Venture Capital

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<ul><li><p>VenturecapitalFromWikipedia,thefreeencyclopedia</p><p>Fortheprocessoffinancingbyventurecapital,seeVenturecapitalfinancing.</p><p>Venturecapital(VC)ismoneyprovidedtoseed,earlystage,emergingandemerginggrowthcompanies.Theventurecapitalfundsinvestincompaniesinexchangeforequityinthecompaniesitinvestsin,whichusuallyhaveanoveltechnologyorbusinessmodelinhightechnologyindustries,suchasbiotechnologyandIT.Thetypicalventurecapitalinvestmentoccursaftertheseedfundingroundasthefirstroundofinstitutionalcapitaltofundgrowth(alsoreferredtoasSeriesAround)intheinterestofgeneratingareturnthroughaneventualrealizationevent,suchasanIPOortradesaleofthecompany.Venturecapitalisatypeofprivateequity.[1]</p><p>Inadditionwithangelinvesting,equitycrowdfundingandotherseedfundingoptions,venturecapitalisattractivefornewcompanieswithlimitedoperatinghistorythataretoosmalltoraisecapitalinthepublicmarketsandhavenotreachedthepointwheretheyareabletosecureabankloanorcompleteadebtoffering.Inexchangeforthehighriskthatventurecapitalistsassumebyinvestinginsmallerandlessmaturecompanies,venturecapitalistsusuallygetsignificantcontrolovercompanydecisions,inadditiontoasignificantportionofthecompany'sownership(andconsequentlyvalue).</p><p>Venturecapitalisalsoassociatedwithjobcreation(accountingfor2%ofUSGDP),[2]theknowledgeeconomy,andusedasaproxymeasureofinnovationwithinaneconomicsectororgeography.Everyyear,therearenearly2millionbusinessescreatedintheUSA,and600800getventurecapitalfunding.AccordingtotheNationalVentureCapitalAssociation,11%ofprivatesectorjobscomefromventurebackedcompaniesandventurebackedrevenueaccountsfor21%ofUSGDP.[3]</p><p>Itisalsoawayinwhichtheprivateandthepublicsectorcanconstructaninstitutionthatsystematicallycreatesnetworksforthenewfirmsandindustries,sothattheycanprogress.Thisinstitutionhelpsidentifyandcombinepiecesofcompanies,suchasfinance,technicalexpertise,marketingknowhow,andbusinessmodels.Onceintegrated,theseenterprisessucceedbybecomingnodesinthesearchnetworksfordesigningandbuildingproductsintheirdomain.[4]</p><p>Contents</p><p>1History1.1Originsofmodernprivateequity1.2EarlyventurecapitalandthegrowthofSiliconValley1.31980s1.4VenturecapitalboomandtheInternetBubble1.5Privateequitycrash</p><p>2Funding2.1Financingstages</p><p>3Firmsandfunds3.1Venturecapitalists3.2Structure3.3Types3.4Roles3.5Structureofthefunds3.6Compensation3.7Alternatives</p><p>4Geographicaldifferences</p></li><li><p>4Geographicaldifferences4.1UnitedStates4.2Mexico4.3Israel4.4Canada4.5Switzerland4.6Europe4.7Asia4.8MiddleEastandNorthAfrica4.9SouthernAfrica</p><p>5Confidentialinformation6GovernmentalRegulations7Inpopularculture</p><p>7.1Inbooks7.2Incomics7.3Infilm7.4Intelevision</p><p>8Seealso9References</p><p>History</p><p>Aventuremaybedefinedasaprojectprospectiveconvertedintoaprocesswithanadequateassumedriskandinvestment.Withfewexceptions,privateequityinthefirsthalfofthe20thcenturywasthedomainofwealthyindividualsandfamilies.TheWallenbergs,Vanderbilts,Whitneys,Rockefellers,andWarburgswerenotableinvestorsinprivatecompaniesinthefirsthalfofthecentury.In1938,LauranceS.RockefellerhelpedfinancethecreationofbothEasternAirLinesandDouglasAircraft,andtheRockefellerfamilyhadvastholdingsinavarietyofcompanies.EricM.WarburgfoundedE.M.Warburg&amp;Co.in1938,whichwouldultimatelybecomeWarburgPincus,withinvestmentsinbothleveragedbuyoutsandventurecapital.TheWallenbergfamilystartedInvestorABin1916inSwedenandwereearlyinvestorsinseveralSwedishcompaniessuchasABB,AtlasCopco,Ericsson,etc.inthefirsthalfofthe20thcentury.</p><p>Originsofmodernprivateequity</p><p>BeforeWorldWarII(19391945),moneyorders(originallyknownas"developmentcapital")remainedprimarilythedomainofwealthyindividualsandfamilies.Onlyafter1945did"true"privateequityinvestmentsbegintoemerge,notablywiththefoundingofthefirsttwoventurecapitalfirmsin1946:AmericanResearchandDevelopmentCorporation(ARDC)andJ.H.Whitney&amp;Company.[5][6]</p><p>GeorgesDoriot,the"fatherofventurecapitalism"[7](andformerassistantdeanofHarvardBusinessSchool),foundedINSEADin1957.AlongwithRalphFlandersandKarlCompton(formerpresidentofMIT),DoriotfoundedARDCin1946toencourageprivatesectorinvestmentinbusinessesrunbysoldiersreturningfromWorldWarII.ARDCbecamethefirstinstitutionalprivateequityinvestmentfirmtoraisecapitalfromsourcesotherthanwealthyfamilies,althoughithadseveralnotableinvestmentsuccessesaswell.[8]ARDCiscreditedwiththefirsttrickwhenits1957investmentof$70,000inDigitalEquipmentCorporation(DEC)wouldbevaluedatover$355millionafterthecompany'sinitialpublicofferingin1968(representingareturnofover1200timesonitsinvestmentandanannualizedrateofreturnof101%).[9]</p></li><li><p>AhighwayexitforSandHillRoadinMenloPark,California,wheremanyBayAreaventurecapitalfirmsarebased</p><p>FormeremployeesofARDCwentontoestablishseveralprominentventurecapitalfirmsincludingGreylockPartners(foundedin1965byCharlieWaiteandBillElfers)andMorgan,HollandVentures,thepredecessorofFlagshipVentures(foundedin1982byJamesMorgan).[10]ARDCcontinuedinvestinguntil1971,whenDoriotretired.In1972DoriotmergedARDCwithTextronafterhavinginvestedinover150companies.</p><p>JohnHayWhitney(19041982)andhispartnerBennoSchmidt(19131999)foundedJ.H.Whitney&amp;Companyin1946.Whitneyhadbeeninvestingsincethe1930s,foundingPioneerPicturesin1933andacquiringa15%interestinTechnicolorCorporationwithhiscousinCorneliusVanderbiltWhitney.FloridaFoodsCorporationprovedWhitney'smostfamousinvestment.ThecompanydevelopedaninnovativemethodfordeliveringnutritiontoAmericansoldiers,laterknownasMinuteMaidorangejuiceandwassoldtoTheCocaColaCompanyin1960.J.H.Whitney&amp;Companycontinuedtomakeinvestmentsinleveragedbuyouttransactionsandraised$750millionforitssixthinstitutionalprivateequityfundin2005.</p><p>EarlyventurecapitalandthegrowthofSiliconValley</p><p>OneofthefirststepstowardaprofessionallymanagedventurecapitalindustrywasthepassageoftheSmallBusinessInvestmentActof1958.The1958ActofficiallyallowedtheU.S.SmallBusinessAdministration(SBA)tolicenseprivate"SmallBusinessInvestmentCompanies"(SBICs)tohelpthefinancingandmanagementofthesmallentrepreneurialbusinessesintheUnitedStates.