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Other positions at venture capital firms include venture partners and entrepreneur-in-residence (EIR). Venture partners «bring in deals» and receive income only on deals they work on (as opposed to general partners who receive income on all deals). EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by VC firms temporarily (6 to 18 months) and are expected to develop startup ideas to their host firm. Some EIRs move on to roles such as Chief Technology Officer at a portfolio company.

Fixed-lifetime funds. Most venture capital funds have a fixed life of ten years. This model was pioneered by some of the most successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is «called down» by the VCs over time as the fund makes its investments. In a typical venture capital fund, the VCs receive an annual management fee equal to 2% of the committed capital to the fund and 20% of the net profits of the fund («two and 20»). Because a fund may run out of capital prior to the end of its life, larger VCs usually have several overlapping funds at the same time. Smaller firms tend to thrive or fail with their initial industry contacts.

Investments by a venture capital fund can take the form of either preferred stock equity or a combination of equity and debt obligation, often with convertible debt instruments that become equity if a certain level of risk is exceeded. The common stock is often reserved by covenant for a future buyout, as VC investment criteria usually include a planned exit event (an IPO or acquisition), normally within 3 to 7 years.

Venture capital is not suitable for many entrepreneurs. Venture capitalists are very selective in deciding what to invest in; as a rule of thumb, a fund invests only in about one in 400 opportunities presented to it. They are most interested in ventures with high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe that venture capitalists expect. Because of such expectations, most venture funding goes into companies in the fast-growing technology and life sciences or biotechnology fields.

Venture capitalists hope to be able to sell their stock, warrants, options, convertibles, or other forms of equity in 3 to 7 years, at or after an exit event; this is referred to as harvesting. Venture capitalists know that not all their investments will pay off. The failure rate of investments can be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested capital. In case a venture fails, then the entire funding by the venture capitalist is written off.

Many venture capitalists try to mitigate the risk of failure through diversification. They invest in fledgling companies in different industries and different countries so that the risk across their portfolio is minimized. Others concentrate their investments in the industry that they are familiar with. In either case, they usually work on the assumption that for every ten investments they make, two will be failures, two will be successful, and six will be marginally successful. They expect that the two successes will pay for the time given to, and risk exposure of the other eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to investors.

General Georges Doroit is considered to be the father of venture capital industry. In 1946 he founded American Research and Development (ARD) Corporation, whose biggest success was Digital Equipment Corporation. When Digital Equipment went public in 1968 it provided ARD with 101% annualized ROI. ARD’s US$70,000 investment in Digital Corporation in 1959 had a market value of US$37mn in 1968. The first venture-backed startup is generally considered to be Fairchild Semiconductors, funded in 1959 by Venrock Associates. Before World War II, venture capital investments were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act authorized the U.S. Small Business Administration to license private «Small Business Investment Companies» to provide financing and management assistance to small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. The goal of the SBIC program was, and still is, to stimulate the U.S. economy in general, and small businesses in particular, by facilitating the flow of capital to pioneering small concerns.

Venture capital is a phenomenon most closely associated with the United States and technologically innovative ventures. Due to structural restrictions imposed on American banks in the 1930s there was no private merchant banking industry in the United States, a situation that was quite unique in developed nations.

As of 2006 some of the most well known VC Firms are:

– Kleiner, Perkins, Caufield and Byers.

– Sequoia Capital.

– Sigma Partners.

Due almost entirely to the dotcom boom, the late 1990s were a boom time for the globally-renowned VC firms on Sand Hill Road in San Francisco. IPOs were taking truly irrational leaps, and access to «friends and family» shares was becoming a major determiner of who would benefit from any such IPO; the ordinary investor rarely got a chance to invest at the strike price in this period.

The NASDAQ crash and technology slump that started in March 2000, and the resulting catastrophic losses on overvalued, non-performing startrups, shook VC funds deeply. By 2003, many VCs were focused on writing off companies they funded just a few years earlier, and many funds were «under water»; that is, their portfolio companies were worth less than when invested in. Venture capital investors sought to reduce the large commitments they have made to venture capital funds. As of mid-2003, the conventional wisdom was that the venture capital industry would shrink to about half its present capacity in the following few years. However, Pricewaterhouse Coopers’ MoneyTree Survey shows total venture capital investments holding steady at 2003 levels through Q2 2005. The renaissance of an Internet-driven business (thanks to deals such as eBay’s purchase of Skype, the News Corporation’s purchase of MySpace, and the very successful Google IPO) has helped to revive the VC environment.

