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Venture capital (VC) is a form of
private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Private equity is a type of equity and one of the asset classes consisti ...
financingFunding 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 i ...
that is provided by venture capital firms or
fundsFunding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III ...
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 differe ...
, 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 face high uncertainty, VC investments have high rates of failure. The start-ups are usually based on an
innovative technology
innovative technology
or
business model
business model
and they are usually from the
high technology High technology (high tech) or frontier technology (frontier tech) is technology Technology ("science of craft", from Ancient Greek, Greek , ''techne'', "art, skill, cunning of hand"; and , ''wikt:-logia, -logia'') is the sum of Art techni ...
industries, such as information technology (IT),
clean technology Clean technology, in short cleantech, is any process, product, or service that reduces negative environmental impacts through significant Efficient energy use, energy efficiency improvements, the sustainable use of resources, or environmental prote ...
or
biotechnology Biotechnology is a broad area of biology, involving the use of living systems and organisms to develop or make products. Depending on the tools and applications, it often overlaps with related scientific fields. In the late 20th and early 21st c ...

biotechnology
. 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 A securities offering (or funding round or investment round) is a discrete round of investment To invest is to allocate money Image:National-Debt ...
" 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 Preferred stock (also cal ...
. Venture capitalists provide this financing in the interest of generating a return 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 in which shares of a company are sold to s and usually also retail (individual) investors. An IPO is typically by one or more , who also arrange for the shares to be listed on one or more s ...
(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 Private equity (PE) typically refers to invest ...
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 start-up, usually in exchange for convertible debt or ownership equity ...
,
equity crowdfundingEquity 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 oft ...
and other
seed funding Seed money, sometimes known as seed funding or seed capital, is a form of securities offering A securities offering (or funding round or investment round) is a discrete round of investment To invest is to allocate money Image:National-Debt ...
options, venture capital is attractive for new companies with limited operating history that are too small to raise
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
in the
public market A market, or marketplace, is a location where people regularly go to gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a market place may be described as a ''souk'' (from the Arab ...
s and have not reached the point where they are able to secure a
bank loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...
or complete a
debt offering
debt offering
. In exchange for the high
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...
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., commonly known as Uber, is an American mobility as a service Mobility-as-a-Service (MaaS) is a type of service that through a joint digital channel enables users to plan, book, and pay for multiple types of mobility ...

Uber
,
Airbnb Airbnb, Inc. (pronounced and stylized as airbnb) operates an online marketplaceAn online marketplace (or online e-commerce marketplace) is a type of e-commerce website where product or service information is provided by multiple third par ...

Airbnb
,
Flipkart Flipkart is an Indian e-commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet The Internet (Capitalization of Internet, or internet) is ...
,
Xiaomi Xiaomi Corporation (; ), registered in Asia as Xiaomi Inc., is a Chinese designer and manufacturer of consumer electronics Consumer electronics or home electronics are electronic Electronic may refer to: *Electronics Electronics c ...

Xiaomi
&
Didi Chuxing Didi Chuxing Technology Co., (stylized DiDi, , pronounced ɨ́tɨ́ ʈʂʰúɕɪ̌ŋ, formerly named Didi Dache () and Didi Kuaidi (), is a Chinese vehicle for hire in New York City File:Chariot Bikes fleet.jpg, upright=1.2, Eco Chariots cy ...

