Venture capital

Venture capital(VC) is a form ofprivate equityfinancing provided by firms orfundstostartup,early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc. Venture capital firms or funds invest in these early-stage companies in exchange forequity,or an ownership stake. Venture capitalists take on the risk offinancingstart-ups in the hopes that some of the companies they support will become successful.Becausestartupsface high uncertainty,VC investments have high rates of failure. Start-ups are usually based on aninnovative technologyorbusiness modeland they are often fromhigh technologyindustries, such asinformation technology(IT),clean technologyorbiotechnology.

Pre-seed and seed rounds are the initial stages of funding for a startup company,typically occurring early in its development. During a seed round, entrepreneurs seek investment fromangel investors,venture capital firms, or other sources to finance the initial operations and development of their business idea. Seed funding is often used to validate the concept, build a prototype, or conductmarket research.This initial capital injection is crucial for startups to kickstart their journey and attract further investment in subsequent funding rounds.

Typical venture capital investments occur after an initial "seed funding"round. The first round of institutional venture capital to fund growth is called theSeries A round.Venture capitalists provide this financing in the interest of generating areturnthrough an eventual "exit" event, such as the company selling shares to the public for the first time in aninitial public offering(IPO), or disposal of shares happening via a merger, via a sale to another entity such as a financial buyer in theprivate equity secondary marketor via a sale to a trading company such as a competitor.

In addition toangel investing,equity crowdfundingand otherseed fundingoptions, venture capital is attractive for new companies with limited operating history that are too small to raisecapitalin thepublic marketsand have not reached the point where they are able to secure abank loanor complete adebt offering.In exchange for the highriskthat venture capitalists assume by investing in smaller and early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies' ownership (and consequently value). Companies such asStripe,Airtable,andBrexare highly valued startups, commonly known asUnicorns(when a company has reached a market valuation of over $1 billion). Venture capitalists also often provide strategic advice to the company's executives on itsbusiness modeland marketing strategies.

Venture capital is also a way in which theprivateandpublic sectorscan construct an institution that systematically createsbusiness networksfor the new firms and industries so that they can progress and develop. This institution helps identify promising new firms and provide them with finance, technical expertise,mentoring,talent acquisition, strategic partnership, marketing "know-how", andbusiness models.Once integrated into the business network, these firms are more likely to succeed, as they become "nodes" in the search networks for designing and building products in their domain.However, venture capitalists' decisions are often biased, exhibiting for instance overconfidence and illusion of control, much like entrepreneurial decisions in general.

History

Origins of modern venture capital

Main article:History of venture capital

BeforeWorld War II(1939–1945) venture capital was primarily the domain of wealthy individuals and families.J.P. Morgan,theWallenbergs,theVanderbilts,theWhitneys,theRockefellers,and theWarburgswere notable investors in private companies. In 1938,Laurance S. Rockefellerhelped finance the creation of bothEastern Air LinesandDouglas Aircraft,and the Rockefeller family had vast holdings in a variety of companies.Eric M. WarburgfoundedE.M. Warburg & Co.in 1938, which would ultimately becomeWarburg Pincus,with investments in bothleveraged buyoutsand venture capital. TheWallenberg familystartedInvestor ABin 1916 in Sweden and were early investors in several Swedish companies such asABB,Atlas Copco,andEricssonin the first half of the 20th century.

Only after 1945 did "true" venture capital investment firms begin to emerge, notably with the founding ofAmerican Research and Development Corporation(ARDC) andJ.H. Whitney & Companyin 1946.

Georges Doriot,the "father of venture capitalism",along withRalph FlandersandKarl Compton(former president ofMIT) founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from sources other than wealthy families. Unlike most present-day venture capital firms, ARDC was a publicly traded company. ARDC's most successful investment was its 1957 funding ofDigital Equipment Corporation(DEC), which would later be valued at more than $355 million after its initial public offering in 1968. This represented a return of over 1200 times its investment and anannualized rate of returnof 101% to ARDC.

Former employees of ARDC went on to establish several prominent venture capital firms includingGreylock Partners,founded in 1965 by Charlie Waite and Bill Elfers; Morgan, Holland Ventures, the predecessor of Flagship Ventures, founded in 1982 by James Morgan; Fidelity Ventures, now Volition Capital, founded in 1969 by Henry Hoagland; andCharles River Ventures,founded in 1970 by Richard Burnes.ARDC continued investing until 1971, when Doriot retired. In 1972 Doriot merged ARDC withTextronafter having invested in over 150 companies.

John Hay Whitney(1904–1982) and his partnerBenno Schmidt(1913–1999) founded J.H. Whitney & Company in 1946. Whitney had been investing since the 1930s, foundingPioneer Picturesin 1933 and acquiring a 15% interest inTechnicolor Corporationwith his cousinCornelius Vanderbilt Whitney.Florida Foods Corporation proved Whitney's most famous investment. The company developed an innovative method for delivering nutrition to American soldiers, later known asMinute Maidorange juice and was sold toThe Coca-Cola Companyin 1960. J.H. Whitney & Company continued to make investments inleveraged buyouttransactions and raised $750 million for its sixthinstitutionalprivate-equity fundin 2005.

