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For those of you who are interested in majoring in venture finance, I offer this article as a follow on course : Advanced Venture Finance 201. Corporate Venture Capital Question: What's the latest trend in venture capital? Answer: Corporate Venture Capital Investors. Question: Why is this trend important to you? Answer: You may find venture capital at a lower price (higher valuation) than from traditional venture capital investment funds. In addition, you may obtain industry expertise and connections that other venture funds do not offer. Corporations making venture capital investments is not a new event. Large companies have been making investments in smaller companies for many years. Indeed, such investments pre-date the modern venture capital industry, which in its current form began about 1970. The positive recent news about this old source of venture money is that big companies are getting more aggressive in their venture capital programs. More companies are seeking out investment opportunities, rather than waiting for opportunities to knock the door down. This more aggressive approach means the pool of available venture capital is growing. The downside for entrepreneurs is that by organizing their venture investment effort, corporate investment departments are becoming more like their counterparts in professionally managed venture funds. There is a much greater emphasis on the financial performance of the corporate venture portfolio than there was in earlier years. Formerly, corporate venture capital was very closely tied to promoting specific operating objectives of their company's business. Corporate venture capital was one of the tools in creating joint ventures and strategic partnerships that directly affected their company's business. Although that is still often true, in many cases the investment decision is no longer made by operations people. Instead, it is made by venture capital specialists whose compensation is primarily tied to the financial performance of the investment rather than to long term benefits to their company's operations. This tends to create lower valuations than is the case when the operations people primarily influence investment decisions. Another trend in corporate venture capital is to promote the growth of whole new industries that will benefit the investor in a general way. Intel, is a leading example of this approach to investing. The positive side for entrepreneurs is that you may be able to get venture money from a corporate venture investor with fewer operating strings attached. The venture managers are often less concerned with obtaining licenses, distribution rights and other operational goodies than is the case when operating managers influence investment decisions. Small Business Investment Companies. SBICs generally are interested in companies that already have a product and either have an established revenue stream or are likely to have a revenue stream soon. Do not look for seed capital from SIBCs or to fund long development projects. SBICs, however, are a great source of capital for financing expansion of your sales team, expanding your marketing resources, moving a basic existing technology into additional applications, adding depth to the management team or expanding production capacity. The key thing to remember about SBICs is that SBICs borrow most of the money they invest. The SBIC, therefore, has to pay interest to its lender. It generally requires the companies in which it makes investments to pay interest and to have a reasonable probability of being able to repay the principal amount of the loan. In return, SBICs will usually accept a smaller percentage of the equity of your company than a venture capital fund would require. Therefore, if your company is able to generate revenue to pay interest and meets the risk profile of the SBIC for repayment of principal, you are likely to get a better deal from an SBIC than from most venture capital funds in a second or third round financing. Institutional Investors Institutional investors, such as pension funds, insurance companies and accounts managed by banks and other financial advisors provide venture capital funds with most of the capital venture funds manage. In most cases, institutional investors prefer to have their venture investments managed for them by professional venture funds. In some cases, however, institutional investors are willing to make direct investments in companies, especially if the company is only a year or two away from IPO or sale. How do you obtain investments from institutional investors? If your company has venture capital investors, it may be worthwhile to ask your venture investor whether any of its investors might want to make a direct investment in your company. This may have certain advantages for both the venture capital fund and the institutional investor. The venture capital fund may be at a time in its life cycle that it is low on capital or already has invested what it wants to invest in your company or industry sector. The institutional investor would benefit because it would not have to split profits with the venture fund managers or pay a placement fee. The institutional investor would get a free ride. Most investments by institutional investors are obtained by hiring investment bankers or placement agents to do a private placement targeted to institutional investors. Generally, these institutional rounds need to be at least $15 million, and are generally higher, because the investment bankers are paid a percentage of the deal and their fee will not be sufficient to compensate them for their efforts, unless it is a large deal. Another factor is that the size of the deal reduces the risk for investors that the company will run out of money. The primary factor in deciding whether to do an institutional investor round through an investment banker is whether the investment bankers can get you a better price from institutional investors than you can obtain from venture capital funds, which they can often do. Another benefit is that the transaction can establish a relationship with the investment bankers that motivates the investment bankers to do your IPO. The investment bankers will know a lot about your company, which means they will have to invest less time in the IPO. More importantly, however, the investment bankers will be motivated to help you make money for the investors they sold stock to in the private placement. The business of investment bankers depends on making money for institutional investors, who are the primary repeat customers of the investment bankers. Foreign Investors The world looks to small U.S. companies for innovation, growth and technology. There is a shortage of all the above in many parts of the world. In many countries there are no viable securities markets for IPOs, which limits investors' exit strategies. Foreign capital, however, exceeds the amount of U.S. capital, both for corporate investors and institutional investors. Foreign companies seeking license and distribution rights in their own markets are a particularly easy source of capital. The imbalance between entrepreneurial resources and capital in the rest of the world represents a major opportunity for you. This is the largest capital source that is often overlooked by entrepreneurs. The way to tap this vast capital market is through investment bankers who specialize in foreign markets, contacts at U.S. companies that have foreign operations, lawyers, accountants and consultants with foreign clients and the U.S. subsidiaries of foreign companies. Summary Willie Sutton is quoted as saying he robbed banks because "that is where the money is." Sometimes, entrepreneurs forget this basic principal of finance. The BIG money is not in venture capital funds. BIG money is in the Fortune 1,000 and institutional investors and their foreign counterparts. Good luck in your capital raising efforts. See you on the money trail. |