Didi Chuxing
are highly valued startups, commonly known as "Unicorns", 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
business model
and marketing strategies. Venture capital is also a way in which the
private Private or privates may refer to: Music * "In Private "In Private" was the third single in a row to be a charting success for United Kingdom, British singer Dusty Springfield, after an absence of nearly two decades from the charts. Both "In Pri ...
and
public sector The public sector (also called the state sector) is the part of the economy composed of both public service A public service is a service Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administ ...
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 categor ...
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. In an organizational setting, a mentor influences the personal and professional growth of a mentee. Most traditional mentorships involve having senior employees mentor more ...
, talent acquisition, strategic partnership, marketing "know-how", and
business model
business model
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 global war A world war is "a war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literatur ...
(1939–1945) venture capital was primarily the domain of wealthy individuals and families.
J.P. Morgan
J.P. Morgan
, the Wallenbergs, the
Vanderbilts The Vanderbilt family is an American family of Dutch Dutch commonly refers to: * Something of, from, or related to the Netherlands * Dutch people () * Dutch language () *Dutch language , spoken in Belgium (also referred as ''flemish'') Dutch ma ...
, the Whitneys, the
Rockefellers The Rockefeller family () is an American Industrial sector, industrial, political, and List of banking families, banking family that owns one of the List of wealthiest historical figures, world's largest fortunes. The fortune was made in the Hi ...
, and the
Warburgs The Warburg family is a prominent German and American banking family of German Jewish The history of the Jews in Germany goes back at least to the year 321, and continued through the Early Middle Ages (5th to 10th centuries CE) and High Middle ...
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 American airline from 1926 to 1991. Before its dissolution, it was headquartered at Miami International Airport in an unincorporated area of Miami-Dade County, Florida, Miami-Da ...
and
Douglas Aircraft The Douglas Aircraft Company was an American aerospace manufacturer based in Southern California Southern California (popularly known as SoCal; es, Sur de California) is a geographic and cultural region that generally comprises the southern p ...
, 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 New York City, New York-based private equity firm with offices in the United States, Europe, Brazil, China, Southeast Asia and India. It has been a private equity investor since 1966. The firm currently has approximately $6 ...
, 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 to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along wit ...
and venture capital. The
Wallenberg family The Wallenberg family are a prominent Swedish family, Europe's most powerful business families and business dynasties. Wallenbergs are noted as bankers A bank is a financial institution Financial institutions, otherwise known as bank ...
started
Investor AB Investor AB is a Swedish investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms ...
in 1916 in Sweden and were early investors in several Swedish companies such as
ABB ABB Ltd (german: ABB AG, French, Italian Italian may refer to: * Anything of, from, or related to the country and nation of Italy ** Italians, an ethnic group or simply a citizen of the Italian Republic ** Italian language, a Romance language * ...

ABB
,
Atlas Copco Atlas Copco (Copco from Compagnie Pneumatique Commerciale) is a Swedish Swedish or ' may refer to: * Anything from or related to Sweden, a country in Northern Europe * Swedish language, a North Germanic language spoken primarily in Sweden and Fin ...

Atlas Copco
, and
Ericsson (lit. "Telephone Stock Company of LM Ericsson"), commonly known as Ericsson, is a Swedish Swedish or ' may refer to: * Anything from or related to Sweden, a country in Northern Europe * Swedish language, a North Germanic language spoken pri ...

Ericsson
in the first half of the 20th century. ( History of venture capital) 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 Venture capital (VC) is a form of private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and ...
(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 France (), officially the French Republic (french: lin ...
, the "father of venture capitalism", along with
Ralph Flanders Ralph Edward Flanders (September 28, 1880 – February 19, 1970) was an American mechanical engineer Mechanical may refer to: Machine * Mechanical system, a system that manages the power of forces and movements to accomplish a task * Machine (me ...
and
Karl Compton Karl Taylor Compton (September 14, 1887 – June 22, 1954) was a prominent American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the United States The United ...
(former president of
MIT Massachusetts Institute of Technology (MIT) is a private land-grant research university A research university is a university A university ( la, universitas, 'a whole') is an educational institution, institution of higher education, hi ...

MIT
) 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 A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights ...
(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 well ...
, 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 that starts in Hopkinton, M ...
, 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 Conglomerate or conglomeration may refer to: * Conglomerate (company) * Conglomerate (geology) * Conglomerate (mathematics) In popular culture: * The Conglomerate (American group), a product ...

Textron
after having invested in over 150 companies.
John Hay Whitney John Hay "Jock" 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 ...
(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 Pi ...
in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin
Cornelius Vanderbilt Whitney Cornelius 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 Thoroughbred ...

Cornelius Vanderbilt Whitney
. 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 A drink (or beverage) is a liquid intended for human consumption. In addition to their basic function of satisfying thirst, drinks play important roles in human culture. Common types of drinks include ...
orange juice and was sold to
The Coca-Cola Company The Coca-Cola Company is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational ...
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 Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever *Leverag ...
transactions and raised $750 million for its sixth
institutional Institutions, according to Samuel P. Huntington, are "stable, valued, recurring patterns of behavior". Institutions can refer to mechanisms which govern the behavior Behavior (American English) or behaviour (British English; American and ...
private-equity fund A private-equity 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. Private equity funds are t ...
in 2005.


