Money
Issue No. 12 - August/September 2003
Venture Capital — the Real Story
by David Twiss
Much has been written and spoken about Venture Capital in recent times, some of it accurate and some less so. This article seeks to set the record straight and correct some of the more outrageous misconceptions.
A common misconception is that venture capital is high—risk equity capital involved in the launch and growth of new companies with innovative technologies or businesses models.
That form of investment is more accurately referred to as seed and start—up capital, and is only one small segment of venture capital. In fact, in Australia seed and start—up investments account for only 9% of venture capital investments.
Venture capital is investment made by a financial intermediary in a private company with the long—term aim of realising significant capital gain on exit; exit being most commonly realised by taking the company public, or trade sale.
VCs typically get the money they invest from institutional and corporate investors. In Australia, superannuation funds are by far the largest investors into VC funds. A large superannuation fund might place 2–6% of its assets under management with a range of VCs. Sometimes this is done directly with each VC fund and sometimes it is done through fund—of—fund managers who might distribute many hundreds of millions of dollars across several VC funds.
Why is it that venture capital has been getting so much airtime lately? It turns out that venture capital is associated with accelerated company growth. Studies consistently show that venture—backed companies contribute substantially to national economic growth through both direct investment and positive multiplier effects, such as high levels of research and development.
In the US the 1% of companies that receive VC account for around 15% of US GDP.
In the UK the (slightly less than) 1% of companies that receive VC account for around 13% of all UK employment.
In Australia, companies backed by VC (on average):<...
