Venture Capital Financing Is A Type of Financing by

Venture Capital Financing
Venture capital financing is a type of financing by venture capital. It is private equity capital
provided as seed funding to early-stage, high-potential, growth companies (startup companies)
or more often it is after the seed funding round as a growth funding round (also referred to
as series A round). It is provided in the interest of generating a return on investment through an
eventual realization event such as an IPO or trade sale of the company. And when we get
simply,it is money provided by investors to startup firms and small businesses with perceived
long-term growth potential. This is a very important source of funding for startups that do not
have access to capital markets. It typically entails high risk for the investor, but it has the
potential for above-average returns.
The venture capital fund earns money by owning equity in the companies it invests in,
which usually have a novel technology or business model in high technology industries, such
as biotechnology and IT. The typical venture capital investment occurs after the seed
funding round as the first round of institutional capital to fund growth (also referred to
as Series A round) in the interest of generating a return through an eventual realization event,
such as an IPO or trade sale of the company. Venture capital is a type of private equity.
In addition to angel investing, equity crowdfunding and other seed funding options, venture
capital is attractive for new companies with limited operating history that are too small to raise
capital in the public markets and have not reached the point where they are able to secure
a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists
assume by investing in smaller and less mature companies, venture capitalists usually get
significant control over company decisions, in addition to a significant portion of the company's
ownership (and consequently value).
Venture capital is also associated with job creation (accounting for 2% of US
GDP), the knowledge economy, and used as a proxy measure of innovation within an economic
sector or geography. Every year, there are nearly 2 million businesses created in the USA, and
600–800 get venture capital funding. According to the National Venture Capital Association,
11% of private sector jobs come from venture-backed companies and venture-backed revenue
accounts for 21% of US GDP.
It is also a way in which the private and the public sector can construct an institution that
systematically creates networks for the new firms and industries, so that they can progress. This
institution helps identify and combine pieces of companies, such as finance, technical expertise,
marketing know-how, and business models.
When you decide to establish a small company or business, one of the first important questions
you would likely have is how to raise money to fund your business operations. One will need to
spend some time developing a business plan. Once you have a well prepared prospectus for
your investors and explained the risks to them, you can go ahead with the venture capital
funding of your business.
Besides providing the capital that a company needs to develop its business, there are other
benefits of venture capital funding, as it also offers a number of value added services.
DEFINITION OF 'VENTURE CAPITAL'

Money provided by investors to startup firms and small businesses with
perceived long-term growth potential. This is a very important source of funding
for startups that do not have access to capital markets. It typically entails high
risk for the investor, but it has the potential for above-average returns.
INVESTOPEDIA EXPLAINS 'VENTURE CAPITAL'

Venture capital can also include managerial and technical expertise. Most
venture capital comes from a group of wealthy investors, investment banks and
other financial institutions that pool such investments or partnerships. This form
of raising capital is popular among new companies or ventures with limited
operating history, which cannot raise funds by issuing debt. The downside for
entrepreneurs is that venture capitalists usually get a say in company decisions,
in addition to a portion of the equity.
Which industries can

benefit the most from
venture capital?
By InvestopediaAAA |
A:
In terms of attracting venture capital, a 2013 report from advisory firm PwC
indicated that companies involved in technology and media tend to bring in the
most venture funds. However, venture capital impact is regional as much as it is
industry-focused; in the United States, California, New York and Texas receive
far more venture capital than the rest of the country, according to research firm
Startups.co. The largest investment amount does not necessarily equate to the
most benefit; it is possible that the industry that benefits the most from venture
capital is not the industry that receives the most money.
WHAT IS VENTURE CAPITAL?

Venture capital refers to a form of private equity financing provided by investors
and given to startup firms with the potential for large, long-term expansion and
profitability. These investors, called venture capitalists, offer a shot in the arm to
firms that might otherwise fail to raise sufficient financial capital.
Venture capitalists often purchase significant ownership interest in the

businesses that they agree to finance. Since they tend to make management
decisions, the investors often have a background in management or corporate
governance.
VENTURE CAPITAL IMPACT BY INDUSTRY

Per PwC's report, the five largest industries in terms of venture capital investment
were software ($10.96 billion), biotechnology ($4.54 billion), media and
entertainment ($2.93 billion), medical devices and equipment ($2.11 billion), and
information technology services ($1.98 billion). It makes sense that technology
and media companies would attract private equity financing; their demands tend
to be weighted in research, development and product testing rather than labor,
manufacturing or infrastructure. Venture capital tends to be more mobile than
labor, and it would tend to flow into areas where financial capital is the primary
constraint (as opposed to human or physical capital).
Venture capital also tends to flow into industries perceived to offer high average
returns. Margins in industries such as restaurants or groceries tend to be very
slim, while margins in technology or medical devices are quite high. Venture
capitalists want to maximize their investments, just like any other market
participant, and money always seeks out the highest payout.
It seems plausible that the pattern of venture capital investments changes over
time. Additional financing, output and competition in software or biotechnology
may have the effect of reducing margins and lowering returns as firms battle for
customers. If this occurs, other sectors may become relatively more attractive
and begin to receive larger percentages of venture funding.
New industries with high growth potential seem like logical challengers to the
apparent venture hegemony created by technology and media. For example, the
legalization of medicinal and recreational marijuana may open up unrealized
profit opportunities for venture capitalists. Even if existing private equity firms
eschew the risks of burgeoning markets, new capitalists are likely to emerge to
help fill the gap between existing and potential output.
TAGS:
How is venture capital

different from other kinds of
equity financing?
A:
Small businesses have a variety of options for raising capital for the purpose of
funding growth operations or start-up costs. Generally referred to as equity
financing, this type of funding is made available through an individual or a group
of investors who are willing to invest in the business for something in return.
Venture capital is an option for some small start-up companies with limited
means to funding, and it differs from other types of equity financing in a number
of ways.
Venture capitalists focus their investing on businesses that are in their infancies
and have high growth potential. Companies that fall into this category are
commonly in the technology sector and may be unable to obtain affordable
financing through other conventional entities, such as banks or the Small
Business Administration. A venture capital deal also involves investing

through equity capital as opposed to debt, creating a situation in which the
business being funded is required to give up a degree of capital to get financing.
Instead of defining repayment terms and interest rates as would take place with a
bank, young businesses working with venture capitalists are instead discussing
future growth and return on investment (ROI) by way of appreciating equity
shares.
Because start-up technology companies bear much higher risk than other small
businesses, venture capitalists require much more ownership or equity in the
business than other financing options. Additionally, a venture capital deal may
require a professional from the venture capital firm to be integrated into
management of the business being funded to ensure the investment is protected
and progress toward growth is monitored in-house. Because of these unique
aspects of young start-up companies, venture capitaldeals take much longer to
create and implement. The funding firm needs to ensure the growth potential
high enough to make the investment worthwhile.
Equity financing through venture capital may be a viable option for companies
that operate in high-yield markets, but businesses must be aware of the
restrictions venture capitalists may place on its operations in exchange for initial
funding.
How is venture capital

different from other kinds of
equity financing?
A:
Small businesses have a variety of options for raising capital for the purpose of
funding growth operations or start-up costs. Generally referred to as equity
financing, this type of funding is made available through an individual or a group

of investors who are willing to invest in the business for something in return.
Venture capital is an option for some small start-up companies with limited
means to funding, and it differs from other types of equity financing in a number
of ways.
Venture capitalists focus their investing on businesses that are in their infancies
and have high growth potential. Companies that fall into this category are
commonly in the technology sector and may be unable to obtain affordable
financing through other conventional entities, such as banks or the Small
Business Administration. A venture capital deal also involves investing
through equity capital as opposed to debt, creating a situation in which the
business being funded is required to give up a degree of capital to get financing.
Instead of defining repayment terms and interest rates as would take place with a
bank, young businesses working with venture capitalists are instead discussing
future growth and return on investment (ROI) by way of appreciating equity
shares.
Because start-up technology companies bear much higher risk than other small
businesses, venture capitalists require much more ownership or equity in the
business than other financing options. Additionally, a venture capital deal may
require a professional from the venture capital firm to be integrated into
management of the business being funded to ensure the investment is protected
and progress toward growth is monitored in-house. Because of these unique
aspects of young start-up companies, venture capitaldeals take much longer to
create and implement. The funding firm needs to ensure the growth potential
high enough to make the investment worthwhile.
Equity financing through venture capital may be a viable option for companies
that operate in high-yield markets, but businesses must be aware of the
restrictions venture capitalists may place on its operations in exchange for initial
funding.
Where does venture capital

