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A Historical Overview of Venture Capital in U.S. and its Past Performance Nousha Tajer Moshaei Azadeh Daniali Behrooz Ataee
What is Venture Capital ? Venture capital is defined as “money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable. Also known as risk capital.” Venture money is used to build a business in the expectation that value of the resulting business will be much grater than the initial investment. An important source of equity capital for start-up companies.
Why use venture capital Provides a solid, flexible, capital base to meet future growth and development of the start-up company. Returns to the venture capitalist depend on the success and growth of the business, hence the entrepreneurs can relay on the vast business network of the VCs. If the business runs into difficulty the VCs will work hard to ensure that the company is turned around. VC funding is committed until exit (M&A, IPO, LBO, MBO – usually 3-5 years).
7 levels of research and planning for every startup • • • • • • •
Feasibility studies to determine whether a given venture should be started. The preparation of the business plan for the seed round, and subsequent rounds of investment and operation. Determining optimum debt and equity ratios, and developing a financial plan. The development of an operational plan to get the project up and running. Development of prospective funding sources for both debt and equity. Preparation of project evaluation for both pre- and postinvestment analysis. Planning investor and owner exit strategies through M&A, IPO’s, LBO, MBO, etc.
History of Venture Capital In the fifteenth century, Christopher Columbus sought to travel westwards instead of eastwards from Europe and so planned to reach India. His farfetched idea did not find favor with the king of Portugal, who refused to finance him. Finally, Queen Isabella of Spain, decided to fund him and the voyages of Christopher Columbus are now empanelled in history. In the 1920’s and 30’s, the wealthy families and individuals investors provided the start up money for companies that would later become famous. Eastern Airlines and Xerox are the most famous ventures they financed. Among the early VC funds set up was the one by the Rockfeller family which started a special fund called VENROCK in 1950, to finance new technology companies. American Research and Development Corporation, formed in 1946. the founder of ARD was General Georges Doroit, a French-born military man who is considered “the father of venture capital”. In the 1950s, he taught at the Harvard Business School. ARD was the first firm, as opposed the private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD’s biggest success was investment in digital equipment corporation (DEC) in 1957.
History of Venture Capital in US 1946
Creation of American Research and Development (ARD) just after the second world war.
1958
A law was passed by congress which allowed small businesses to borrow from the federal government at below-market interest rates.
1960’s
A few wealthy individuals in California called “Angles” invested money in private companies.
1970’s
VC activity was depressed by a weak stock market, high taxation of capital gains and a global economic recession.
1979
Capital gains taxes were reduced from 49 percent to 28 percent, hence it encouraged investors making profits from investing in Venture Capital firms.
1981
The capital gains tax was further reduced from 28 percent to 20 percent.
1983
There were over 100 initial public offerings for the first time in U.S. some of 1983’s funding went to newly funded companies that are today’s largest and most prominent firms*.
Venture capital stages Early Stage: Seed Capital: primary for product development and market research. (seed investing) Start-up capital: company has complete business plan, initial marketing begins.
Expansion Stage: Company is ready for business, but no commercial sales yet.
Later Stage: Invest in a company throughout the company’s life cycle: providing financing to help the company grow to a critical mass to attract public financing through stock offering.