[11]</p><p>Duringthe1960sand1970s,venturecapitalfirmsfocusedtheirinvestmentactivityprimarilyonstartingandexpandingcompanies.Moreoftenthannot,thesecompanieswereexploitingbreakthroughsinelectronic,medical,ordataprocessingtechnology.Asaresult,venturecapitalcametobealmostsynonymouswithtechnologyfinance.AnearlyWestCoastventurecapitalcompanywasDraperandJohnsonInvestmentCompany,formedin1962[12]byWilliamHenryDraperIIIandFranklinP.Johnson,Jr.In1965,SutterHillVenturesacquiredtheportfolioofDraperandJohnsonasafoundingaction.BillDraperandPaulWytheswerethefounders,andPitchJohnsonformedAssetManagementCompanyatthattime.</p><p>ItiscommonlynotedthatthefirstventurebackedstartupisFairchildSemiconductor(whichproducedthefirstcommerciallypracticalintegratedcircuit),fundedin1959bywhatwouldlaterbecomeVenrockAssociates.[13]Venrockwasfoundedin1969byLauranceS.Rockefeller,thefourthofJohnD.Rockefeller'ssixchildrenasawaytoallowotherRockefellerchildrentodevelopexposuretoventurecapitalinvestments.</p><p>Itwasalsointhe1960sthatthecommonformofprivateequityfund,stillinusetoday,emerged.Privateequityfirmsorganizedlimitedpartnershipstoholdinvestmentsinwhichtheinvestmentprofessionalsservedasgeneralpartnerandtheinvestors,whowerepassivelimitedpartners,putupthecapital.Thecompensationstructure,stillinusetoday,alsoemergedwithlimitedpartnerspayinganannualmanagementfeeof1.02.5%andacarriedinteresttypicallyrepresentingupto20%oftheprofitsofthepartnership.</p></li><li><p>ThegrowthoftheventurecapitalindustrywasfueledbytheemergenceoftheindependentinvestmentfirmsonSandHillRoad,beginningwithKleiner,Perkins,Caufield&amp;ByersandSequoiaCapitalin1972.LocatedinMenloPark,CA,KleinerPerkins,SequoiaandlaterventurecapitalfirmswouldhaveaccesstothemanysemiconductorcompaniesbasedintheSantaClaraValleyaswellasearlycomputerfirmsusingtheirdevicesandprogrammingandservicecompanies.[14]</p><p>Throughoutthe1970s,agroupofprivateequityfirms,focusedprimarilyonventurecapitalinvestments,wouldbefoundedthatwouldbecomethemodelforlaterleveragedbuyoutandventurecapitalinvestmentfirms.In1973,withthenumberofnewventurecapitalfirmsincreasing,leadingventurecapitalistsformedtheNationalVentureCapitalAssociation(NVCA).TheNVCAwastoserveastheindustrytradegroupfortheventurecapitalindustry.[15]Venturecapitalfirmssufferedatemporarydownturnin1974,whenthestockmarketcrashedandinvestorswerenaturallywaryofthisnewkindofinvestmentfund.</p><p>Itwasnotuntil1978thatventurecapitalexperienceditsfirstmajorfundraisingyear,astheindustryraisedapproximately$750million.WiththepassageoftheEmployeeRetirementIncomeSecurityAct(ERISA)in1974,corporatepensionfundswereprohibitedfromholdingcertainriskyinvestmentsincludingmanyinvestmentsinprivatelyheldcompanies.In1978,theUSLaborDepartmentrelaxedcertainoftheERISArestrictions,underthe"prudentmanrule,"[16]thusallowingcorporatepensionfundstoinvestintheassetclassandprovidingamajorsourceofcapitalavailabletoventurecapitalists.</p><p>1980s</p><p>Thepublicsuccessesoftheventurecapitalindustryinthe1970sandearly1980s(e.g.,DigitalEquipmentCorporation,AppleInc.,Genentech)gaverisetoamajorproliferationofventurecapitalinvestmentfirms.Fromjustafewdozenfirmsatthestartofthedecade,therewereover650firmsbytheendofthe1980s,eachsearchingforthenextmajor"homerun."Thenumberoffirmsmultiplied,andthecapitalmanagedbythesefirmsincreasedfrom$3billionto$31billionoverthecourseofthedecade.