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Chapter 14
Venture Capital
Copyright¸ 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Instructors may make copies of the PowerPoint Presentations contained herein for classroom distribution only. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Learning Objectives• How venture capital fund structure is influenced by
regulation and other factors.
• How venture capital fund structure influences the kinds of investors who can invest.
• How the role of the fund’s general partner changes over the life of the fund.
• How the contract structure of venture capital funds promotes efficient investment and management.
• The role of reputation in defining relationships among the venture capitalist, investors, and portfolio companies.
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Historical Development of Venture Capital As an Institution
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
• Legal environment:
–1933 and 1934 SEC Acts
– Investment Company Act of 1940
–ERISA Act (1974 and 1979).
• Fund structure:
–Closed-end mutual fund.
–Limited partnership.
Fig 14-1
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Figure 14-2
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Venture Capital Investments by Stage of Development
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%1
98
0
19
82
19
84
19
86
19
88
19
90
19
92
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94
19
96
19
98
20
00
Pe
rce
nt
of
Ne
w C
om
mit
me
nt
Do
lla
rs
Later Stage
Expansion
Early Stage
Seed/Start-up
Figure 14-3
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
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European Venture Capital and Private Equity Funds Raised in 2001
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Expected Allocation of Funds Raised in 2001European Venture Capital
56.4%
11.3%
10.4%
3.0%
14.6%
4.3%
Buyout
Non High-tech Expansion
High-tech Expansion
Non High-tech Early-stage
High-tech Early-stage
Not Available
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Private Equity Raised by Investor Type (1997 - 2001)European Venture Capital
24.8%
25.8%
13.3%
9.7%
7.3%
6.8%
5.2%
7.1%
Pension Funds
Banks
Insurance Companies
Corporate Investors
Fund of Funds
Individuals
Government Agencies
Other
Organizational Structure of Venture Capital Investment
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Figure 14-4
Summary of Terms:Venture Capital Limited Partnership Agreement
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Managing The Investment Portfolio
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
The Venture Capital Investment Process (Figure 14-6)
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Allocation of Venture Capitalist Time (Figure 14-7)
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Incentive Conflicts and Structures
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
©2003, Entrepreneurial Finance, Smith and Kiholm Smith Chapter 14
Figure 14-8