%Distribution of Investment
U.S. Venture Capital Investment by Stage of Company Development
70% 60% 50% 40% 30% 20% 10% 0% 1997
1999
Early Stage
2002
Expansion
2004
Later Stage
The Economic Impact of Three Decades of U.S. Venture Capital Funding Cumulative VC Invested, 1970-2000 ($ billions)
Sales of VCBacked Firms, 2000 ($ billions)
Employment by VC-Backed Firms, 2000 (# of workers)
5-Yr Compound Annual VC Growth Rate, 1996-2001
108.8
207.6
1,415,748
24.3%
26
48.9
381,433
35.7%
Texas
17.2
158.2
676,158
29.8%
New York
16.1
65.9
369,314
33.1%
Colorado
9.9
14.6
62,971
32.1%
New Jersey
9.1
38.2
260,114
23.3%
Washington
7.4
75.4
263,585
20.9%
Virginia
7.2
35.7
207,777
14.5%
Pennsylvania
7.2
58
424,652
na
Georgia
6.4
62.8
338,188
34.5%
$ 273.3
$ 1,300
7,600,000
-
State California Massachusetts
U.S. Total
Year 2000 Venture Capital and Stock Market Capitalization, R&D, GDP GDP ($ Billions)
VC Investment ($ Billions)
Stock Market Capitalization ($ Billions)
R&D Spending ($ Billions)
VC as % of GDP
Market Capitalization as % of GDP
R&D Spending as % of GDP
United States
$9,152
$122.1
$16,635
$243.5
1.33%
181.8%
2.66%
United Kingdom
1,442
12.2
2,933
25.8
0.85
203.5
1.79
Germany
2,112
4.4
1,432
50.3
0.21
67.8
2.38
Canada
635
4.3
801
10.0
0.68
126.2
1.58
Israel
101
3.2
64
2.8
3.17
63.6
2.78
Italy
1,171
2.8
728
12.2
0.24
62.2
1.04
Hong Kong
159
2.2
609
0.35
1.38
383.3
0.22
Sweden
239
2.1
373
8.8
0.88
156.4
3.69
4,347
2.0
4,547
141.7
0.05
104.6
3.26
Singapore
85
1.2
198
1.6
1.41
233.7
1.85
India
447
0.5
148
2.3
0.11
33.1
0.51
Country
Japan
Venture Capital fund-raising worldwide
250 200 150 100 50 0
1989
1995
2000
$billion
2002
Venture Capital Fund-raising
$ Billions
250 200 150 100 50 0 1996
1998 Asia Pacific
2000 North America
2002 World
World Investment and Fund raising
North America Investment and fund raising
Cumulative Investment
Annual Venture Capital Investment in the U.S. 120 100 80 60 40 20 0 1990
1995
1998
2000
in billion $
2002
2003
Average Investment Per Company 12 10 8 6 4 2 0
1995
2000
2002
in million $
2004
Historical Trend Data-By Quarter 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0
5
10 Qtr 1
15 Qtr 2
20 Qtr 3
25 Qtr 4
30 Billions $
U.S. Venture Capital Investment by Industry: 1998 - 2003 Industry
1998
2000
2002
2003
Computer Software & Services
21.6%
14.0%
17%
19.4%
Networking & Equipment
13.4%
46.4%
14.4%
7.9%
Biotechnology
5.2%
2.7%
12.1%
20.7%
Telecommunications
17.6%
17.1%
11.6%
11.7%
Consumer related
6.9%
1.6%
7.2%
3.3%
Semiconductor
4.2%
5.9%
6.9%
4.1%
Medical Devices & Equipment
12.8%
3.5%
6.6%
8.9%
-
-
5.6%
5.0%
Computer Hardware
3.1%
2.2%
3.8%
4.0%
Industrial / Energy
2.4%
1.4%
4.5%
3.8%
Other products
12.7%
5.1%
0.7%
11.2%
$18,705
$102,976
$21,400
$18,200
Media & Entertainment
Total ( $ Million)
Venture Capital Funding in Information Technology
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1998
2000 % of total
2002
High-technology investment trends
Top 20 countries based on high-tech investment
Venture Capital Fund-raising sources 1979-2000 Sources of Funds
1979
1983
1987
1991
1995
1999
2001
Private Pension Funds
31%
26%
27%
25%
38%
9%
42%
Public Pension Funds
a
5%
12%
17%
a
9%
a
Corporations
17%
12%
10%
4%
2%
16%
4%
Individuals
23%
21%
12%
12%
17%
19%
8%
Endowments
10%
8%
10%
24%
22%
15%
23%
Insurance Companies & Banks
4%
12%
15%
6%
18%
11%
23%
Foreign Investors & others
15%
16%
14%
12%
3%
22%
na
Independent Venture Partnerships as a share of total Venture Capital pool
na
68%
78%
80%
na
na
na
Law Origin vs. VC Performance
Country
Legal Origin Nation’s Commercial Code
Venture Capital Investment
Stock Market Capitalization
R&D Spending
As % of GDP
Ranking
As % of GDP
Ranking
As % of GDP
Ranking
Israel
English common law
3.17%
1
63.6%
16
