1. Background Information of Venture Capital
Venture capital plays an important role in the financial industry. In this part, we will introduce the concept, the participants, the differences with the traditional financing and the process of venture capital.
1.1 Basic Concepts about Venture capital
The money source of venture capital is supplied by individual and/or institutional investors. Their mission is to finance startups, rapidly growing companies or the ones that are in debt, hoping one day they can have a sizable return upon exit. Nowadays venture capital has played a more and more important role in the investment market because this is a good way for new companies to receive funding capital. Not like regular source of funding, venture capital is more like to supply small and new companies since these companies can’t get funding capital from traditional way such as banks. Venture firms provide venture capital to companies. It builds the connection from investors to invest. In this case, venture firms seek to help companies that have the potential capacity to earn market and money and seek for a higher percentage of reward. Once the companies come into the market or exit, venture firms get their investment back. Venture capital firms usually prefer high-technology industrial. However, in cases where tremendous potential growth is present, those firms are also willing to step into traditional markets to realize their investment ideologies.
1.2 The
Equity capital represents money put up and owned by shareholders. This money can be used to fund projects and other opportunities under the auspice of creating greater value. This type of capital is typically the most expensive. In order to attract
Walnut Venture Associates are a group of angel investors. In 1997 the club had around a dozen individual investors, forming an “angel group”. Their primary targets are investments ranging from $250,000 to $1,000,000. This is due to the gap of capital funds initiated by the VC’s from not considering investments bellow $1 million. Also, angel investors can acquire significant equity at low cost, and help the growth of the company with their knowledge and expertise. By selecting only the most exceptional people and ideas, investments in startups can lead to massive returns on relatively small investments. As unexperienced entrepreneurs, they are a key resource to have in order to achieve quick growth, and secure the company’s early stages.
Venture capital firms typically appoint representatives on the company’s board and offers strategic advice to the
Hart Venture Capital (HVC) specializes in providing venture capital for software development and Internet applications. Currently HVC has two investment opportunities: (1) Security Systems, a firm that needs additional capital to develop an Internet security software package, and (2) Market Analysis, a market research company that needs additional capital to develop a software package for conducting customer satisfaction surveys. In exchange for the Security Systems stock, the firm has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $350,000 in year 3. In exchange of their stock, Market Analysis has asked HVC to provide $500,000 in year 1, $350,000 in year 2,
Before now, only entrepreneurs in a few select areas with the right connections could be funded, and only then if their vision matched a VC or Angel Investors criteria or schedule. Consequently, only a few thousand VCs in the world could decide which entrepreneurial
Zacharakis and Meyer’s research (1998) into the investment decision-making processes of VC investors is particularly pertinent to whether VC investments can be systematically improved and whether there are any gaps between understanding of their procedures and what happens in reality. Zacharakis, via studying 53 VCs from the two main start-up hubs in the United States (Silicon Valley and Colorado Front Range), establishes that there is a gap between the factors that affect VCs’ decision-making in reality and the factors that VCs identify as pertinent to their decision-making.
Private equity investments are primarily made by private equity firms, venture capital firms, or angel investors, each with their own set of goals, preferences and investment strategies.
Angel Investors - The main business angels vary from venture capitalists in their motives and level of involvement. Often angels are more involved in the business, providing ongoing mentorship and advice based on experience in a particular industry. For that reason, matching angels and owners is critical. There are substantial easily locatable networks of angels. Pitching to them is no less demanding than to a venture capitalist as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).
My experiences at the Demo Day solidified my fascination in the ecosystem of startups and venture capital. Unlike software where objects are definite and fulfill specific conditions, entrepreneurship represents an exciting uncertainty where success can be defined in myriad ways. However, due to the inherently uncertain nature of startups, a recurring theme among the startups I met was the need for funding to convert their dreams into realities. As the Demo Day ended, I determined that although creating a startup would be exhilarating, I want to become a venture capital investor. I decided that these innovators shouldn’t have to be concerned with funding and that becoming a venture capital investor would allow me to remove their limitations and join them on their paths to success.
Walnut Venture Associates is a small group of angel investors with backgrounds in the software industry. RBS is a small software company that makes billing and enterprise management software specifically targeted at other software companies. RBS and Walnut are deciding whether Walnut should invest in RBS, and then if they are willing, whether RBS finds the terms of the deal satisfactory. This case memo illustrates that the venture capitalists are looking for good managers in a particular industry, while entrepreneurs typically think funding is dependent on having a good idea. It also discusses why or why not RBS and Walnut might be a good fit for each other.
Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of companies that received venture capital early in their development.
Banks issue credits to organizations seeking funds for there ventures. The bank usually “prefers a self-liquidating loan in which the use of funds will ensure a built-in or automatic repayment scheme” (Block & Hirt, 2005, Chapter 8, p.
investors exist for larger amounts of capital such as VC funds and banks, entrepreneurial initiatives that require much smaller amounts to start with need to rely on friends and family or own savings. They then also make extensive use of bootstrapping techniques to mitigate their financial constraints, by boosting their short-term profits.
This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business.
The last one Venture capitalists. It is finance provided for an equity stake in a potentially high growth company.