come from?
A:
Venture capital comes from investment banks, wealthy investors and other
financial institutions that support venture investment. These parties are
collectively known as venture capitalists.
Venture capital is attractive to start-up companies with high potential for growth.
These companies are usually not large enough to obtain meaningful funds from
equity financing. The companies may not have enough history or collateral to
qualify for a bank loan large enough to cover their needs. In such cases, venture
capital is the best option. For a company to qualify for venture capital, it needs to
have high potential for growth. This potential promises venture capitalists that
there might be returns for their investments.
The investors run the risk of losing large amounts of money if the companies do
not grow as intended. For running this risk, they are rewarded with the power to
be part of the decision-making process in the companies. They also own equity
in the companies. While these privileges are a plus for the investors, they are a
disadvantage for the company owners.
Venture capital allows people with great ideas to turn them into sources of
income. The result is the creation of jobs for those who are qualified to fill them.
Venture-backed companies also contribute to the growth of the economy due to
their contribution to the gross domestic product (GDP) of a country.
Most venture capitalists prefer to pool their investments and invest in different
start-ups. This way, the risk of losing everything for an individual investor is
greatly minimized. Similar funding options for start-ups include seed funding,
equity crowd funding and angel investment.
How can I become a venture

capitalist?
A:
Many paths lead to venture capitalism, none of which are set or absolute.
According to Forbes, there are two primary categories of beginner venture
capitalists: true entrepreneurs and highly skilled investment bankers. Contrary to
popular belief, venture capitalism does not require a huge bank account. After all,
venture capitalists are not necessarily investing their own assets. That said,
having a large amount of personal wealth makes it easier to break into any
investment scene.
These are not the only options, however. Some venture capitalists are lifelong
financial advisers. Others might be academics and technical business process
experts. What separates venture capitalists from other equity investors is that
venture capitalists oftendeploy third-party assets to improve the efficacy of a
young company with high upside. Private equity firms are interested in
someone's ability to improve aspects of the "bottom line," such as cash flow,
productivity, economies of scale and marketing.
Venture capitalism attracts a huge number of aspiring investors or business

process developers. Competition is stiff for access to the world of third-party
equity financing. Even with the requisite skills, there is no guarantee of a
breakthrough into the industry. As the old expression goes, it is often not what
you know but who you know.
Aspiring venture capitalists who are individually wealthy can start their own
funds. Young venture firms must usually prove themselves before third-party
funds begin to make up a significant percentage of total capital invested. It can
also be difficult for a young firm to acquire sufficient expertise in infrastructure;
human resources planning; security; intensely technology-centric operations and

information sharing; and performance evaluation.
Venture capital firms act as large, professional entrepreneurs, always on the

prowl for opportunity. According to economist Israel Kirzner, entrepreneurs have
a knack for discovering new profit opportunities, and profitably acting in the
market until the opportunity is eliminated. This is a highly sought-after skill and
having or developing it goes a long way in the private equity industry
Top 10 Pfizer Venture

Investments
By Investopedia | Updated June 02, 2015AAA |
Pfizer Venture Investments, or PVI, founded in 2004 and headquartered in New

York City, is the private equity venture capital arm of Pfizer Inc. (PFE). Pfizer
Venture Investments makes investments of up to $10 million per company, with a

total annual investment budget of $50 million. While Pfizer invests in all stages of
business development, it focuses on growth stages represented by series B
financing and beyond. The company prefers to invest in the health care sector,
which is Pfizer's area of expertise, and concentrates on therapeutic,
pharmaceutical and medical technology companies.
Pfizer Venture Investments prefers to invest in U.S.-based companies. It invests

as a lead investor or in syndication deals with other investors and holds board
seats for those companies. As of 2015, Pfizer Venture Investments has 22
companies in its investment portfolio. The following are the top 10 companies, by
amount of investment, in Pfizer Venture Investments' current portfolio.
1. CytomX
CytomX is a San Francisco-based biotechnology company engaged in creating

Probody therapeutics for cancer treatment. Probodies are recombinant
antibodies designed to focus on diseased tissue but remain inert in healthy
tissues in the body. CytomX is seeking to develop new immunotherapies.
2. Ablexis
Ablexis is one of Pfizer Venture Investments' early-stage major investments. The

company, located in San Francisco, California, is developing a transgenic mouse
platform, AlivaMab Mouse, for use in discovering and developing therapeutic
antibodies to treat a wide variety of diseases.
3. Autifony
Headquartered in London in the United Kingdom, Autifony is one of Pfizer

Venture Investments' few major investments in non-U.S. based firms. Autifony is
devoted to developing new medicines to treat hearing disorders. The company's
current lead project undergoing testing is a new drug that targets basic auditory
processing in the brain.
4. Mirna Therapeutics
Pfizer Venture Investments is a major investor in Austin, Texas-based Mirna

Therapeutics, a biopharma and immuno-oncology company developing a
pipeline of micro-RNA based therapies for the treatment of cancer patients.
5. Rhythm Pharmaceuticals
An increasing focus in the health care sector on developing novel treatments for
diabetes and obesity is part of the motivation behind Pfizer's investment in
Rhythm Pharmaceuticals of Boston, Massachusetts. Rhythm is a biopharma
company developing a variety of peptide therapeutics designed for the treatment
of diabetes, obesity and gastrointestinal diseases.
6. TetraLogic
Pfizer Venture Investments is a major participant in a syndicate of investors in

TetraLogic, based in Malvern, Pennsylvania, a biopharma company developing
new, targeted drugs for the treatment of cancer. TetraLogic's projects are
focused on developing biopharmaceuticals designed to unblock direct pathways
for targeting and killing cancer cells without destroying surrounding healthy body
tissues.
7. Mersana Therapeutics
Headquartered in Cambridge, Massachusetts, Mersana is developing antibody-

drug conjugates, or ADCs, designed to serve as precisely tailored, anti-cancer
drugs. Mersana is focused on overcoming problems of other ADCs, enabling the
application of high payloads of anti-cancer agents, with the ability to control
precisely when and where the agents are activated in the body.
8. Novocure
Located in Haifa, Israel, Novocure is another non-U.S. company in Pfizer Venture

Investments' portfolio. Novocure has already developed a unique brain cancer
treatment that has received approval from the U.S. Food and Drug
Administration, or FDA. The company creates cancer treatment devices that
deliver Tumor Treating Fields, or TTFs, alternating electric current fields
delivered through the skin and designed to disrupt division of cancer cells.
9. Flexion Therapeutics
Woburn, Massachusetts-based Flexion Therapeutics is a company developing

innovative therapies for the treatment of osteoarthritis and various other
musculoskeletal diseases.
10. Cydan
Boston-based Cydan is an orphan drug accelerator company that seeks to

identify, derisk and develop therapeutic programs that it believes have
commercial potential. Cydan is notable for its spin-off company, Vtesse, a
company focused on developing treatments for a number of rare diseases.
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30 Under 30: The Top