Early venture capital and the beginning of Silicon Valley

One of the first steps toward a professionally managed venture capital industry was the passage of theSmall Business Investment Act of 1958.The 1958 Act officially allowed the U.S.Small Business Administration(SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.The Small Business Investment Act of 1958 provided tax breaks that helped contribute to the rise of private-equity firms.

During the 1950s, putting a venture capital deal together may have required the help of two or three other organizations to complete the transaction. It was a business that was growing very rapidly, and as the business grew, the transactions grew exponentially.Arthur Rock,one of the pioneers of Silicon Valley during his venturing theFairchild Semiconductoris often credited with the introduction of the term "venture capitalist" that has since become widely accepted.

During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical, or data-processing technology. As a result, venture capital came to be almost synonymous with financing of technology ventures. An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962byWilliam Henry Draper IIIand Franklin P. Johnson, Jr. In 1965,Sutter Hill Venturesacquired the portfolio of Draper and Johnson as a founding action.Bill Draper and Paul Wythes were the founders, and Pitch Johnson formed Asset Management Company at that time.

It was also in the 1960s that the common form ofprivate-equity fund,still in use today, emerged.Private-equity firmsorganizedlimited partnershipsto hold investments in which the investment professionals served asgeneral partnerand the investors, who were passivelimited partners,put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1.0–2.5% and acarried interesttypically representing up to 20% of the profits of the partnership.

The growth of the venture capital industry was fueled by the emergence of the independent investment firms onSand Hill Road,beginning withKleiner PerkinsandSequoia Capitalin 1972. Located inMenlo Park, California,Kleiner Perkins, Sequoia and later venture capital firms would have access to the manysemiconductorcompanies based in theSanta Clara Valleyas well as earlycomputerfirms using their devices and programming and service companies.Kleiner Perkinswas the first venture capital firm to open an office on Sand Hill Road in 1972.

Throughout the 1970s, a group of private-equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association (NVCA). The NVCA was to serve as theindustry trade groupfor the venture capital industry.Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund.

It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. With the passage of theEmployee Retirement Income Security Act(ERISA) in 1974, corporate pension funds were prohibited from holding certain risky investments including many investments inprivately heldcompanies. In 1978, theUS Labor Departmentrelaxed certain restrictions of the ERISA, under the "prudent man rule",thus allowing corporate pension funds to invest in the asset class and providing a major source of capital available to venture capitalists.

1980s and VC involvement in large American companies

The public successes of the venture capital industry in the 1970s and early 1980s (e.g.,Digital Equipment Corporation,Apple Inc.,Genentech) gave rise to a major proliferation of venture capital investment firms. From just a few dozen firms at the start of the decade, there were over 650 firms by the end of the 1980s, each searching for the next major "home run". The number of firms multiplied, and the capital managed by these firms increased from $3 billion to $31 billion over the course of the decade.

The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors affected returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987, and foreign corporations, particularly fromJapanandKorea,flooded early-stage companies with capital.

In response to the changing conditions, corporations that had sponsored in-house venture investment arms, includingGeneral ElectricandPaine Webbereither sold off or closed these venture capital units. Additionally, venture capital units withinChemical BankandContinental Illinois National Bank,among others, began shifting their focus from funding early stage companies toward investments in more mature companies. Even industry foundersJ.H. Whitney & CompanyandWarburg Pincusbegan to transition towardleveraged buyoutsandgrowth capitalinvestments.

Venture capital boom and the Internet Bubble

By the end of the 1980s, venture capital returns were relatively low, particularly in comparison with their emergingleveraged buyoutcousins, due in part to the competition for hot startups, excess supply of IPOs and the inexperience of many venture capital fund managers. Growth in the venture capital industry remained limited throughout the 1980s and the first half of the 1990s, increasing from $3 billion in 1983 to just over $4 billion more than a decade later in 1994.

The advent of theWorld Wide Webin the early 1990s reinvigorated venture capital as investors saw companies with huge potential being formed.NetscapeandAmazon (company)were founded in 1994, andYahoo!in 1995. All were funded by venture capital.InternetIPOs—AOL in 1992; Netcom in 1994; UUNet, Spyglass and Netscape in 1995; Lycos, Excite, Yahoo!, CompuServe, Infoseek, C/NET, and E*Trade in 1996; and Amazon, ONSALE, Go2Net, N2K, NextLink, and SportsLine in 1997—generated enormous returns for their venture capital investors. These returns, and the performance of the companies post-IPO, caused a rush of money into venture capital, increasing the number of venture capital funds raised from about 40 in 1991 to more than 400 in 2000, and the amount of money committed to the sector from $1.5 billion in 1991 to more than $90 billion in 2000.

The bursting of thedot-com bubblein 2000 caused many venture capital firms to fail and financial results in the sector to decline.

2001 Private equity crash

The technology-heavyNASDAQ Compositeindex peaked at 5,048 in March 2000, reflecting the high point of the dot-com bubble.

