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  • VenturecapitalFromWikipedia,thefreeencyclopedia

    Fortheprocessoffinancingbyventurecapital,seeVenturecapitalfinancing.

    Venturecapital(VC)ismoneyprovidedtoseed,earlystage,emergingandemerginggrowthcompanies.Theventurecapitalfundsinvestincompaniesinexchangeforequityinthecompaniesitinvestsin,whichusuallyhaveanoveltechnologyorbusinessmodelinhightechnologyindustries,suchasbiotechnologyandIT.Thetypicalventurecapitalinvestmentoccursaftertheseedfundingroundasthefirstroundofinstitutionalcapitaltofundgrowth(alsoreferredtoasSeriesAround)intheinterestofgeneratingareturnthroughaneventualrealizationevent,suchasanIPOortradesaleofthecompany.Venturecapitalisatypeofprivateequity.[1]

    Inadditionwithangelinvesting,equitycrowdfundingandotherseedfundingoptions,venturecapitalisattractivefornewcompanieswithlimitedoperatinghistorythataretoosmalltoraisecapitalinthepublicmarketsandhavenotreachedthepointwheretheyareabletosecureabankloanorcompleteadebtoffering.Inexchangeforthehighriskthatventurecapitalistsassumebyinvestinginsmallerandlessmaturecompanies,venturecapitalistsusuallygetsignificantcontrolovercompanydecisions,inadditiontoasignificantportionofthecompany'sownership(andconsequentlyvalue).

    Venturecapitalisalsoassociatedwithjobcreation(accountingfor2%ofUSGDP),[2]theknowledgeeconomy,andusedasaproxymeasureofinnovationwithinaneconomicsectororgeography.Everyyear,therearenearly2millionbusinessescreatedintheUSA,and600800getventurecapitalfunding.AccordingtotheNationalVentureCapitalAssociation,11%ofprivatesectorjobscomefromventurebackedcompaniesandventurebackedrevenueaccountsfor21%ofUSGDP.[3]

    Itisalsoawayinwhichtheprivateandthepublicsectorcanconstructaninstitutionthatsystematicallycreatesnetworksforthenewfirmsandindustries,sothattheycanprogress.Thisinstitutionhelpsidentifyandcombinepiecesofcompanies,suchasfinance,technicalexpertise,marketingknowhow,andbusinessmodels.Onceintegrated,theseenterprisessucceedbybecomingnodesinthesearchnetworksfordesigningandbuildingproductsintheirdomain.[4]

    Contents

    1History1.1Originsofmodernprivateequity1.2EarlyventurecapitalandthegrowthofSiliconValley1.31980s1.4VenturecapitalboomandtheInternetBubble1.5Privateequitycrash

    2Funding2.1Financingstages

    3Firmsandfunds3.1Venturecapitalists3.2Structure3.3Types3.4Roles3.5Structureofthefunds3.6Compensation3.7Alternatives

    4Geographicaldifferences

  • 4Geographicaldifferences4.1UnitedStates4.2Mexico4.3Israel4.4Canada4.5Switzerland4.6Europe4.7Asia4.8MiddleEastandNorthAfrica4.9SouthernAfrica

    5Confidentialinformation6GovernmentalRegulations7Inpopularculture

    7.1Inbooks7.2Incomics7.3Infilm7.4Intelevision

    8Seealso9References

    History

    Aventuremaybedefinedasaprojectprospectiveconvertedintoaprocesswithanadequateassumedriskandinvestment.Withfewexceptions,privateequityinthefirsthalfofthe20thcenturywasthedomainofwealthyindividualsandfamilies.TheWallenbergs,Vanderbilts,Whitneys,Rockefellers,andWarburgswerenotableinvestorsinprivatecompaniesinthefirsthalfofthecentury.In1938,LauranceS.RockefellerhelpedfinancethecreationofbothEasternAirLinesandDouglasAircraft,andtheRockefellerfamilyhadvastholdingsinavarietyofcompanies.EricM.WarburgfoundedE.M.Warburg&Co.in1938,whichwouldultimatelybecomeWarburgPincus,withinvestmentsinbothleveragedbuyoutsandventurecapital.TheWallenbergfamilystartedInvestorABin1916inSwedenandwereearlyinvestorsinseveralSwedishcompaniessuchasABB,AtlasCopco,Ericsson,etc.inthefirsthalfofthe20thcentury.

