators from across Australia's startups and tech companies. Its community is invested in its fund, and lean into assist with sourcing and evaluating deal opportunities, as well as supporting companies post-investment.
Several Australian corporates have corporate VC arms, including NAB Ventures, Reinventure (associated with Westpac), IAG Firemark Ventures, and Telstra Ventures.
Bulgaria
The Bulgarian venture capital industry has been growing rapidly in the past decade. As of the beginning of 2021, there are 18 VC and growth equity firms on the local market, with the total funding available for technology startups exceeding €200M. According to BVCA – Bulgarian Private Equity and Venture Capital Association, 59 transactions of total value of €29.4 million took place in 2020. Most of the venture capital investments in Bulgaria are concentrated in the seed and Series A stages. Sofia-based LAUNCHub Ventures recently launched one of the biggest funds in the region, with a target size of €70 million.
Mexico
The Venture Capital industry in Mexico is a fast-growing sector in the country that, with the support of institutions and private funds, is estimated to reach US$100 billion invested by 2018.
Israel
In Israel, high-tech entrepreneurship and venture capital have flourished well beyond the country's relative size. As it has very little natural resources and, historically has been forced to build its economy on knowledge-based industries, its VC industry has rapidly developed, and nowadays has about 70 active venture capital funds, of which 14 international VCs with Israeli offices, and additional 220 international funds which actively invest in Israel. In addition, as of 2010, Israel led the world in venture capital invested per capita. Israel attracted $170 per person compared to $75 in the USA. About two thirds of the funds invested were from foreign sources, and the rest domestic. In 2013,
Wix.com
Wix.com Ltd. ( he, וויקס.קום) is an Israeli software company, publicly listed in the US, that provides cloud-based web development services. It allows users to create HTML5 websites and mobile sites through the use of online drag and ...
joined 62 other Israeli firms on the Nasdaq.
Canada
Canadian technology companies have attracted interest from the global venture capital community partially as a result of generous tax incentive through the
Scientific Research and Experimental Development (SR&ED) investment tax credit program. 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, material, R&D contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company, which might not be desirable. 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.
Canada also has a fairly unusual form of venture capital generation in its
labour-sponsored venture capital corporations (LSVCC). These funds, also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and offer
tax break
Tax break also known as tax preferences, tax concession, and tax relief, are a method of reduction to the tax liability of taxpayers. Government usually applies them to stimulate the economy and increase the solvency of the population. By this fi ...
s from government to encourage retail investors to purchase the funds. Generally, these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. However, innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada.
Switzerland
Many Swiss start-ups are university spin-offs, in particular from its federal institutes of technology in
Lausanne
, neighboring_municipalities= Bottens, Bretigny-sur-Morrens, Chavannes-près-Renens, Cheseaux-sur-Lausanne, Crissier, Cugy, Écublens, Épalinges, Évian-les-Bains (FR-74), Froideville, Jouxtens-Mézery, Le Mont-sur-Lausanne, Lugrin (FR-74), ...
and
Zurich.
According to a study by the
London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
analysing 130
ETH Zurich
(colloquially)
, former_name = eidgenössische polytechnische Schule
, image = ETHZ.JPG
, image_size =
, established =
, type = Public
, budget = CHF 1.896 billion (2021)
, rector = Günther Dissertori
, president = Joël Mesot
, ac ...
spin-offs
Spin-off may refer to:
*Spin-off (media), a media work derived from an existing work
*Corporate spin-off, a type of corporate action that forms a new company or entity
* Government spin-off, civilian goods which are the result of military or gove ...
over 10 years, about 90% of these start-ups survived the first five critical years, resulting in an
average annual IRR of more than 43%.
Switzerland's most active early-stage investors are The
Zurich Cantonal Bank
Zurich Cantonal Bank (german: Zürcher Kantonalbank, or ZKB) is the largest cantonal bank and fourth largest bank in Switzerland, as well as the leading financial services provider in the Greater Zurich area, with total assets of over CHF 150 bi ...
, investiere.ch, Swiss Founders Fund, as well as a number of
angel investor
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
clubs.