Young Investors Of
Venture Capital
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To build a transformative new company, entrepreneurs

need more than a big idea. The job often takes years of
focus and grueling work. So when founders look to raise
money to help grow their businesses, they traditionally
look to venture capitalists with battle scars, longtime
investors who’ve built their own companies and seen it
all before.
A new crop of investors is poised to prove tradition

wrong. Like the founders they support,
these standout young venture capitalists move fast.
They’ve earned coveted partner roles at big firms like
Sequoia Capital, founded their own funds like Romulus
Capital and founded key startup programs like Dorm
Room Fund and StartX.
Take Y Combinator president Sam Altman, who says he

still gets asked at age 29 what it feels like to be arguably
the most powerful investor in Silicon Valley, with 10,000
candidate submissions each year. Altman’s sold a
startup, Loopt, for $43.4 million; he’s already spent years
investing in companies like Airbnb and Teespring under
the guidance of industry stalwarts like YC cofounder Paul
Graham. With that experience, Altman says he tries to
think about his age as little as possible. Instead,
he’s focused on putting his stamp on Graham’s old haunt,
which has worked with more than 730 startups to date.
His goal? To find more companies in difficult but world-
changing industries like nuclear energy (where he’s just
backed two). “We want to have an impact,” Altman tells
Forbes. “It’s cool that you can make a list of the problems
in the world and then fund companies to solve them.”
2015 30 Under 30: Venture Capital
1 of 31
Sam Altman, 29
President, Y Combinator
Since the legendary computer programmer and entrepreneur Paul Graham founded Y Combinator
along with 3 others) in 2005, the accelerator has funded and coached more than 730 start-ups. Nearly
thirty of those firms now have market valuations in excess of $100 million and some (Dropbox,
Airbnb, Stripe) are worth billions. So when Graham decided he wasn’t the right person to continue to
grow Y Combinator, some were surprised that his handpicked successor wasn’t a name-brand venture
capitalist or superstar entrepreneur, but a hyper-kinetic, virtually unknown 20-something named Sam
Altman. Altman—a Y Combinator grad himself who built and sold (for $43.4 million) a moderately
successful location-based services company called Loopt – officially took over the accelerator in
February and has big plans to expand the number of companies in the program by a factor of 10 over
the next decade. “We want to have an impact. It’s cool that you can make a list of the problems in the
world and then fund companies to solve them.”
Photo: Walter Smith for Forbes

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Altman’s not the only investor on this list looking for
moonshots. There’s Ilya Golubivich, 29, who as
managing partner of I2BF Global Ventures has backed
companies launching satellites and looking to mine for
precious minerals on asteroids. And
there’s Google GOOGL +2.8% Ventures general partner Blake
Byers, also 29, who uses his bioengineering Ph.D. to find
companies like Rani Therapeutics, which hopes to turn
injectable drugs into pill form.
About half the members of the list come from traditional
bigger firms in VC that feature partners regularly on the
Forbes Midas List of top investors, including Accel
Partners, First Round Capital, Insight Venture Partners,
Kleiner Perkins Caufield & Byers,
New Enterprise Associates, Sequoia Capital and SV
Angel. Chetan Puttagunta, 28, rose from associate to
partner at NEA in just three years after playing a key role
in bringing the firm companies like ElasticSearch,
MongoDB and MuleSoft.
Others, like Nitesh Banta, 28, and Peter Boyce II, 24, join
the list for founding ventures of their own. Banta and
Boyce run Rough Draft Ventures, a firm that’s provided

up to $25,000 to dozens of student entrepreneurs.
They’re joined by First Round Capital’s CeCe Cheng, 28.
Cheng serves as director of Dorm Room Fund, which she
started as a peer-to-peer investing platform that’s backed
60 student startups so far.
One-third of the list’s 33 members (three joint entries

swell this year’s ranks) are at the cusp of 30. But two
members crack the list at just 22 years old: Alex Banayan
of Alsop Louie Partners and Stephanie Weiner of Bain
Capital Ventures, both of whom started investing in their
teens. Weiner’s a founding member of Dorm Room Fund
and started her own website in middle school. Banayan’s
writing a book about a colorful career to date that’s led
him to advise types from Department
of Education officials to Lady Gaga.
The young investors of this list also represent the

changing face of technology and investing as they prove
success doesn’t depend on a white-male
stereotype. While several Silicon Valley scions make the
list on their investing merits, so too do a larger number
of immigrant investors from India and Taiwan,
Venezuela and Ukraine. And while VC still has a long way
to go to reach gender equality, eight talented women
investors fill out this year’s list.
See the full list and more insights at the 30 Under 30
Venture Capital page.
Special thanks to this year’s judges: Josh Kopelman,
partner at First Round Capital; Chris Sacca, founder of
Lowercase Capital, and Scott Sandell, general partner
at New Enterprise Associates.
Follow Alex on Forbes, Twitter and Facebook for more

coverage of startups, enterprise software and venture
capital.
The Future of Venture

Capital, Tech
Valuations and the
Fate of Tech
Incumbents -
Conversation with
Bill Janeway
Igor Stenmark , Contributor
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I recently had a chance to catch up with Bill Janeway of

Warburg-Pincus to get his take on a whole spectrum of
technology investment and innovation issues. Bill, – who
is currently a Senior Adviser at Warburg-Pincus, devotes
a great deal of his time to teaching at Cambridge and
Princeton, as well as to speaking and writing on a variety
of technology, investment and innovation topics. To be
clear, – Bill is not exactly an academic only – he is a
tremendously accomplished tech investor with real street-
cred of generating 150X returns way before Facebook,
Linkedin or Twitter. I have seen him in action and not only
when things were great, but in crisis situations when his
portfolio companies faced uncertain odds of survival.

From the early 1980s and till 2006, Bill ran the entire
technology practice at Warburg-Pincus and served as the
firm’s Vice-Chairman with over $48 billion in assets under
management. He is one of the rare breed of tech investors
who combine great economic insight with practical hands-
on experience and an unbelievable amount of patience.
His most recent book – “Doing Capitalism in the
Innovation Economy: Markets, Speculation and the
State”, was published in 2012 by Cambridge University
Press.
An excerpt of my interview with Bill Janeway here focuses

on issues of the role of venture capital and private equity
industry, on tech valuations and on what happens to the
old guard tech firms – IBM, Dell, HP, et al. The full
interview will be available on our
website: www.mgiresearch.com shortly. You can follow
me on Twitter @istenmark.
20 Questions with Bill Janeway
Igor Stenmark: Let us focus a bit on the venture capital
industry. Do you think the venture industry today is
innovative enough? What needs to happen so that this
industry keeps its momentum and relevance?
Dr. William H. Janeway
Bill Janeway: First of all, the venture capital industry

as an industry is contracting. The capital under
management by venture capital firms, and the number of
venture capital firms, are both declining from the absurd
and unsupportable spike of the end of dot.com bubble.
Then the amount of money committed to venture capital
firms went from order of magnitude of $10 billion in 1995
to a $105 billion in the year 2000 – that’s a $140 billion in
today’s terms.
The decline in capital under management and in number
of firms tracks the radical shift in venture capital returns
since 2000-2001. I have just been reviewing the data
because of updating the course that I teach at Cambridge
and Princeton on venture capital in the innovation
economy. Through 2000, the returns to venture capital
firms, while highly skewed by a small number of persistent
out-performers, had substantially exceeded the NASDAQ
index. Since 2000, the VC returns have actually under
performed NASDAQ. That in turn is no doubt in
significant part due to the very substantial closing of
access to an active speculative market for initial public
offerings. There have been obviously some highly visible
major IPOs and a modest recovery in the number of IPOs
in the last few quarters, but in general, since 2001, the IPO
market has been running at a rate below where it ran for
almost 20 years from 1982 to 2001. Put it this way, – what
we think of the venture capital industry was built on the
back of the greatest bull market in the history of capitalism
and that bull market came to a speculative peak in 2000-
2001.
So, there have always been venture capitalists, there

always will be venture capitalists. It is only the notion of
an industry that I think needs to be questioned. What we

are seeing today is a bifurcation between a small number
of very large venture firms who are investing funds well in
excess of a billion dollars and a much larger number of
smaller VC firms. The larger VCs are challenged to learn
how to invest the money in other than a classic start-up.
Some of them are doing a pretty good job of that, investing
as growth equity rather than start-up venture investors.
On the other hand, there are a larger number of small
firms who reckon that what they are really doing is
funding distributed research and development for large
companies. They are funding projects, which if they
succeed should be sold on to big companies before the
challenge and risk of attempting to create new sustainable
cash positive independent business is accepted. Now that
is a legitimate and even needed economic role, and it
actually shifts the burden from venture capitalist and
entrepreneurs conducting distributed research and
development to the large companies, so they have to learn
how to absorb innovation from the outside without
smothering it the day after the closing.That is a big, big
problem that I do not believe is nearly sufficiently
accepted, understood, or addressed by corporate America
and America’s business schools.
Igor Stenmark: One of the things that really caught
my interest in reading your book was your comparative
analysis of gaps in venture capital returns between a few
top firms and the rest of the pack. The data seems very
compelling so why does capital continue to flow into the
venture funds?
Bill Janeway: First of all, there is a great deal of inertia
in institutional limited partnerships, the limited partners
who invest in the venture funds. When a pension fund,
particularly a state pension fund, decides that it has an
allocation for venture capital, it may be three percent of a