[17]</p><p>Thegrowthoftheindustrywashamperedbysharplydecliningreturns,andcertainventurefirmsbeganpostinglossesforthefirsttime.Inadditiontotheincreasedcompetitionamongfirms,severalotherfactorsaffectedreturns.Themarketforinitialpublicofferingscooledinthemid1980sbeforecollapsingafterthestockmarketcrashin1987,andforeigncorporations,particularlyfromJapanandKorea,floodedearlystagecompanieswithcapital.[17]</p><p>Inresponsetothechangingconditions,corporationsthathadsponsoredinhouseventureinvestmentarms,includingGeneralElectricandPaineWebbereithersoldofforclosedtheseventurecapitalunits.Additionally,venturecapitalunitswithinChemicalBankandContinentalIllinoisNationalBank,amongothers,beganshiftingtheirfocusfromfundingearlystagecompaniestowardinvestmentsinmorematurecompanies.EvenindustryfoundersJ.H.Whitney&amp;CompanyandWarburgPincusbegantotransitiontowardleveragedbuyoutsandgrowthcapitalinvestments.[17][18][19]</p><p>VenturecapitalboomandtheInternetBubble</p><p>Bytheendofthe1980s,venturecapitalreturnswererelativelylow,particularlyincomparisonwiththeiremergingleveragedbuyoutcousins,dueinparttothecompetitionforhotstartups,excesssupplyofIPOsandtheinexperienceofmanyventurecapitalfundmanagers.Growthintheventurecapitalindustryremainedlimitedthroughoutthe1980sandthefirsthalfofthe1990s,increasingfrom$3billionin1983tojustover$4billionmorethanadecadelaterin1994.</p></li><li><p>ThetechnologyheavyNASDAQCompositeindexpeakedat5,048inMarch2000reflectingthehighpointofthedotcombubble.</p><p>Afterashakeoutofventurecapitalmanagers,themoresuccessfulfirmsretrenched,focusingincreasinglyonimprovingoperationsattheirportfoliocompaniesratherthancontinuouslymakingnewinvestments.Resultswouldbegintoturnveryattractive,successfulandwouldultimatelygeneratetheventurecapitalboomofthe1990s.YaleSchoolofManagementProfessorAndrewMetrickreferstothesefirst15yearsofthemodernventurecapitalindustrybeginningin1980asthe"preboomperiod"inanticipationoftheboomthatwouldbeginin1995andlastthroughtheburstingoftheInternetbubblein2000.[20]</p><p>Thelate1990swereaboomtimeforventurecapital,asfirmsonSandHillRoadinMenloParkandSiliconValleybenefitedfromahugesurgeofinterestinthenascentInternetandothercomputertechnologies.Initialpublicofferingsofstockfortechnologyandothergrowthcompanieswereinabundance,andventurefirmswerereapinglargereturns.</p><p>Privateequitycrash</p><p>TheNasdaqcrashandtechnologyslumpthatstartedinMarch2000shookvirtuallytheentireventurecapitalindustryasvaluationsforstartuptechnologycompaniescollapsed.Overthenexttwoyears,manyventurefirmshadbeenforcedtowriteofflargeproportionsoftheirinvestments,andmanyfundsweresignificantly"underwater"(thevaluesofthefund'sinvestmentswerebelowtheamountofcapitalinvested).Venturecapitalinvestorssoughttoreducesizeofcommitmentstheyhadmadetoventurecapitalfunds,and,innumerousinstances,investorssoughttounloadexistingcommitmentsforcentsonthedollarinthesecondarymarket.Bymid2003,theventurecapitalindustryhadshriveledtoabouthalfits2001capacity.Nevertheless,PricewaterhouseCoopers'MoneyTreeSurvey[21]showsthattotalventurecapitalinvestmentsheldsteadyat2003levelsthroughthesecondquarterof2005.