The Myths About Venture Capital
The U.S. venture-capital industry is envied by nations around the world. Yet the industry is fueled by myths and collective imagination. It’s important to separate the myths from current realities, and that’s especially important for entrepreneurs. This article aims to clear up some of the myths about the venture capital industry and its role in the growth of companies. The goal is to help you make a better investment decision.
The first major fundraising year for venture capital occurred in 1978, when the venture capital industry raised $750 million. Before this period, the Employee Retirement Income Security Act (ERISA) prohibited private investments, including many early-stage ventures. In 1978, the US Labor Department relaxed ERISA rules and implemented the “prudent man rule” to allow corporate pension funds to invest in private companies. The influx of funds from corporate pension funds changed the financing landscape, enabling venture capitalists to pursue a variety of investment opportunities. However, early-stage funding was usually provided by angel investors. Today, equity crowdfunding is becoming a popular source of seed funding.
As the market research stage of a start-up business is extremely costly, only a handful of venture capitalists are willing to invest in it. A new company will require a large amount of market research capital in order to identify its potential customers. This may include costs of creating a sample product, recruitment of key management, and additional research. Marketing capital will cover marketing efforts and production capacity. While most venture capitalists are happy to help a startup in this stage, few are willing to put their money into the early stages of a business.
The process of investing in a venture capital firm can be challenging, but it’s not as complicated as it may seem. A Venture Capital firm’s team will carefully screen prospective portfolio investments and provide the pros and cons. Once the investment has been made, the firm will send the due diligence team a proposal and a “round-table” vote. The entire process takes place on the west coast, with a few exceptions. The team may travel to portfolio companies on a regular basis to see how the company is doing and if they need to make changes.
An investor may not be aware of the various positions at a venture capital firm. There are several levels of executives at a Venture Capital firm. Some of these people are known as principals. They are mid-level investment professionals. They are considered to be partner-track positions. They will have experience in a different field. The first-stage financing stage is usually accompanied by an “emerging” stage. The second-stage funding stage is the most specialized.
In the early stages, the Venture Capital industry received its first major fundraising year in 1978. That year, it raised $750 million. However, the US Employee Retirement Income Security Act (ERISA) had prevented many types of investments in privately held companies. The US Labor Department eased the restrictions and the “prudent man” rule was lifted. Now, many corporate pension funds are investing in private companies. They are also increasing in number thanks to equity crowdfunding.