Venture capital plays a critical in providing finance to start-ups that have high growth potential but cannot get funding from conventional sources of finance such as banks and capital markets.
Journal of Applied Corporate Finance • Volume 22 Number 2 A Mo.docxpriestmanmable
Journal of Applied Corporate Finance • Volume 22 Number 2 A Morgan Stanley Publication • Spring 2010 1
It Ain’t Broke: The Past, Present, and Future of Venture Capital
BT
by Steven N. Kaplan, University of Chicago Booth School of Business
and NBER, and Josh Lerner, Harvard Business School and NBER*
he U.S. venture capital (VC) industry is currently
subject to a great deal of uncertainty and contro-
versy. Some observers and practitioners believe
that the VC model is broken and that the U.S.
VC industry needs to shrink.1 In this paper, we put the U.S.
VC industry into its historical context, assess the current state
of the VC market, and discuss the implications of that history
and the current conditions for the future.
We begin by describing the fundamental problem that
entrepreneurs face and VCs need to solve in order to invest
successfully. There is a great deal of evidence to support what
is now a highly developed theory of how the U.S. VC model
provides an efficient solution to this basic problem of entre-
preneurial finance. And there is little doubt that the U.S.
venture capital industry has been very successful. A large
fraction of IPOs, including many that are now among the
most successful public companies in the world, have been
funded by VCs. And, where possible, the U.S. VC model has
been copied around the world.
Next we look at the historical patterns of commitments
to U.S. VC funds and investments in companies by those
funds. U.S. VC investments in companies have represented
a remarkably constant 0.15% of the total value of the stock
market over the past three decades—the period for which we
have reliable data. Commitments to VC funds, while more
variable, have been consistently in the 0.10% to 0.20% range.
These percentages have not changed in recent years.
Third, we consider the historical record on VC fund returns,
paying particular attention to returns of post-2000 “vintages.”
Contrary to the popular impression, we do not find that returns
to VC funds this decade have been unusually low (or high)
relative to the overall stock market. This is true despite the
relatively low number of IPOs. Overall, VC investment and
returns have been subject to boom-and-bust cycles over time.
Based on our historical analyses, we make some observa-
tions about the current situation and consider what is likely to
happen going forward. The level of commitments to and the
investment pace of VC funds since 2002 have been consistent
with the long-term historic averages. At the same time, the
returns relative to the overall stock market appear to have
been roughly average. This does not suggest to us that there
is too much money in U.S. VC, or that the VC model is
broken. Instead it appears to reflect the natural evolution of
a relatively competitive market.
In fact, given the unusual and unexplained paucity of IPOs
between 2004 and 2007, we argue there is more upside than
downside for the VC vint ...
Impact Of Venture Capital and Research Institute on Entrepreneurialecosystemâ...inventionjournals
International Journal of Engineering and Science Invention (IJESI) is an international journal intended for professionals and researchers in all fields of computer science and electronics. IJESI publishes research articles and reviews within the whole field Engineering Science and Technology, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Venture capital plays a critical in providing finance to start-ups that have high growth potential but cannot get funding from conventional sources of finance such as banks and capital markets.
Journal of Applied Corporate Finance • Volume 22 Number 2 A Mo.docxpriestmanmable
Journal of Applied Corporate Finance • Volume 22 Number 2 A Morgan Stanley Publication • Spring 2010 1
It Ain’t Broke: The Past, Present, and Future of Venture Capital
BT
by Steven N. Kaplan, University of Chicago Booth School of Business
and NBER, and Josh Lerner, Harvard Business School and NBER*
he U.S. venture capital (VC) industry is currently
subject to a great deal of uncertainty and contro-
versy. Some observers and practitioners believe
that the VC model is broken and that the U.S.
VC industry needs to shrink.1 In this paper, we put the U.S.
VC industry into its historical context, assess the current state
of the VC market, and discuss the implications of that history
and the current conditions for the future.
We begin by describing the fundamental problem that
entrepreneurs face and VCs need to solve in order to invest
successfully. There is a great deal of evidence to support what
is now a highly developed theory of how the U.S. VC model
provides an efficient solution to this basic problem of entre-
preneurial finance. And there is little doubt that the U.S.
venture capital industry has been very successful. A large
fraction of IPOs, including many that are now among the
most successful public companies in the world, have been
funded by VCs. And, where possible, the U.S. VC model has
been copied around the world.
