Venture Capitalists

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					Venture Capital
Strategies of Investing
Mr. Yates
        What/who are they?
• Venture capital provides a source of funds
  through investment, usually in companies
  or projects that are start-up or at a very
  early stage of product development.
• These projects and organizations usually
  would not attract sources of finance such
  as loans and could not raise money in the
  major public stock markets.
          How do they do it?
• The usual mechanism for venture investment is
  through the formation of a new company.
• The company will own rights to the intellectual
  property (patents etc.) that stem from earlier
  research activities and will probably employ or
  have consultancy contracts with the scientists
  behind the research work.
• The venture capital firm buys a shareholding in
  the new company, thereby providing the
  company with money for development work.
• Frequently, more than one venture capital firm
  may invest in a company, even at an early stage
  in its development.
• Venture capital firms are often instrumental in
  'assisting' the founders to develop their
• This may involve a range of activities including:
• strengthening and broadening the management
  team by recruiting individuals with specific
• working with the management team to raise
  further finance from other investors or by listing
  on a stock exchange
• combining specific technologies or projects to
  expand the company's portfolio.
         What are their risks?
• Venture capital firms specialize in investments
  that bear a high degree of risk.
• Investing in research-based activities is
  intrinsically risky because, by definition, one is
  dealing with the unknown or barely known.
• Compounding that risk are the uncertainties of
  product development, of healthcare markets, of
  the law (regulatory authorities and patents), of
  economic cycles and of management.
• Furthermore, even if a company succeeds in its
  endeavors, the venture capital firm's money
  could be tied up in the company for many years.
• Venture capitalists need high returns on those projects that
  do succeed because not all projects they back will succeed.
• Venture firms normally manage money that originates in
  less-specialized investment institutions, such as those
  which manage pension funds.
• The venture capital companies need to deliver a good rate
  or return to those investors.
• In evaluating investment prospects, the venture capital firm
  will weigh up the various risks (see 'due diligence'), length
  of time their money is likely to be tied up, and the level of
  return they need to deliver to their investors.
             Spreading the Risk
• Venture firms invest in a diverse portfolio of companies to
  avoid 'putting all their eggs in one basket'.
• This cushions the impact of failure by any one company in
  their portfolio.
• In biotechnology, a portfolio might include companies
  involved in bioinformatics, functional genomics,
  combinatorial chemistry, biopharmaceutical,
  pharmaceutical or drug-delivery-based companies.
• Importantly for those seeking venture capital, if a venture
  firm has already invested extensively in a particular type of
  company, it may be less willing to raise funds for a directly
  competitive company.
• Conversely, if a venture investor sees synergies with a
  company already in its portfolio, it may have an additional
  reason to back a new project.
           With whom to invest?
• Venture capitalists need to be satisfied with a company's
  management or potential management and their plans.
• In the event that there are gaps in the management team,
  the venture capital firm may provide assistance with
  recruiting additional team members.
• The management must also have the right resources
  available, such as strong patent position, access to skilled
  employees and facilities, and a technological or product
  advantage that addresses ideally a substantial unmet
  market need.
• In addition, the high rate of biotechnology products that fail
  during development means venture capitalists will expect
  that a company will develop a range of technologies or
  products so that the failure of one does not bring down the
  whole enterprise.
            And for how long?
• Venture firms generally seek to sell most of
  their shares within about five years of their
  initial investment; typically, they will sell after
  the company floats its shares on a public
  stock market.
• Alternatively, investors will also consider a
  trade sale or merger as their exit route.
• Therefore, the management's business plan
  needs to take this timeframe into account
                 “Due Diligence”
• Due diligence' is investment jargon for the process by which
  a venture firm will analyze and evaluate any investment
• After assessment by its own experts, it will seek a range of
  outside advice.
• Lawyers will review any legal agreements and assess the
  strength of patents; auditors will check the financial status;
  scientific consultants will assess the technology; industry
  experts will consider the product development hurdles;
  clinical advisors will look at the demand for, and benefits of,
  any medical product; and recruitment consultants may
  advise on the company's management.
• Due diligence is a process of risk assessment. It allows the
  venture capital firm to understand what actions need to be
  undertaken to reduce the risk and maximize the chance of
  a return.
  Do they get their money back?
• The value of a venture firm's shareholding
  may increase as a new company grows but
  this is just 'paper money' until there is an
  opportunity to sell the shares.
• Typically this comes when a company
  makes a public offering or when it is
  acquired by another company.
• Venture capital firms will expect to sell their
  shares at many times the price they
  originally paid.
              Rate of Return?
• According to Venture Economics, the average
  annual return on VC funds was 48%, 40%, and
  36% for 1995, 1996 and 1997 respectively.
• Many VC firms have reported even higher returns
  in the last decade and the internet has produced
  scores of success stories that have yielded
  remarkable short term returns for VC firms.
• Yahoo! which went public within a year of its initial
  VC financing, is one of many examples.
        How much $ out there?
• Venture capital firms placed $11.4 Billion in 1997
  up 16% from 1996 (which was up 42% from 1995)
  according to Venture One Corp.
• $7 billion went to 1089 information technology
• NEA was the most active with 75 investments
  followed closely by Kleiner Perkins Caufield &
  Byers which invested in 67 firms.
• The median investment was $4 million with the
  most expensive being E-TEK Dynamics which
  pulled in $120 million.
                     VC Today
• The NASDAQ crash and technology slump that started in
  March 2000 shook some VC funds significantly by the
  resulting disastrous losses from overvalued and non-
  performing startups.
• By 2003 many firms were forced to write off companies they
  had funded just a few years earlier, and many funds were
  found "under water" (the market value of their portfolio
  companies were less than the invested value)
• Venture capital investors sought to reduce the large
  commitments they had made to venture capital funds.
• By mid-2003 the venture capital industry is now at half its
  present capacity.
• It has held at that level thanks to Google, MySpace, eBay’s
  purchase of Skype, and others…
Your task…
• In groups, you will come up with a
  company or start up with which to compete
  with others in the class to get the money
  from our Venture Capitalists
• The top stock market winners are the
  Venture Capitalists
• Details of your company,
  products/services, and potential will be
  featured in a presentation