This page looks at venture capital funding.
It covers -
Venture capital is sometimes characterised as 'risk capital'
and offering investors a higher return than that from
safer investments such as money market deposits, fixed
interest or equities.
Debt financing (eg through banks) is not a viable option
for many new enterprises, particularly in internet and
other new technology sectors, because
lenders such as banks do not understand or trust new
require collateral, usually in short supply in new ventures
(esp in knowledge-based ventures)
financing seriously inhibits growth because an enterprise
needs to repay loans rather than invest in future growth
financing puts entrepreneurs at the mercy of changes
in the economy, the bank's financial performance and
about those concerns and banking practice in Australia
are provided in Anthony Stanger's A Review of Recent
Developments in SME Banking Services & Debt Financing
Few startups meet requirements for listing on the stockmarket.
Financial support from venture capital funds and business
angels is therefore attractive.
Much of the literature on recent venture capital activity
has adopted a mystique promoted by individual funds and
enthusiasts. That mystique overemphasises
returns to investors and benefits to the 'innovation economy'
or broader economic growth, typically
on a handful of spectacular successes
the larger number of failure
notional valuations rather than money actually received
through sale of a stakes
concerns about abuse of privileged positions
has been illustrated by dazzling statistics. Some 439
dotcoms went public in the US between 1995 and 2001, raising
over US$33 billion. As noted in discussion elsewhere on
this site regarding the internet bubble,
much of that capital evaporated but VC funds enjoyed a
substantial return. It is reported that Silicon Valley
funds had notional returns of 53% in 1995, 58% in 1996
and 31% in 1997.
Kleiner Perkins Caufield & Byers for example paid
US$4 million in 1994 for around 25% of Netscape.
Netscape for practical purposes has disappeared but Kleiner
Perkins apparently did well during Netscape's IPO
and subsequent US$4 billion acquisition by AOL. Kleiner
Perkins US$8 million stake in Cerent was worth around
US$2 billion when the optical equipment maker was sold
to Cisco for US$7.2
billion in 1999. In that year Kleiner Perkins and Sequoia
Capital paid around US$25 million for 20% of Google. Draper
Fisher Jurvetson's US$0.7 million stake in Kana Communications
was subsequently valued at over US$1 billion. Initial
supporters of Amazon.com would have scored notional returns
of over 55,000% at its December 1999 peak. US$2 million
put into Cisco in 1987 would be worth over US$6 billion
In 1997 the boosters at the US National Venture Capital
Association reported that US enterprises backed by venture
capital from 1970 to 2005 employed nearly 10% of private-sector
workers, had US$2.1 trillion revenue, accounted for 16.6%
of total gross domestic production and "generally
outperformed non-venture-funded counterparts" in
2005. California claimed 42% of investments over the period.
The enterprises included FedEx, Starbucks, Home Depot,
eBay, Google and Apple.
Venture capital funds are run by professional managers
and pool money from individuals, institutions, superannuation
funds, insurance companies and other businesses. Most
nations offer generous tax
concessions for the funds and/or the investors in those
funds, with the result that some are perceived primarily
as vehicles for tax avoidance rather than true investment
The funds gain equity in a company in return for providing
capital, generally seeking long term capital gain rather
than immediate and regular interest payments and offsetting
the risk of corporate failure by investing in a spread
of companies with the potential for rapid growth and greater
than average returns.
As part owners of an enterprise, the fund representatives
typically require board membership but usually do not
take day to day control, instead offering advice on management
and technical issues.
Although a particular fund may be long-lived and have
a wide ambit, many are sector-specific and typically operate
for seven to ten years. Most aim to reward the investors
(and the fund managers) by taking the companies that they
fund to the stock market or an industry sale. Fund managers
typically receive a management fee and between 15 to 25%
of the capital gains when the investment is liquidated.
In contrast to North America, venture capital investment
in Australian internet companies tends to be small; several
of the funds identified below have total portfolios of
well under a million dollars. A 2002 report by Axiss,
a Commonwealth government finance sector specialist, suggested
that only around 230 of an estimated 13,000 ITC enterprises
received VC funding since 1992. US fund raising in 2000
was 115 times greater than in Australia; when adjusted
for population differences US and EU fund raising exceeds
Australia's by a factors of eight and 1.6 respectively.
Overall, the Australian venture capital sector with $6.3
billion under management in 2001 was the largest in the
region. Local funds raised $1.4 billion in 2001, up 18.5%
on raisings in 2000. Investment in 2001 was $2.2 billion
($1.6 billion new funding and $635 million follow-on funding).
The third ABS Venture Capital survey
suggested that as of June 2003 investors had $7.5 billion
committed to venture capital funds or associated financial
institutions, with $4.8 billion of committed funds having
been drawn down. New and follow-on investments during
2002-03 contributed $658 million to around $4.4 billion
previously invested in around 850 companies. Management
fees were around $110 million.
The NZ Venture Capital Monitor suggests that VC funds
under management in New Zealand in 2003 was an aggregate
NZ$1.12 billion, with some NZ$568 million available for
investment and 51 deals (with an investment value of approximately
NZ$88 million) reported. Expansion and later stage investments
accounted for 90% of investment by value (some 82% by
activity). Health and Biosciences accounted for the highest
value of capital invested during that year. ICT was the
most active sector by number of investments. Average and
median deal sizes during 2003 were NZ$1.7 million and
NZ$0.5 million respectively.