    Originsofmodernprivateequity

    BeforeWorldWarII(19391945),moneyorders(originallyknownas"developmentcapital")remainedprimarilythedomainofwealthyindividualsandfamilies.Onlyafter1945did"true"privateequityinvestmentsbegintoemerge,notablywiththefoundingofthefirsttwoventurecapitalfirmsin1946:AmericanResearchandDevelopmentCorporation(ARDC)andJ.H.Whitney&Company.[5][6]

    GeorgesDoriot,the"fatherofventurecapitalism"[7](andformerassistantdeanofHarvardBusinessSchool),foundedINSEADin1957.AlongwithRalphFlandersandKarlCompton(formerpresidentofMIT),DoriotfoundedARDCin1946toencourageprivatesectorinvestmentinbusinessesrunbysoldiersreturningfromWorldWarII.ARDCbecamethefirstinstitutionalprivateequityinvestmentfirmtoraisecapitalfromsourcesotherthanwealthyfamilies,althoughithadseveralnotableinvestmentsuccessesaswell.[8]ARDCiscreditedwiththefirsttrickwhenits1957investmentof$70,000inDigitalEquipmentCorporation(DEC)wouldbevaluedatover$355millionafterthecompany'sinitialpublicofferingin1968(representingareturnofover1200timesonitsinvestmentandanannualizedrateofreturnof101%).[9]

  • AhighwayexitforSandHillRoadinMenloPark,California,wheremanyBayAreaventurecapitalfirmsarebased

    FormeremployeesofARDCwentontoestablishseveralprominentventurecapitalfirmsincludingGreylockPartners(foundedin1965byCharlieWaiteandBillElfers)andMorgan,HollandVentures,thepredecessorofFlagshipVentures(foundedin1982byJamesMorgan).[10]ARDCcontinuedinvestinguntil1971,whenDoriotretired.In1972DoriotmergedARDCwithTextronafterhavinginvestedinover150companies.

    JohnHayWhitney(19041982)andhispartnerBennoSchmidt(19131999)foundedJ.H.Whitney&Companyin1946.Whitneyhadbeeninvestingsincethe1930s,foundingPioneerPicturesin1933andacquiringa15%interestinTechnicolorCorporationwithhiscousinCorneliusVanderbiltWhitney.FloridaFoodsCorporationprovedWhitney'smostfamousinvestment.ThecompanydevelopedaninnovativemethodfordeliveringnutritiontoAmericansoldiers,laterknownasMinuteMaidorangejuiceandwassoldtoTheCocaColaCompanyin1960.J.H.Whitney&Companycontinuedtomakeinvestmentsinleveragedbuyouttransactionsandraised$750millionforitssixthinstitutionalprivateequityfundin2005.

    EarlyventurecapitalandthegrowthofSiliconValley

    OneofthefirststepstowardaprofessionallymanagedventurecapitalindustrywasthepassageoftheSmallBusinessInvestmentActof1958.The1958ActofficiallyallowedtheU.S.SmallBusinessAdministration(SBA)tolicenseprivate"SmallBusinessInvestmentCompanies"(SBICs)tohelpthefinancingandmanagementofthesmallentrepreneurialbusinessesintheUnitedStates.[11]

    Duringthe1960sand1970s,venturecapitalfirmsfocusedtheirinvestmentactivityprimarilyonstartingandexpandingcompanies.Moreoftenthannot,thesecompanieswereexploitingbreakthroughsinelectronic,medical,ordataprocessingtechnology.Asaresult,venturecapitalcametobealmostsynonymouswithtechnologyfinance.AnearlyWestCoastventurecapitalcompanywasDraperandJohnsonInvestmentCompany,formedin1962[12]byWilliamHenryDraperIIIandFranklinP.Johnson,Jr.In1965,SutterHillVenturesacquiredtheportfolioofDraperandJohnsonasafoundingaction.BillDraperandPaulWytheswerethefounders,andPitchJohnsonformedAssetManagementCompanyatthattime.