$40 billion fund, they are committed to putting that
money to work. It can take a decade, even two decades for
them to make that allocation. It is not surprising that it
should take a decade for them to cut it back, or eliminate
it but that is why the money that is going into the venture
capital is being reduced.
Second, there is the kind of home run sort of momentum
herding that contributes to the slow rate of change. So,
Facebook goes public and there can be humongous
returns earned, even if the odds against earning them
remain very high. Put those together and you can see
why. Even though the very best venture capital firms by
and large can turn down and select the limited partners,
there is still demand for participation in venture capital
partnerships even at a much-reduced level. Frankly, what
I said to my friends who are on the limited partner side is
examine closely the historical record of any fund that
approaches you, look for persistence across multiple funds
in different economic and financial environments. If the
funds that pass this test are prepared to accept your
money, give it to them, but if not, then don’t just hand
capital out to the mediocre followers.
Igor Stenmark: Let us flip the conversation a little bit

and talk about some of the start-ups Many of the start-
ups we see today are created by people who previously
have had two, three, in some cases four ventures
with successful exits. They have more than sufficient
amount of capital to start the business, they have access
now to very robust technological tools, and they have the
cloud available as a development platform with lots of
open source and lots of talent around. What is the role of
the venture firms in this context? Can they remain
relevant; can they structure deals that remain attractive

for everyone? What is your view forward?
Bill Janeway: Well, first of all, there actually is a very
interesting academic literature that says that for the
serially successful entrepreneur, it does not matter who
they take money from, whether they have a mediocre
venture firm based on historical track record or a top
notch one. They know what to do and they know how to
do it.
Having said that however, particularly in the world I know
best, – enterprise software, there has been a shift. It is
partly the function of the availability of open source
software, so it costs very little to begin the process of
launching a start-up by writing code. Even in the initial
build of market, there is the availability of Twitter and the
social media tools to get some attention. But, – the shift
from proprietary license to software as a service model has
profound financial consequence for enterprise software
start-ups. Very simply in the enterprise software world
the poor start-up was funded by the rich customer who
wrote big upfront checks for the expected future value of
the software being bought while at the same time
committing to annual maintenance payments. More
capital came in from customers than from venture
capitalists, so you could get to positive cash flow with no
more than $20 million in capital.
Today, the model has shifted in mathematical terms from
selling the integral of the expected future value to selling
the differential; the incremental value delivered per unit
of time or customer or transaction and the balance has
shifted the other way. Now, the poor startup is in effect
financing the rich customer and what that means is that
the revenue needed to achieve a positive cash flow is
typically well over $100 million. If you are going to trying
to go all the way and build a sustainable business, having

a lead venture capitalist with a track record and a network
and standing and resources to fund that really matters
even to the previously successful entrepreneur.
Igor Stenmark: Bill, – I could not agree more of you on
that point. We follow the SaaS space very closely and see
this in spades on a daily basis in our research and
advisory practice. We also see that 15-20 years ago when
you were at Warburg-Pincus and I was at Gartner we
saw companies that were crossing 100 million dollars in
sales, 40-50% top line growth, 20% operating margin
and this company would be valued at three, three and
half, or maybe four times revenue on a good day. Now,
we see SaaS companies fetching 6, 7, 10, 15 times revenue.
Are we in a bubble?
Bill Janeway: Can you rationalize that? How do you
rationalize that? You know I actually gave an interview to
the New York Times about the brilliant success
Amazon’s Jeff Bezos had in being able to convince the
Street to value Amazon on the basis of multiple of
revenues with maximum growth subject to minimum
necessary cash flow – something that is under his control
because he can slow down growth and generate more
cash. I think it must be a function of the perceived, almost
limitless scale of the market available to the early leaders
in each of these spaces. I myself don’t think it’s
indefinitely sustainable as a mode of valuing businesses
but those who funded and who valued salesforce.com on
this model have been rewarded and it has become a bit of
a model for others as they move into the historically
proven large space of enterprise applications. I think it is
unlikely that it will be maintained indefinitely.
Igor Stenmark: Do you have any thoughts you can

share on the valuations of social media companies,
Linkedin, Yelp, Facebook or for Twitter.
Bill Janeway: Well, the whole point of thinking about
the valuation of the companies at the frontier of
innovation, is that it is not possible in any plausible
disciplined manner to derive the net present value of the
expected future cash flows, which constitute “the
fundamental” definition of value in the mainstream
conventional neoclassical economics. Obviously, the
valuations are huge relative to any set of metrics. It is new
ground. Each one of these companies represents a new
foray into what appears to be a limitless market space with
evidence from Google and Facebook and potentially
Twitter, that it can be monetized and generate positive
cash flow over time.
The way to invest in all the candidates for this seems to be
what I guess is now known to the younger generation
as the investment strategy of “spray and pray”, – a little bit
of money to a lot of startups knowing that most of them
will fail but one or two might just possibly break out. As
soon as they show any evidence of breaking out the
valuations for a C round, forget about the IPO, becomes a
nosebleed. That is not an investment model that I am
temperamentally oriented towards. I am much more
interested as you know from my book in following the cash
and generating the cash earlier rather than later, but this
is the kind of phenomenon that emerges when a new
economy becomes sufficiently mature to open up space for
these radical new business models and application types.
Think about what happened in the 1880s, as Railway
Express provided the layer of “infrastructure software” on
top of the railroad network in North America, which in
turn enabled Montgomery Ward and Sears Roebuck to
deliver the “killer app” for the railroad age known as mail
order retail, which completely transformed the economy,
created national brands like Procter & Gamble and re-
architected the physical and economic architecture of
North America. That is the kind of phenomenon that
Google, Facebook, Amazon, EBay, Twitter
represent. Trying to value them on a net present value of
expected cash flows is just not relevant yet. Sooner or
later, it will become so.
The value now is driven by supply and demand amongst

speculators who have liquidity and will not have to stick
around to find out what the fundamental value turns out
to be over time. Because of this phenomenon of bubbles
more risk will be taken, more capital will be mobilized
than would be the case if investors were strictly investing
based upon the net present value of the expected future
cash flow, which as I began by saying cannot be
determined in plausibly rigorous manner. Now having
said all that, one of the laws of life is, as I used to tell my
young colleagues, nothing ever sells for 50 times earnings
for very long. So when it does, you, who are in a position
of influence, have a positive obligation to raise all the cash
you can as cheaply as you can, and then distribute as
rapidly as you can the liquid securities, which you
happened to own.
Take the example of Elon Musk at Tesla who had an

extraordinary opportunity to do what Jeff Bezos did at
Amazon at the top of the dot.com bubble – mainly to buy
from the market – that is from speculative investors, a vast
quantity of financial resources, billions and billions of
dollars at a minimum cost. If he does not do that and does
not emulate Jeff Bezos, you will have learned something
about Elon Musk’s strategic judgment as an
entrepreneur. This was an extraordinary opportunity for

them. Having said all that, I actually think the value of
social media companies that are addressing markets,
which are effectively limitless from today’s perspective
have relatively trivial significance to the overall health and
prospects of the innovation economy.
Igor Stenmark: Do you think that the constantly