Next we look at the historical patterns of commitments
to U.S. VC funds and investments in companies by those
funds. U.S. VC investments in companies have represented
a remarkably constant 0.15% of the total value of the stock
market over the past three decades—the period for which we
have reliable data. Commitments to VC funds, while more
variable, have been consistently in the 0.10% to 0.20% range.
These percentages have not changed in recent years.
Third, we consider the historical record on VC fund returns,
paying particular attention to returns of post-2000 “vintages.”
Contrary to the popular impression, we do not find that returns
to VC funds this decade have been unusually low (or high)
relative to the overall stock market. This is true despite the
relatively low number of IPOs. Overall, VC investment and
returns have been subject to boom-and-bust cycles over time.
Based on our historical analyses, we make some observa-
tions about the current situation and consider what is likely to
happen going forward. The level of commitments to and the
investment pace of VC funds since 2002 have been consistent
with the long-term historic averages. At the same time, the
returns relative to the overall stock market appear to have
been roughly average. This does not suggest to us that there
is too much money in U.S. VC, or that the VC model is
broken. Instead it appears to reflect the natural evolution of
a relatively competitive market.
In fact, given the unusual and unexplained paucity of IPOs
between 2004 and 2007, we argue there is more upside than
downside for the VC vint ...
Impact Of Venture Capital and Research Institute on Entrepreneurialecosystemâ...inventionjournals
International Journal of Engineering and Science Invention (IJESI) is an international journal intended for professionals and researchers in all fields of computer science and electronics. IJESI publishes research articles and reviews within the whole field Engineering Science and Technology, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
DealMarket Digest Issue137 - 17 April 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 137 - April 17th, 2014:
- Cravings for Direct Co-Investment Still Strong
- Narrow Niches and Big Returns
- Australian PE Backed IPOs Outperform
- The Traits of Family Wealth Managers That Make Money…. and Lose it
- CEOs Get M&A Fever Again
- Quote of the Week: Betting on Justice
Yannis Pierrakis: Trends & Challenges of the Venture Capital Market in Europe...FITT
This presentation was held by Yannis Pierrakis during the FITT conference „ICT Innovations: Research > Business > Society“ on 10 May 2011 in Brussels.
www.fitt-for-innovation.eu
WORKING PAPER (ESADEgeo): More Layers than an Onion: Looking For a Definition...ESADE
ABSTRACT
We analyze definitions used by researchers about a single concept: Sovereign Wealth Funds (SWF). It is still a matter of recent controversy and debate. We place these definitions into one of eleven categories. The results show full agreement (what we have called ‘the core’) for just two characteristics: SWFs are owned by governments and they are investment funds. Beyond the core, there are three layers commanding general consensus.
AUTHORS
Javier Capapé: PhD Candidate, ESADE Business School Researcher, ESADEgeo - Center for Global Economy and Geopolitics, ESADE Business School Research Affiliate, SovereigNET, The Fletcher School (Tufts University)
Tomás Guerrero Blanco: PhD Candidate, University Carlos III Madrid Researcher, ESADEgeo - Center for Global Economy and Geopolitics, ESADE Business School Research Affiliate, SovereigNET, The Fletcher School (Tufts University)
DealMarket Digest Issue130 - 28 February 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 130 - February 28th, 2014:
- PE Shuns Pricey Buyouts; Seeks Alternative Strategies
- Southern Europe Back on the PE Radar
- Non-bank Lenders to Boost Buyout M&A Activity
- PE Execs Making Top Dollar on Wall Street
- Global IPOs Float Private Equity’s Boat
- Quote of the Week: IMF Chief Gives Her Savvy View on Tech Impact
Challenges of SMEs innovationand entrepreneurial financing.docxcravennichole326
Challenges of SMEs innovation
and entrepreneurial financing
Jarunee Wonglimpiyarat
College of Innovation, Thammasat University, Bangkok, Thailand
Abstract
Purpose – Today, the financing mechanisms to support small-and medium-sized enterprises (SMEs)
development have been a subject of great interest and a challenge to policy makers as SMEs are
regarded as an important sector contributing to economic growth and stability. This paper is
concerned with the bank financing policies to support SME development in China. The purpose of this
paper is to examine the governmental financing policies and the innovation financing system of China.
