Sunday, August 12, 2007

Venture Capital Investing

Venture Capital Investing


Venture Capital Investing

Daniel V. Leff

Venture capital is money that is typically invested in young, unproven companies with the potential to develop into multibillion-dollar industry leaders, and it has been an increasingly important source of funds for high-technology start-up companies in the last several years. Venture capitalists are the agents that provide these financial resources as well as business guidance in exchange for ownership in a new business venture. VCs typically hope to garner returns in excess of 3050 percent per year on their investments. They expect to do so over a four- to seven-year time horizon, which is the period of time, on average, that it takes a start-up company to reach a liquidity event (a merger, acquisition, or initial public offering).

Very few high-tech start-up companies are attractive candidates for VC investment. This is especially true for nanotechnology start-ups, because the commercialization of nanoscience is still in its nascent stages. Companies that are appropriate for VC investment generally have some combination of the following five characteristics: (1) an innovative (or disruptive) product idea based on defensible intellectual property that gives the company a sustainable competitive advantage; (2) a large and growing market opportunity that is greater than $1 billion and is growing at more than 2030 percent per year; (3) reasonable time to market (one to three years) for the first product to be introduced; (4) a strong management team of seasoned executives; and (5) early customers and relationships with strategic partners, with a strong likelihood of significant revenue.

An early-stage start-up company rarely possesses all of these characteristics and often does not need to in order to attract venture financing. Indeed, early-stage start-ups are often funded without complete management teams, strategic partners, or customers. Absent these characteristics, however, there should be, at a minimum, a passionate, visionary entrepreneur who helped develop the core technology and wants to play an integral role in building the company.

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