Among financial vehicles, venture capital is still a very new form of investment.
Stocks, mutual funds, private equity, and other forms of investments have been around much longer than venture capital. However, venture capital has fueled new innovation all over the world over the past 30 years thanks in part to their ability to get exciting new ventures off the ground with the capital that they need to launch new products into the market.
Venture Capital is perhaps most famous for the dot.com boom where a record $104 billion was invested by venture capital firms, mostly in dotcom companies. We all know what happened after the bubble burst, but not surprisingly, investments by venture capitalists quickly rebounded to and steadily increased year over year after hitting a low-point of $19.7 BN in 2003.
Just as venture capital investments were ramping up, the new recession hit and with it drove venture capital investments to a new low of $17.7 BN in 2009. Venture Capital have also fallen victim to supply & demand issues. There are now hundreds of U.S. based venture capitalists all vying for the same or similar investments. There are too few good investment opportunities for all venture capitalists to generate the returns that they need to execute their business model. As a result, many of the smaller and lesser known venture capital firms have closed their doors as a result of the limited pool of investment opportunities.
The current state of venture capital continues to be a wait and see game. Entrepreneurs are still getting financed, but deals continue to be harder to come by, valuations are lower, and terms are more favorable for the VC more so than the entrepreneur.
Venture Capital is a lifeline for new innovation as a whole, but it certainly is not a requirement to start a company. Angel investors are becoming an even more critical source for early stage funding smaller to mid-size opportunities that simply fly below the VC radars.
In 2010, VC's have seen an uptick in the number of successful exits via acquisition or IPO, however the number of exits has still been much lower than what the VC industry needs to sustain their business model. Expect to see changes in how VC firms operate and interact with potential firms.
As an entrepreneur seeking financing, it is important to understand how venture capital firms work, what they look for in investments, and how you can better position yourself and your firm to raise the capital that you need. VC's are looking for bigger and bigger opportunities to generate the returns that they need and with exit opportunities becoming harder to come by. As an entrepreneur seeking financing, it is crucial to focus on the potential market opportunity, your proposed exit plan and how you will position your firm to exit starting in day 1.
Venture Capital is about generating returns and exiting investments to return capital back to investors who invested in the VC partnership. Times are tough, even for the VC industry, so take head, do your homework, and align your company's pitch with what VC's are looking for.