TheNasdaqcrash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many venture firms had been forced to write-off large proportions of their investments, and many funds were significantly "under water"(the values of the fund's investments were below the amount of capital invested). Venture capital investors sought to reduce the size of commitments they had made to venture capital funds, and, in numerous instances, investors sought to unload existing commitments for cents on the dollar in thesecondary market.By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity. Nevertheless,PricewaterhouseCoopers'MoneyTree Surveyshows that total venture capital investments held steady at 2003 levels through the second quarter of 2005.

Although the post-boom years represent just a small fraction of the peak levels of venture investment reached in 2000, they still represent an increase over the levels of investment from 1980 through 1995. As a percentage of GDP, venture investment was 0.058% in 1994, peaked at 1.087% (nearly 19 times the 1994 level) in 2000 and ranged from 0.164% to 0.182% in 2003 and 2004. The revival of anInternet-driven environment in 2004 through 2007 helped to revive the venture capital environment. However, as a percentage of the overall private-equity market, venture capital has still not reached its mid-1990s level, let alone its peak in 2000.

Venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of thedot-com bubble), raised only $25.1 billion in 2006, a 2% decline from 2005 and a significant decline from its peak.The decline continued till their fortunes started to turn around in 2010 with $21.8 billion invested (not raised).The industry continued to show phenomenal growth and in 2020 hit $80 billion in fresh capital.

Financing

Main article:Venture capital financing

Obtaining venture capital is substantially different from raising debt or a loan. Lenders have a legal right to interest on a loan and repayment of the capital irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. The return of the venture capitalist as a shareholder depends on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholdings when the business is sold to another owner.

Venture capitalists are typically very selective in deciding what to invest in, with a Stanford survey of venture capitalists revealing that 100 companies were considered for every company receiving financing.Ventures receiving financing must demonstrate an excellent management team, a large potential market, and most importantly high growth potential, as only such opportunities are likely capable of providing financial returns and a successful exit within the required time frame (typically 8–12 years) that venture capitalists expect.

Because investments areilliquidand require the extended time frame to harvest, venture capitalists are expected to carry out detaileddue diligenceprior to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching anIPOstage whenvaluationsare favourable. Venture capitalists typically assist at four stages in the company's development:

• Idea generation;
• Start-up;
• Ramp-up;and
• Exit

Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private-equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether he wants a follow-up meeting. In addition, some new private online networks are emerging to provide additional opportunities for meeting investors.

This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-frontcapital requirements,which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. In turn, this explains why venture capital is most prevalent in the fast-growingtechnologyandlife sciencesorbiotechnologyfields.

If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.

Financing stages

There are multiple stages ofventurefinancing offered in venture capital, that roughly correspond to these stages of a company's development.

• Pre-seed funding: The earliest round of financing needed to prove a new idea, often provided by friends and family,angel investors,startup accelerators,and sometimes by venture capital funds.Equity crowdfundingis also emerging as an option for seed funding.
• Early Stage: Early stage funding includesSeedandSeries Afinancing rounds. Companies use this capital to findproduct-market fit.
• Growth Capital:Once companies have foundproduct-market fit,companies will use growth capital to scale the business. These are typically larger financing rounds with have higher valuations because the companies have started to prove traction and de-risk the investment. Growth capital typically includes Series B, Series C, and later rounds.
• Exit of venture capitalist: VCs can exit through secondary sale or aninitial public offering(IPO) or an acquisition. Early stage VCs may exit in later rounds when new investors (VCs or private-equity investors) buy the shares of existing investors. Sometimes a company very close to an IPO may allow some VCs to exit and instead new investors may come in hoping to profit from the IPO.
• Bridge financing is when a startup seeks funding in between full VC rounds. The objective is to raise a smaller amount of money to "bridge" the gap when current funds are expected to run out prior to planned future funding, intended to meet short-term working capital needs.

In early stage and growth stage financings, venture-backed companies may also seek to takeventure debt.

Firms and funds

Venture capitalist

A venture capitalist or sometimes simply called acapitalist,is a person who makes capital investments in companies in exchange for anequity stake.The venture capitalist is often expected to bring managerial and technical expertise, as well as capital, to their investments. A venture capital fund refers to apooled investmentvehicle (in the United States, often anLPorLLC) that primarily invests thefinancial capitalof third-party investors in enterprises that are too risky for the standardcapital marketsorbank loans.These funds are typically managed by a venture capital firm, which often employs individuals with technology backgrounds (scientists, researchers), business training and/or deep industry experience.

A core skill within VCs is the ability to identify novel or disruptive technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments instead of taking the chance of putting all of their money in one start up firm.

Diagram of the structure of a generic venture capital fund

Structure

Venture capital firms are typically structured aspartnerships,thegeneral partnersof which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured aslimited liability companies,in which case the firm's managers are known as managing members. Investors in venture capital funds are known aslimited partners.This constituency comprises both high-net-worth individuals and institutions with large amounts of available capital, such as state and privatepension funds,universityfinancial endowments,foundations,insurancecompanies, andpooled investmentvehicles, calledfunds of funds.

Types

Venture capitalist firms differ in their motivationsand approaches. There are multiple factors, and each firm is different.

