Английский язык. Практический курс для решения бизнес-задач

Даже если «Газпром» никогда не сделает предложение о покупке, другие крупные производители газа могут открыть охоту на ретейлеров. Было бы неплохо заранее подумать о последствиях таких сделок.

Источник: Ведомости, 07.02.2006

Lesson 19 New Industry

Read and translate the text and learn terms from the Essential Vocabulary.

Venture capital

Venture capital (VC) is capital provided by outside investors for financing of new, growing or struggling businesses. A venture capital fund is a pooled investment vehicle that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital differs substantially from ‘traditional’ financing:

– Funding provided to new firms with potential for above-average growth.

– Often provided to startup and other emerging enterprises because they lack the collateral, track record, or earnings required to get a loan.

– The investment, typically requiring a high potential of return, is structured so that it can be liquidated within three to seven years

– Then an initial public offering may take place, or the business merges or is sold, or other sources of capital are found.

– The entrepreneur relinquishes ownership and control of the business.

– VCs typically expect a 20—50% annual ROI at the time they are bought out.

– Typical investments range from $500,000 to $5 million.

– Management experience is a major consideration in evaluating financing prospects.

Venture capital fund operations

The VCs and their partners. Venture capital general partners may be former CEOs at firms similar to those which the partnership funds. Investors in venture capital funds are typically large institutions with huge amounts of available capital, such as state and private pension funds, university endowments, insurance companies, and pooled investment vehicles.

Other positions at venture capital firms include venture partners and entrepreneur-in-residence (EIR). Venture partners «bring in deals» and receive income only on deals they work on (as opposed to general partners who receive income on all deals). EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by VC firms temporarily (6 to 18 months) and are expected to develop startup ideas to their host firm. Some EIRs move on to roles such as Chief Technology Officer at a portfolio company.

Fixed-lifetime funds. Most venture capital funds have a fixed life of ten years. This model was pioneered by some of the most successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is «called down» by the VCs over time as the fund makes its investments. In a typical venture capital fund, the VCs receive an annual management fee equal to 2% of the committed capital to the fund and 20% of the net profits of the fund («two and 20»). Because a fund may run out of capital prior to the end of its life, larger VCs usually have several overlapping funds at the same time. Smaller firms tend to thrive or fail with their initial industry contacts.

How and why VCs invest

Investments by a venture capital fund can take the form of either preferred stock equity or a combination of equity and debt obligation, often with convertible debt instruments that become equity if a certain level of risk is exceeded. The common stock is often reserved by covenant for a future buyout, as VC investment criteria usually include a planned exit event (an IPO or acquisition), normally within 3 to 7 years.

Venture capital is not suitable for many entrepreneurs. Venture capitalists are very selective in deciding what to invest in; as a rule of thumb, a fund invests only in about one in 400 opportunities presented to it. They are most interested in ventures with high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe that venture capitalists expect. Because of such expectations, most venture funding goes into companies in the fast-growing technology and life sciences or biotechnology fields.

Winners and losers

Venture capitalists hope to be able to sell their stock, warrants, options, convertibles, or other forms of equity in 3 to 7 years, at or after an exit event; this is referred to as harvesting. Venture capitalists know that not all their investments will pay off. The failure rate of investments can be high; anywhere from 20% to 90% of the enterprises funded fail to return the invested capital. In case a venture fails, then the entire funding by the venture capitalist is written off.

Many venture capitalists try to mitigate the risk of failure through diversification. They invest in fledgling companies in different industries and different countries so that the risk across their portfolio is minimized. Others concentrate their investments in the industry that they are familiar with. In either case, they usually work on the assumption that for every ten investments they make, two will be failures, two will be successful, and six will be marginally successful. They expect that the two successes will pay for the time given to, and risk exposure of the other eight. In good times, the funds that do succeed may offer returns of 300 to 1000% to investors.

History

General Georges Doroit is considered to be the father of venture capital industry. In 1946 he founded American Research and Development (ARD) Corporation, whose biggest success was Digital Equipment Corporation. When Digital Equipment went public in 1968 it provided ARD with 101% annualized ROI. ARD’s US$70,000 investment in Digital Corporation in 1959 had a market value of US$37mn in 1968. The first venture-backed startup is generally considered to be Fairchild Semiconductors, funded in 1959 by Venrock Associates. Before World War II, venture capital investments were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act authorized the U.S. Small Business Administration to license private «Small Business Investment Companies» to provide financing and management assistance to small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. The goal of the SBIC program was, and still is, to stimulate the U.S. economy in general, and small businesses in particular, by facilitating the flow of capital to pioneering small concerns.

Venture capital is a phenomenon most closely associated with the United States and technologically innovative ventures. Due to structural restrictions imposed on American banks in the 1930s there was no private merchant banking industry in the United States, a situation that was quite unique in developed nations.

As of 2006 some of the most well known VC Firms are:

– Kleiner, Perkins, Caufield and Byers.

– Sequoia Capital.

– Sigma Partners.