The discussions are focused on the bank financing policies to support SME development in China.
Design/methodology/approach – This study is a qualitative research with the use of case study
methodology (Eisenhardt, 1989; Yin, 2003). The research is focused on the policy perspectives of bank
financing to support SME development in the case of China, the world’s fastest-growing economy.
To explore the role of financial institutions and banks in SME financing in China, the research also
derives evidence from a collection of documentary investigation. The research fieldwork and
interviews were undertaken in Beijing and Shanghai, major financial centers in China, with the use of
semi-structured questionnaire. The analyses are undertaken to answer the key questions of: What are
the Chinese government’s strategies to support the development of SMEs? To what extent the
government policies in bank financing can support SMEs and promote the development of an
innovative economy?
Findings – The empirical study has shown that despite the introduction of the 12th Five-Year
National Economic and Social Development Plan to support SMEs development, China still needs to
improve regulatory policies in support of innovative businesses which would help its transition to an
innovation-driven economy. The study provides lessons and policy guidelines to improve the
competitiveness of SMEs in China. The insights from this study can also be applied to other developing
and emerging economies attempting to understand the role of financing mechanisms in building an
innovative economy.
Originality/value – The study has addressed the policy challenges to support SME development in
China, a major Asian emerging country and one of the fastest-growing economies in the world
(with averaged growth rate of 10 percent per annum). The empirical study of policy challenges was
undertaken in Beijing and Shanghai, major financial centers in China. The study offers insights which
can be applied to other developing and emerging economies attempting to understand the role of SME
financing policies and mechanisms in building an innovative economy.
Keywords Sustainable development, SMEs
Paper type Research paper
1. Introduction
China is one of the fastest-growing economies in the world (with averaged growth rate of
10 percent per annum). In 2014, China was p ...
At the Master or PhD levels, this course examines the framework for return on investment calculation and criteria in new ventures, cash management techniques and controls for small businesses; equity and debt sources and their criteria for investment in new businesses; additional sources of capital and entry strategies for new businesses. This course covers the financial skills needed at each level and phase of a new venture‟s development. Students review the equity and debt markets for startup firms and alternative entry strategies such as franchising and acquisition. At the end of this course, an online assessment will be conducted!
DealMarket Digest Issue137 - 17 April 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 137 - April 17th, 2014:
- Cravings for Direct Co-Investment Still Strong
- Narrow Niches and Big Returns
- Australian PE Backed IPOs Outperform
- The Traits of Family Wealth Managers That Make Money…. and Lose it
- CEOs Get M&A Fever Again
- Quote of the Week: Betting on Justice
Yannis Pierrakis: Trends & Challenges of the Venture Capital Market in Europe...FITT
This presentation was held by Yannis Pierrakis during the FITT conference „ICT Innovations: Research > Business > Society“ on 10 May 2011 in Brussels.
www.fitt-for-innovation.eu
WORKING PAPER (ESADEgeo): More Layers than an Onion: Looking For a Definition...ESADE
ABSTRACT
We analyze definitions used by researchers about a single concept: Sovereign Wealth Funds (SWF). It is still a matter of recent controversy and debate. We place these definitions into one of eleven categories. The results show full agreement (what we have called ‘the core’) for just two characteristics: SWFs are owned by governments and they are investment funds. Beyond the core, there are three layers commanding general consensus.
AUTHORS
Javier Capapé: PhD Candidate, ESADE Business School Researcher, ESADEgeo - Center for Global Economy and Geopolitics, ESADE Business School Research Affiliate, SovereigNET, The Fletcher School (Tufts University)
Tomás Guerrero Blanco: PhD Candidate, University Carlos III Madrid Researcher, ESADEgeo - Center for Global Economy and Geopolitics, ESADE Business School Research Affiliate, SovereigNET, The Fletcher School (Tufts University)
DealMarket Digest Issue130 - 28 February 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 130 - February 28th, 2014:
- PE Shuns Pricey Buyouts; Seeks Alternative Strategies
- Southern Europe Back on the PE Radar
- Non-bank Lenders to Boost Buyout M&A Activity
- PE Execs Making Top Dollar on Wall Street
- Global IPOs Float Private Equity’s Boat
- Quote of the Week: IMF Chief Gives Her Savvy View on Tech Impact
Challenges of SMEs innovationand entrepreneurial financing.docxcravennichole326
Challenges of SMEs innovation
and entrepreneurial financing
Jarunee Wonglimpiyarat
College of Innovation, Thammasat University, Bangkok, Thailand
Abstract
Purpose – Today, the financing mechanisms to support small-and medium-sized enterprises (SMEs)
development have been a subject of great interest and a challenge to policy makers as SMEs are
regarded as an important sector contributing to economic growth and stability. This paper is
concerned with the bank financing policies to support SME development in China. The purpose of this
paper is to examine the governmental financing policies and the innovation financing system of China.