increasing size of new private equity and venture funds
contribute in any way to creation of these bubbles?
Bill Janeway: That is not happening. The magnitude of
private equity funds has effectively been kept in the low
double-digit billions. There has been a major phase shift
towards somewhat greater discipline on the part of limited
partners. The market has loosened up a bit this year but
it’s not what it was in 2006-2007. The number of venture
capital firms is declining and the amount of capital
dedicated to those firms is at best stable at around $20
billion, equivalent to the roughly $10 billion it was back in
mid 1990s. What is happening in the venture world is the
bifurcation between a small number of very large firms
that are transforming themselves into growth equity and
even low-to-middle market buyout firms and a significant
number of small firms, with less than $100 million in
capital under management. The smaller firms are focused
on funding distributed research and development for big
companies intending to sell only rather than trying to
build businesses or practicing the “spray and pray”
strategy of investing across the host of social media and
similar kinds of very low cost, very high risk start-ups.
Igor Stenmark: What are the characteristics of
someone who is a successful venture investor in this
century? What separates those who are outstanding vs
just average? Do you have any examples of people who
you think are really outstanding in this business right

now?
Bill Janeway: I do not want to get into naming
winners. The winners are pretty well known by their track
records. The only way to evaluate them is their actual
achieved track record particularly in identifying the
persistent success through different market environments
and across different parts of technologies. What I can tell
you is that after 40 years of trying, I have definitely
decided that there is no prospective basis for judging who
will be a successful investor. You simply have to let the
younger members of the firm have the chance to lose
money, and if all they do is lose money then you have got
your answer.
Igor Stenmark: Looking back at 40 years of your
career, what were some of the most positive and negative
surprises in your investment career?
Bill Janeway: The first one which is discussed at length
in the third chapter of my book, the founding of Life
Technologies. This involved the most intense fundamental
education in dealing with the radical uncertainty of
financing of new companies. My colleague and I delivered
$20 million to a company called Bethesda Research
Laboratories to fund the two years it would take to get to
positive cash flow. In two months this money was spent
thus leaving us with a potentially catastrophic liquidation.
We managed to turn the situation around by joining forces
with an outstanding operational leader – Fred Adler – and
with Fred we took control of the situation and raised the
necessary cash to fix the company. Ever since then, the
core lesson that I learned and teach at Cambridge and
Princeton has been that the sole hedge against the
inescapable uncertainty of financing startups is cash and
control. Unequivocal access to enough cash to buy the
time necessary to find out what is going on, meaning what

has gone wrong, and enough control to change the
parameters of the problem. Now, in the world of venture
capital that typically begins by firing a CEO, but it can
involve re-purposing the venture. It can involve selling
the assets before they lose all value. It can involve even
adding to the assets by acquisition under new trusted
leadership. I learned this lesson of cash and control in
roughly 1981 and it has guided my investing practice ever
since.
Igor Stenmark: What advice would you offer today to
founder CEOs who are looking to raise capital for a new
venture?
Bill Janeway: Define a path towards positive cash flow
from operations. Understand what is involved in pursuing
this path in terms not only of the capital required but also
the degree of technical difficulty and, above all,
understanding of competitive market conditions and
channel to market. All of these things need to come
together into a credible business plan.
Understand the challenges of going public and gaining
access both to cheap capital and to liquidity for the early
investors. Given all of these circumstances, my advice to
the entrepreneurs and those who finance them is to be
thinking consistently and repeatedly about when to
sell. When we plug in the new stuff and it lights up, do we
sell now. When we have three customers who will stand
up and say, I bought it, it works, I will buy more, do we sell
now or do we accept the very substantial dilution,
particularly if the business is a SaaS revenue model? I am
talking about a very substantial dilution and incremental
risk of attempting to build a sustainable cash-positive
business which today typically requires at least $100
million of risk equity capital to get to sustainable positive

cash flow from operations.
Igor Stenmark: Bill, when we look at the transition to

cloud computing and mobile, a lot of the incumbent
players such as IBM, Dell, and HP have really been more
hurt than helped?
Bill Janeway: Clearly, they are trying to transition. It is
always the case that the incumbents are vulnerable. Their
profitability is based on franchises they built using the
previous architecture, and consequently they are slow to
respond. That is the innovator’s dilemma. Clearly, IBM is
trying to catch up by being very acquisitive. Oracle is
trying to move into the new environment. It has been very
acquisitive in technology now, and not just in customer-
base oriented acquisitions such as PeopleSoft and Siebel.
Since its acquisition of BEA Systems, it has been acquiring
core technologies. So, the big guys are definitely awake to
the challenge and for the new guys, as I say, breaking in
and disfranchising the incumbent will be somewhat more
difficult this time round than it was in the 1990s.
Compounding the challenge is the lack of available
technology to acquire and the shift to a SaaS revenue
model which radically increases the equity capital
required to get to positive cash flow.
Igor Stenmark: What do you think is going to happen
to a company like Dell?
Bill Janeway: Warburg Pincus did not participate in
any of the activity around Dell. There may be a path
towards some kind of milking of a revenue stream that
leads to time horizon and the return goals of Silver Lake. I
have enormous respect for Silver Lake. I have known the
firm from when it was founded. I knew its founders. I am
not going to second guess their investment. It is a
challenge obviously to turn around a business of this scale

and efforts were made to do the similar kinds of
transactions back when the world shifted from the
vertically integrated proprietary computing model to the
distributed model. You may even remember
ComputerVision and companies of that sort that were the
subject of first generation private equity buyout deals. It
is critically challenged, but as I say, I would also expect
that Silver Lake went into the deal with their eyes
collectively very wide open.
Igor Stenmark: Do you think that HP has a
reasonable chance to transform itself again?
Bill Janeway: HP is so big and has so many diverse
businesses. I have no doubt that within HP there are some
very attractive businesses. I actually agreed with the older
very high-level strategy of one of the several former CEOs,
Leo Apotheker, which I thought came in two pieces. Piece
one was: HP had managed to miss the transfer of value
from hardware to software that took place in roughly 1995
and over the following decade it completely missed that
transfer. The only significant software business it had was
deep down in the systems management space and in
between the stacks of software and operating
systems. The commoditized relational database owned by
Oracle and applications based on the relational database
owned by Oracle and SAP, left no room there, but those
applications were all based upon the management of
structured data. The one space of blue sky and blue water
that was available was the management and exploitation
of unstructured data. Hence, the obviously highly
controversial and unfortunate acquisition of Autonomy–
at the highest strategic level I get what Apotheker was
thinking about. Similarly, I certainly get what he was
thinking about in saying that “we have got to get rid of this
anchor of the PC business from around our necks”. The

acquisition of Compaq was a categorical error under Carly
Fiorina just as the acquisition of EDS was a categorical
error under Mark Hurd. Liberating HP from both of these
will have to happen sooner or later.
Igor Stenmark: IBM has become giant services and
financing operation. What are your thoughts about IBM
these days?
Bill Janeway: Absolutely right. I think Sam Palmisano
(previous CEO of IBM) did an outstanding job of shifting
towards being a first-class services business. IBM’s
financial performance for a period of years shall we say
was enhanced by very aggressive financial
engineering. But IBM is clearly established. IBM is going
to be here and it is going to be part of the environment. I
think, as the world of enterprise application itself
increasingly becomes one of IT-enabled services, IBM has
a very clear opportunity to play higher up the value stack.
***
This is an advance excerpt from a full interview with Bill

Janeway that will be available on our
website www.mgiresearch.com shortly.
Is Social Impact
Investing The Next
Venture Capital?
Comment Now
Follow Comments
GUEST POST WRITTEN BYSir Ronald Cohen and Matt Bannick

In late August, mobile security company Lookout raised

$150 million in venture capital, taking advantage of the
surging demand for cybersecurity products that had
already attracted nearly $900 million in VC
funding in the first half of the year.
Why can’t we address social needs with similar

inventiveness and resources?
Poverty, homelessness, crime, unemployment continue

to plague even the wealthiest of nations. Imagine if in
addition to existing efforts, we could leverage trillions in
private capital and bring the same level of focus
and entrepreneurial dynamism that we see in the private
sector to meet the pressing needs for better schools,
more job opportunities, improved public services, safer
streets?
We don’t have to imagine. It is already happening – and

it is called impact investing. The idea is simple enough –
to invest in efforts that not only provide a return on
investment, but also target specific social needs.
We can dramatically accelerate the growth of this

important market by partnering with government to
remove roadblocks.
If you don’t think government policies matter in the

development of new investing opportunities, think about
how the venture capital market emerged.
Started in the mid-1960s, the idea of professionally-

managed venture capital partnerships had nearly
evaporated by late 1970s. That’s when the U.S.
government implemented several changes that sparked
the growth of a successful industry.
Among the policy changes were clarifications to ERISA’s