2.78%
4
Singapore
English common law
1.41
2
233.7
3
1.85
11
Hong Kong
English common law
1.38
3
383.3
1
0.22
20
United States
English common law
1.33
4
181.8
5
2.66
5
Sweden
Scandinavian law / Civil
0.88
5
156.4
7
3.69
1
France
French civil law
0.34
10
103.0
11
2.21
8
Switzerland
German law / Civil
0.23
14
268.0
2
3.12
3
Japan
German law / Civil
0.05
20
104.6
10
3.26
2
Average, English common law countries
1.14%
-
166.4%
-
1.60%
-
Average, all civil law countries
0.31%
-
105.0%
-
2.10%
-
Top 20 countries – based on investment
Top 20 countries – based on growth 1998-2002
Top 20 VC countries (Total VC Investment)
Annual Rate of Return to Investors in U.S VC Funds, (1974-1999)
160 140 120 100 80 60 40 20 0 -20
1974
1976
1978
1980
1982
1984
1986
1988
1990
% Return
1992
1994
1996
1998
1999
The pricing of Venture Capital Investment
FV=A(1+r)n FV= Future Value A= Initial Investment Amount r= required return n= investment horizon, (years)
% Equity = FV/ Exp MV %Equity= % of equity that Venture Capitalist will receive FV= Future Value Exp MV=Expected Market Valuation
Asia Pacific Region Venture Capital Investment
12 10 8 6 4 2 0
1995
2000 $billion
2002
Asia Pacific Investment and Fund raising trends
Asia Pacific
Reasons for low VC investment in Asia
Lack of the basic legal and accounting infrastructure
Lack of an efficient IPO market
Characteristics of a successful VC industry
A tradition of entrepreneurship & risk-taking. A well- established legal system, with good investor protection. A supportive, but non-interventionist, government. A stable regulatory system, that doesn’t penalize start-ups. A free (and mobile) labor market, rich in engineering talent. A non-punitive taxation regime that allows use of stock options. A strong R&D culture especially in Universities or national labs. A vibrant IPO market, though this could be a result, rather than a precursor of a strong VC industry. A risk-tolerant pension system.
Why Use Venture Capital in Iran Iranians contribute more than $6 billion per year to high technology industries in United States ~ 25% of Iran’s Oil Revenue In 2003, all 15 Sharif University PhD students who participated in Engineering School Doctoral Exam at Stanford University passed the exam. No other university in the world could claim such achievement. No.1 student in the exam was from Sharif University, Abtin Keshavarzian. 75% of population below 30 years of age (~ 55,000,000 people) 15.7% official unemployment rate (~25% if taxi agency drivers are included) 1.6 million official number of collage students.
This mental power of expatriates should be absorbed back into Iran’s industry and academia.
What we can do for developing a VC industry in Iran? 1.
IP protection strategy
2.
Transfer of investment practices know how
3.
Establishment of an investment bank support unit
4.
Creation of financially streamlined corporate structure
5.
Creation of synergic new business models
6.
Creation of win-win business development practices
Data Sources • “Synergetic Combination of Idea, Capital, and Management”, by Behrooz Ataee, in the First IDRO Conference of Human Resources Development, October 2526, 2003 • The Pricewaterhouse Coopers/Venture Economics / National Venture Capital Association MoneyTree Survey www.pwcmoneytree.com • “Toward A Global Model of Venture Capital” by William L.Megginson, University of Oklahoma
What is Venture Capital ? Venture capital is defined as “money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable. Also known as risk capital.” Venture money is used to build a business in the expectation that value of the resulting business will be much grater than the initial investment. An important source of equity capital for start-up companies.