</p><p>Althoughthepostboomyearsrepresentjustasmallfractionofthepeaklevelsofventureinvestmentreachedin2000,theystillrepresentanincreaseoverthelevelsofinvestmentfrom1980through1995.AsapercentageofGDP,ventureinvestmentwas0.058%in1994,peakedat1.087%(nearly19timesthe1994level)in2000andrangedfrom0.164%to0.182%in2003and2004.TherevivalofanInternetdrivenenvironmentin2004through2007helpedtorevivetheventurecapitalenvironment.However,asapercentageoftheoverallprivateequitymarket,venturecapitalhasstillnotreacheditsmid1990slevel,letaloneitspeakin2000.</p><p>Venturecapitalfunds,whichwereresponsibleformuchofthefundraisingvolumein2000(theheightofthedotcombubble),raisedonly$25.1billionin2006,a2%declinefrom2005andasignificantdeclinefromitspeak.[22]</p><p>Funding</p><p>Obtainingventurecapitalissubstantiallydifferentfromraisingdebtoraloan.Lendershavealegalrighttointerestonaloanandrepaymentofthecapitalirrespectiveofthesuccessorfailureofabusiness.Venturecapitalisinvestedinexchangeforanequitystakeinthebusiness.Thereturnoftheventure</p></li><li><p>capitalistasashareholderdependsonthegrowthandprofitabilityofthebusiness.Thisreturnisgenerallyearnedwhentheventurecapitalist"exits"bysellingitsshareholdingswhenthebusinessissoldtoanotherowner.</p><p>Venturecapitalistsaretypicallyveryselectiveindecidingwhattoinvestinasaresult,firmsarelookingfortheextremelyrareyetsoughtafterqualitiessuchasinnovativetechnology,potentialforrapidgrowth,awelldevelopedbusinessmodel,andanimpressivemanagementteam.Ofthesequalities,fundsaremostinterestedinventureswithexceptionallyhighgrowthpotential,asonlysuchopportunitiesarelikelycapableofprovidingfinancialreturnsandasuccessfulexitwithintherequiredtimeframe(typically37years)thatventurecapitalistsexpect.</p><p>Becauseinvestmentsareilliquidandrequiretheextendedtimeframetoharvest,venturecapitalistsareexpectedtocarryoutdetailedduediligencepriortoinvestment.Venturecapitalistsalsoareexpectedtonurturethecompaniesinwhichtheyinvest,inordertoincreasethelikelihoodofreachinganIPOstagewhenvaluationsarefavourable.Venturecapitaliststypicallyassistatfourstagesinthecompany'sdevelopment:[23]</p><p>IdeagenerationStartupRampupandExit</p><p>Becausetherearenopublicexchangeslistingtheirsecurities,privatecompaniesmeetventurecapitalfirmsandotherprivateequityinvestorsinseveralways,includingwarmreferralsfromtheinvestors'trustedsourcesandotherbusinesscontactsinvestorconferencesandsymposiaandsummitswherecompaniespitchdirectlytoinvestorgroupsinfacetofacemeetings,includingavariantknownas"SpeedVenturing",whichisakintospeeddatingforcapital,wheretheinvestordecideswithin10minuteswhetherhewantsafollowupmeeting.Inaddition,somenewprivateonlinenetworksareemergingtoprovideadditionalopportunitiesformeetinginvestors.[24]</p><p>Thisneedforhighreturnsmakesventurefundinganexpensivecapitalsourceforcompanies,andmostsuitableforbusinesseshavinglargeupfrontcapitalrequirements,whichcannotbefinanc...</p></li></ul>