Venture capital funds are generally three in types:

• 1. Angel investors
• 2. Financial VCs
• 3. Strategic VCs

Some of the factors that influence VC decisions include:

• Business situation: Some VCs tend to invest in new, disruptive ideas, or fledgling companies. Others prefer investing in established companies that need support to go public or grow.
• Some invest solely in certain industries.
• Some prefer operating locally while others will operate nationwide or even globally.
• VC expectations can often vary. Some may want a quicker public sale of the company or expect fast growth. The amount of help a VC provides can vary from one firm to the next. There are also estimates on how big of an exit a VC will expect for the company (i.e. if the size of the VC fund is $20M, estimate that they will at least want the company to exit for the size of the fund).

Roles

Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but, broadly speaking, venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background (operating partner) tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to haveinvestment bankingor othercorporate financeexperience.

Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

Position	Role
General Partners or GPs	They run the Venture Capital firm and make the investment decisions on behalf of the fund. GPs typically put in personal capital up to 1–2% of the VC Fund size to show their commitment to the LPs.
Venture partners	Venture partners are not employees of the firm but are expected to source potential investment opportunities ( "bring in deals" ) and typically are compensated only for those deals with which they are involved.
Principal	This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field, such asinvestment banking,management consulting,or a market of particular interest to the strategy of the venture capital firm.
Associate	This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field, such asinvestment bankingormanagement consulting.
Analyst	In some cases, a venture capital firm may offer an analyst role for fresh graduates who have no prior relevant experience.
Entrepreneur-in-residence	Entrepreneurs-in-residence (EIRs) are experts in a particular industry sector (e.g., biotechnology or social media) and performdue diligenceon potential deals. EIRs are hired by venture capital firms temporarily (6 to 18 months) and are expected to develop and pitch startup ideas to their host firm, although neither party is bound to work with each other. Some EIRs move on to executive positions within a portfolio company.
Platform Team	Responsible for providing support and resources to portfolio companies beyond financial investment. This team focuses on offering strategic guidance, operational expertise, and access to networks to help portfolio companies scale and succeed. Platform teams may assist with talent acquisition, marketing and branding, product development, and strategic partnerships.

Structure of the funds

Mostventure capital fundshave a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio.This model was pioneered by successful funds inSilicon Valleythrough 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 initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a limited partner (or investor) that fails to participate in acapital call.

It can take anywhere from a month to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10-year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. Thevintage yeargenerally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison.

From an investor's point of view, funds can be: (1)traditional—where all the investors invest with equal terms; or (2)asymmetric—where different investors have different terms. Typically asymmetry is seen in cases where investors have opposing interests, such as the need to not have unrelated business taxable income in the case of public tax-exempt investors.

Investment Decision Process

The decision process to fund a company is elusive. One study report in theHarvard Business Reviewstates that VCs rarely use standard financial analytics.First, VCs engage in a process known as "generating deal flow," where they reach out to their network to source potential investments.The study also reported that few VCs use any type of financial analytics when they assess deals; VCs are primarily concerned about the cash returned from the deal as a multiple of the cash invested.According to 95% of the VC firms surveyed, VCs cite the founder or founding team as the most important factor in their investment decision.Other factors are also considered, including intellectual property rights and the state of the economy.Some argue that the most important thing a VC looks for in a company is high-growth.

The funding decision process has spawned bias in the form of a large disparity between the funding received by men and minority groups, such as women and people of color.In 2021, female founders only received 2% of VC funding in the United States.Some research studies have found that VCs evaluate women differently and are less likely to fund female founders.

Compensation

Main article:Carried interest

Venture capitalists are compensated through a combination of management fees andcarried interest(often referred to as a "two and 20" arrangement):

Payment	Implementation
Management fees	Quarterly payments made by the limited partners to the fund's manager to pay for the firm's investment operations.In a typical venture capital fund, the general partners receive an annual management fee between 2% and 2.5% of the committed capital.
Carried interest	A share of the profits of the fund, typically 20%, paid to the fund's general partner as a performance incentive. The remaining 80% of the profits are allocated to the general partner and limited partners in proportion to their contributed capital.Strong limited partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the general partner, and certain groups are able to command a carried interest of 25 to 30% for their funds.

Because a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.

Alternatives

Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seekseed fundingfromangel investors,who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur. Additionally, entrepreneurs may seek alternative financing, such asrevenue-based financing,to avoid giving up equity ownership in the business. For entrepreneurs seeking more than just funding, startup studios can be an appealing alternative to venture capitalists, as they provide operational support and an experienced team.

Furthermore, many venture capital firms will only seriously evaluate an investment in astart-up companyotherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-financesweat equityuntil they reach a point where they can credibly approach outside capital providers such as venture capitalists orangel investors.This practice is called "bootstrapping".

Equity crowdfundingis emerging as an alternative to traditional venture capital. Traditionalcrowdfundingis an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Someequity crowdfundingmodels are also being applied specifically for startup funding, such as those listed atComparison of crowd funding services.One of the reasons to look for alternatives to venture capital is the problem of the traditional VC model. The traditional VCs are shifting their focus to later-stage investments, andreturn on investmentof many VC funds have been low or negative.