Early venture capital and the growth of Silicon Valley

One of the first steps toward a professionally managed venture capital industry was the passage of the
Small Business Investment Act of 1958 The U.S. Small Business Administration (SBA) is a United States government Independent agencies of the United States government, agency that provides support to Entrepreneurship, entrepreneurs and small businesses. The mission of the Small Busines ...
. The 1958 Act officially allowed the U.S.
Small Business Administration The U.S. Small Business Administration (SBA) is a United States government The federal government of the United States (U.S. federal government or U.S. government) is the Federation#Federal governments, national government of the United ...
(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 and career Draper was born on January 1, 1928 in White Plains, New York, the son of Katherine Louise (née Baum) and banker, general, and diplomat Wil ...
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 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. Private equity funds are t ...
, still in use today, emerged.
Private-equity firm A private-equity firm is an investment management Investment management is the professional asset management of various securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument ...
s organized
limited partnership A limited partnership (LP) is a form of partnership A partnership is an arrangement where parties, known as business partner A business partner is a commercial entity with which another commercial entity has some form of Business alliance, a ...
s to hold investments in which the investment professionals served as
general partnerGeneral 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 business's debts and ob ...
and the investors, who were passive limited partners, 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 in excess of the amount that the manager contributes to the partnership, specifically in alternative investment An alternative inve ...
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", is an arterial road in western Silicon Valley, California, running through Palo Alto, California, Palo Alto, Menlo Park, California, Menlo Park, and Woodside, California, Woodside, notable for i ...
, 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 Venture capital (VC) is a form of private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that ...
in 1972. Located in
Menlo Park, CA Menlo Park is a city located at the eastern edge of San Mateo County, California, San Mateo County within the San Francisco Bay Area of California in the United States. It is bordered by San Francisco Bay on the north and east; East Palo Alto, C ...
, Kleiner Perkins, Sequoia and later venture capital firms would have access to the many
semiconductor A semiconductor material has an electrical conductivity Electrical resistivity (also called specific electrical resistance or volume resistivity) is a fundamental property of a material that measures how strongly it resists electric curre ...
companies based in the
Santa Clara Valley The Santa Clara Valley is a geologic trough in Northern California Northern California (colloquially known as NorCal) is a geographic and cultural region that generally comprises the northern portion of the U.S. state of California. Spanning ...
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 automatically. Modern computers can perform generic sets of operations known as Computer program, programs. These ...

computer
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 (economics), industry. An industry trad ...
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 federal Federal or foederal (archaic) may refer to: Politics General *Federal monarchy, a federation of monarchies *Federation, or ''Federal state'' (fed ...
(ERISA) in 1974, corporate pension funds were prohibited from holding certain risky investments including many investments in
privately held A privately held company or private company is a company which does not offer or trade its company stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in whic ...
companies. In 1978, the US Labor Department relaxed certain restrictions of the ERISA, under the " prudent man rule", 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 A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights ...
,
Apple Inc. Apple Inc. is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational state, ...
,
Genentech Genentech, Inc., is an American biotechnology Biotechnology is a broad area of biology, involving the use of living systems and organisms to develop or make products. Depending on the tools and applications, it often overlaps with related scie ...

Genentech
) 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'' is an American daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or simply a periodical) is a category of Serial (publishing), serial published, publicatio ...
, 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 ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
and
Korea Korea is a region In geography, regions are areas that are broadly divided by physical characteristics (physical geography), human impact characteristics (human geography), and the interaction of humanity and the environment (environmental ...

Korea
, 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 corporation, multinational Conglomerate (company), conglomerate incorporated in New York State and headquartered in Boston. Until 2021, the company operated through GE Aviation, aviat ...
and
Paine Webber PaineWebber & Co. was an American Investment banking, investment bank and brokerage firm, stock brokerage firm that was acquired by the Swiss bank UBS in 2000. The company was founded in 1880 in Boston, Massachusetts, by William A. Paine, William A ...
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, 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 New York City, New York-based private equity firm with offices in the United States, Europe, Brazil, China, Southeast Asia and India. It has been a private equity investor since 1966. The firm currently has approximately $6 ...
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 to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along wit ...
and
growth capital Growth may refer to:"''Quantative increase in size''". Biology * Auxology, the study of all aspects of human physical growth * Bacterial growth * Cell growth Cell growth refers to an ''increase in the total mass Mass is both a property ...
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 Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever *Leverag ...
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 An information system (IS) is a formal, sociotechnical Sociotechnical systems (STS) in organizational development is an approach to complex organizational ...
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 Mountain View is a city in Santa Clara County, Californi ...

Netscape
and
Amazon (company) Amazon.com, Inc. ( ) is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational ...
were founded in 1994, and
Yahoo! Yahoo (, styled as yahoo''!'') is an American web services The term Web service (WS) is either: * a service offered by an electronic device to another electronic device, communicating with each other via the World Wide Web, or * a server run ...
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 ''internetworking, network of networks'' that consist ...

Internet
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, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble Stock (also capital stock) is all of the Share (finance), shares into which ownership of a corporation is divided.Long ...
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 () is an American stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorpora ...
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 A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finan ...
. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless, 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 ''internetworking, network of networks'' that consist ...

