Venture Capital
Categories: Investing
What is venture capital?
Google. Facebook. Yahoo. Netflix. LinkedIn. Snapchat. Instagram. They were all originally funded by venture capitalists. And the common theme was that two college dropouts built these companies starting in a garage in Silicon Valley, creating something-dot-com that would change the world. And the world is a mess. So it needs a lot of changing.
Venture capital comes in a few flavors. The earliest rounds are called “seed capital,” and usually mean that an original investor put in a few hundred grand...to a million or two. The money was invested at the very beginning of a company when it usually has no revenues, no product, no nothin’. Just a hope and a dream. And a big idea. And the idea can be huge. At one point, Yahoo’s original seed investment returned 10 thousand times its original capital. Regular seed level investors are called “angels,” and they are typically previously-successful founders or entrepreneurs who want to recycle precious high-risk capital back into the Silicon Valley ecosystem in that form. They know that 99% of their investments go bankrupt, but a few become lottery ticket winners that produce massive returns, and make up for the many losses.
Once a company has, say, a million bucks in revenue and has likely burned through the original seed money they raised, they would then seek to take in what’s called an A Round, i.e. a first level, full venture capital round, where the company raised 4 or 5 million dollars to then bring it to the next level of growth...in product use, revenue, or depth and power of patents or intellectual properties.
Later stages are tagged (cleverly) B, C, and D rounds. And when a company is in the tens of millions of revenue looking at a hundred million around the corner, they would raise what is called “growth capital,” as they are no longer a speculative venture, and they then appeal to a lower risk, lower reward group of investors.
So where does the venture capital money come from? The initial seed amounts are relatively tiny. A pocket of 50 million dollars might fund a hundred early startup companies for years, and in the scheme of all wealth, that $50 million is like lunch money.
A normal-sized venture capital fund might have half a dozen partners and another half dozen junior partners. It would raise money from what are called limited partners. The people responsible for investing the money diligently are the general partners. And for this pleasure, the general partners charge roughly a 2% per year management fee, and then also take a 20-30% “success fee,” or “carry,” if their fund pays back all of its initial capital and then has profits.
So, for a normal-sized venture capital fund, there might be 4 general partners. If they raise 400 million bucks, invest it well, and in, say, 8 years, have produced maybe a dozen IPOs and sold a half dozen other companies, so that the $400 million has turned into $2.4 billion, they would show a profit of 2 billion bucks. And if their carry was 25%, then the partners would split 500 million dollars among the four of them, in addition to the salaries they were taking along the way.
So yeah. Nice work if you can get it. And as an entrepreneur, if you’re looking to start any sort of major venture, you’ll need to attract some venture capital. Unless, you know...you and your buddy in the garage have a couple mil just lying around with nothing better to do.
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Finance: What is Venture Capital?755 Views
finance a la shmoop- what is venture capital? Google Facebook Yahoo Netflix
LinkedIn snapchat Instagram well they were all originally funded by venture [logos flash across screen]
capital. and the common theme was that two college dropouts built these
companies starting in a garage in Silicon Valley, creating something
dot-com that would change the world. and the world's a mess so it needs a lot of
changing. venture capital comes in a few flavors-
the earliest rounds are called seed capital, and it usually mean that an
original investor put in a few hundred grand, maybe a million or two .the money
was invested at the very beginning of a company when it usually has no revenues [seed capital defined]
no product no nothing. just a hope and a dream and a big idea .and the idea can be
huge. at one point Yahoo's original seed
investment returns 10,000 times its original capital. a regular seed level
investors are called angels and they are typically previously
successful founders or entrepreneurs who want to recycle precious high risk
capital back into the Silicon Valley ecosystem in that form. and yeah Angels [man holding money looks excited]
know that 99 plus percent of their investments go fully bankrupt, but a few
become lottery ticket winners which produce massive returns and those
returns make up for the many many many losses. well once a company has say a
million bucks in revenue and has likely burned through the original seed money
million-ish or so that they raised, well they would then seek to take in what's [money burns in a fire]
called an a round. ie a first level full venture capital round where the company
raises four or five million dollars to then bring it to the next level of
growth. either in product use or revenues or depth and power of its patents or
intellectual properties and so on. anyway later stages of venture capital
investment are cleverly tagged B C and D rounds. and when a company is in the tens
of millions of revenues looking at a hundred million around the corner well
they would raise what is called growth capital- if they're no longer a [people peek around a corner]
speculative venture and they then appeal to a lower risk lower reward group of
investors. so where does the venture capital money come from? well the initial
seed amounts are relatively tiny. a pocket of 50 million dollars might fun
a hundred early startup companies for years and in the scheme of all the
wealth and Silicon Valley well 50 million bucks is just lunch money. a
normal sized venture capital fund might have half a dozen partners and another [business people smile at each other]
half a dozen junior partners .it would raise money from what is called limited
partners and that has nothing to do with the department store. the people
responsible for investing the money diligently are called the general
partners, and for this pleasure the general partners charge roughly 2% a
year in management fees and then they also take a 20 to 30 percent success fee
or carry if their fund pays back all of its initial capital and then has real
profits. so for a normal-size venture capital fund now let's say there's just
four general partners if they raise four hundred million dollars, invest it well
and in say eight years they've produced maybe a dozen IPOs and they've sold [graph showing growth]
maybe a half a dozen other companies so that the 400 million originally raised
has now turned into 2.4 billion dollars well they would show a profit of 2
billion bucks, and if their carry was 25 percent then the partners would split
five hundred million dollars among the four of them. and they'd get that all in
addition to the nice fat salaries they were taking along the way, so yeah it's a
nice work if you can get it and then there's the other side of the street as
an entrepreneur, if you're looking to start any sort of major venture you'll
need to attract some venture capital unless you know you and your buddy in
the garage have a couple mil just lying around with nothing better to do. [two people sit behind computer screens]