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Venture capital investment

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1Just as venture capital firms invest in various industries, they also invest in companies at various stages of development.


2There are several stages to an entrepreneurial company’s growth cycle, and many venture capitalists limit their investment only to companies in a particular stage of growth.

growth cycle



3Most people tend to associate venture capital with so-called “start-up” or “seed investing”, where the investment occurs prior to the organization of the company or the development of an actual product.

tend to


seed investing

prior to



4However, most venture capital investments in the United States in recent years have actually consisted of ” early-stage investing ” and “growth equity” investing.



5Early-stage venture capital is typically invested following company organization and at the time of, or shortly after, initial introduction of a developed product or service.

initial introduction



6Growth equity venture capital or “late stage’ capital is typically provided to an established company to enable it to reach the critical mass [necessary to attract additional financing through the public equity markets or attract a suitable merger or acquisition partner capable of supporting future expansion.]

an established company:

the critical mass

merger or acquisition:



7Venture capitalists generally do not run companies; managements do. Thus, the success of any venture capital investment is dependent, in large part, on the strength of the related management team.

run companies:



8Most venture capitalists will not invest in a company [lacking strong management, particularly at the chief executive officer level.]

lacking strong management:

the chief executive officer



9In evaluating the quality of a management team, venture capitalists frequently look for managers with entrepreneurial vision, integrity, intelligence, a strong work ethic, relevant industry experience, a track record for success and an ability to prioritize and focus.

entrepreneurial vision


a strong work ethic

a track record for success

an ability to prioritize



10Venture capitalists generally require the right to appoint representatives to the venture-backed company’s Board of Directors or other governing body. Such representation is designed to allow the venture capitalists an opportunity to monitor developments at the company and influence certain corporate decisions.

the venture-backed company

Board of Directors

appoint representatives

is designed to




11The extent of Board representation can vary from company to company, but it is often proportional to the percentage of equity in the company held by the venture capitalist.

vary from company to company

be proportional to:



12The right to Board representation is generally protected through various other contractual provisions, including a limitation on the removal of the Board representative, a limitation on increases in the number of directors, the right of the representative to be included on all committees of the Board and a commitment from other major equity holders to vote their interests in a manner to ensure Board representation for the venture capitalist.

contractual provisions


equity holders



13To protect the value of their invested capital, venture capitalists desire control over various corporate decisions.



14In instances[ where such control does not otherwise exist by virtue of the venture capitalist’s equity ownership or Board representation,] control over certain corporate actions is often obtained through contractual agreement between the venture capitalist and the company.

in instances



15 The extent of such contractual control will vary depending upon the venture capitalist’s investment in the company, although investments in excess of 20% of the total equity often carry significant veto or consent rights over certain corporate actions.

in excess of

the total equity

significant veto or consent rights



16Owing to their relatively short three-to-seven year investment horizon, venture capitalists have a tendency to focus their investments on potentially large and growing markets where opportunities exist for small companies, [with additional capital and management oversight provided by the venture capital investment,] to quickly achieve significant market scale and create investor wealth.

Owing to

have a tendency to

management oversight

market scale



17The technology markets are a particularly appealing target market for venture capitalists, given that these markets are currently estimated to have a median long-term growth rate of 25%or greater.

a particularly appealing target market:




18This appeal is evidenced ,in part, by the fact that during the first quarter of 1999, two out of every three venture capital dollars invested in the United States were invested in the information technology sector.

the first quarter of:



19 As the world demand for new information technologies continues to experience unprecedented growth, a significant portion of available venture capital funds can be expected to be funneled into information technology throughout the world in the next few years.


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