The discussions are focused on the bank financing policies to support SME development in China.
Design/methodology/approach – This study is a qualitative research with the use of case study
methodology (Eisenhardt, 1989; Yin, 2003). The research is focused on the policy perspectives of bank
financing to support SME development in the case of China, the world’s fastest-growing economy.
To explore the role of financial institutions and banks in SME financing in China, the research also
derives evidence from a collection of documentary investigation. The research fieldwork and
interviews were undertaken in Beijing and Shanghai, major financial centers in China, with the use of
semi-structured questionnaire. The analyses are undertaken to answer the key questions of: What are
the Chinese government’s strategies to support the development of SMEs? To what extent the
government policies in bank financing can support SMEs and promote the development of an
innovative economy?
Findings – The empirical study has shown that despite the introduction of the 12th Five-Year
National Economic and Social Development Plan to support SMEs development, China still needs to
improve regulatory policies in support of innovative businesses which would help its transition to an
innovation-driven economy. The study provides lessons and policy guidelines to improve the
competitiveness of SMEs in China. The insights from this study can also be applied to other developing
and emerging economies attempting to understand the role of financing mechanisms in building an
innovative economy.
Originality/value – The study has addressed the policy challenges to support SME development in
China, a major Asian emerging country and one of the fastest-growing economies in the world
(with averaged growth rate of 10 percent per annum). The empirical study of policy challenges was
undertaken in Beijing and Shanghai, major financial centers in China. The study offers insights which
can be applied to other developing and emerging economies attempting to understand the role of SME
financing policies and mechanisms in building an innovative economy.
Keywords Sustainable development, SMEs
Paper type Research paper
1. Introduction
China is one of the fastest-growing economies in the world (with averaged growth rate of
10 percent per annum). In 2014, China was p ...
At the Master or PhD levels, this course examines the framework for return on investment calculation and criteria in new ventures, cash management techniques and controls for small businesses; equity and debt sources and their criteria for investment in new businesses; additional sources of capital and entry strategies for new businesses. This course covers the financial skills needed at each level and phase of a new venture‟s development. Students review the equity and debt markets for startup firms and alternative entry strategies such as franchising and acquisition. At the end of this course, an online assessment will be conducted!
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
A Strategic Approach: GenAI in EducationPeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Normal Labour/ Stages of Labour/ Mechanism of LabourWasim Ak
Normal labor is also termed spontaneous labor, defined as the natural physiological process through which the fetus, placenta, and membranes are expelled from the uterus through the birth canal at term (37 to 42 weeks
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
Biological screening of herbal drugs: Introduction and Need for
Phyto-Pharmacological Screening, New Strategies for evaluating
Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
1. Page 1 of 9
AN OVERVIEW OF VENTURE CAPITAL
By Kennedy Mulenga, BBA (CBU); MBA (MsM)
Introduction
Small and medium size enterprises (SMEs, hereafter) play an important role in the economy of any
nation. However, SMEs all over the world are faced with a number of challenges that derail their
expansion. The major challenge that SMEs face is that of acquiring financing from traditional financiers
such as banks and capital markets. Lack of collateral and lack of financial records characterise SMEs
generally (Ferrer, 2010). Zambian SMEs also cannot raise money on the Lusaka Stock Exchange (LUSE,
hereafter) because they are not listed. Moreover, the SMEs cannot meet the stringent rules that LUSE
has put in place for firms to be listed on the exchange. The inability of SMEs to raise capital from
conventional financial institutions means that they have to find other sources of financing. In many
countries, the only source that is available to supply capital to unquoted companies with growth and
profit prospects is venture capital (VC, hereafter).