In Europe and India,Media for equityis a partial alternative to venture capital funding. Media for equity investors are able to supply start-ups with often significant advertising campaigns in return for equity. In Europe, an investment advisory firm offers young ventures the option to exchange equity for services investment; their aim is to guide ventures through the development stage to arrive at a significant funding, mergers and acquisition, or other exit strategy.

In industries where assets can besecuritizedeffectively because they reliably generate future revenue streams or have a good potential for resale in case offoreclosure,businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries. Offshore funding is provided via specialist venture capital trusts, which seek to use securitization in structuring hybrid multi-market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.

In addition to traditional venture capital and angel networks, groups have emerged, which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process.

Law firms are also increasingly acting as an intermediary between clients seeking venture capital and the firms providing it.

Other forms include venture resources that seek to provide non-monetary support to launch a new venture.

Role in employment

Every year, there are nearly 2 million businesses created in the US, but only 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.

Gender disparities

In 2020, female-founded companies raised 2.8% of capital investment from venture capital, the highest amount recorded.Babson College's Diana Report found that the number of womenpartnersin VC firms decreased from 10% in 1999 to 6% in 2014. The report also found that 97% of VC-funded businesses had malechief executives,and that businesses with all-male teams were more than four times as likely to receive VC funding compared to teams with at least one woman.

Currently, about 3% of all venture capital is going to woman-led companies. More than 75% of VC firms in the US did not have any female venture capitalists at the time they were surveyed.It was found that a greater fraction of VC firms had never had a woman represent them on the board of one of theirportfolio companies.For comparison, a UC Davis study focusing on large public companies in California found 49.5% with at least one femaleboard seat.

Geographical differences

Venture capital, as an industry, originated in the United States, and American firms have traditionally been the largest participants in venture deals with the bulk of venture capital being deployed in American companies. However, increasingly, non-US venture investment is growing, and the number and size of non-US venture capitalists have been expanding.

Venture capital has been used as a tool foreconomic developmentin a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitatingaccess to financeforsmall and medium enterprises(SMEs), which in most cases would not qualify for receiving bank loans.

In the year of 2008, while VC funding were still majorly dominated by U.S. money ($28.8 billion invested in over 2550 deals in 2008), compared to international fund investments ($13.4 billion invested elsewhere), there has been an average 5% growth in the venture capital deals outside the US, mainly inChinaandEurope.Geographical differences can be significant. For instance, in the UK, 4% of British investment goes to venture capital, compared to about 33% in the U.S.

VC funding has been shown to be positively related to a country'sindividualistic culture.According to economistJeffrey Funkhowever more than 90% of US startups valued over $1 billion lost money between 2019–2020 and return on investment from VC barely exceed return from public stock markets over the last 25 years.

United States

Quarterly U.S. Venture Capital Investments, 1995–2017

Venture capital investment by area

Venture capital by state (2016)

In theUnited States,venture capital investing reached $209.4 billion in 2022, the second-highest investment year in history.

Venture capitalists invested some $29.1 billion in 3,752 deals in the U.S. through the fourth quarter of 2011, according to a report by the National Venture Capital Association. The same numbers for all of 2010 were $23.4 billion in 3,496 deals.

According to a report by Dow Jones VentureSource, venture capital funding fell to $6.4 billion in the US in the first quarter of 2013, an 11.8% drop from the first quarter of 2012, and a 20.8% decline from 2011. Venture firms have added $4.2 billion into their funds this year, down from $6.3 billion in the first quarter of 2013, but up from $2.6 billion in the fourth quarter of 2012.

Canada

Canadian technology companies have attracted interest from the global venture capital community partially as a result of generous tax incentive through theScientific Research and Experimental Development(SR&ED) investment tax credit program.The basic incentive available to any Canadian corporation performing R&D is a refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company, which might not be desirable. The SR&ED program does not restrict the export of any technology or intellectual property that may have been developed with the benefit of SR&ED tax incentives.

Canada also has a fairly unusual form of venture capital generation in itslabour-sponsored venture capital corporations (LSVCC).These funds, also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and offertax breaksfrom government to encourage retail investors to purchase the funds. Generally, these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. However, innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada.In 2022, theInformation and Communications Technology (ICT)sector closed around 50% of Canada's venture capital deals, 16% were in theLife Sciences.

Mexico

The Venture Capital industry inMexicois a fast-growing sector in the country that, with the support of institutions and private funds, is estimated to reach US$100 billion invested by 2018.

Australia and New Zealand

In Australia and New Zealand, there have been 3 waves of VC, starting with Bill Ferris who founded IVC in 1970. are more than one hundred active VC funds, syndicates, or angel investors making VC-style investments. The 2nd wave was led by Starfish & Southern Cross VC, with the latter producing the leading VC of the 3rd wave, Blackbird.There was a boom in 2018, and today there are more than one hundred active VC funds, syndicates, or angel investors making VC-style investments. There have been fewNasdaq IPOsof Australian VC backed startups, with only LooksmartfromBill Ferris's fund, and QuantennafromLarry Marshall's Southern Cross VC, but Blackbird is expected to IPOCanvasoon.