Europe
Leading early-stage venture capital investors in Europe include Mark Tluszcz of Mangrove Capital Partners and Danny Rimer of
Index Ventures
Index Ventures is a European venture capital firm with dual headquarters in San Francisco and London, investing in technology-enabled companies with a focus on e-commerce, fintech, mobility, gaming, infrastructure/ AI, and security. Since its f ...
, both of whom were named on ''Forbes'' Magazine's Midas List of the world's top dealmakers in technology venture capital in 2007. In 2020, the first Italian Venture capital Fund named Primo Space was launched by Primomiglio SGR. This fund first closed €58 million out a target €80 million and is focused on
Space
Space is the boundless three-dimensional extent in which objects and events have relative position and direction. In classical physics, physical space is often conceived in three linear dimensions, although modern physicists usually consider ...
investing.
Nordic countries
Recent years have seen a revival of the Nordic venture scene with more than €3 billion raised by VC funds in the Nordic region over the last five years. Over the past five years, a total of €2.7 billion has been invested into Nordic startups. Known Nordic early-stage venture capital funds include NorthZone (Sweden), Maki.vc (Finland) and ByFounders (Copenhagen).
Poland
As of March 2019, there are 130 active VC firms in
Poland
Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populous ...
which have invested locally in over 750 companies, an average of 9 companies per portfolio. Since 2016, new legal institutions have been established for entities implementing investments in enterprises in the seed or startup phase. In 2018, venture capital funds invested in Polish startups (0.033% of GDP). As of March 2019, total assets managed by VC companies operating in Poland are estimated at . The total value of investments of the Polish VC market is worth .
Asia
India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
is 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). In 2006, the total amount of private equity and venture capital in India reached $7.5 billion across 299 deals. In the Indian market, venture capital consists of investing in equity, quasi-equity, or conditional loans in order to promote unlisted, high-risk, or high-tech firms driven by technically or professionally qualified entrepreneurs. It is also used to refer to investors "providing seed", "start-up and first-stage financing", or financing companies that have demonstrated extraordinary business potential. Venture capital refers to capital investment; equity and debt ;both of which carry indubitable risk. The anticipated risk is very high. The venture capital industry follows the concept of "high risk, high return", innovative entrepreneurship, knowledge-based ideas and human capital intensive enterprises have become common as venture capitalists invest in risky finance to encourage innovation.
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
is also starting to develop a venture capital industry (
CVCA).
Vietnam
Vietnam or Viet Nam ( vi, Việt Nam, ), officially the Socialist Republic of Vietnam,., group="n" is a country in Southeast Asia, at the eastern edge of mainland Southeast Asia, with an area of and population of 96 million, making i ...
is experiencing its first foreign venture capitals, including IDG Venture Vietnam ($100 million) and DFJ Vinacapital ($35 million)
Singapore
Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borde ...
is widely recognized and featured as one of the hottest places to both start up and invest, mainly due to its healthy ecosystem, its strategic location and connectedness to foreign markets. With 100 deals valued at US$3.5 billion, Singapore saw a record value of PE and VC investments in 2016. The number of PE and VC investments increased substantially over the last 5 years: In 2015, Singapore recorded 81 investments with an aggregate value of US$2.2 billion while in 2014 and 2013, PE and VC deal values came to US$2.4 billion and US$0.9 billion respectively. With 53 percent, tech investments account for the majority of deal volume. Moreover, Singapore is home to two of South-East Asia's largest unicorns.
Garena
Garena is a Singaporean game developer and publisher of free online games. It is the digital entertainment arm of parent company Sea Ltd, which was formerly named Garena.
The company distributes game titles on Garena+ in various countries ac ...
is reportedly the highest-valued unicorn in the region with a US$3.5 billion price tag, while
Grab is the highest-funded, having raised a total of US$1.43 billion since its incorporation in 2012.
Start-ups and small businesses in Singapore receive support from policymakers and the local government fosters the role VCs play to support entrepreneurship in Singapore and the region. For instance, in 2016, Singapore's
National Research Foundation (NRF) has given out grants up to around $30 million to four large local enterprises for investments in startups in the city-state. This first of its kind partnership NRF has entered into is designed to encourage these enterprises to source for new technologies and innovative business models.