Definition of Venture Capital
Several scholars have defined venture capital differently. According to Kortum and Lerner (1998)
e tu e apital is defi ed as e uit o e uit li ked i est e ts i ou g, p i atel held o pa ies
p. . Bal oa a d Ma ti defi e e tu e apital as the p ofessio alised fi a ial a ti it o sisti g
of investing in companies which are in the start-up o e pa di g stages p. . This defi itio is
consistent with the definitions of Megginson (2001); Da Rin, Hellmann and Puri (2011); Aizenman and
Ke dal . Ve tu e apital is a t pe of fi a ial i te edia that is spe ialised i the fi a i g
e t ep e eu ial o pa ies Hell a & Pu i, , p. . Gilso a d Bla k defi e e ture capital
o siste t ith A e i a u de sta di g as i est e t spe ialised o ga isatio s e tu e apital
funds in high growth, high risk, often high- technology firms that need equity capital to finance product
de elop e t o g o th p. .
In the United States of America (USA, hereafter), VC is made up of three types of investing and these are
seed, start-up and expansion investment (Jeng and Wells, 1998). Metrick and Yasuda (2011) conclude
that venture capital is a form of private equity, which is an investment that cannot be traded in public
markets. This view is shared by EVCA (2007) and Jeng and Wells (1998). EVCA adds that VC focuses on
innovative firms in early (seed and start-up) and expansion stages of their existence.
There is a lot confusion surrounding the meanings of VC and private equity (PE, hereafter). Several
autho s defi e p i ate e uit i diffe e t a s. Je g a d Wells defi e VC as o e t pe of PE
i esti g p. . PE e o passes the pa ti ipatio of p ofessio al i esto s, generally on a temporally
asis, i the e uit apital of o pa ies that do ot uote o the sto k a ket Ma ti & Bal oa, ,
p.3).
2. Page 2 of 9
Fe , Lia g a d P o se ote that the p i ate e uit a ket is a i po ta t sou e of fu ds fo
start-up firms, private middle-market firms, firms in financial distress, and public firms seeking buyout
fi a i g p. . Fe e o se es that hile VC is iased to a ds seed a d sta t-up financing, PE
i eases po tfolio fi s’ le e age.
To avoid confusion, throughout this paper, the term VC is used to refer to seed, start-up and expansion
investment in unquoted companies. This is consistent with the way the term is used in the USA.
The Historical Perspective of venture capital
The modern VC industry traces back to the formation of the firm called American Research and
Development (ARD, hereafter) in 1946 in Massachusetts. Massachusetts Institute of Technology (MIT)
President Karl Compton, Harvard Professor Georges F. Doriot and local business leaders were
responsible for the formation of ARD (Jeng & Wells, 1998; Gompers & Lerner, 1999, 2001; Bottazzi & Da
Ri , ; Met i k & Yasuda, . ARD as fo ed ith the sole a date of aisi g fu ds f o
wealthy individuals and college endowments and invest in entrepreneurial start- ups in technology
ased a ufa tu i g Bottazzi & Da Ri , , p. .
However, it is worth noting that ARD was structured as a corporation and was publicly traded (Metrick &
Yasuda, 2011). They add that in the 1960s, VC industry in the United States saw a landmark in terms of
the introduction of the limited partnerships for VC funds. Furthermore, they point out that customarily,
VC investments have focused on the health and IT sectors in the USA.
Overview of the world venture capital industry
The last 30 years have witnessed the impressive expansion of the world VC industry (Da Rin et al. 2011).
The City UK 2010 (as cited in Metrick and Yasuda, 2010) reports that global PE industry is responsible for
$ 2.5 trillion of which half to two thirds is accounted for by buyouts, while VC accounts for the most of
the number of investments deals . Preqin (as cited in Da Rin et al., 2011) report that an average of over
200 new VC firms have been formed per annum beginning the year 2000 and this has led to the raising
of over US $ 50 billion.
VC is deep rooted in the industrialised countries. However, it is important to note that the USA is
responsible for half of the VC activity globally (Metrick & Yasuda, 2011). This is consistent with Da Rin et
al., (2011) though they add that Europe and Asia account for half of VC investment. In the year 2000,
North America accounted for 77 percent of the global PE funds. However, 2010 saw the fall of North
A e i a’s sha e of glo al PE fu ds f o pe e t to 44.5 percent; while Europe accounted for 34.1
percent, Asia accounted for 10.1 percent and the Rest of the world accounted for 10.1 percent (SAVCA
& KPMG, 2011).
