Venture Capital

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<p>Department of Urban and Regional Planning</p> <p>Why care?</p> <p>Some basics on venture capital</p> <p>Of increasing interest to states, larger cities with emphasis on entrepreneurship and innovation Capital availability as a constant concern of start up businessesShift of political attention to start ups means capital questions front and center</p> <p>Initial experimentation, by some jurisdictions, in VC support policies, programs What are the right policies and programs?Department of Urban &amp; Regional Planning 2</p> <p>Venture capital definedMoney invested in new ventures and developing businesses More than money, synergy: A significant form of financial intermediation that provides privately held entrepreneurial firms with equity or hybrid forms of financing, in conjunction with managerial expertise</p> <p>Differences from traditional capitalVenture capitalLess fluid Requires high return rate Invested based on longerrun future Concerned with product and market potential Venture capitalist and partner are co-owners</p> <p>TraditionalMore fluid Bears lower return Invested based on immediate future Concerned with past performance Loaning bank is creditorRequires collateral</p> <p>Source: Hosmer (1982)</p> <p>Department of Urban &amp; Regional Planning</p> <p>3</p> <p>Department of Urban &amp; Regional Planning</p> <p>4</p> <p>The role of VCEnables businesses that would not receive conventional bank funding to:Start-up (pre-seed) Expand (seed)</p> <p>Players in VC industryActorEntrepreneur</p> <p>RoleProvides innovative business idea</p> <p>ProfileLittle to no capital/business experience Commitment and preparation Knowledge and awareness Reasoned risk taker Ability to get things done Willingness to share ownership Friends/business partners of entrepreneur with high personal net worth Typically Invest less than $100,000 in the venture</p> <p>Typically less developed, higher-risk entrepreneurial firms Entrepreneurs with innovative ideas, but no internal capital and no business track record Examples: SAS, Microsoft, Apple, Staples, TCBY</p> <p>Angel</p> <p>Provides initial money (mostly pre-seed), but no managerial service</p> <p>Source: Gompers (1994)</p> <p>Source: Barry (1994)</p> <p>Department of Urban &amp; Regional Planning</p> <p>5</p> <p>Department of Urban &amp; Regional Planning</p> <p>6</p> <p>Players contActorInvestors</p> <p>VC investment processProfileIndividuals/Families (17%) Commercial and specialized banking firms/Insurance (18%) Corporate sponsors (2%) Pension funds (38%) Foundations/Endowments (22%) Other (3%) Experienced with going public, selling/merging a portfolio firm, liquidating unpromising deals, replacement of management Providing access to key needed expertise</p> <p>Role (in Limited Partnership)Provide 99% of investment money Serves as limited partner (LP) Not allowed to be involved in dayto-day fund activities, but have some measures of control</p> <p>Raise funds Identify options for investment Execute deal Monitor investmentsSell stake; achieve return on investment</p> <p>Venture capitalist</p> <p>General partner Contributes 1% of fund Responsible for deal origination, screening, evaluation &amp; structuring as well as post-investment activities</p> <p>Source: Barry (1994)</p> <p>Source: Fried and Hisrich (1994)</p> <p>Department of Urban &amp; Regional Planning</p> <p>7</p> <p>Department of Urban &amp; Regional Planning</p> <p>8</p> <p>VC funding use at business stageStart up First stage Second stage</p> <p>Venture capital contracting problemsUncertainty the inability to predict future event Information asymmetry between entrepreneur and venture capitalist Agency costs uncertainty and information asymmetry mean the entrepreneur is in a position to take advantage of the VC</p> <p>Product development and initial marketing Establishment of product or service in commercial use and generation of early sales Operational expansion coverage for a company with growing sales Funding for major expansion of a profitable company, or bridge financing for a firm expecting to soon go public Financing the purchase of a business for companies or management teamsSource: Walter (1985)</p> <p>Third stage+ Acquisition/buyout</p> <p>Department of Urban &amp; Regional Planning</p> <p>9</p> <p>Department of Urban &amp; Regional Planning</p> <p>10</p> <p>Solution?IncentivesShift of control from the entrepreneur to VC Intense monitoring The emphasis on exit to recycle VC contributions</p> <p>Public sector rationale in VC?Capital perfectly mobile, available everywhere?Why might it not be?</p> <p>Department of Urban &amp; Regional Planning</p> <p>11</p> <p>Department of Urban &amp; Regional Planning</p> <p>12</p> <p>Boom &amp; bust in VC marketWhat shifts VC market (supply/demand) Why is adjustment of VC industry slow, say to demand growth? Why does VC market have a tendency to overreact? What are the consequences of under- and overshooting? Appropriate government action?</p> <p>SourcesBinder, R A, and L A Yow,Venture capital: Do economic developers want a piece of the pie?, PowerPoint presentation, Department of Urban &amp; Regional Planning, University of North Carolina at Chapel Hill, April 2001. Perez, R. 1986. Inside Venture Capital: Past, Present and Future. Praeger: New York. Amit, R., J. Brander, and C. Zott. 1998. Why do venture capital firms exist? Theory and Canadian experience. Journal of Business Venturing 13 (6). Hosmer, L. T. 1982. A Venture Capital Primer for Small Businesses. Washington, DC: Small Business Administration. Berlin, M. 1998. That thing that venture capitalists do. Federal Reserve Bank of Philadelphia Business Review, January/February, pp. 15-27. Gompers, P. 1994. The rise and fall of venture capital. Business and Economic History 23 (2). Walter, D. 1985. Venture Capital: Where to find it, How to go after it. Seattle, Washington: Venture Source Publishers. Barry, C. B. 1994. New directions in research on venture capital finance. Financial Management. 23 (3): 3-15. Fried, V. H. and R. D. Hisrich. 1994. Toward a model of venture capital investment decision making. Financial Management 23 (3): 28-37. Growing New Businesses with Seed and Venture Capital: State Experiences and Options. National Governors Association, 2000. 13 Department of Urban &amp; Regional Planning 14</p> <p>Department of Urban &amp; Regional Planning</p>