Currently, the rules governing VC firms are being reviewed by the
Monetary Authority of Singapore (MAS) to make it easier to set up funds and increase funding opportunities for start-ups. This mainly includes simplifying and shortening the authorization process for new venture capital managers and to study whether existing incentives that have attracted traditional asset managers here will be suitable for the VC sector. A public consultation on the proposals was held in January 2017 with changes expected to be introduced by July.
Middle East and North Africa
The Middle East and North Africa (MENA) venture capital industry is an early stage of development but growing. According to
H1 2019 MENA Venture Investment Report' by MAGNiTT, 238 startup investment deals have taken place in the region in the first half of 2019, totaling in $471 million in investments. Compared to 2018’s H1 report, this represents an increase of 66% in total funding and 28% in number of deals.
According to the report, the
UAE
The United Arab Emirates (UAE; ar, اَلْإِمَارَات الْعَرَبِيَة الْمُتَحِدَة ), or simply the Emirates ( ar, الِْإمَارَات ), is a country in Western Asia (The Middle East). It is located at th ...
is the most active ecosystem in the region with 26% of the deals made in H1, followed by
Egypt
Egypt ( ar, مصر , ), officially the Arab Republic of Egypt, is a transcontinental country spanning the northeast corner of Africa and southwest corner of Asia via a land bridge formed by the Sinai Peninsula. It is bordered by the Mediter ...
at 21%, and
Lebanon
Lebanon ( , ar, لُبْنَان, translit=lubnān, ), officially the Republic of Lebanon () or the Lebanese Republic, is a country in Western Asia. It is located between Syria to the north and east and Israel to the south, while Cyprus li ...
at 13%. In terms of deals by sector, fintech remains the most active industry with 17% of the deals made, followed by e-commerce at 12%, and delivery and transport at 8%.
The report also notes that a total of 130 institutions invested in MENA-based startups in H1 2019, 30% of which were headquartered outside the MENA, demonstrating international appetite for investments in the region. 15 startup exits have been recorded in H1 2019, with
Careem
Careem is a Dubai-based super app with operations in over 100 cities, covering 12 countries across the Middle East, Africa, and South Asia regions. The company, which was valued at over billion in 2018, became a wholly-owned subsidiary of Uber ...
’s $3.1 billion acquisition by
Uber
Uber Technologies, Inc. (Uber), based in San Francisco, provides mobility as a service, ride-hailing (allowing users to book a car and driver to transport them in a way similar to a taxi), food delivery (Uber Eats and Postmates), package ...
being the first unicorn exit in the region. Other notable exits include Souq.com exit to
Amazon
Amazon most often refers to:
* Amazons, a tribe of female warriors in Greek mythology
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon River, in South America
* Amazon (company), an American multinational technology c ...
in 2017 for $650 million.
Sub-Saharan Africa
The Southern African venture capital industry is developing. The South African Government and Revenue Service is following the international trend of using tax-efficient vehicles to propel economic growth and job creation through venture capital. Section 12 J of the ''Income Tax Act'' was updated to include venture capital. Companies are allowed to use a tax-efficient structure similar to VCTs in the UK. Despite the above structure, the government needs to adjust its regulation around
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
, exchange control and other legislation to ensure that Venture capital succeeds.
Currently, there are not many venture capital funds in operation and it is a small community; however, the number of venture funds are steadily increasing with new incentives slowly coming in from government. Funds are difficult to come by and due to the limited funding, companies are more likely to receive funding if they can demonstrate initial sales or traction and the potential for significant growth. The majority of the venture capital in Sub-Saharan Africa is centered on South Africa and Kenya.
Entrepreneurship is a key to growth. Governments will need to ensure business friendly regulatory environments in order to help foster innovation. In 2019, venture capital startup funding grew to 1.3 billion dollars, increasing rapidly. The causes are as of yet unclear, but education is certainly a factor.
Confidential information
Unlike
public companies
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
, information regarding an entrepreneur's business is typically
confidential
Confidentiality involves a set of rules or a promise usually executed through confidentiality agreements that limits the access or places restrictions on certain types of information.
