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Although Ronald Reagan expanded the economy through governmental defense spending from the middle to the end of the 1980s, venture capital profits declined through the mid-1990s and a new wealth generator for venture capitalists replaced funding start-up companies…. the Leveraged Buyout.
For definition, a leveraged buyout (LBO) is the purchase of a company with a combination of debt and the target company’s assets, which might include airplanes, real property, and/or cash flow. All of these are used to repay the debt taken out to buy the business. (The debt, much as in real estate when a 90/10 loan is taken out on a rental property, is considered the leverage to buy the business).
Beginning in about 1995, VC money was being sought by and was beginning to “feed” companies creating internet businesses.
Functioning on what was to be known as “the biggest fool theory”--- where the last person to own the stock loses all his investment--- companies went public with enormous valuations without ever having sold one product. Instead, they were selling blue sky, or opportunity.
By the turn of the century, in the year 2000, the investing world had started to realize that technology and internet companies were yielding either low or non-existent returns and began dumping these stocks in favor of better investment opportunities---leading to what became known as the bursting of the “dot-com bubble.” The sell-off caused VC firms to experience net losses on their internet and technology companies and the private equity business stalled, yet again. Cyclically, VC again must seek out opportunity.
Since 2005, however, VC funding has remained fairly constant even with the market decline of 2008-2010. This window of lending seems to have established itself and seems key to some serious investment and critical infrastructure development.
Let’s ExamineThe VC View on Investing
With very few exceptions, VC firms care where the money is invested as long as it does not violate their moral principles.
Given that moral reality, VC firms are interested in:
1. How much they must invest.
2. When they will get that money back; and
3. How much return they are going to get on their investment.
Venture capital is money invested in a company in exchange for company equity. The venture capitalist earns money from either:
1. Cash flow from the business when it becomes profitable and receives dividends;
2. When the stock is sold privately, and/or
3. After the company goes public through an IPO.
Most VC firms are not out to save the whales, to feed the starving children in Biafra, or stop the war in Uganda. Instead they want returns for their investors and on investment capital expended-- and, as mentioned, follow their personal values clearly stated by the company in doing so.
Selecting a Business to Fund
As previously mentioned VC investors carefully look for the following characteristics when considering investing in a company:
1. An experienced, proven management team, with past demonstrable results.
2. Dramatic growth potential for the concept being funded.
3. Capital-efficient/scalable business model which has been fully vetted and approved;
4. Significant barriers to entry
5. Highly differentiated products or services that are compelling and unique;
6. A probable exit from the business in between three and seven years, post-funding.
Interestingly enough, in a survey of over 100 VC firms, it is estimated that the average clock time a VC firm Project Screener invests only about eight minutes on a project before he or she moves to the next project submitted for review. Further, a venture capitalist may screen 400 projects before it ever funds one that it is interested in moving forward to the due diligence phase.
Clearly, the key six points listed previously must be clearly addressed in a business proposal, or the proposal will be thrown into the “round file” faster than can be imagined.
Due Diligence and Business Development
Venture capitalists are careful and do a great deal of detailed research in both the people and the potential business opportunity itself before investing any money. They do this because:
1. They want return of their investment,
2. They want return on their investment, and
3. If they invest in just any project, they may lack insufficient capital to invest later on, in a potentially more profitable opportunity (aka opportunity cost) so they must be certain that each project has a very high probability of success, as well as high profits.
VC firms usually invest in areas in which they have expertise. The expertise may come from VC firm previous experience with other similar investments, or from the VC staff itself, who may have successful business experience in the business being considered for investment.
VC firms universally want at least one seat on the Board of Directors in the businesses they are investing in, depending on how much money has been invested, and are often highly involved in business development because of their successful past similar-field experience.
A business owner should expect this level of involvement and interest from a VC investor.
DISCLAIMER: All information, content, and data in this article are sole opinions and/or findings of the individual user or organization that registered and submitted this article at Isnare.com without any fee. The article is strictly for educational or entertainment purposes only and should not be used in any way, implemented or applied without consultation from a professional. We at Isnare.com do not, in anyway, contribute or include our own findings, facts and opinions in any articles presented in this site. Publishing this article does not constitute Isnare.com's support or sponsorship for this article. Isnare.com is an article publishing service. Please read our Terms of Service for more information.Dr. Brent Lundell owns http://www.gainstreamgroup.com/, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services.Venture Capital Firms and Funds Submitted by: Dr. Brent Lundell, PhD, MBAVenture Capitalists What is a venture capitalist. A venture capitalist is an individual who makes investments in businesses before the firm goes public. In addition to bringing money to the business venture, capitalists usually bring managerial and business-specific talent to the business, and will take assume equity and generally a board seat in return for investment in the business. What is a venture capital fund...VC Fund Types, Players, Structure Submitted by: Dr. Brent Lundell, PhD, MBATypes of Venture Capital Funds Let?s do a quick review of the types of venture capital funds. VC firms differ in their investment approaches. Some companies ? Invest for a quick turnaround, by going public?selling within the public equities markets ? 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?? 1 → He has the one but will need a two and three to go with it1. used of a single unit or thing; not two or more
Definition of the Term: Business1. incidental activity performed by an actor for dramatic effect
?? 1 → His business with the cane was hilarious2. the principal activity in your life that you do to earn money
?? 1 → He's not in my line of business3. the activity of providing goods and services involving financial and commercial and industrial aspects
?? 1 → Computers are now widely used in business4. the volume of commercial activity
?? 2 → Show me where the business was today1. a rightful concern or responsibility
?? 1 → It's none of your business2. an immediate objective
?? 1 → Gossip was the main business of the evening1. business concerns collectively
?? 1 → Government and business could not agree2. a commercial or industrial enterprise and the people who constitute it
?? 1 → He bought his brother's business?? 2 → A small mom-and-pop business?? 3 → A racially integrated business concern3. customers collectively
?? 1 → They have an upper class clientele
Definition of the Term: Investing1. the act of investing; laying out money or capital in an enterprise with the expectation of profit
Definition of the Term: Opportunity1. a possibility due to a favorable combination of circumstances
?? 1 → The holiday gave us the opportunity to visit Washington
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