Why use venture capital Provides a solid, flexible, capital base to meet future growth and development of the start-up company. Returns to the venture capitalist depend on the success and growth of the business, hence the entrepreneurs can relay on the vast business network of the VCs. If the business runs into difficulty the VCs will work hard to ensure that the company is turned around. VC funding is committed until exit (M&A, IPO, LBO, MBO – usually 3-5 years).
7 levels of research and planning for every startup • • • • • • •
Feasibility studies to determine whether a given venture should be started. The preparation of the business plan for the seed round, and subsequent rounds of investment and operation. Determining optimum debt and equity ratios, and developing a financial plan. The development of an operational plan to get the project up and running. Development of prospective funding sources for both debt and equity. Preparation of project evaluation for both pre- and postinvestment analysis. Planning investor and owner exit strategies through M&A, IPO’s, LBO, MBO, etc.
History of Venture Capital In the fifteenth century, Christopher Columbus sought to travel westwards instead of eastwards from Europe and so planned to reach India. His farfetched idea did not find favor with the king of Portugal, who refused to finance him. Finally, Queen Isabella of Spain, decided to fund him and the voyages of Christopher Columbus are now empanelled in history. In the 1920’s and 30’s, the wealthy families and individuals investors provided the start up money for companies that would later become famous. Eastern Airlines and Xerox are the most famous ventures they financed. Among the early VC funds set up was the one by the Rockfeller family which started a special fund called VENROCK in 1950, to finance new technology companies. American Research and Development Corporation, formed in 1946. the founder of ARD was General Georges Doroit, a French-born military man who is considered “the father of venture capital”. In the 1950s, he taught at the Harvard Business School. ARD was the first firm, as opposed the private individuals, at MIT to finance the commercial promotion of advanced technology developed in the US Universities. ARD’s biggest success was investment in digital equipment corporation (DEC) in 1957.
History of Venture Capital in US 1946
Creation of American Research and Development (ARD) just after the second world war.
1958
A law was passed by congress which allowed small businesses to borrow from the federal government at below-market interest rates.
1960’s
A few wealthy individuals in California called “Angles” invested money in private companies.
1970’s
VC activity was depressed by a weak stock market, high taxation of capital gains and a global economic recession.
1979
Capital gains taxes were reduced from 49 percent to 28 percent, hence it encouraged investors making profits from investing in Venture Capital firms.
1981
The capital gains tax was further reduced from 28 percent to 20 percent.
1983
There were over 100 initial public offerings for the first time in U.S. some of 1983’s funding went to newly funded companies that are today’s largest and most prominent firms*.
Venture capital stages Early Stage: Seed Capital: primary for product development and market research. (seed investing) Start-up capital: company has complete business plan, initial marketing begins.
Expansion Stage: Company is ready for business, but no commercial sales yet.
Later Stage: Invest in a company throughout the company’s life cycle: providing financing to help the company grow to a critical mass to attract public financing through stock offering.