Internet
-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, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble Stock (also capital stock) is all of the Share (finance), shares into which ownership of a corporation is divided.Long ...
), 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 Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit. ...
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 Standard may re ...
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 A public offering is the offering of securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance is the ...
stage when valuations are favourable. Venture capitalists typically assist at four stages in the company's development: * Idea generation; * Start-up; * Ramp-up; 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 (road ...
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
.
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 or capital adequacy) 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 adequacy ratio o ...
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 ("science of craft", from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. I ...
and
life sciences This list of life sciences comprises the branches of science The branches of science, also referred to as sciences, "scientific fields", or "scientific disciplines," are commonly divided into three major groups: *Formal sciences: the stu ...
or
biotechnology Biotechnology is a broad area of biology, involving the use of living systems and organisms to develop or make products. Depending on the tools and applications, it often overlaps with related scientific fields. In the late 20th and early 21st c ...

biotechnology
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 company, startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture fund ...
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 A securities offering (or funding round or investment round) is a discrete round of investment To invest is to allocate money Image:National-Debt ...
: 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 start-up, usually in exchange for convertible debt In finance Fina ...
s.
Equity crowdfundingEquity 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 oft ...
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 Preferred stock (also cal ...
): 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 (abbreviated WC) is a financial metric which represents available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a ...
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, 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 instead of a full round and usually the existing investors participate. Between the first round and the fourth round, venture-backed companies may also seek to take
venture debtVenture 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 asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information ab ...
. 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 investmentImage:Financial info.jpg, 200px, thumbnail, The values and performance of collective funds are listed in newspapers An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages ...
vehicle (in the United States, often an LP or
LLC A limited liability company (LLC) is the US-specific form of a private limited company A private limited company is any type of business entity in Privately held company, "private" ownership used in many jurisdictions, in contrast to a Pu ...
) that primarily invests the
financial capital Financial capital (also simply known as capital or equity in finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
of third-party investors in enterprises that are too risky for the standard
capital market A capital market is a financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Swed ...
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 partnerA business partner is a commercial entity with which another commercial entity has some form of alliance. This relationship may be a contract A contract is a legally bin ...
, the general partners 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) is the US-specific form of a private limited company A private limited company is any type of business entity in Privately held company, "private" ownership used in many jurisdictions, in contrast to a Pub ...
, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as
limited partner A limited partnership (LP) is a form of partnership 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 ent ...
s. 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 private ...
s, university
financial endowment A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of financial Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is ...
s, foundations,
insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...

insurance
companies, and
pooled investmentImage:Financial info.jpg, 200px, thumbnail, The values and performance of collective funds are listed in newspapers An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages ...
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) 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 An investment bank is a financial services Financial services are the economic services provided by the finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is conce ...
or other
corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers a ...
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 Northern California (colloquially known as NorCal) is a geographic and cultural region that generally comprises the northern portion of the U.S. state of California California is a U.S ...

Silicon Valley
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. It can take anywhere from a month or so 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 yearVintage 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 investors' point of view, funds can be: (1)
traditional A tradition is a belief A belief is an Attitude (psychology), attitude that something is the case, or that some proposition about the world is truth, true. In epistemology, philosophers use the term "belief" to refer to attitudes about the wo ...
—where all the investors invest with equal terms; or (2) asymmetric—where different investors have different terms. Typically the asymmetry is seen in cases where there's an investor that has other interests such as tax income in case of public investors.


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 in excess of the amount that the manager contributes to the partnership, specifically in alternative investment An alternative inve ...
(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 A securities offering (or funding round or investment round) is a discrete round of investment To invest is to allocate money Image:National-Debt ...
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 Startup company, start-up, usually in exchange for convertible debt or owne ...
, 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 financingRevenue-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 payme ...
, 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 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 equitySweat 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 c ...
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 Startup company, start-up, usually in exchange for convertible debt or owne ...
. This practice is called "
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".
Equity crowdfundingEquity 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 oft ...
is emerging as an alternative to traditional venture capital. Traditional
crowdfunding Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, in modern times typically via the Internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative ...

crowdfunding
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 crowdfundingEquity 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 oft ...
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 In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Sim ...
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
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, 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 special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limite ...
): 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.
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's Diana Report found that the number of women partners 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), chief administrator officer, or just chief executive (CE), is one of a number of corporate executives A corporation is an organization—usually a group of people or a company A company, abbreviated as co ...
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 A newspaper is a containing written and is often typed in black ink with a white or gray background. Newspapers ...

