Venture Capital: An Overview Of Trends, Strategies And Structural Issues

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Anatomy Of A Term Sheet

Venture Capital: An Overview of Trends, Strategies and Structure Owners and managers of early-stage growing companies often have mixed views toward the institutional venture capital industry.

On one hand, they welcome the money and management support they desperately need for growth, but fear the loss of control and various restrictions that are typically placed on the company by the investment documents. In order to achieve the delicate balance between the needs of the venture capitalist and the needs of the company, business owners and managers must understand the process of obtaining venture capital financing.

Three Types of Venture Capitalists

In general, there are three different types of traditional institutional pools of venture capital, though in recent years the lines between the three may be blurring. These include:

Public and Private International Venture Capital Firms.

These firms are typically organized as limited partnerships which themselves seek capital from venture investors, trusts, pension funds, insurance companies, among others. They in turn manage and invest in high-growth companies. Venture capital firms tend to specialize in particular niches, either by the business’s industry, territory or stage of development. Their investors expect a certain success Return on Investment (ROI), which is critical to the firm’s future ability to attract additional capital and track record.

SBIC/MESBIC

The Small Business Investment Act, enacted in 1958, established a national program for licensing privately owned small business investment companies (SBIC). Minority- Enterprise IBIC’s were added by a 1972 amendment to the Act. Although the SBIC program has experienced some difficulty, it currently remains an integral part of the organized venture capital community. The program allows the SBA to grant licenses to certain types of venture capital firms that are eligible to borrow money from the Federal Government at very attractive rates in exchange for certain restrictions on deal structures as well as the types of businesses which the SBIC can provide capital.

Corporate Venture Capital Divisions

These include venture-capital divisions established by large corporations such as Intel and Motorola, usually in hopes of funding small companies that have technology or resources that larger companies want or need. The investment is often structured more like a quasi-joint venture, because corporate venture capital often brings more to the table than just money, such as access to the resources of these large companies. Corporate venture capital efforts typically revolve around the corporation’s goals to incubate future acquisitions; gain access into new technologies; obtain intellectual property licenses; provide work for unused capacity; technology entrepreneur thinking to current corporate staff; final hours for excess cash; and break into new markets.