The State of Startup Funding report found that in 2021, over AUD $10 billion AUD was invested into Australian and New Zealand startups across 682 deals. This represents a 3x increase from the $3.1 billion that was invested in 2020.

Some notable Australian and New Zealand startup success stories include graphic design companyCanva,financial services providerAirwallex,New Zealand payments provider Vend (acquired by Lightspeed), rent-to-buy companyOwnHome,and direct-to-consumer propositions such asEucalyptus(a house of direct-to-consumer telehealth brands), andLyka(a pet wellness company).

In 2022, the largest Australian funds areBlackbird Ventures,Square Peg Capital,andAirtree Ventures.These three funds have more than $1 billion AUD under management across multiple funds. These funds have funding from institutional capital, including AustralianSuper and Hostplus, family offices, and sophisticated individual high-net-wealth investors.

Outside of the 'Big 3', other notable institutional funds includeAfterWork Ventures,Artesian, Folklore Ventures, Equity Venture Partners, Our Innovation Fund, Investible, Main Sequence Ventures (the VC arm of the CSIRO), OneVentures, Proto Axiom, and Tenacious Ventures.

As the number of capital providers in the Australian and New Zealand ecosystem has grown, funds have started to specialise and innovate to differentiate themselves. For example, Tenacious Ventures is a $35 million specialised agritech fund,while AfterWork Ventures is a 'community-powered fund' that has coalesced a group of 120 experienced operators from across Australia's startups and tech companies. Its community is invested in its fund, and lean into assist with sourcing and evaluating deal opportunities, as well as supporting companies post-investment.

Several Australian corporates have corporate VC arms, including NAB Ventures, Reinventure (associated with Westpac), IAG Firemark Ventures, and Telstra Ventures.

Europe

Leading early-stage venture capital investors in Europe include Mark Tluszcz of Mangrove Capital Partners and Danny Rimer ofIndex Ventures,both of whom were named onForbesMagazine's Midas List of the world's top dealmakers in technology venture capital in 2007.In 2020, the first Italian Venture capital Fund named Primo Space was launched by Primomiglio SGR. This fund first closed €58 million out a target €80 million and is focused onSpaceinvesting.

Comparing the EU market to the United States, in 2020 venture capital funding was seven times lower, the EU having less unicorns. This hampers the EU's transformation into a green anddigital economy.

As of 2024, tighter financial conditions have harmed venture capital funding in the European Union, which remains undeveloped in comparison to the United States.

The EU lags significantly behind the US and China in venture capital investments, with the EU capturing only 5% of global venture capital compared to 52% in the US and 40% in China.Venture capital funds in the EU account for just 5% of the global total, whereas those in the United States and China secure 52% and 40%, respectively.The financing gap for EU scale-ups is significant, with companies raising 50% less capital than those inSilicon Valley.This disparity exists across industries and is unaffected by the business cycle or year of establishment.

TheEuropean Green Dealhas fostered policies that contributed to a 30% rise in venture capital specifically for greentech companies in the EU from 2021 to 2023, despite a downturn in other sectors during the same period.

Nordic countries

Recent years have seen a revival of the Nordic venture scene with more than €3 billion raised by VC funds in the Nordic region over the last five years. Over the past five years, a total of €2.7 billion has been invested into Nordic startups. Known Nordic early-stage venture capital funds include NorthZone (Sweden), Maki.vc (Finland) and ByFounders (Copenhagen).

Switzerland

Many Swiss start-ups are university spin-offs, in particular from its federal institutes of technology inLausanneandZurich. According to a study by theLondon School of Economicsanalysing 130ETH Zurichspin-offsover 10 years, about 90% of these start-ups survived the first five critical years, resulting in anaverage annual IRRof more than 43%. Switzerland's most active early-stage investors are TheZurich Cantonal Bank,investiere.ch, Swiss Founders Fund, as well as a number ofangel investorclubs.In 2022, half of the total amount ofCHF4 billion investments went to theICTandFintechsectors, whereas 21% was invested inCleantech.

Poland

Main article:Venture capital in Poland

As of March 2019, there are 130 active VC firms inPolandwhich have invested locally in over 750 companies, an average of 9 companies per portfolio. Since 2016, new legal institutions have been established for entities implementing investments in enterprises in the seed or startup phase. In 2018, venture capital funds invested€178Min Polish startups (0.033% of GDP). As of March 2019, total assets managed by VC companies operating in Poland are estimated at€2.6B.The total value of investments of the Polish VC market is worth€209.2M.

Bulgaria

The Bulgarian venture capital industry has been growing rapidly in the past decade. As of the beginning of 2021, there are 18 VC and growth equity firms on the local market, with the total funding available for technology startups exceeding €200M. According to BVCA – Bulgarian Private Equity and Venture Capital Association, 59 transactions of total value of €29.4 million took place in 2020.Most of the venture capital investments in Bulgaria are concentrated in the seed and Series A stages. Sofia-based LAUNCHub Ventures recently launched one of the biggest funds in the region, with a target size of €70 million.

