Venture capital defined
Wednesday, 22 November 2006 14:54
Here's my working definition of a "venture capital fund", drawing on a McKaskill book and other sources.
"A venture capital fund is a pool of investment money from institutional investors (such as superannuation or pension funds), companies, banks, governments or high net worth individuals (each known as a limited partner). The fund is placed under the management of a venture capital fund manager (known as a general partner). Funds are generally limited to a 10-year life, so funds need to be returned to the investors before the end of that period. Venture capital funds typically look for a 20%+ cumulative return on funds over the risk free rate. They require a liquidity event (eg trade sale or IPO) within three to five years."
Australian venture capital - market size and definition
The venture capital sector is relatively small in Australia though it is growing. This is illustrated in the following statistics as at 30 June 2005. I draw them from McKaskill's book.
140 - Number of venture capital managers
210 - Number of venture capital vehicles
912 - Number of investee companies
A$11.2 billion - Venture capital under management
A$0.839 billion - Venture capital invested in 2004-05
7 hints for venture capital
Are you ready to raise venture capital? A digital media consultant I've worked with since 1993 yesterday sent me a good list of 7 hints for making a company ready for VC investment. As you'll see part of his recommendation is to "work with a legally informed strategy from the outset".
I'm sharing the 7 hints below with readers of lightbulb. A special welcome to readers from China. Your country ranks at no. 4 in our readership and follows the United States, Australia, and Great Britain. The illustration is Mandarin for "lightbulb".
- The amount of time that needs to be devoted to the process by the company seeking VC funding is usually under-estimated particularly by senior management.
- The fund raising process involves an intense review of the company seeking funds. If before the process begins there are non-existent or weak accounting, law, reporting, governance and other internal systems then the company will be involved in two activities or projects running in parallel. First, to implement revised internal systems and methodologies. Second, to maintain progress and achieve milestones mandated by the VC review and funding.
- This affects value. As has been well documented, technological founders of companies have a tendency to see their achievement as technical. They then put weight on THEIR notions on value and THEIR expectations for what positions acquirers or VC funds should take. It is better for such founders to take steps for their opinion to be tested or teased out.
- More broadly, everyone needs to know what is do-able and required before the fund raising process starts. Here it is critical to be realistic about the company's finance position. Is it for example in the seed stage, early stage, expansion stage, replacement capital stage, or buyout stage?
- The process of seeking investment is a business process in the main, though technological considerations can be important.
- Most VCs give considerable weight to the people involved when they make their valuations of companies. So in preparation it is wise to take a good look at the list of board members, shareholders, key executives, employees and professional advisers. Hence companies seeking VC funds are well advised to work with a legally informed strategy from the outset.
- The company seeking funds, and the people depending on it and supporting it, need to find the right fit with the VC fund. It's not a search for Other People's Money (OPM), the title of the 1991 Danny DeVito film.
: Tom McKaskill, Finding the Money: How to Raise Venture Capital
(Wilkinson Publishing Pty Ltd, Melbourne, 2006).