The 1997 Coopers & Lybrand Economic Impact of Venture
Capital study under Commonwealth sponsorship suggested
that only 2% to 3% of SME equity was derived from venture
capital; most funding came from the owner's personal funds
or bank finance.
VC investment criteria
Criteria for investment by VC funds vary but generally
proprietary technology product/service that is market
ready or will be in in the immediate future after access
to a global market
ownership of intellectual property
strong commercial management team with pertinent experience
and personal attributes ("chemistry" or "personality")
viable business plan with the commitment of the enterprise's
principals and key staff
of substantial sales (esp substantial growth in gross
and net revenue) within x years
gross margins and requirement for modest expansion capital
valuation and investment terms
clear exit path for the investor (eg will be able to
liquidate the investment within x years)
for substantial gains to the investor through an IPO
or trade sale. Australian Venture Capital Journal
data in August 2000 suggests that the Internal Rates
of Return sought by Australian fund managers ranges
between 25% and 60%, with a mean of 34%).
2000 Australian Bureau of Statistics (ABS) report
suggested that a small fund will receive between five
and 20 approaches per month for funding. Of those two
or three may receive a thorough examination, with one
per quarter gaining funding. Medium sized funds receive
up to 400 approaches per month, with investigation of
five to 10 proposals per month and funding of two or three
proposals per quarter. The major funds, which probably
account for most money under management, receive upwards
of 400 approaches per month and tend to invest in five
to seven enterprises per quarter.
The 2003 ABS survey reported that in Australia during
2002-03 some 133 venture capital managers reviewed 9,512
potential new investments. There was further analysis
of 1,088 investees, with only 132 (1% of those initially
considered) being funded. These managers supposedly spent
a total of 163,000 hours considering and dealing with
Australian and New Zealand VC funds
There is considerable disagreement about the number and
viability of VC funds in Australia. Estimates of the size
of the sector and number of participants vary widely.
Some observers have suggested that around 10% of funds
cease each year.
We have selected some of the bodies that are interested
in online or other digital developments. The major
VC fund managers are located in Melbourne and Sydney:
the 2001 ABS report
suggested that NSW-based funds accounted for around 46.9%
of Australian VC under management and Victoria for 24.1%.
In contrast to overseas counterparts (probably because
of the small size of the local market) most of the funds
have a high proportion of their investments outside their
One New Zealand study quipped that
While a powerful engine of wealth creation, venture
capital also ruthlessly ignores any sentiment about
income distribution or balanced regional economic development.
... the operation of venture capital may widen the gap
between the "haves" and "have-nots"
by concentrating investment capital in a few select
regions and in a few select industries.
and New Zealand funds are identified in a separate note
More information is available from investment advisers
and from bodies such as the Australian Venture Capital
Association Ltd (AVCAL)
and the New Zealand Venture Capital Association Inc (NZVCA)
An offshore perspective is provided by suggestions that
the number of US VC firms grew from 87 in 1980 to over
690 in 2000, with employment rising during that time from
1,035 to 8,368.
Other points of reference are the OECD's 2003 reports
Venture Capital Policy Review: Canada (PDF),
Venture Capital Policy Review: United Kingdom
and Venture Capital Policy Review: Sweden (txt).
The AVCAL Directory
is available on its site, along with papers
from the 6th AVCAL Conference and an Australian venture
capital survey prepared by Venture Economics in conjunction
with Arthur Andersen.
It suggests that the most popular sectors are biotechnology,
medical/health devices, communications and information
site also contains Guidelines for the Valuation
and Disclosure of Venture Capital Portfolios, modelled
on the British Venture Capital Association (BVCA)
guidelines. AVCAL members are bound by its Code of
Conduct; the site contains a model Confidentiality
Publications publishes an annual Australian Venture
Capital Guide and the Australian Venture
Overseas venture capital associations are identified here.
Tensions within the Commonwealth government bureaucracy
about the most effective mechanisms for encouraging innvovation
and commercialisation are reflected in two basic types
The 'industry' departments have tended to favour a direct
injection of government money. The Treasury department,
perhaps with a more macroeconomic approach, has favoured
a small range - from A to C - of tax incentives, ie indirect
The Innovation Investment Fund (IIF)
involves government participation in nine private sector
venture capital funds. The expectation is that those funds
will thereby be better able to "assist small companies
in the early stages of development to commercialise the
outcomes of Australias strong research and development
capability". It is claimed that Australian firms
receiving venture capital experienced 20% annual growth
in the 1990s, compared with growth of 2% in other areas.
Pooled Development Funds (PDF)
program aims to increase the supply of equity capital
for growing Australian SMEs by encouraging PDFs - private
sector investment companies established under the PDF
Act to raise capital for investment in Australian companies.
The Venture Capital Limited Partnerships (VCLP)
program provides for registration of limited partnerships
as venture capital limited partnerships (VCLPs) and is
to increase the supply of venture capital to Australian
companies by addressing a tax impost to the flow of
foreign venture capital to Australian companies.
New Zealand the government established the Venture
Investment Fund (VIF)
during 2001, with NZ$100 million to accelerate development
of the "VC industry". Investment is handled
by private sector fund managers who match government money
two to one with private funds. The expectation is that
managers will ultimately establish their own "fund
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