Asia

South Koreahas been undergoing an investment boom over the last ten years, peaking at US$10 billion in 2021. The Korean government and mega-corporations such as Kakao, Smilegate, SK, and Lotte has been behind much of the funding, backing both venture firms and accelerators, but has recently announced a 40% slash to funding, leaving fledgling VCs in dire straits.

Indiais catching up with the West in the field of venture capital and a number of venture capital funds have a presence in the country (IVCA). In 2006, the total amount of private equity and venture capital in India reached $7.5 billion across 299 deals.In the Indian market, venture capital consists of investing in equity, quasi-equity, or conditional loans in order to promote unlisted, high-risk, or high-tech firms driven by technically or professionally qualified entrepreneurs. It is also used to refer to investors "providing seed", "start-up and first-stage financing",or financing companies that have demonstrated extraordinary business potential. Venture capital refers to capital investment; equity and debt; both of which carry indubitable risk. The anticipated risk is very high. The venture capital industry follows the concept of "high risk, high return", innovative entrepreneurship, knowledge-based ideas and human capital intensive enterprises have become common as venture capitalists invest in risky finance to encourage innovation.A large portion of funding from startups in India arise from Foreign Venture Capital Funds such as Sequoia, Accel, Tiger Global, SoftBank, etc.

Chinais also starting to develop a venture capital industry (CVCA).

Vietnamis experiencing its first foreign venture capitals, including IDG Venture Vietnam ($100 million) and DFJ Vinacapital ($35 million).

Singaporeis widely recognized and featured as one of the hottest places to both start up and invest, mainly due to its healthy ecosystem, its strategic location and connectedness to foreign markets.With 100 deals valued at US$3.5 billion, Singapore saw a record value of PE and VC investments in 2016. The number of PE and VC investments increased substantially over the last 5 years: In 2015, Singapore recorded 81 investments with an aggregate value of US$2.2 billion while in 2014 and 2013, PE and VC deal values came to US$2.4 billion and US$0.9 billion respectively. With 53 percent, tech investments account for the majority of deal volume.

Moreover, Singapore is home to two of South-East Asia's largest unicorns.Garenais reportedly the highest-valued unicorn in the region with a US$3.5 billion price tag, whileGrabis the highest-funded, having raised a total of US$1.43 billion since its incorporation in 2012.

Start-ups and small businesses in Singapore receive support from policymakers and the local government fosters the role VCs play to support entrepreneurship in Singapore and the region. For instance, in 2016, Singapore'sNational Research Foundation (NRF)has given out grants up to around $30 million to four large local enterprises for investments in startups in the city-state. This first of its kind partnership NRF has entered into is designed to encourage these enterprises to source for new technologies and innovative business models.

Currently, the rules governing VC firms are being reviewed by theMonetary Authority of Singapore(MAS) to make it easier to set up funds and increase funding opportunities for start-ups. This mainly includes simplifying and shortening the authorization process for new venture capital managers and to study whether existing incentives that have attracted traditional asset managers here will be suitable for the VC sector. A public consultation on the proposals was held in January 2017 with changes expected to be introduced by July.

In recent years, Singapore's focus in venture capital investments has geared more towards more early stage, deep tech startups,with the government launching SGInnovate in 2016to support the development of deep tech startups. Deep tech startups aim to address significant scientific problems. Singapore's tech startup scene has grown in recent years, and the city-state ranked seventh in the latest Global Innovation Index 2022. For the first nine months of 2022, investments up to Series B rounds amounted to $5.5 billion Singapore dollars ($4 billion), an increase of 14% by volume and 45% by value, according to data from government agency Enterprise Singapore.

Middle East and North Africa

The Middle East and North Africa (MENA) venture capital industry is an early stage of development but growing. According toH1 2019 MENA Venture Investment Reportby MAGNiTT, 238 startup investment deals have taken place in the region in the first half of 2019, totaling in $471 million in investments. Compared to 2018's H1 report, this represents an increase of 66% in total funding and 28% in number of deals.

According to the report, theUAEis the most active ecosystem in the region with 26% of the deals made in H1, followed byEgyptat 21%, andLebanonat 13%. In terms of deals by sector, fintech remains the most active industry with 17% of the deals made, followed by e-commerce at 12%, and delivery and transport at 8%.

The report also notes that a total of 130 institutions invested in MENA-based startups in H1 2019, 30% of which were headquartered outside the MENA, demonstrating international appetite for investments in the region. 15 startup exits have been recorded in H1 2019, withCareem's $3.1 billion acquisition byUberbeing the first unicorn exit in the region.Other notable exits include Souq.com exit toAmazonin 2017 for $650 million.

Israel

Main article:Venture capital in Israel

In Israel, high-tech entrepreneurship and venture capital have flourished well beyond the country's relative size. As it has very little natural resources and, historically has been forced to build its economy on knowledge-based industries, its VC industry has rapidly developed, and nowadays has about 70 active venture capital funds, of which 14 international VCs with Israeli offices, and additional 220 international funds which actively invest in Israel. In addition, as of 2010, Israel led the world in venture capital invested per capita. Israel attracted $170 per person compared to $75 in the USA.About two thirds of the funds invested were from foreign sources, and the rest domestic. In 2013,Wix.comjoined 62 other Israeli firms on the Nasdaq.

