How Venture Capital Works
By Robert Zider
Synopsis
The popular mythology surrounding the U.S. venture-capital industry deriv=
es
from a previous era. Venture capitalists who nurtured the computer indust=
ry
in its infancy were legendary both for their risk taking and for their
hands-on operating experience. But today things are different, and
separating the myths from the realities is crucial to understanding this
important piece of the U.S. economy.
Today=E2=80=99s venture capitalists are more like conservative bankers th=
an the risk
takers of days past. They have carved out a specialized niche in the capi=
tal
markets, filling a void that other institutions cannot serve. They are th=
e
linchpins in an efficient system for meeting the needs of institutional
investors looking for high returns, of entrepreneurs seeking funding, and=
of
investment bankers looking for companies to sell. Venture capitalists mus=
t
earn a consistently superior return on investments in inherently risky
businesses. The myth is that they do so by investing in good ideas and go=
od
plans. In reality, they invest in good industries -- that is, industries
that are more competitively forgiving than the market as a whole. And the=
y
structure their deals in a way that minimizes their risk and maximizes th=
eir
returns. Although many entrepreneurs expect venture capitalists to provi=
de
them with sage guidance as well as capital, that expectation is unrealist=
ic.
Given a typical portfolio of ten companies and a 2,000-hour work year, a
venture capital partner spends on average less than two hours per week on
any given company.
In addition to analyzing the current venture-capital system, the author
offers practical advice to entrepreneurs thinking about venture funding
Tushar J. Mehta
email: [email protected]
voicemail: (425)558-1101