San Jose Mercury News
'' readers dismissed the possibility that sexism was a cause. In a follow-up ''
Newsweek ''Newsweek'' is an American weekly news magazine A news magazine is a typed, printed, and published , radio or , usually published weekly, consisting of articles about current events. News magazines generally discuss stories, in greater de ...
'' article, asked "Where were all these offended people when women like
Heidi Roizen Heidi Roizen (born 1958) is a Silicon Valley executive, venture capitalist, and entrepreneur. She is known for speaking out against the Sexism in the technology industry, harassment of women in technology, having herself received harassment in th ...
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 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 for small and medium enterprises (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 and Europe. 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. According to economist Jeffrey Funk 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 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.


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 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 Tax Credit Program, 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 corporation, 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 breaks 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 École Polytechnique Fédérale de Lausanne, Lausanne and ETH Zurich, Zurich. According to a study by the London School of Economics analysing 130 ETH Zurich University spin-off, spin-offs over 10 years, about 90% of these start-ups survived the first five critical years, resulting in an Rate of return, average annual IRR of more than 43%. Switzerland's most active early-stage investors are The Zurich Cantonal Bank
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 start-up, usually in exchange for convertible debt In finance Fina ...
clubs.


Europe

Leading early-stage venture capital investors in Europe include Mark Tluszcz of Mangrove Capital Partners and Danny Rimer of Index Ventures, 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 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 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 is fast catching up with the West in the field of venture capital and a number of venture capital funds have a presence in the country (IVCA). In 2006, the total amount of private equity and venture capital in India reached $7.5 billion across 299 deals. In the Indian context, 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 risk anticipated 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 taken the front seat as venture capitalists invest in risky finance to encourage innovation. China is also starting to develop a venture capital industry (China Venture Capital Association, CVCA). Vietnam is experiencing its first foreign venture capitals, including IDG Venture Vietnam ($100 million) and DFJ Vinacapital ($35 million) Singapore 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 is reportedly the highest-valued unicorn in the region with a US$3.5 billion price tag, while Grab (application), 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 Prime Minister's Office (Singapore)#National Research Foundation, 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, 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 United Arab Emirates, UAE is the most active ecosystem in the region with 26% of the deals made in H1, followed by Egypt at 21%, and Lebanon 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’s $3.1 billion acquisition by
Uber Uber Technologies, Inc., commonly known as Uber, is an American mobility as a service Mobility-as-a-Service (MaaS) is a type of service that through a joint digital channel enables users to plan, book, and pay for multiple types of mobility ...

Uber
being the first unicorn exit in the region. Other notable exits include Souq.com exit to Amazon (company), Amazon 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, 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 company, public companies, information regarding an entrepreneur's business is typically confidential 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 Standard may re ...
process, most venture capitalists will require significant detail with respect to a company's business plan. 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 Agreements because of the potential liability issues those agreements entail. Entrepreneurs are typically well advised to protect truly proprietary intellectual property. Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership, 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 guidelines.


In popular culture


In books

* Mark Coggins' 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'' is an American daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or simply a periodical) is a category of Serial (publishing), serial published, publicatio ...
'', Matt Richtel 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'' 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 funding. * 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'' (2005), Jeremy Grey (Vince Vaughn) and John Beckwith (Owen Wilson) 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'' (2011) chronicled the recent history of American technology venture capitalists.


In television

* In the TV series ''Dragons' Den'', various startup companies pitch their business plans to a panel of venture capitalists. * In the ABC reality television show ''Shark Tank'', venture capitalists ("Sharks") hear entrepreneurs' pitches and select which ones they will invest in. * The short-lived Bravo reality TV show ''Start-Ups: Silicon Valley'' had participation from venture capitalists in
Silicon Valley Silicon Valley is a region in Northern California Northern California (colloquially known as NorCal) is a geographic and cultural region that generally comprises the northern portion of the U.S. state of California California is a U.S ...

Silicon Valley
. * The sitcom ''Silicon Valley (TV series), Silicon Valley'' parodies startup companies and venture capital culture. * The AMC Drama ''Halt and Catch Fire (TV series), 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 * Corporate venture capital * Deep tech * Enterprise Capital Fund—a type of venture capital fund in the UK *
Equity crowdfundingEquity 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 oft ...
* History of private equity and venture capital * Initial public offering (IPO) * List of venture capital firms * M&A * Platform cooperative * Private equity secondary market * Private equity * Revenue-based financing * Seed funding * Social venture capital * Sweat equity * Venture capital financing * Venture capitalist * Women in venture capital


Notes


Further reading

* Charles Duhigg, Duhigg, Charles, "The Enablers: Venture capitalists used to exert discipline on startups. Now they often encourage recklessness", ''The New Yorker'', 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 Venture capital, Corporate finance Entrepreneurship Equity securities Private equity