“Prudent Man” rule that allowed pension funds to make
VC investments, and a safe harbor rule making it clear
that VC managers wouldn’t be considered
plan fiduciaries.
In just two years, VC investments went from virtually

zero to more than $5 billion. And this capital helped
unleash waves of innovation.
Now we are poised to see the same happen with impact

investing.
And around the world, there are stories of how impact

investments are meeting needs in areas as diverse as
childhood education, clean technology, and financial
services for the poor.
Last year, New York State, Social Finance and Bank of

America Merrill Lynch teamed up to launch a “social
impact bond” designed to cut New York City’s seemingly
insoluble recidivism problem. The $13.5 million
raised will extend the proven approach of the Center for
Employment Opportunities. If the Center meets targets
for reducing recidivism rates, investors stand to earn up
to a 12.5% return.
Or take d.light – a company that manufactures and

distributes solar lighting and power products to those
without access to reliable electricity, transforming lives
in the developing world. Over eight years, d.light
has reached more than 30 million people worldwide.
Recently, J.P. Morgan and the Global Impact Investing

Network studied 125 major fund managers, foundations,
and development finance institutions and found $46
billion in sustainable investments under

management. That’s up nearly 20% from last year.
Some estimate that the impact investment market could

grow to $3 trillion. And as the more socially conscious
millennial generation of entrepreneurs build impact-
driven businesses, you can be sure the supply of
impact investment opportunities will vastly expand.
This week, a new comprehensive report released by the

Social Impact Investment Taskforce established under
the UK’s presidency of the G8 outlines
comprehensive policy steps that should be taken to
realize the potential. Among them: regulators should
once again review ERISA rules for pension funds to
make it clear that plan managers can consider social,
targeted economic, or environmental factors in
investment decisions because they affect the long-term
financial performance of their investments.
Seed Capital
AAA |
DEFINITION OF 'SEED CAPITAL'

The initial capital used to start a business. Seed capital often comes from the
company founders' personal assets or from friends and family. The amount of
money is usually relatively small because the business is still in the idea or
conceptual stage. Such a venture is generally at a pre-revenue stage and seed
capital is needed for research & development, to cover initial operating expenses
until a product or service can start generating revenue, and to attract the
attention of venture capitalists.
INVESTOPEDIA EXPLAINS 'SEED CAPITAL'

Seed capital is needed to get most businesses off the ground. It is considered a
high-risk investment, but one that can reap major rewards if the company
becomes a growth enterprise. This type of funding is often obtained in exchange

for an equity stake in the enterprise, although with less formal contractual
overhead than standard equity financing.
Banks and venture capital investors view seed capital as an "at risk" investment
by the promoters of a new venture, which represents a meaningful and tangible
commitment on their part to making the business a success. Frequently, capital
providers will want to wait until a business is a little more mature before making
the larger investments that typify the early stage financing of venture capital
funding.
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Risks of Venture Capital

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On the up side there's the money. On the down side there's potentially stolen ideas, a
likely loss of control, and the possibility of being tossed out on your ear at a moment's
notice.
Entrepreneurs seeking big bucks from venture capitalists likely know what the risks are.
But do they know how to mitigate them? Joel West, a professor at the Keck Graduate
Institute of Applied Life Sciences, Claremont, CA, who teaches innovation management
and writes the Engineering Entrepreneurship blog, warns that when you turn to venture
capital for funding you hand over all your power. "It's like the weather, everyone
complains about it, but nobody does anything about it," he says.
Holding onto power in the face of a face-to-face meeting with venture capital execs
means holding on to your ideas. Don't go thinking you'll try pitching to one group, then,
based on the response you get, refine your proposal for the next one. Each person you
explain your idea to is another person that might take your idea and run with it himself.
"There are a lot of businesses where once you hear the concept it's easy to steal the
idea. There are other businesses where the execution and the details are much more
important," says West.
Having a patent already in hand helps an entrepreneur in negotiating with investors.

Protecting Your Idea
"There are different degrees to which the uniqueness of an idea is protectable," he

continues. "If you come up with clever way to solve a problem—say, a particular
material science that solves a manufacturing problem—once people know the material,
they know the business. They can go off and do it themselves. In general, ideas are a
dime a dozen. They need people that can execute."
Aside from keeping things close to your vest, the only other kind of protection is the
legal kind, namely a patent. Forget about trying to get venture capitalists to sign a non-
disclosure agreement. "Nobody is going to agree to it," says West. "There's so much
information about dealing with VCs—go to Amazon, there's a dozen books, every
business school has a course. VCs expect you to do your homework," he says. "If you
don't get that aspect of how to do business, they're probably going to show you the door
anyway."
Pending or otherwise, patents, prototypes, and business plans give you more
bargaining power. "Anything you can do to strengthen your hand before you go to a VC
is going to get you a better deal," says West. "If you have a prototype and a patent a
year away from being granted, you have a pretty good leg up and better negotiation
terms."
Holding on to Control
Once you've secured some funds you may find yourself in another kind of struggle—
holding on to control. "There are all sorts of ways in which the interests of an
entrepreneur and a venture capitalist can diverge," says West. "For the venture to be
successful they need to be aligned, they need to stay aligned. If at some point they
have contrary interests, it's not going to be pretty. Just because their interests are the
same as yours today, it doesn't mean they'll be the same two years from now."
In the end, if you have a product that you want to see come to fruition your own way,
and the idea is not time sensitive, it might be best to scrounge up your own capital,
where possible. "If you want to answer to no one, you better provide all the funding,"
says West. With venture capital, "You will be at the mercy of whoever provided the
funding," he says.
"That's the realty of taking investors," he adds. "They don't believe in you and want you
to be successful like your mom. They want to make a buck and then move on to
something else.
Benefits of Using Venture Capital

