IPO Research

Author: Igor Kadimov, IPO-Congress UK Representative

Venture capitalists- questions and answers

What kind of investors are venture capitalists?

Venture capitalists are professional investors who specialize in funding and building young, innovative enterprises. Venture capitalists are long-term investors who take a hands-on approach with all of their investments and actively work with entrepreneurial management teams in order to build great companies.

Where do venture capitalists get their money?

Most venture capital firms raise their “funds' from institutional investors, such as pension funds, insurance companies, endowments, foundations and high net worth individuals. The investors who invest in venture capital funds are referred to as “limited partners.” Venture capitalists, who manage the fund, are referred to as “general partners.” The general partners have a fiduciary responsibility to their limited partners.

What's the average size of a venture capital fund?

In 2003, the average venture fund size was $145 million.

How many venture capital firms are there in the U.S.?

There are approximately 700 venture capital firms in the United States. As of 12/31/2003, the venture capital industry was managing approximately $252 billion.

How many companies receive venture capital financing?

In 2003, venture capitalists invested approximately $18 billion into 2,227 companies. Investment levels have been slowing declining since its peak in 2000. Current investment levels are on par with levels seen in the late 1990's and many believe that they are appropriate considering investment opportunities, exit markets and current valuations.

What types of companies and industries do venture capitalists invest in?

Venture capitalists invest in young and innovative companies that have great potential for growth. Venture capitalists were instrumental in developing industries, such as the computer, biotechnology and the communications industries. Today, the majority of venture capital is invested in high technology companies. However, venture capitalists invest in all types of companies in many industry sectors.

What impact does venture capital have on the economy?

Venture capital activity has a significant impact on the U.S and global economies. Venture capital is a catalyst for job creation, innovation, technology advancement, international competitiveness and increased tax revenues. According to a recent economic impact of venture capital study, venture capitalists created 10 million jobs and over $1.7 trillion in revenue since 1970.

How are venture capitalists different from other investors?

Venture capitalists are long-term investors who take a very active role in their portfolio companies. When a venture capitalist makes an investment he/she does not expect a return on that investment for 5 – 7 years, on average. The initial investment is just the beginning of a long relationship between the venture capitalist and entrepreneur. Venture capitalists provide great value by providing capital and management expertise. Venture capitalists often are invaluable in building strong management teams, managing rapid growth and facilitating strategic partnerships.

How do venture capitalists realize a return on their investment?

Most companies that venture capitalists invest in are private enterprises. Accordingly, the venture capitalist only realizes a return on their investment if the company goes public (IPO) or is merged or purchased by another company (M&A).

What percentage of venture-backed companies succeed?

Venture capitalists invest in high-risk enterprises. However, venture capitalists manage that risk through portfolio risk management. As mentioned earlier, venture capitalists invest their “funds” in many companies. The venture capitalist anticipates that a few of those investments will provide an extremely healthy return – however, a few of the investments might not provide any return -- and some will produce an average return. Historical data shows that an average return from a venture capital fund produces a higher return than the public markets. The concept, “the greater the risk, the greater the reward” prevails in the venture capital industry.

How does angel investing differ from venture capital?

Venture capital firms are professional investors who dedicate 100% of their time to investing and building innovative companies. Most venture capitalists have a fiduciary responsibility to their investors. The angel investment community is an informal network of investors who invest in companies for their own interests. Typically, angel investors invest less than $1 million in any particular company, whereas venture capitalists usually invest more than $1 million per company.

What's the difference between venture capital and private equity?

Venture capital is a subset of the larger private equity asset class. The private equity asset class includes venture capital, buyouts, and mezzanine investment activity. Venture capital focuses on investing in private, young, fast growing companies. Buyout and mezzanine investing focuses on investing in mature companies.

What impact does corporate venture investing have on the venture industry?

Many corporations have been active venture capital investors for many years. Corporate venture capitalists often co-invest with traditional venture capitalists. Besides being savvy investors, many corporate vc's provide their portfolio companies access to corporate distribution channels and potentially important strategic partners.