Lesson 3 of 7
Although venture capital is said to have existed for many years, General Doriot is considered to be the founder of the modern venture capital industry. In 1946, Doriot, a former dean of Harvard Business School, founded the American Research and Development Corporation (ARDC) with Ralph Flanders and Karl Compton (former president of MIT). It aimed to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC was significant because it was the first institutional private equity investment firm that raised capital from sources other than wealthy families. One of its success stories was a $70,000 investment in Digital Equipment Corporation (DEC) which would be valued at over $355 million after the company’s initial public offering in 1968.
Venture Capitalists in 1960’s focused their attention on breakthrough technologies in electronics, medical technology and data-processing. It helped launch many familiar brand names, including Apple, Cisco, Compaq, Electronic Arts, Federal Express, Genentech, etc. The 70’s saw a further rise in Venture Capitalists. This slowly started to reduce due to competition, IPOs, and foreign competition. The 1990’s saw a consolidation.
The1990s saw investors show interest in Internet businesses and other computer companies. Some winners included Amazon, e-Bay, Intuit, Netscape, Sun Microsystems and Yahoo! Duds that were funded were pets.com, eToys, among others. This led to a further shrinking of the venture capital industry due to heavy losses, write-offs and closures.
The financial crises of 2007 has further dampened the VC industry. This has led to drying up of capital. The increasingly global nature of start-ups has seen competition moving from largely domestic (Silicon Valley vs Boston-both high-tech industry areas), to anywhere in China or India. This requires a globally aware breed of Venture Capitalists.
This said, Venture Capitalists or VCs as they are often known look at funding the next big idea. This requires sound analysis of the company’s stream of revenue and growth plans. The firm invests its own capital and that it raises from investors. Typically these investments place the venture capitalists as investors with a stake in the company.
In start-ups, VC’s usually play mentor roles for a period of 5-10 years before exiting. Their presence helps in setting up processes and further getting funds from the market. VC’s who help fledgling businesses are called incubators. They take advantage of economies of scale and offer skills and experience that might be lacking or out of reach in financial terms.
While start-ups offer an exit to the VC in 5-10 years, in the case of incubators it can be in 2-3 years.
Business Angels (Angel investors) help fledgling businesses with a more hands on role, offering advice and putting in lesser money as investment. Their role is invaluable in helping companies reach their goals, with their offer of management advice, introductions and other practical experience.
Venture Capitalists also help businesses that are looking at investment to grow and expand their businesses, and not only at the start-up stage.
In the US and UK multiple exit options for VCs are available, enabling easy availability of VC funds to start-ups and growing businesses.