In this discussion, we are going to focus on the benefits of using venture capital, as well as focusing on
the fact that you access to a number of different professionals that will be actively engaged in the
business of assisting you in expanding your business for a substantial time frame. As we discussed
before, most venture capital firms want to see that you are able to aggressively expand your business for
a 3 to 10 year time frame with the intent of selling the business to a third party for significant earnings
premium or that you're going to take the company public. Unlike new investors will provide you with
smaller sums of money and mentorship of your business, venture capital firm will be able to effectively
provide you with not only the initial capital you need to develop expanded business operations, but also
the funding they need on an ongoing basis as your business expands. For instance if you are a brand-
new high-tech startup company, and require an initial investment of $1 million to launch a business
operations the venture capital firm will be able to provide you with that money immediately. If the
technology that technology have developed becomes extremely profitable, and need an additional $10
million of capital in order to further ramp up their business operations, venture capital group will also be
there to source that the additional capital that will provided to your business so that they can further
expand their investment. This is the primary difference between a venture capital firm and investors.
Venture capital groups are able to provide you with ongoing rounds of capital as they see that your
business is becoming more and more successful.
Many angel investors, the capital that they can continue to provide your business, regardless of how
successful it is limited. As such, if you have a valuable piece of technology or a rapidly expanding
business then seeking venture capital may be the best route for you. As we have continued to discuss as
one of our themes for new articles and produced for TheFinanceResource.com, it is imperative that you
have the appropriate counseling place including a certified public accountant as well as an attorney that
will actively assist you in negotiating the ordeal as it relates to selling equity stake in your business to a
venture capital firm. In many instances, beyond selling just an equity stake in your business there will
need to specific rights as a relates to buyouts, stock options, bonuses, and other forms of compensation
that you'll receive if you are able to do an outstanding job in developing the business to profitability and
providing the venture capital firm with a substantial return on their investment.
Foremost, when working with a venture capital firm is important to remember that they are seeking a
substantial return on investment. You may have a vision for your business, venture capital firm that you're
working with these, and then, suddenly interested in the amount of money that they can make from the
ongoing investments that make in you firm with the intent of selling the business to a third party. As such,
working with a venture capital group takes on a number of different challenges as you continue to
negotiate sales of equity to venture capital firms concurrently maintaining a certain level of control over
how you intend to run the business. If you are a highly skilled entrepreneur with years of activity within
your industry leader much better position to negotiate with venture capital firms as it relates to the sales of
equity stakes in your business as well as other forms of compensation as it relates to you owning and
operating the business for a substantial time frame. However, you should be aware that when you work
with a venture capital company that they will the vast amount of control as to how the business will be
run. Primarily, this is due to the fact that they own a majority stake in the business and if they feel that
you're not doing the appropriate job as needed to provide the return on investment that they are seeking
then they will quickly replace you with a different CEO for manager that will operate the business
differently than you intended. This is the most important things to a member when working with a venture
capital firm.
Again, turning to the benefits of working with a venture capital firm, one of the best things to remember is
that you'll have access to a nearly unlimited number of resources as it pertains to the ongoing growth of
your business. This is especially true when it comes time to sell the business to a third party. As we
discussed before, venture capital firms are solely interested in making an investment with the overall
intent to sell the business to another party or take the company public. Venture capital firms, for the most
part, are not interested in the ongoing cash flow that they can receive their investment. Venture capital
firms are very interested in the ultimate sale the business for a substantial earnings helpful. In many
venture capital deals, especially as it relates to technology, these firms are seeking to receive 35% per
year on their investment if not higher. As such, when determining as to whether or not you're a venture
capital firm prospect, you should ensure that your firm is able to produce these types of financial results
prior to seeking venture capital. If you are unable do so, then it may be in your best interest to work with
smaller investors were banking institutions that can provide you the capital that you need.
Regarding the divestiture of your business to a third party, venture capital firms often have the means and
the contacts that are necessary to package your business for sale of his become highly profitable. This
includes having relationships with investment banks, private equity firms, and other businesses that
specialize in purchasing businesses as well as taking companies public. This should be the last thing on
your mind as it relates to the ongoing development and growth of your business. Among the 98 million
businesses that are currently active with the United States about 20,000 are actively traded as publicly
traded businesses on the stock exchanges. Of course, we are all familiar with the success of specific
entrepreneurs that have developed highly profitable businesses within their specific fields that take the
company public and receive a tremendous amount of money for their work. However, again, this is only a
small fraction the companies that exist. In most cases that involve venture capital, the business is grown
to a substantial size over a seven year time frame and is sold to a larger company, competitor, or to a
private equity firm that is looking to get into the specific industry in which you have developed your
business. Returning to the nature of the specific topic, the venture capital firm you work with closely with
you as it comes time to prepare the business for sale to a third-party. This includes developing the
appropriate business plan that showcases the previous operations of the business as well as the potential
growth of the business as it relates to selling the business to a third party. Additionally, the venture capital
firm that you're working with pertaining and appropriate mergers and acquisitions law for this is what the
legal matters at pertaining to selling a business as well as retaining a major accounting firm that produced
the financial statements that are necessary for the due diligence process. When selling a large business
that has received a venture capital investment, the cost associated with preparing and selling the
business are extraordinarily high. Typically, in most instances, the costs that can be incurred as it relates
to the specific deal then are equal to approximately 80% of the total value of the deal. For instance, if you
have a company you have developed that is now reached a value of $50 million then you can anticipate
that the costs related to selling that business to a third party for taking the company public in the unique
$3 million-$5 million range. As you can see this is a very expensive proposition for the venture capital
group. However, unlike privately owned businesses, the venture capital firm that works with has
knowledge providing you with the investment that you'd have needed in order to develop that business
but also pick up the tab as it relates to preparing the business for sale.
Other benefits of working with a venture capital firm is that they're very happy to reward substantial
success among the portfolio investments. Unlike an angel investment deal there a specific amount of
equity is supposed directly to a small third-party with the intent to generate a cash flow for a moderate
sales premium and business comes to sale, venture capital firms reward top executives handsomely
when it comes to outstanding performance. Again, you are going to need to provide a tremendous
amount of the equity and controlling your business to this venture capital firm but through your
appropriate negotiations you will be able to attain it things such as stock options, restricted stock,
bonuses, and other forms of compensation that will be provided to you in the event that the business
becomes extremely successful. As an entrepreneur, and the other benefits of working with a venture
capital firm and other highly successful enterprise is that you will be able to very easily raise capital for
any future entrepreneurial endeavors that you're seeking. This, of course, like anything else in life is the
fact that you're able to prove that you been successful in business once then you'll be able to continue to
receive capital investment that you need for any future ideas are businesses that you intend to develop.
Of course, this is the Catch-22 of venture capital and that you first need to prove that you're successful in
order receive the capital you need while concurrently being in a stage where you've not yet proven
yourself to be successful in business. As such, prior to seeking venture capital strongly recommended if
you are able to do so then it may be in your best interest to start the business on a very low budget so
you can produce something of candidate value to a venture capital firm prior to approaching them for
investment.
In the future discussions we will, again, focus on the tremendous benefits of using venture capital. We are
also the focus on some of the negative issues that occur when you are seeking investment from a venture
capital firm. The strongest things that we are going to discuss about this theme of articles, as it pertains to
venture capital, is that again, you are going to need to seed a significant amount of equity in control of
your business to a third-party company that is solely interested in producing as much profit as possible for
their firms and their respective investors
Venture capital financing process[edit]

There are five common stages of venture capital financing:[citation needed]
1. The Seed stage

