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Earn Big Returns On Your Investment Using A
Well-Known, But Little-Understood No-Load Mutual Fund Strategy.
Venture Capital
Venture Capitalists and their Partners
Venture capital partners, also known as venture capitalists or VCs, have been found to usually be former chief executives at firms similar to those which their partnerships funds. Investors in venture capital funds who are called limited partners are typically large institutions which have large amounts of available capital, like as state and private pension funds, insurance companies, university endowments, and pooled investment vehicles. Other positions available at venture capital firms generally include venture partners and entrepreneur-in-residence (EIR). While the venture partners bring in deals and receive income only on deals they work on as against general partners who receive income on all deals, EIRs are experts in one particular domain and perform with diligence on potential deals. EIRs are engaged by VC firms temporarily, usually six to 18 months, and are expected to develop and sell startup ideas to their host firm although neither party is forced to work with each other. Some EIR's also do go on to move to roles such as Chief Technology Officer (CTO) at a portfolio company, for instance.
Fixed Lifetime Funds
Most venture capital funds have a fixed life span of ten years. This model was initiated by some of the most successful funds in Silicon Valley through the 1980s in order to invest in technological trends essentially, but only during their period of ascendance. This would also cut exposure to management and marketing risks of any individual firm or its product.
In such funds, the investors have an unflinching commitment towards the fund that is called down by the VCs over time when the fund makes its investments. In a typical case of venture capital fund, the VCs receive an annual management fee usually amounting to 2% of the committed capital to the fund and ranging to 20% of the net profits of the fund; this is referred to commonly as 'two and 20'. Owing to the fact that a fund may run out of capital well before the end of its life, larger VCs normally have several overlapping funds running at the same time; this lets the larger firm keep specialists in all stages of the development phases of firms constantly engaged. Smaller firms may tend to thrive or fail with their initial industry contacts; and by the time the fund cashes out, an entirely new generation of technologies and people is on the rise, whom the general partners may not know well, and so it is considered wise to reassess and shift industries or personnel rather than to attempt to invest more in the industry or people the partners already know closely.
How and Why Venture Capitalists
Invest
Investments by a venture capital fund can either take up the form of preferred stock equity or else a combination of equity and debt obligation, usually with convertible debt instruments that become equity in case a certain level of risk is exceeded. The common stock is often reserved by the covenant for a future buy out, as venture capitalist investment criteria normally include a planned exit event called an IPO or acquisition, usually within three to seven years.
In most cases, at least one or more general partners of the investing fund joins the Board of Directors of the new venture, since this will often help to recruit personnel to key management positions easily.
Venture capital however is not suitable for all entrepreneurs. Venture capitalists are very selective while deciding would like to invest in and as a rule, a fund generally invests only in about one out of every four hundred opportunities presented to it. They are more likely y\to be keen on ventures with a high growth potential, as only opportunities of this sort are seen to be capable of providing the financial returns and fruitful exit event within the required time frame that venture capitalists normally expect. Owing to such expectations, most venture funding goes to companies in the fast growing technology and life sciences or biotechnology fields. Because of these strict requirements, there are many entrepreneurs who seek initial funding from angel investors.
Winners and Losers
Venture capitalists often hope to be able to sell their stock, convertibles, warrants, options, or any other forms of equity within three to seven years, usually after an exit event. This practice is referred to as harvesting. Venture capitalists know that not all their investments will necessarily pay off. The failure rate of investments can be high; and range anywhere between 20% and 90%. This is the number of the enterprises funded that could fail to return the invested capital and when a venture fails, the entire funding by the venture capitalist tends to be written off.
Most venture capitalists try to alleviate the risk of failure by employing diversification. They invest in companies belonging to different industries and located in different countries so that the risk across their portfolio is kept at a minimum. Others try to concentrate their investments in an industry that they are at ease with. In either case, they usually work based on the assumption that for every ten investments that they end up making, two will be successful, two will be failures, and six will be marginally successful. They expect that the two successes will generate enough to be able to pay for the time given to, and risk exposure of the other eight. In good times though, the funds that do succeed may offer returns of 300 to 1000 percent to investor.
History
General Georges Doriot is believed to be the father of the venture capital industry. In the year 1946 he founded the American Research and Development Corporation also known as the ARD Corporation, whose biggest success was a venture called Digital Equipment Corporation. When this company went public in the year 1968 it provided ARD with 101% annualized Return on Investment or ROI. ARD's $70,000 USD investment in Digital Corporation in the year 1959 had a market value of $37 million USD in the same year. The first venture backed startup however, is generally considered to be Fairchild Semiconductor, funded in the year 1959 by Venrock Associates.
Before the World War II, venture capital investments were known to primarily be the domain of wealthy individuals and families. One of the first steps toward a professionally managed venture capital industry was the passage of the Small Business Investment Act in the year 1958. This 1958 Act authorized the United States' Small Business Administration or SBA to license private Small Business Investment Companies or SBICs to provide financing and management assistance to small entrepreneurial businesses in the country. The passage of the Act addressed concerns raised in a Federal Reserve Board report to the Congress that concluded that a major gap did exist in the capital markets as regards long term funding for growth oriented small businesses. The goal of the SBIC program was, and still is, to stimulate the United States economy in general, and small businesses in particular, thereby facilitating the flow of capital to launching small concerns.
Venture capital is a phenomenon that has been most closely associated with the United States and its technologically innovative ventures. Due to certain structural restrictions imposed on American banks in the 1930s, there was no private merchant banking industry in the USA - this was a situation that was quite unique in developed nations. Though late, in the 1980s Lester Thurow, a noted economist, refuted the inability of the USA's financial regulation framework to be able to support any merchant bank other than the one that is run by the United States Congress in the garb of federally funded projects. These, he argued, were large in scale, but also politically motivated, and were too focused on housing and such specialized technologies as space exploration, agriculture, defense, and aerospace. United States investment banks were then confined to handling large M&A transactions, issuing of equity and debt securities, and, also often, the breakup of industrial concerns in order to access their pension fund surplus or sell off any infrastructural capital in return for big gains.
The relaxed regulation of this situation was not only very heavily criticized at the time, this industrial policy was also not in line with that of other industrialized rivals of which the notable ones were Germany and Japan, which at that time were gaining ground in world markets in automotive and consumer electronics sectors. There was hence a general feeling that the United States was probably on an economic decline.
However, those nations
were also becoming more and more dependent on the central bank and elite
academic judgment, instead of the more people oriented and commercial way
that priorities had been set by the government and private investors in
the United States. This was a model that had proven to have a few
advantages when the attention of the public was strongly altered by the
successful IPO of Netscape along with other Internet related firms. This
highlighted the nearly insignificant role that the Silicon Valley had
played in sustaining the American economic innovation.