3. Page 3 of 9
The venture capital business model
A lot of literature exists about the structure of venture capital industry. The venture capital industry
provides finance and other services to entrepreneurial firms with high growth prospects with a view of
attaining a high rate of return on funds that have been invested in portfolio companies (Timmons &
Spinelli, 2007). The VC business model is made up of portfolio firms, investors, VC firm and the VC fund.
The diagram below represents a venture capital model:
Figure 1.1: The venture capital business model
Disbursement Distribution
Management fee and carried interest
Small equity contribution
Investment Exit proceeds
Source: Da Rin et al. (2011)
Limited partners: Investors
Venture Capital Fund
Companies: Entrepreneurs
General Partners:
VC firms
The VC firm
Scarborough (2011) defines venture capital o ga isatio s as p i ate, fo p ofit o pa ies that
assemble pools of capital and then use them to purchase equity positions in young businesses they
believe have high-growth and high- p ofit pote tial p. . I o de to i est i po tfolio o pa ies
VC firms who are known as general partners have to raise capital from investors such as pension funds,
insurance firms, endowments and foundations and wealthy individuals (Da Rin et al., 2011).
4. Page 4 of 9
The capital that is raised is put into a special purpose vehicle (SPV) called VC fund. Investors also known
as limited partners because they are not involved in the day to day affairs of the VC fund. On the other
hand, general partners are actively involved in the management of the fund (Da Rin et al., 2011). The
function of active participation of VC firms in portfolio companies is at different levels in different
countries. For example, Japanese and German VC firms are less active than their USA counterparts in
managing the portfolio companies they have invested in.
In addition, VC firms in these two countries do not have board representation and are not involved in
the day-to-day running of portfolio firms (Jeng & Wells, 1998).
Structure of VC firms
I te s of VC fi s’ legal st u tu e, Ma e , “ hoo s & Yafeh 2002) find that most VC firms in Japan are
organised as joint stock companies and more often than not are affiliated to banks or securities
companies. They add that in Germany, 25 percent of VC firms are listed companies; while in the UK the
most common type legal structure for VC firms is limited partnerships. However, it is important to note
that about 5 percent of VC firms in the UK are organised as public corporations (Mayer et al., 2002).
Types of investments undertaken by VC firms
Mayer et al. (2002) report that in Germany and Israel, equity financing is the most common type of
investment and in the USA, convertible debt financing is regarded as the most prevalent type of VC
investment. Lerner and Hardymon (as cited in Mayer et al., 2002) assert that equity financing is the most
prevalent among VC firms in Japan. Lerner and Hardymon (as cited in Mayer et al., 2002) indicate that
the VC industry in Japan focuses on investing in older firms as opposed to the American VC industry that
focuses on emerging firms. Mayer et al. (2002) find that Israeli VC firms focus on supplying finance to
o pa ies i ea l phases of e iste e. O the othe ha d, the add that Ge a a d UK VC fu ds
provide financing to companies in all stages, though there is a slight bias towards later stages of
de elop e t p. . Co pa ed to the Is aeli, Japa ese, a d Ge a VC I dust ies, the UK VC I dust
is more global as it has 25 percent of its capital invested abroad. Japanese VC firms have invested 24
percent abroad; while their German counterparts have invested only 15 percent (Mayer et al., 2002).
The VC fund
After fundraising, the VC firm invests in selected entrepreneurial firms and is actively involved in daily
affairs of the firms they have invested in. When the life of the VC fund comes to an end, the VC firm
exits the VC fund and proceeds are distributed to the limited partners who are the investors (Da Rin et
al., 2011; Berlin, 1998). The VC firm is compensated in two parts. One part is called management fee and
the other part is called carried interest (Da Rin et al., 2011; Berlin, 1998).
5. Page 5 of 9
Berlin adds that the management fee is fixed and is typically 2 to 3 percent of money invested. Whereas,
carried interest is variable and is 20 percent of the returns made by the fund. This is consistent with the
view of CVCA (2009). Investors or limited partners get the remaining 80 percent. Da Rin et al. add that
carried interest is based on performance.
