Venture capital

Venture capital - also known as venture capital or venture capital - is off-market equity ( "private equity" ), which provides a holding company ( venture capital firm ) to participate in particularly risky applicable activities. The venture capital is introduced in the form of vollhaftendem equity or equity-like financing instruments such as mezzanine debt or convertible into the company, often by specializing in this business model venture financing companies often "Venture capital firms " (abbreviated VCG ) called.

Overview

A risk-capital participation is characterized by the following points:

• The involvement occurs mainly in young, unquoted, technology-oriented companies ( engl. " start-ups ").
• Since such companies for a conventional loan financing usually may not have sufficient collateral, are fully liable equity and hybrid forms of financing in the foreground. Are usual in Germany minority interests in the amount of 20-35 %.
• While financial resources are allocated in principle no time limit; the goal of equity, however, lies not in dividends or interest payments but the gain from the sale of shares ( exit).
• The participation is associated with a very high risk that can lead to the total loss of the invested capital. At the same time very high returns are possible with a success.
• It will not only capital, but also managerial know -how made ​​available to help the typically inexperienced entrepreneurs, or to successfully design the participation. Therefore, in this context of intelligent capital (" smart capital" ) is spoken. The investor can actively engage in entrepreneurial activities ( management support ) and help with its network about the establishment of business or hiring staff.
• In return, the investors receive common information, control and participation rights that go beyond the normal rights of an investment.

Financing stages

Before venture capital firms invest, get entrepreneurs funding often from friends and family members ( "friends & family " ), from funding or of so-called business angels ( seed funding ).

Depending on the stage in the life cycle of the company funded the following characteristics of a risk-capital participation are distinguished:

Seed Stage Capital

In the early stage seed finance the funds as seed money usually for research and development are required to result in a product or service to market. This phase is regularly characterized by a very high risk, because there is not a finished product and the possible commercial success at this stage is very difficult to estimate. The investor will therefore take one, compared to the later stages, higher participation rate, ie the purchase in the company comes at a low price at high risk.

Early Stage Capital

In the Early Stage Financing phase of the company's product development is largely complete and it is capital for tests (eg clinical trials in the pharmaceutical or biotechnology industry ), marketing activities and the development of production capacity needed to ensure a successful launch. The risk for the investor is here already lower than the "seed finance" because the functionality is already demonstrable. The commercial success is, however, difficult to estimate in this phase.

Later Stage Capital

In the Later Stage Financing phase, which as expansion and Growth Finance ie growth phase is called, the young company is ready for the market with its new product with revenues from the sale of products. The commercial success is visible and it is required for the expansion of production and sales capacities further capital. The risk for the investor is much lower than in the previous phases, so that he buys relatively expensive at this stage.

Exit

, - (Also disinvestment English " exit" ) aimed After two to seven years ( depending on the strategy of risk capital even later) the discharge is ie the investor withdraws from the company. He sold his shares in the stock market to other companies, venture capital companies or offers them to the company owners to buy back. Specifically, the following exit strategies are common:

• Initial Public Offering ( IPO): Normally, here is the listing of the Company and the Shares are sold on the market.
• Trade Sale: The young company is taken over by another company, usually from the same industry.
• Secondary Sale: The venture capitalists sold its stake to a third party
• Company buy-back: the entrepreneur buys back the shares of the venture capitalist.
• Liquidation: This reflects the worst case resists: The company must be liquidated if it can not maintain itself in the market.

The targeted, average yields are to be achieved with 15 to 25 % per annum higher than average - that, however, the investor bears the increased risks of this young company with. In a scientific study of European venture capital fund could be established for the investment period 1980-2003 an average return ( IRR) of 10%. If only the funds that were established in 1989 and later taken into account, yields of approximately 20 % can be achieved in fact. However, this year (eg, the New Market ), especially during the dot-com bubble marked by periods of overvaluation of equity securities and euphoria in the growth markets. With an investment in a venture capital fund, the risk is reduced with an average holding period of 7 years.

Typical incentive problems

From an economic point of view, venture capital is a form of financing that is fraught especially true with incentive problems between venture capital firm and entrepreneurs, as the venture capital firm can not observe, if the entrepreneur the provided money is actually used to increase the company's value in terms of the investors. To mitigate these incentive problems, venture capital companies have established various typical contract structures and control rights:

• The capital is made in several installments, whereby only continue to be financed, provided that certain milestones have been reached (" staging " )
• Convertible bonds are preferably used to give the venture capital companies the opportunity to participate in good company results and, if necessary, to obtain further still in bad course of an ongoing interest and priority in case of bankruptcy.
• Venture capital companies have extensive rights to intervene and can the entrepreneur in poor performance even dismissed.

History

In the Federal Republic of Germany, the first venture capital firm was established in 1975 and 1988, there were already 40 companies. 1987 were collected on venture capital and investing which around 540 million DM, especially in the fields of high technology, electronics and microelectronics DM 1.2 billion.

In December 1987, 12 venture capital firms joined in West Berlin together with the German Venture Capital Association ( DVCA ), which contained around DM 600 million and DM 120 million it invested. Main donors were the banks and industrial companies. In December 1989, the DVCA merged with the Federation, also founded in West Berlin on 29 January 1988 German Capital Association ( BVK).