Source: Wikipedia

1.venture capital (VC) – венчурный (рисковый) капитал

venture capitalist – венчурный капиталист

2. capital market – рынок капитала

3. bank loan – банковский заем

4. collateral (collat) n – обеспечение

5. initial public offering (IPO) – первоначальное публичное предложение акций

6. entrepreneur-in-residence (EIR) – «домашний» предприниматель

7. due diligence – процесс должной проверки

8. Chief Technology Officer (CTO) – главный технический директор

9. fixed-lifetime fund – фонд с фиксированным сроком действия

10. pioneer n – первопроходец

pioneer v – прокладывать путь, вести

11. ascendance n – власть, доминирующее положение

12. preferred stock – привилегированные акции

13. convertible (convertibles) debt instruments (bonds) – конвертируемые долговые инструменты (облигации)

14.common stock – обыкновенные акции

15. buyout n – выкуп

buy out v – выкупать

16. rule of thumb – эмпирическое правило, практический метод

17. warrant (WT) n – варрант

18. harvest n – урожай, уборка урожая

harvesting n – уборка урожая

harvest v – собирать урожай

19. write off n – списание

write off v – списывать

20. mitigation n – смягчение, уменьшение

mitigate v – смягчать, уменьшать

21. fledgling company – только что созданная компания

22. annualizing n – пересчет в годовое исчисление

annualize v – пересчитывать на годовой основе

annualized a – пересчитанный на годовой основе

23. passage n – зд. прохождение, принятие (закона)

pass v – принимать (закон)

24. Small Business Administration (SBA) – Администрация по делам малого бизнеса (США)

25. Small Business Investment Company (SBIC) – инвестиционная компания для малого бизнеса (США)

26. Federal Reserve Board (FRB) – Совет управляющих ФРС (США)

27. merchant bank – торговый банк (Великобритания, сходен с инвестиционным банком по функциям)

28. boom n – бум, быстрый экономический подъем, период экономического процветания

boom v – быстро расти, процветать (об экономике)

29. strike price – цена исполнения

30. National Association of Securities Dealers Automated Quotations (NASDAQ) – Автоматизированные котировки Национальной ассоциации дилеров по ценным бумагам (НАСДАК)

31. slump n – краткосрочное падение экономической активности или цены конкретной ценной бумаги

slump v – снижаться, падать (об экономической активности или цене ценной бумаги)

Exercise 1. Answer the following questions.

1. What are the main differences between venture capital and the traditional financing? 2. Who are the partners of venture capitalists? 3. What are the characteristic features of fixed-lifetime funds? 4. What are the usual forms of a VC investment? 5. Is venture capital suitable for many entrepreneurs? 6. What is the usual proportion between successes and failures in the VC industry? 7. How can venture capitalists mitigate the risk of failure? 8. How was the VC industry launched? 9. How did the Small Business Investment Act of 1958 promote the VC industry? 10. Why has venture capitalism developed more actively in the US than elsewhere in the world? 11. What was the contribution of the dotcom boom to the development of the VC industry? 12. What were the effects of NASDAQ crash and technological slump? 13. How is the VC industry developing worldwide?

Exercise 2*. In general, businesses set up through venture financing develop by stages described below. Match the names of these stages given under the leading «Venture Financing Terms» with their definitions given below and describe evolution of a fledgling company through these stages.

Stages of Development of a Business

1. source of funding for the early stages of a startup venture where the product, process, or service is in its conceptual or developmental phase

2. from founding the business to the beginning of operations and the generation of revenue

3. initial growth phase, funded by the initial capitalization. Management and operations are in place, and markets initially identified are being penetrated using available resources

4. the business seeks to expand its product line, expand its facilities, identify and penetrate new markets, and continue the growth phase

5. the business is established in its target markets

6. financing provided, usually by private investors or venture capital firms, prior to a company going public, or initiating its next stage of financing

7. an offering of debt, equity or limited partnership interests to a small number of investors (generally 35 or fewer) on a ‘private’ basis. Exempt from the registration requirements of the securities laws

8. either the percentage reduction of ownership in a company resulting from the sale of additional shares of stock, or the difference between the price paid by investors in either a private-placement or public financing

9. the process of investigation by venture capital firms and other investors of a company, its business, and financial plans, prior to proceeding with an investment

10. a study that evaluates a proposed venture’s potential for success

11. an equity ownership position that is provided to a funding source as compensation, or additional compensation, for providing management consulting, financing or miscellaneous services

12. the value assigned to the entrepreneur’s contribution or investment of time and effort in the venture

Venture Financing Terms: