Venture Capital Guide

The Guide On Venture Capital And Getting Funded

This content shows Simple View


Category Archives Venture Capital

The History of the Venture Capitalist Industry

A venture capitalist provides funding for start-up companies that are not able to get money through traditional bank loans in order to get their businesses off the ground. In return for this generosity of funds, the venture capitalist has a major stake in the company and makes decisions as they see fit so that the company can turn a considerable profit and make them, and the company, money.

Most venture capital funding is given to what can be considered high-risk businesses, but with the potential of making a huge amount of profit. Many of these companies deal with technological advances that are sure to be in high demand, once production and operation begins.

The History

Back in medieval Islamic society, partnership arrangements were made that highly resemble that of the current form of venture capital funding. But venture capital really took off right after World War II. In 1946, the American Research and Development Corporation (AR&DC) was formed and founded by General Georges Doriot, a U.S. Army General and businessman who was born in France, but educated at Harvard.

In 1957, Doriot’s AR&DC invested $70,000 in venture capital to Digital Equipment Corporation. From his investment, the company was able to begin operation of their business, which grew to a value of $355 million. The company went public in 1968 and gave AR&DC a 101% annual rate of return. This extraordinary outcome represented everything that should result in venture capitalist funding.

Congress passed the Small Business Investment Act of 1958 bringing the Small Business Administration into the picture. The Act gave licensing to Small Business Investment Companies (SBICs). Congress recognized that before World War II, only the very wealthy or families of a company’s founders gave any venture capital for businesses that were trying to bring about new technology.

They knew that in order for the economy to grow and for the country to be competitive in the global technological world, they had to do something to encourage venture capitalist activity.

The Present Days

By the end of the last century, venture capitalist investing took off as more and more businesses were entering the information technology industry. As Silicon Valley became the hub for all things high-tech, it also became the core of venture capitalist investing. Unfortunately, due to the sensitive nature of the stock market’s effect on venture capital investing, the 1974 stock market decline hit the venture capital firms hard. A similar result came from the rise and fall of the dot.com industry in the 1990’s and the NASDAQ’s poor showing in the early 2000’s.

Today, things seem to be a bit clearer for the venture capital movement as more venture capitalists are willing to invest in these high-risk companies once again. They are also branching out beyond just the technology sector. With alternative fuel and energy sources getting a lot of press and becoming an increasingly popular way of life for many people and organizations, a venture capitalist no longer has to stick with those businesses that only deal in advance technology. And while the jury may still be out for a while on whether alternative fuel and energy becomes the same success story as Digital Equipment Corporation was, there will always be a venture capitalist willing to take the risk.





Venture Capital: Investing in the Future

If you are unfamiliar with venture capital, it is money that is invested in companies that are just starting up and are in their early stages of development. Because they do not yet have a proven track record of success, they are considered high risk, but also high-potential earners.

How Does a Venture Capitalist Make Money?

The venture capital fund owns equity in the company for which it provides the investment. The interesting part about it is that the venture capital fund is usually invested only in companies that are involved in cutting edge technology like software, information technology or biotechnology.

When initial public offerings or trade sales can bring a bit of a return, venture capital becomes a part of private equity. But not all private equity is considered a venture capital.

In return for the investment venture capitalists make in a company, they get substantial control when it comes to making decisions for the company, plus they own a large portion of the company itself.

Why Do Companies Rely on Venture Capital?

When companies are just starting to get off the ground, venture capital allows them the funding they need to grow their business. At this point, bank loans or completing a debt offering are not realistic options for a company that has no history in terms of producing income.

Another reason why venture capital is popular with companies is because it creates job growth. Each year, approximately two million businesses are created just in the United States alone, but only a very small percentage (600-800 companies) receives venture capital funding. The National Venture Capital Association reports that eleven percent of jobs in the private sector come from companies who get venture capital funding.

How Do Companies Get Venture Capital?

Unlike regular lenders where a loan is made and then paid back, venture capital is made with an understanding that the venture capitalist will own stake in the company.

Of course, the venture capitalist will only make money if the company proves to be profitable. If it does succeed, venture capitalists usually end their relationship with the company when they sell their shares to another owner (usually in a three to seven-year period).

What Does a Venture Capitalist Look for in a Company?

Venture capitalists do not just invest in any start-up company. More often than not, they are looking for businesses that are unique and are offering something new, innovative and in high demand.

They also want to invest in a company that has a good business model and an effective team of managers. As long as there is the potential for high growth, the venture capitalist will make the investment.

Among the other factors that can influence a venture capitalist are:

  • A real passion for the business from the company’s founders
  • A real possibility to get out of the investment before the funding cycle ends
  • A return of no less than forty percent a year

These all play an important part in whether or not venture capital will be provided to a company.

Keep in mind that if you are a business just starting out, you should not assume that venture capital will be coming your way. Venture capitalists are very picky about whom they choose to invest in, but if you have the qualities they are looking for including a product or service that is unlike any other and has the potential to make millions, you just might be the recipient of venture capital.





Venture Capital Funding Around the Globe

If you think venture capital funding is just something that United States businesses rely on, you would be mistaken. It may have originated in the U.S., but many countries all over the world are quickly gravitating towards this means of business funding.

In 2008, there was a five percent increase in venture capital funding made in non-U.S. companies. Most of these were in China and Europe. However, each country has slightly different ways of conducting venture capital funding.

Canada

Because of the great tax incentives offered through an investment tax credit program known as Scientific Research and Experimental Development (SR&ED), technology, companies in Canada have been reaping the benefits of venture capital funding from all around the world.

Basically, any Canadian company that is conducting research and development will get a refundable tax credit equivalent to twenty percent of expenditures like labor, material and equipment. There is a thirty-five percent refundable tax credit for some smaller private corporations, but the rule is that they must have a fifty percent minimum ownership by Canadians. This is not the most attractive deal for non-Canadian investors since they would be required to take a much smaller percentage in the company. However, the SR&ED does not have this type of restriction.

There is also the (LSVCC) which is sponsored by the labor unions. They also offer tax breaks for investors who purchase the funds.

Europe

In 2006, the United Kingdom, France and Germany were the biggest receivers of venture capital funding. The numbers in Europe continue to grow as the second quarter of 2007 brought a five percent growth (€1.14 billion) in venture capital funding.

India

In 2006, private equity and venture capital in India was equivalent to $7.5 billion from nearly three hundred deals that were made. When it comes to venture capital investing in India, the investment can be in equity, partial equity and/or a loan that is conditional so it can promote a high-risk or high-tech company.

Venture capital in India follows the mantra of high risk, high return. Many venture capitalists in India thrive on investing in these high risk businesses in order to encourage and support technological innovation.

Other Parts of the World

The Middle East, North Africa and Southern Africa are all in the early stages of venture capital funding. In Southern Africa, in particular, funding is very difficult to get even if a company seems well on its way to being highly successful. But as of now, venture capital investing in Southern Africa is getting off to a very slow start.

What may be somewhat surprising is that Israel is setting out to be a leader in venture capital. In 2010, they actually were the world leader in venture capital in terms of money invested per capita ($170 per person vs. $75 per person in the United States). Two-thirds of invested funds came from other countries and the rest from Israeli venture capitalists.

Venture capital may have started in the west, but it is quickly making its migration to parts far and wide. While countries strive to be leaders in technological advancement, acquiring venture capital will become even more competitive, as start-up companies all around the world aggressively go after valuable venture capital funding that can skyrocket their businesses to the top.