Joint Venture Capital
(V.C ) Venture capital, as an industry, originated in the United States and American firms have traditionally been the largest participants in venture deals and the bulk of venture capital has been 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 enterprise (SMEs), which in most cases would not qualify for receiving bank loans.
In the year of 2008, while the Venture Capital fundings are still majorly dominated by U.S. (USD 28.8 B invested in over 2550 deals in 2008), compared to International fund investments (USD 13.4 B invested in everywhere else), there have been an average 5% growth in the Venture capital deals outside of the U.S- mainly in China, Europe and Israel. Geographical differences can be significant. For instance, in the U.K., 4% of British investment goes to venture capital, compared to about 33% in the U.S.
Venture capital (VC) is funding invested, or available for investment, in an enterprise that offers the probability of profit along with the possibility of loss. Indeed, venture capital was once known also as risk capital, but that term has fallen out of usage, probably because investors don’t like to see the words “risk” and “capital” in close conjunction. Venture capitalists often don’t tend to think that their investments involve an element of risk, but are assured a successful return by virtue of the investor’s knowledge and business sense.
Venture capital is the second or third stage of a traditional start up financing sequence, which starts with the entrepreneurs putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest – angels are sometimes said to invest “emotional money,” while venture capitalists are said to invest “logical money” – that is willing to help give the new enterprise a more solid footing. First-round venture capital funding involves a significant cash outlay and managerial assistance. Second-round venture capital involves a larger cash outlay and instructions to a stock or initial public offering (IPO) underwriter, who will sell stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an investment bank is commissioned to sell shares to the public.
In the currently sober economic climate, a return to traditional business wisdom has meant that enterprises are generally expected to show a clear path to profitability if they want to attract investment funds.
Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in one in four hundred opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3-7 years) that venture capitalists expect.
Because investments are illiquid and require 3-7 years to harvest, venture capitalists are expected to carry out detailed due diligence prior to investment. An illiquid asset is an asset which is not readily saleable due to uncertainty about its value or the lack of a market in which it is regularly traded. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations are favourable.
An initial public stock offering (IPO) referred to simply as an “offering” or “flotation,” is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.
Venture capitalists typically assist at four stages in the company’s development:
A business idea is a concept which can be used for commercial purposes.
It typically centers around a commodity or service that can be sold for money, according to a unique model.
There are several methods for developing and testing a business idea. The ability to come up with a business idea can be transformed into a viable business, where ideas supported by feasibility and a business plan can then be sold to interested investors, firms, and interested parties for a lump sum or a management contract, or as agreed. Business ideas, if introduced at the right time, when demand for such service or a product introduced by the idea is expected to surge, can lead to a very profitable business. Business ideas are always available through different sources; however, it is the application applied on these ideas, and timing makes all the difference in failure or success.
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets. The term became popular internationally during the dot-com bubble when a great number of dot-com companies were founded. A high tech startup company is a startup company specialized in a high tech industry. Evolution of a startup company
Startup companies can come in all forms, including those that are simply life-style companies, but the phrase “startup company” is often associated with high growth, technology oriented companies. Investors are generally most attracted to those new companies distinguished by their risk/reward profile and scalability. That is, they have lower return on investment. Successful startups are typically more scalable than an established business, in the sense that they can potentially grow rapidly with limited investment of capital, labor or land.
Startups enjoy several unique options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging cash for an equity stake. In practice though, many startups are initially funded by the founders themselves. Factoring is another option, though not unique to start ups.
A critical task in setting up a business is to conduct research in order to validate, assess and develop the ideas or business concepts in addition to opportunities to establish further and deeper understanding on the ideas or business concepts as well as their commercial potential.
If a company’s value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The newsmagazine The Economist estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980). Often, 100% of a small startup company’s value is based on its intellectual property. As such, it is important for technology oriented start up companies to develop a sound strategy for protecting their intellectual capital as early as possible.
Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors – a recent example of such was Google, whose creators are now billionaires through their share ownership. However, the failure rate of startup companies is very high. Based on a research, founder CEOs of high-tech companies can typically expect their stock to be worth about $6,500,000 (statistical average) if the company succeeds in going public(in 1997)
While there are startup businesses created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The Internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in Silicon Valley, an area of northern California renowned for the high level of startup company activity.
A company may cease to be a startup as it passes various milestones, such as becoming profitable, or becoming publicly traded in an IPO, or ceasing to exist as an independent entity via a merger or acquisition. Companies may also fail and cease to operate altogether. Recently the patent assets of these failed startup companies have been being purchased by what are derogatorily known as “patent trolls” who then take the patents from the companies and assert those patents against companies that might be infringing the technology covered by the patent.
Ramp up is a term used in economics and business to describe an increase in firm production ahead of anticipated increases in product demand. Alternatively, ramp up describes the period between product development, and maximum capacity utilzation, characterized by product and process experimentation and improvements.
Ramp up typically occurs when a company strikes a deal with a distributor, retailer, or producer, which will substantially increase product demand. For example, in June, 2008, after launching a joint venture with Guangzhou Automible, Toyota announced that it would “ramp up” production in China to meet expected increases in market demand by constructing a plant in Guangdong, which would produce some 120,000 additional Camry sedans.
As ramp up is typical in early stages of firm or market development, the term and process is widely associated with venture capital, which seek to rapidly increase rate of return on investment, just prior to exit. For example, Wrightspeed, the producer of the X1 electric car prototype, began to seek out capital in order to hire on 50 well-trained employees in order to “ramp up” production in anticipation of sales successes.
An exit strategy is a means of escaping one’s current situation, typically an unfavourable situation. An organization or individual without an exit strategy may be in a quagmire. At worst, an exit strategy will save face; at best, an exit strategy will peg a withdrawal to the achievement of an objective worth more than the cost of continued involvement.
There are typically six stages of financing offered in Venture Capital, that roughly correspond to these stages of a company’s development.
Seed Money: Low level financing needed to prove a new idea (Often provided by “angel investore”)
Start-up: Early stage firms that need funding for expenses associated with marketing and product development
First-Round: Early sales and manufacturing funds
Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit
Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company
Fourth-Round: Also called bridge financing, 4th round is intended to finance the “going public” process
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 know as “Speed Venturing”, which is akin to speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting.
This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-front capital requirements 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 and life sciences or 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