According to Metrick and Yasuda (2011) a VC fund has five main characteristics:
. A VC fu d is a fi a ial i te edia , ea i g that it takes the i esto s’ apital a d i ests it di e tl
in portfolio companies.
2. A VC fund invests only in private companies. This means that once investments are made, the
companies cannot immediately be traded on a public exchange.
3. A VC fund takes an active role in monitoring and helping the companies in its portfolio.
. A VC fu d’s p i a goal is to a i ise its fi a ial etu e iti g i est e ts th ough a sale o a
initial public offering (IPO).
5. A VC fund invests to fund the internal growth of companies (p.3).
Structure of venture capital funds
Several authors discuss the structure of venture funds. Venture capital funds are mostly organised as
limited partnerships with fixed lives (Da Rin et al., 2011; Berlin, 1998; Gompers & Lerner, 1999; Metrick
& Yasuda, 2011; Kaplan & Stromberg, 2008) but can be extended if need be by a few years (Berlin,
1998).Traditionally, the general or lead partner supplies at least 1 perce t of the fu d’s apital Kapla &
Stromberg, 2008).
Financing of venture capital funds
The major sources of funds for VC are different in different countries. For example, Fineberg (as cited in
Megginson, 2001) describes the Canadian VC industry as unique because it draws funds from labour
unions. Mayer et al. (2002) point out that in Germany, Israel, Japan and the UK; banks are a significant
source of funds for VC firms.
However, they note that pension funds provide more capital in the UK than in Germany, Israel and Japan
and corporations represent a major contributor of capital in Israel than in the three countries mentioned
above.
In Japan, all VC firms included in the research conducted by Mayer et al. (2002) indicate that they are
joint stock companies and as a result owners provide capital used to invest in portfolio companies.
Mayer et al. (2002) and Gilson and Black (1999) state that pension funds in Germany do not supply
capital or financing to venture capital funds. In the USA, pension funds provide 40 percent of the capital
acquired by VC funds (Gilson & Black, 1999).
6. Page 6 of 9
On the other hand, in the UK, local authorities play a critical role in VC industry than they do in Germany
and their role in Japan and Israel is insignificant (Mayer et al., 2002). The research by Gilson and Black
also indicates that in Germany, banks are the largest contributor to VC funds and while endowments
and foundations provide funds to VC funds in the USA; this is not the case in Germany.
Investors (Limited partners)
Investors in VC funds are known as limited partners because they do not participate in the daily running
of the VC fu d Go pe s & Le e , ; CVCA, . CVCA adds that the ai a age e t
parameters of the fund (management fees, carried interest, investment strategy and restricts) are
defi ed i the li ited pa t e ship ag ee e t p. . O di a il , li ited pa t e s i lude pe sio fu ds,
insurance companies, endowment funds and private individuals (Kaplan & Stromberg, 2008). Kaplan and
Stromberg (2008) observe that provided the general partner is following what is contained in the fund
ag ee e t, li ited pa t e s ha e little to do ith the ge e al pa t e ’s i est e t st ateg .
Portfolio companies
Portfolio companies are firms with high growth prospects in which the general partner invests capital
that has been raised from limited partners. Portfolio companies are also known as investee companies.
Conclusion
Venture capital is still a new asset class in many countries including Zambia. However, in countries like
the United States of America, venture capital has contributed a great deal to the development of SMEs
and capital markets. Venture capital firms provide capital to unquoted companies that would otherwise
find challenges getting funding from conventional capital sources such as banks and capital markets. In
addition to capital, venture capital firms provide expertise to investee companies in form of coaching,
mentoring and counseling.
In Zambia, the venture capital industry is beginning to take shape. 1996 saw the formation of the
ou t ’s fi st e tu e apital fu d alled the )a ia Ve tu e Capital Fu d )VCF . Cu e tl , e ha e a
number of venture capital firms such as Kukula Capital and Aerios Capital. Kukula Capital is currently
running Kukula Fund I and the fund has invested in three portfolio companies namely More Beef,
PostDotNet and Jabulani Sawmills.
The Zambian venture capital industry is destined for growth as the economy is poised to grow at more
than 7 percent in 2013. A growing economy leads to an increase in the demand for venture capital. It is
believed that as the economy continues to grow, the rate of start-up formation will go up and this will
result in high demand for venture capital.
7. Page 7 of 9
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