%Distribution of Investment
U.S. Venture Capital Investment by Stage of Company Development
70% 60% 50% 40% 30% 20% 10% 0% 1997
1999
Early Stage
2002
Expansion
2004
Later Stage
The Economic Impact of Three Decades of U.S. Venture Capital Funding Cumulative VC Invested, 1970-2000 ($ billions)
Sales of VCBacked Firms, 2000 ($ billions)
Employment by VC-Backed Firms, 2000 (# of workers)
5-Yr Compound Annual VC Growth Rate, 1996-2001
108.8
207.6
1,415,748
24.3%
26
48.9
381,433
35.7%
Texas
17.2
158.2
676,158
29.8%
New York
16.1
65.9
369,314
33.1%
Colorado
9.9
14.6
62,971
32.1%
New Jersey
9.1
38.2
260,114
23.3%
Washington
7.4
75.4
263,585
20.9%
Virginia
7.2
35.7
207,777
14.5%
Pennsylvania
7.2
58
424,652
na
Georgia
6.4
62.8
338,188
34.5%
$ 273.3
$ 1,300
7,600,000
-
State California Massachusetts
U.S. Total
Year 2000 Venture Capital and Stock Market Capitalization, R&D, GDP GDP ($ Billions)
VC Investment ($ Billions)
Stock Market Capitalization ($ Billions)
R&D Spending ($ Billions)
VC as % of GDP
Market Capitalization as % of GDP
R&D Spending as % of GDP
United States
$9,152
$122.1
$16,635
$243.5
1.33%
181.8%
2.66%
United Kingdom
1,442
12.2
2,933
25.8
0.85
203.5
1.79
Germany
2,112
4.4
1,432
50.3
0.21
67.8
2.38
Canada
635
4.3
801
10.0
0.68
126.2
1.58
Israel
101
3.2
64
2.8
3.17
63.6
2.78
Italy
1,171
2.8
728
12.2
0.24
62.2
1.04
Hong Kong
159
2.2
609
0.35
1.38
383.3
0.22
Sweden
239
2.1
373
8.8
0.88
156.4
3.69
4,347
2.0
4,547
141.7
0.05
104.6
3.26
Singapore
85
1.2
198
1.6
1.41
233.7
1.85
India
447
0.5
148
2.3
0.11
33.1
0.51
Country
Japan
Venture Capital fund-raising worldwide
250 200 150 100 50 0
1989
1995
2000
$billion
2002
Venture Capital Fund-raising
$ Billions
250 200 150 100 50 0 1996
1998 Asia Pacific
2000 North America
2002 World
World Investment and Fund raising
North America Investment and fund raising
Cumulative Investment
Annual Venture Capital Investment in the U.S. 120 100 80 60 40 20 0 1990
1995
1998
2000
in billion $
2002
2003
Average Investment Per Company 12 10 8 6 4 2 0
1995
2000
2002
in million $
2004
Historical Trend Data-By Quarter 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0
5
10 Qtr 1
15 Qtr 2
20 Qtr 3
25 Qtr 4
30 Billions $
U.S. Venture Capital Investment by Industry: 1998 - 2003 Industry
1998
2000
2002
2003
Computer Software & Services
21.6%
14.0%
17%
19.4%
Networking & Equipment
13.4%
46.4%
14.4%
7.9%
Biotechnology
5.2%
2.7%
12.1%
20.7%
Telecommunications
17.6%
17.1%
11.6%
11.7%
Consumer related
6.9%
1.6%
7.2%
3.3%
Semiconductor
4.2%
5.9%
6.9%
4.1%
Medical Devices & Equipment
12.8%
3.5%
6.6%
8.9%
-
-
5.6%
5.0%
Computer Hardware
3.1%
2.2%
3.8%
4.0%
Industrial / Energy
2.4%
1.4%
4.5%
3.8%
Other products
12.7%
5.1%
0.7%
11.2%
$18,705
$102,976
$21,400
$18,200
Media & Entertainment
Total ( $ Million)
Venture Capital Funding in Information Technology
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1998
2000 % of total
2002
High-technology investment trends
Top 20 countries based on high-tech investment
Venture Capital Fund-raising sources 1979-2000 Sources of Funds
1979
1983
1987
1991
1995
1999
2001
Private Pension Funds
31%
26%
27%
25%
38%
9%
42%
Public Pension Funds
a
5%
12%
17%
a
9%
a
Corporations
17%
12%
10%
4%
2%
16%
4%
Individuals
23%
21%
12%
12%
17%
19%
8%
Endowments
10%
8%
10%
24%
22%
15%
23%
Insurance Companies & Banks
4%
12%
15%
6%
18%
11%
23%
Foreign Investors & others
15%
16%
14%
12%
3%
22%
na
Independent Venture Partnerships as a share of total Venture Capital pool
na
68%
78%
80%
na
na
na
Law Origin vs. VC Performance
Country
Legal Origin Nation’s Commercial Code