Legal confidentiality
By law, lawyers are often required ...
and proprietary. As part of the
due diligence
Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
It can be a l ...
process, most venture capitalists will require significant detail with respect to a company's
business plan
A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on t ...
. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter into
Non Disclosure Agreement
A non-disclosure agreement (NDA) is a legal contract or part of a contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish ...
s because of the potential liability issues those agreements entail. Entrepreneurs are typically well advised to protect truly proprietary
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
.
Limited partners
A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited ...
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.
Governmental regulations
There are several strict guidelines regulating those that deal in venture capital. Namely, they are not allowed to advertise or solicit business in any form as per the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
guidelines.
In popular culture
In books
*
Mark Coggins
Mark Coggins is the Choctaw and American author of a series of novels featuring private eye protagonist August Riordan. He is also a photographer.
Biography
Coggins was born in New Mexico in 1957 and attended Stanford University, where he ear ...
' novel ''Vulture Capital'' (2002) features a venture capitalist protagonist who investigates the disappearance of the chief scientist in a biotech firm in which he has invested. Coggins also worked in the industry and was co-founder of a dot-com startup.
* Drawing on his experience as reporter covering technology for the ''
New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
'',
Matt Richtel
Matt Richtel (born October 2, 1966 in Los Angeles) is an American writer and journalist for ''The New York Times''. He was awarded the 2010 Pulitzer Prize for National Reporting for a series on distracted driving.
Education
Richtel obtained a bac ...
produced the novel ''Hooked'' (2007), in which the actions of the main character's deceased girlfriend, a Silicon Valley venture capitalist, play a key role in the plot.
* Great, detailed work on VC method of funding.
In comics
* In the ''
Dilbert
''Dilbert'' is an American comic strip written and illustrated by Scott Adams, first published on April 16, 1989. It is known for its satirical office humor about a white-collar, micromanaged office with engineer Dilbert as the title characte ...
'' comic strip, a character named "Vijay, the World's Most Desperate Venture Capitalist" frequently makes appearances, offering bags of cash to anyone with even a hint of potential. In one strip, 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. The children respond that they are already looking for
mezzanine fund
In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typical ...
ing.
* Robert von Goeben and Kathryn Siegler produced a comic strip called ''The VC'' between the years 1997 and 2000 that parodied the industry, often by showing humorous exchanges between venture capitalists and entrepreneurs. Von Goeben was a partner in Redleaf Venture Management when he began writing the strip.
In film
* In ''
Wedding Crashers
''Wedding Crashers'' is a 2005 American comedy film directed by David Dobkin, written by Steve Faber and Bob Fisher, starring Owen Wilson, Vince Vaughn and Christopher Walken with Rachel McAdams, Isla Fisher, Bradley Cooper and Jane Seymou ...
'' (2005), Jeremy Grey (
Vince Vaughn
Vincent Anthony Vaughn (born March 28, 1970) is an American actor.
Vaughn began acting in the late 1980s, appearing in minor television roles before attaining wider recognition with the 1996 comedy-drama film '' Swingers''. He has appeared in ...
) and John Beckwith (
Owen Wilson
Owen Cunningham Wilson (born November 18, 1968) is an American actor. He has had a long association with filmmaker Wes Anderson with whom he shared writing and acting credits for '' Bottle Rocket'' (1996), '' Rushmore'' (1998), and '' The Royal ...
) are bachelors who create appearances to play at different weddings of complete strangers, and a large part of the movie follows them posing as venture capitalists from New Hampshire.
* The documentary ''
Something Ventured
"Something Ventured" is a 2011 documentary film investigating the emergence of American venture capitalism in the mid-20th century. ''Something Venture''d follows the stories of the venture capitalists who worked with entrepreneurs to start and b ...
'' (2011) chronicled the recent history of American technology venture capitalists.
In television
* In the TV series ''
Dragons' Den
''Dragons' Den'' is a reality television program format in which entrepreneurs pitch their business ideas to a panel of venture capitalists in the hope of securing investment finance from them. The program originated in 2001 in Japan, where it is k ...