Sub-Saharan Africa

See also:Economy of Africa § Entrepreneurship

The Southern African venture capital industry is developing. The South African Government and Revenue Service is following the international trend of using tax-efficient vehicles to propel economic growth and job creation through venture capital. Section 12 J of theIncome Tax Actwas updated to include venture capital. Companies are allowed to use a tax-efficient structure similar to VCTs in the UK. Despite the above structure, the government needs to adjust its regulation aroundintellectual property,exchange control and other legislation to ensure that Venture capital succeeds.

Currently, there are not many venture capital funds in operation and it is a small community; however, the number of venture funds are steadily increasing with new incentives slowly coming in from government. Funds are difficult to come by and due to the limited funding, companies are more likely to receive funding if they can demonstrate initial sales or traction and the potential for significant growth. The majority of the venture capital in Sub-Saharan Africa is centered on South Africa and Kenya.

Entrepreneurship is a key to growth. Governments will need to ensure business friendly regulatory environments in order to help foster innovation. In 2019, venture capital startup funding grew to 1.3 billion dollars, increasing rapidly. The causes are as of yet unclear, but education is certainly a factor.

Confidential information

Unlikepublic companies,information regarding an entrepreneur's business is typicallyconfidentialand proprietary. As part of thedue diligenceprocess, most venture capitalists will require significant detail with respect to a company'sbusiness plan.Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter intoNon Disclosure Agreementsbecause of the potential liability issues those agreements entail. Entrepreneurs are typically well advised to protect truly proprietaryintellectual property.Startups commonly use adata roomto securely share this information with potential investors during the due diligence process.

Limited partnersof venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund'slimited partnership agreement.

Governmental regulations

There are several strict guidelines regulating those that deal in venture capital. Namely, they are not allowed to advertise or solicit business in any form as per theU.S. Securities and Exchange Commissionguidelines.

In popular culture

In books

• Mark Coggins' novelVulture Capital(2002) features a venture capitalist protagonist who investigates the disappearance of the chief scientist in a biotech firm in which he has invested. Coggins also worked in the industry and was co-founder of a dot-com startup.
• Drawing on his experience as reporter covering technology for theNew York Times,Matt Richtelproduced the novelHooked(2007), in which the actions of the main character's deceased girlfriend, a Silicon Valley venture capitalist, play a key role in the plot.
• Great, detailed work on VC method of funding.

In comics

• In theDilbertcomic strip, a character named "Vijay, the World's Most Desperate Venture Capitalist" frequently makes appearances, offering bags of cash to anyone with even a hint of potential. In one strip, he offers two small children with good math grades money based on the fact that if they marry and produce an engineer baby he can invest in the infant's first idea. The children respond that they are already looking formezzanine funding.
• Robert von Goeben and Kathryn Siegler produced a comic strip calledThe VCbetween the years 1997 and 2000 that parodied the industry, often by showing humorous exchanges between venture capitalists and entrepreneurs.Von Goeben was a partner in Redleaf Venture Management when he began writing the strip.

In film

• InWedding Crashers(2005), Jeremy Grey (Vince Vaughn) and John Beckwith (Owen Wilson) are bachelors who create appearances to play at different weddings of complete strangers, and a large part of the movie follows them posing as venture capitalists from New Hampshire.
• The documentarySomething Ventured(2011) chronicled the recent history of American technology venture capitalists.

In television

• In the TV seriesDragons' Den,various startup companies pitch their business plans to a panel of venture capitalists.
• In the ABC reality television showShark Tank,venture capitalists ( "Sharks" ) hear entrepreneurs' pitches and select which ones they will invest in.
• The short-lived Bravoreality TVshowStart-Ups: Silicon Valleyhad participation from venture capitalists inSilicon Valley.
• The sitcomSilicon Valleyparodies startup companies and venture capital culture.
• The AMC DramaHalt and Catch Firefeatures the use of venture capital firms for the startup companies during the PC revolution of the 1980s and rise of the world-wide-web in the early 1990s.

See also

• Angel investor
• Corporate venture capital
• Deep tech
• Enterprise Capital Fund—a type of venture capital fund in the UK
• Equity crowdfunding
• History of private equity and venture capital
• Initial public offering(IPO)
• Joint venture
  • International joint venture
• List of venture capital firms
• Mergers and acquisitions
• Platform cooperative
• Private equity secondary market
• Private equity
• Revenue-based financing
• Seed funding
• Social venture capital
• Sweat equity
• Venture capital financing
• Venture capitalist
• Women in venture capital

Further reading

• Duhigg, Charles,"The Enablers: Venture capitalists used to exert discipline on startups. Now they often encourage recklessness",The New Yorker,30 November 2020, pp. 38–47.
• Lerner, Josh, and Ramana Nanda. 2020. "Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn."Journal of Economic Perspectives, 34 (3): 237–61.