Venture Capital Is Key To Making Innovative Ideas Succeed

Venture Capital Is Key To Making Innovative Ideas Succeed

Clean technology is fastest growing sector attracting venture capital

Washington — Innovation stems not just from a great new idea and
hard work. Capital investment — money — also is needed, and banks
usually are not willing to finance high risk ventures. That’s where the
venture capitalist comes in.

"Venture capital is largely
responsible for the commercialization of many modern innovations that
would have otherwise not made it out of the labs of scientists and the
minds of entrepreneurs," says Emily Mendell, the National Venture
Capital Association’s (NCVA) vice president.

Mendell said
venture capitalists "are looking for disruptive technologies that shift
the status quo, as that is where the most money is to be made."  She
added that many venture capitalists are former scientists and
entrepreneurs who can identify the best opportunities.

Microsoft,
Apple, Intel, Genentech, Google, eBay, Cisco, AOL and Amgen are among
the many prominent American companies that got their start with venture
capital. In 2006, venture capital-funded companies were directly
responsible for 10.4 million jobs and $2.3 trillion in sales, which
corresponds to 9.1 percent of total U.S. private sector employment and
17.6 percent of U.S. gross domestic product, according to the NCVA.

Looking
for high growth, venture capitalists long have favored high technology
companies, especially those that make software, but also those involved
in the Internet, semiconductors and wireless technologies. Over the
last 10 years, companies from the life sciences sector, including
biotechnology and medical devices, have shown strong growth, Mendell
said.

"Within the last year, clean technology has emerged as
the fastest growing venture capital investment sector.  Clean
technology comprises companies innovating in such areas as alternative
and renewable energies, pollution control and conservation, recycling
and more advanced and longer lasting power supplies," which makes it
"certain that the venture capital industry is well positioned to help
our planet in these very important ways," she said in an interview.

WHAT MAKES A VENTURE HIGH RISK?

"Venture
capitalists typically look for early stage companies which often do not
have a business plan or an infrastructure.  Sometimes the ‘company’ is
just an idea and an entrepreneur; sometimes it is a project that has
been spun out of a university or government laboratory," Mendell said.

Unlike
other kinds of investors, a venture capitalist not only invests money
but also works alongside management, providing advice and expertise
that will help the new company grow and succeed.  "Venture capitalists
almost always take a seat on the company’s board of directors and work
to make sure that the optimal strategic path is taken. Venture capital
investment is almost always earmarked for research and development,
marketing, hiring and sales development — that is to say, company
growth."

Far from making a profit, initially a new company
spends large amounts of money to establish the business and grow. "A
typical venture capital investment is 5-10 years, often longer and
rarely less," said Mendell. In the meantime — and usually until the
company can "go public" through a stock offering or be acquired by a
bigger company — the venture capitalist’s equity investment has no
ready cash value.

Of the more than 11,000 firms funded by
venture capitalists in the 1990s, some 14 percent have gone public and
33 percent have been acquired by other companies — the two outcomes
that can result in the venture capitalist making money, according to
the NCVA. 

FROM WHERE DOES VENTURE CAPITAL COME?

Venture
capital comes mostly from large institutional investors, such as public
and private pension funds, endowments, foundations and, to a lesser
extent, "high net worth individuals" — that is, people with lots of
money, said Mendell.  "These investors place their money in
partnerships with a venture capital firm comprised of ‘general
partners’ who are responsible for investing those funds in high risk
companies," she said. The investors are looking for a potentially
higher rate of return than they get from public markets.

While
most U.S. venture capital is invested within the United States,
American venture capitalists increasingly have been interested in
overseas enterprises, particularly in China, India, Israel, Eastern
Europe, Southeast Asia and Canada. "Venture capitalists follow the
entrepreneur — so they will go wherever the great ideas are housed,"
Mendell said.

She pointed out that venture capital investment
is vital to innovation, efficiency and improved technology and
products.  "No other asset class will invest in risky startup
companies," she said. "And venture capitalists do so in a unique and
valuable way — partnering with the entrepreneur to bring the best
ideas to life."

(USINFO is produced by the Bureau of International Information
Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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