'', various startup companies pitch their business plans to a panel of venture capitalists.
* In the ABC reality television show ''
Shark Tank
''Shark Tank'' is an American business reality television series that premiered on August 9, 2009, on ABC.Hibberd, James (May 10, 201'Dancing,' 'Bachelor,' and a bigger 'Shark Tank' returning to ABCInsider TV. Retrieved June 24, 2012 The show i ...
'', venture capitalists ("Sharks") hear entrepreneurs' pitches and select which ones they will invest in.
* The short-lived Bravo
reality TV
Reality television is a genre of television programming that documents purportedly unscripted real-life situations, often starring unfamiliar people rather than professional actors. Reality television emerged as a distinct genre in the early 19 ...
show ''
Start-Ups: Silicon Valley'' had participation from venture capitalists in
Silicon Valley
Silicon Valley is a region in Northern California that serves as a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical areas San Mateo County ...
.
* The sitcom ''
Silicon Valley
Silicon Valley is a region in Northern California that serves as a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical areas San Mateo County ...
'' parodies startup companies and venture capital culture.
* The AMC Drama ''
Halt and Catch Fire'' features the use of Venture Capital firms for the startup companies during the PC revolution of the 80s and rise of the world-wide-web in the early 90s.
See also
*
Angel investor
An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...
*
Corporate venture capital
Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies.Chesbrough, Henry''Making Sense of Corporate Venture Capital''. Harvard Business Review, 2002. CVC is defined by the Business Dictionary as ...
*
Deep tech
Deep technology (deep tech) or hard tech is a classification of organization, or more typically startup company, with the expressed objective of providing technology solutions based on substantial scientific or engineering challenges. They present ...
*
Enterprise Capital Fund
Enterprise Capital Funds are financial schemes established by the Department for Business, Innovation and Skills (BIS) in the United Kingdom to address a market weakness in the provision of equity finance to UK small and medium enterprises (SMEs ...
—a type of venture capital fund in the UK
*
Equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it ...
*
History of private equity and venture capital
The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-i ...
*
Initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
(IPO)
*
List of venture capital firms
Below is a list of notable venture capital firms.
Assets under management
Shown below are the largest venture capital firms ranked by Assets Under Management.
Capital raised
Data is for capital raised between January 1, 2017, and June 30, 2022. ...
*
Mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
*
Platform cooperative
*
Private equity secondary market
In finance, the private-equity secondary market (also often called private-equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private-equity and other alternative investment funds. Given t ...
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Private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
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Revenue-based financing Revenue-based financing or royalty-based financing (RBF) is a type of financial capital provided to small or growing businesses in which investors inject capital into a business in return for a fixed percentage of ongoing gross revenues, with paymen ...
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Seed funding
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term ''seed'' su ...
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Social venture capital Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsi ...
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Sweat equity Sweat equity is a non-monetary benefit that a company's stakeholders give in labor and time, rather than a monetary contribution, that benefit the company. Sweat equity is rewarded in the form of sweat equity shares. These are shares given out by a ...
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Venture capital financing
Venture capital financing is a type of funding by venture capital. It is private equity capital that can be provided at various stages or funding rounds. Common funding rounds include early-stage seed funding in high-potential, growth companies ( ...
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Venture capitalist
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which hav ...
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Women in venture capital
Women in venture capital or ''VC'' are investors who provide venture capital funding to startups. Women make up a small (usually less than 10%) fraction of the venture capital private equity workforce. A widely used source for tracking the number ...
Notes
Further reading
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Duhigg, Charles, "The Enablers: Venture capitalists used to exert discipline on startups. Now they often encourage recklessness", ''
The New Yorker
''The New Yorker'' is an American weekly magazine featuring journalism, commentary, criticism, essays, fiction, satire, cartoons, and poetry. Founded as a weekly in 1925, the magazine is published 47 times annually, with five of these issues ...
'', 30 November 2020, pp. 38–47.
* Lerner, Josh, and Ramana Nanda. 2020.
Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn" Journal of Economic Perspectives, 34 (3): 237-61.
References
{{Authority control
Corporate finance
Entrepreneurship
Equity securities
Private equity