2. The Start-up stage
3. The Second stage
4. The Third stage
5. The Bridge/Pre-public stage
The number and type of stages may be extended by the VC firm if it deems necessary; this is
common.[citation needed] This may happen if the venture does not perform as expected due to bad
management or market conditions (see: Dot com boom).
The following schematics shown here are called the process data models. All activities that find
place in the venture capital financing process are displayed at the left side of the model. Each box
stands for a stage of the process and each stage has a number of activities. At the right side, there
are concepts. Concepts are visible products/data gathered at each activity. This diagram is
according to the modeling technique developed by Sjaak Brinkkemper of the University of Utrecht in
the Netherlands.
The Seed Stage[edit]
The Seed Stage
This is where the seed funding takes place. It is considered as the setup stage where a person or a
venture approaches an angel investor or an investor in a VC firm for funding for their idea/product.
During this stage, the person or venture has to convince the investor why the idea/product is
worthwhile. The investor will investigate into the technical and the economical feasibility (Feasibility
Study) of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully
developed or tested.
If the idea is not feasible at this stage, and the investor does not see any potential in the
idea/product, the investor will not consider financing the idea. However if the idea/product is not
directly feasible, but part of the idea is worthy of further investigation, the investor may invest some
time and money in it for further investigation.
Example[edit]
A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which allows
companies to order lunch. To open this portal, the venture needs some financial resources, they also
need marketeers and market researchers to investigate whether there is a market for their idea. To
attract these financial and non-financial resources, the executives of the venture decide to approach
ABN AMRO Bank to see if the bank is interested in their idea.
After a few meetings, the executives are successful in convincing the bank to take a look in the
feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After two weeks, the
bank decides to invest. They come to an agreement and invest a small amount of money into the
venture. The bank also decides to provide a small team of marketeers and market researchers and a
supervisor. This is done to help the venture with the realization of their idea and to monitor the
activities in the venture.
Risk[edit]
At this stage, the risk of losing the investment is tremendously high, because there are so many
uncertain factors. Research by J.C. Ruhnka and J.E. Young shows that the risk of losing the
investment for the VC firm is around 66.2% and the causation of major risk by stage of development
is 72% .[citation needed] The Harvard report[2] by William R. Kerr, Josh Lerner, and Antoinette Schoar,
however, shows evidence that angel-funded startup companies are less likely to fail than companies
that rely on other forms of initial financing.
The Start-up Stage[edit]
The Start-up Stage
If the idea/product/process is qualified for further investigation and/or investment, the process will go
to the second stage; this is also called the start-up stage. A business plan is presented by the
attendant of the venture to the VC firm. A management team is being formed to run the venture. If
the company has a board of directors, a person from the VC firms will take seats at the board of
directors.
While the organisation is being set up, the idea/product gets its form. The prototype is being
developed and fully tested. In some cases, clients are being attracted for initial sales. The
management-team establishes a feasible production line to produce the product. The VC firm
monitors the feasibility of the product and the capability of the management-team from the board of
directors.
To prove that the assumptions of the investors are correct about the investment, the VC firm wants
to see result of market research to see whether the market size is big enough, if there are enough
consumers to buy their product. They also want to create a realistic forecast of the investment
needed to push the venture into the next stage. If at this stage, the VC firm is not satisfied about the
progress or result from market research, the VC firm may stop their funding and the venture will
have to search for another investor(s). When the cause relies on handling of the management in
charge, they will recommend replacing (parts of) the management team.
Example[edit]
Now the venture has attracted an investor, the venture needs to satisfy the investor for further
investment. To do that, the venture needs to provide the investor a clear business plan how to
realise their idea and how the venture is planning to earn back the investment that is put into the
venture, of course with a lucrative return.
Together with the market researchers, provided by the investor, the venture has to determine how
big the market is in their region. They have to find out who are the potential clients and if the market
is big enough to realise the idea.
From market research, the venture comes to know that there are enough potential clients for their
portal site. But there are no providers of lunches yet. To convince these providers, the venture
decided to do interviews with providers and try to convince them to join.
With this knowledge, the venture can finish their business plan and determine a pretty good forecast
of the revenue, the cost of developing and maintaining the site and the profit the venture will earn in
the following five years.
After reading the business plan and consulting the person who monitors the venture activities, the
investor decides that the idea is worth for further development.
Risk[edit]
At this stage, the risk of losing the investment is shrinking because the nature of any uncertainty is
becoming clearer. The VC firm's risk of losing the investment has dropped to 53.0%. However, the
causation of major risk becomes higher (75.8%), because the prototype was not fully developed and
tested at the seed stage. The VC firm could have underestimated the risk involved, or the product
and the purpose of the product could have changed during development.[3]
The Second Stage[edit]
The Second Stage
At this stage, we presume that the idea has been transformed into a product and is being produced
and sold. This is the first encounter with the rest of the market, the competitors. The venture is trying
to squeeze between the rest and it tries to get some market share from the competitors. This is one
of the main goals at this stage. Another important point is the cost. The venture is trying to minimize
their losses in order to reach the break-even.
The management team has to handle very decisively. The VC firm monitors the management
capability of the team. This consists of how the management team manages the development
process of the product and how they react to competition.
If at this stage the management team is proven their capability of standing hold against the
competition, the VC firm will probably give a go for the next stage. However, if the management
team lacks in managing the company or does not succeed in competing with the competitors, the VC
firm may suggest for restructuring of the management team and extend the stage by redoing the
stage again. In case the venture is doing tremendously bad whether it is caused by the management
team or from competition, the investor will cut the funding.
Example[edit]
The portal site needs to be developed. (If possible, the development should be taken place in house.
If not, the venture needs to find a reliable designer to develop the site.) Developing the site in house
is not possible; the venture does not have this knowledge in house. The venture decides to consult
this with the investor. After a few meetings, the investor decides to provide the venture a small team
of web-designers. The investor also has given the venture a deadline when the portal should be
operational. The deadline is in three months.
In the meantime, the venture needs to produce a client portfolio, who will provide their menu at the
launch of the portal site. The venture also needs to come to an agreement on how these providers
are being promoted at the portal site and against what price.
After three months, the investor requests the status of development. Unfortunately for the venture,
the development did not go as planned. The venture did not make the deadline. According to the
one who is monitoring the activities, this is caused by the lack of decisiveness by the venture and the
lack of skills of the designers.
The investor decides to cut back their financial investment after a long meeting. The venture is given
another three months to come up with an operational portal site. Three designers are being replaced
by a new designer and a consultant is attracted to support the executives’ decisions. If the venture
does not make this deadline in time, they have to find another investor.
Luckily for the venture, with the come of the new designer and the consultant, the venture succeeds
in making the deadline. They even have two weeks left before the second deadline ends.
Risk[edit]
At this stage, the risk decreases because the start-up is no longer developing its product, but is now
concentrating on promoting and selling it. These risks can be estimated. The risk to the VC firm of
losing the investment drops from 53.0% to 33.7%, and the causation of major risk by stage of
development also drops at this stage, from 75.8% to 53.0%.[4]
The Third Stage[edit]
The Third Stage
This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to
expand the market share they gained in the previous stage. This can be done by selling more
amount of the product and having a good marketing campaign. Also, the venture will have to see
whether it is possible to cut down their production cost or restructure the internal process. This can
become more visible by doing a SWOT analysis. It is used to figure out the strength, weakness,
opportunity and the threat the venture is facing and how to deal with it.
Apart from expanding, the venture also starts to investigate follow-up products and services. In some
cases, the venture also investigates how to expand the life-cycle of the existing product/service.
At this stage the VC firm monitors the objectives already mentioned in the second stage and also the
new objective mentioned at this stage. The VC firm will evaluate if the management team has made
the expected cost reduction. They also want to know how the venture competes against the
competitors. The new developed follow-up product will be evaluated to see if there is any potential.
Example[edit]
Finally the portal site is operational. The portal is getting more orders from the working class every
day. To keep this going, the venture needs to promote their portal site. The venture decides to
advertise by distributing flyers at each office in their region to attract new clients.
In the meanwhile, a small team is being assembled for sales, which will be responsible for getting
new lunchrooms/bakeries, any eating-places in other cities/region to join the portal site. This way the
venture also works on expanding their market.
Because of the delay at the previous stage, the venture did not fulfil the expected target. From a new
forecast, requested by the investor, the venture expects to fulfil the target in the next quarter or the
next half year. This is caused by external issues the venture does not have control of it. The venture
has already suggested to stabilise the existing market the venture already owns and to decrease the
promotion by 20% of what the venture is spending at the moment. This is approved by the investor.
Risk[edit]
At this stage, the risk to the VC firm of losing the investment drops from 20.1% to 13.6%, and the
causation of major risk by stage of development drops substantially from 53.0% to 37.0%. However,
new follow-up products are often being developed at this stage. The risk of losing the investment is
still decreasing, because the venture relies on its income from sales of the existing product.[5]
The Bridge/Pre-public Stage[edit]
The Bridge/Pre-public Stage

In general, this is the last stage of the venture capital financing process. The main goal of this stage
is for the venture to go public so that investors can exit the venture with a profit commensurate with
the risk they have taken.
At this stage, the venture achieves a certain amount of market share. This gives the venture some
opportunities, for example:
 Merger with other companies

 Keeping new competitors away from the market
 Eliminate competitors
Internally, the venture has to examine where the product's market position and, if
possible, reposition it to attract new Market segmentation. This is also the phase to introduce the
follow-up product/services to attract new clients and markets.
Ventures have occasionally made a very successful initial market impact and been able to move
from the third stage directly to the exit stage. In these cases, however, it is unlikely that they will
achieve the benchmarks set by the VC firm.
Example[edit]
Faced with the dilemma of whether to continuously invest or not. The causation of major risk by this
stage of development is 33%. This is caused by the follow-up product that is introduced.[6]
At Last[edit]
As mentioned in the first paragraph, a VC firm is not only about funding and lucrative returns, but it
also offers knowledge support. Also, as can be seen below, the amount of risk (of losing investment
value) decreases with each additional funding stage
Stage at which investment made Risk of loss Causation of major risk by stage of development
The Seed-stage 66.2% 72.0%
The Start-up Stage 53.0% 75.8%
The Second Stage 33.7% 53.0%

The Third Stage 20.1% 37.0%
The Bridge/Pre-public Stage 20.9% 33.0%

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