    ItiscommonlynotedthatthefirstventurebackedstartupisFairchildSemiconductor(whichproducedthefirstcommerciallypracticalintegratedcircuit),fundedin1959bywhatwouldlaterbecomeVenrockAssociates.[13]Venrockwasfoundedin1969byLauranceS.Rockefeller,thefourthofJohnD.Rockefeller'ssixchildrenasawaytoallowotherRockefellerchildrentodevelopexposuretoventurecapitalinvestments.

    Itwasalsointhe1960sthatthecommonformofprivateequityfund,stillinusetoday,emerged.Privateequityfirmsorganizedlimitedpartnershipstoholdinvestmentsinwhichtheinvestmentprofessionalsservedasgeneralpartnerandtheinvestors,whowerepassivelimitedpartners,putupthecapital.Thecompensationstructure,stillinusetoday,alsoemergedwithlimitedpartnerspayinganannualmanagementfeeof1.02.5%andacarriedinteresttypicallyrepresentingupto20%oftheprofitsofthepartnership.

  • ThegrowthoftheventurecapitalindustrywasfueledbytheemergenceoftheindependentinvestmentfirmsonSandHillRoad,beginningwithKleiner,Perkins,Caufield&ByersandSequoiaCapitalin1972.LocatedinMenloPark,CA,KleinerPerkins,SequoiaandlaterventurecapitalfirmswouldhaveaccesstothemanysemiconductorcompaniesbasedintheSantaClaraValleyaswellasearlycomputerfirmsusingtheirdevicesandprogrammingandservicecompanies.[14]

    Throughoutthe1970s,agroupofprivateequityfirms,focusedprimarilyonventurecapitalinvestments,wouldbefoundedthatwouldbecomethemodelforlaterleveragedbuyoutandventurecapitalinvestmentfirms.In1973,withthenumberofnewventurecapitalfirmsincreasing,leadingventurecapitalistsformedtheNationalVentureCapitalAssociation(NVCA).TheNVCAwastoserveastheindustrytradegroupfortheventurecapitalindustry.[15]Venturecapitalfirmssufferedatemporarydownturnin1974,whenthestockmarketcrashedandinvestorswerenaturallywaryofthisnewkindofinvestmentfund.

    Itwasnotuntil1978thatventurecapitalexperienceditsfirstmajorfundraisingyear,astheindustryraisedapproximately$750million.WiththepassageoftheEmployeeRetirementIncomeSecurityAct(ERISA)in1974,corporatepensionfundswereprohibitedfromholdingcertainriskyinvestmentsincludingmanyinvestmentsinprivatelyheldcompanies.In1978,theUSLaborDepartmentrelaxedcertainoftheERISArestrictions,underthe"prudentmanrule,"[16]thusallowingcorporatepensionfundstoinvestintheassetclassandprovidingamajorsourceofcapitalavailabletoventurecapitalists.

    1980s

    Thepublicsuccessesoftheventurecapitalindustryinthe1970sandearly1980s(e.g.,DigitalEquipmentCorporation,AppleInc.,Genentech)gaverisetoamajorproliferationofventurecapitalinvestmentfirms.Fromjustafewdozenfirmsatthestartofthedecade,therewereover650firmsbytheendofthe1980s,eachsearchingforthenextmajor"homerun."Thenumberoffirmsmultiplied,andthecapitalmanagedbythesefirmsincreasedfrom$3billionto$31billionoverthecourseofthedecade.[17]

    Thegrowthoftheindustrywashamperedbysharplydecliningreturns,andcertainventurefirmsbeganpostinglossesforthefirsttime.Inadditiontotheincreasedcompetitionamongfirms,severalotherfactorsaffectedreturns.Themarketforinitialpublicofferingscooledinthemid1980sbeforecollapsingafterthestockmarketcrashin1987,andforeigncorporations,particularlyfromJapanandKorea,floodedearlystagecompanieswithcapital.[17]

    Inresponsetothechangingconditions,corporationsthathadsponsoredinhouseventureinvestmentarms,includingGeneralElectricandPaineWebbereithersoldofforclosedtheseventurecapitalunits.Additionally,venturecapit