Economics 137A Corporate Finance

Venture Capital

by

John Lang

In the 1980's corporate finance was dominated by leverage buyouts. In the 1990's corporate finance is dominated by venture capital.  Generally venture capital is associated with giving startups the seed money to get started, however many venture capital firms diversify their investments strategies by investing in all stages development.  By diversifying their investments, venture capitalists are able reduce their portfolio risk (the risk associated with owning a portfolio).

 According to a PricewaterhouseCoopers study the investments by stage of development are as follows:

In addition to diversifying the investment portfolio's, venture capitalist also spread out their investments to other industries.  According to PricewaterhouseCoopers the break down of industries that venture capitalist invested in are:

The venture capitalist by investing in different industries is able to minimize the unsystematic risk associated with startups (unsystematic risk is the business or financial risk associated with the operation of the business).

One major advantage that venture capitalist have over traditional means of financing startups is a venture capitalist can assist with the business development, essentially act as a mentor to the startup.  In doing this the venture capitalist is able to monitor and insure that their risk will be minimized.  There is one disadvantage with this as well, it creates a principal agent problem in that the agent, the startup may not dove tail it's business agenda with that of the venture capitalist and therefore the venture capitalist does incur some monitoring costs.

If you would like more information regarding venture capital please refer to the San Jose Mercury News Money Tree report.