Venture Capital Investment
Stock Market Capitalization
R&D Spending
As % of GDP
Ranking
As % of GDP
Ranking
As % of GDP
Ranking
Israel
English common law
3.17%
1
63.6%
16
2.78%
4
Singapore
English common law
1.41
2
233.7
3
1.85
11
Hong Kong
English common law
1.38
3
383.3
1
0.22
20
United States
English common law
1.33
4
181.8
5
2.66
5
Sweden
Scandinavian law / Civil
0.88
5
156.4
7
3.69
1
France
French civil law
0.34
10
103.0
11
2.21
8
Switzerland
German law / Civil
0.23
14
268.0
2
3.12
3
Japan
German law / Civil
0.05
20
104.6
10
3.26
2
Average, English common law countries
1.14%
-
166.4%
-
1.60%
-
Average, all civil law countries
0.31%
-
105.0%
-
2.10%
-
Top 20 countries – based on investment
Top 20 countries – based on growth 1998-2002
Top 20 VC countries (Total VC Investment)
Annual Rate of Return to Investors in U.S VC Funds, (1974-1999)
160 140 120 100 80 60 40 20 0 -20
1974
1976
1978
1980
1982
1984
1986
1988
1990
% Return
1992
1994
1996
1998
1999
The pricing of Venture Capital Investment
FV=A(1+r)n FV= Future Value A= Initial Investment Amount r= required return n= investment horizon, (years)
% Equity = FV/ Exp MV %Equity= % of equity that Venture Capitalist will receive FV= Future Value Exp MV=Expected Market Valuation
Asia Pacific Region Venture Capital Investment
12 10 8 6 4 2 0
1995
2000 $billion
2002
Asia Pacific Investment and Fund raising trends
Asia Pacific
Reasons for low VC investment in Asia
Lack of the basic legal and accounting infrastructure
Lack of an efficient IPO market
Characteristics of a successful VC industry
A tradition of entrepreneurship & risk-taking. A well- established legal system, with good investor protection. A supportive, but non-interventionist, government. A stable regulatory system, that doesn’t penalize start-ups. A free (and mobile) labor market, rich in engineering talent. A non-punitive taxation regime that allows use of stock options. A strong R&D culture especially in Universities or national labs. A vibrant IPO market, though this could be a result, rather than a precursor of a strong VC industry. A risk-tolerant pension system.
Why Use Venture Capital in Iran Iranians contribute more than $6 billion per year to high technology industries in United States ~ 25% of Iran’s Oil Revenue In 2003, all 15 Sharif University PhD students who participated in Engineering School Doctoral Exam at Stanford University passed the exam. No other university in the world could claim such achievement. No.1 student in the exam was from Sharif University, Abtin Keshavarzian. 75% of population below 30 years of age (~ 55,000,000 people) 15.7% official unemployment rate (~25% if taxi agency drivers are included) 1.6 million official number of collage students.
This mental power of expatriates should be absorbed back into Iran’s industry and academia.
What we can do for developing a VC industry in Iran? 1.
IP protection strategy
2.
Transfer of investment practices know how
3.
Establishment of an investment bank support unit
4.
Creation of financially streamlined corporate structure
5.
Creation of synergic new business models
6.
Creation of win-win business development practices
Data Sources • “Synergetic Combination of Idea, Capital, and Management”, by Behrooz Ataee, in the First IDRO Conference of Human Resources Development, October 2526, 2003 • The Pricewaterhouse Coopers/Venture Economics / National Venture Capital Association MoneyTree Survey www.pwcmoneytree.com • “Toward A Global Model of Venture Capital” by William L.Megginson, University of Oklahoma
