Venture capital or venture capital (also venture capital from English venture capital ) is over-the-counter equity capital (English private equity ), which an investment company provides for participation in companies that are considered to be particularly risky. The venture capital is in the form of vollhaftendem equity or quasi-equity financing instruments such as mezzanine debt or convertible into the company introduced, often by a specialist in this business model venture capital company (including venture finance company or venture capital company - abbreviated VCG - called).
A venture capital investment is characterized by the following points:
- The investment flows mainly into young, unlisted, mostly technology-oriented companies ( company foundations , English start-ups ).
- Since such companies are usually unable to raise sufficient loan collateral for conventional external financing , fully liable equity and hybrid forms of financing are in the foreground. In Germany, minority holdings of 20 to 35% are common.
- It is true that the financial resources are in principle made available for an unlimited period of time; The aim of the equity stake is not dividend or interest payments , but rather the profit from the sale of the stake (exit).
- Participation is associated with a very high risk , which can lead to the total loss of the capital invested. At the same time, however, very high returns are possible if successful.
- Not only capital but also business know-how is made available in order to help the usually inexperienced company founders or to make the investment successful. Therefore, in this context of intelligent capital (English capital smart spoken). The investor can actively intervene in business activities (management support) and help with his network, for example, in establishing business relationships or hiring staff.
- In return, the investor often receives information, control and participation rights that go beyond the usual rights from a participation.
Even before venture capital companies invest, entrepreneurs often receive funding from friends and relatives (English friends & family ), from support programs or so-called business angels ( seed money ).
The type and scope of venture capital participation is differentiated according to the phases in the life cycle of the financed company. Such phases are shown below; however, there is no uniform definition of these phases and other types of classification are also in use.
The early stage is subdivided again into the pre-founding phase (English seed stage ) and the founding phase (English start-up stage ).
In the pre-founding phase, there are initially ideas or unfinished prototypes of the product or service. In this phase, preparations for the foundation are in progress and a business plan is drawn up. The venture capital made available in this phase enables activities such as research and development and construction of a prototype with the aim of making the product or service ready for the market .
This phase is regularly characterized by a very high risk, as there is no finished product and the possible commercial success at this stage is very difficult to estimate. The investor will accordingly claim a higher participation quota compared to the later phases, i.e. H. buying into the company is done at a low price with high risk.
In the start-up phase, the steps from company foundation to market launch as well as from research and development to production and sales take place. Areas of activity in this phase are production planning and preparation, weighing up your own and external production, building up the sales network, marketing activities and initial customer acquisition.
The risk for the investor is already lower here than in the pre-foundation phase, since the functionality can already be demonstrated. Nevertheless, there is a great risk of loss, since the commercial success is difficult to estimate even in this phase.
The growth phase or expansion phase (English growth stage ) follows on from the foundation phase . It can be further subdivided into the actual growth phase (also called the “first growth phase”) and the bridging phase.
First growth phase
In the first growth phase, the young company is ready for the market with the developed product and generates revenue from the sale of products. To ensure economic success, rapid market penetration is indicated and further capital is required for the expansion of production and sales capacities. The risk for the investor in this phase is far lower than in the previous phases, so that he buys relatively expensive.
In the bridging phase, the decision is made for a far-reaching expansion - characteristics of this phase can be diversification of the product range, expansion of the sales system and expansion abroad. A possible impetus for this "increase in speed" can be the entry of competitors into the market niche.
The capital required for the expansive plans is often sought by going public . For this, the company needs bridge financing until the expected proceeds from the IPO arrive.
In the late phase or final phase (English later stage ) to the founding team created for the company such diverse needs as further diversification, future expansion, but also rehabilitation, restructuring or replacement or supplement. The forms of financing in this phase are correspondingly different. Examples are management buyouts, the development of subsidies or the use of the proceeds from the IPO.
After two to seven years (depending on the strategy of the risk capital also later) the exit (also disinvestment , English exit ) is sought; that is, the investor withdraws from the company . He sells his shares on the stock exchange, to other companies, to venture capital companies or offers them to the company owner for repurchase. Specifically, the following exit strategies are common:
- IPO ( initial public offering , abbreviated IPO): Usually this is where the company is listed and the shares are sold on the market.
- Trade sale : The start-up is taken over by another company, usually from the same industry.
- Secondary sale : The venture capitalist sells 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 scenario: the company has to be liquidated if it cannot hold its own in the market.
The targeted, average returns that can be achieved are at 15 to 25% annually, above average - but the investor also bears the increased risks of the young company. In a scientific study of European venture capital funds, an average return (IRR) of 10% for the investment period 1980 to 2003 could be determined. If only the funds that were founded in 1989 and later are taken into account, returns of around 20% result - however, these figures are shaped by the euphoric phase on the growth exchanges such as the German Neuer Markt (see dotcom bubble ). When investing in a venture capital fund, the risk is significantly reduced with an average holding period of 7 years.
Typical incentive problems
From an economic point of view, venture capital represents a form of financing that is particularly fraught with incentive problems between venture capital company and entrepreneur, since the venture capital company cannot precisely observe whether the entrepreneur actually uses the money made available to increase the company value in the interests of investors. In order to alleviate these incentive problems, venture capital companies have established various typical contractual structures and control rights:
- The capital is made available in several tranches, with continued financing only if certain milestones have been reached ( "staging" )
- Convertible bonds are preferred to give venture capital companies the opportunity to participate in good corporate results and still receive ongoing interest and, if necessary, priority in the event of bankruptcy in the event of poor performance.
- Venture capital companies have extensive rights of intervention and can even fire the entrepreneur if they perform poorly.
The first venture capital company was founded in the Federal Republic of Germany in 1975 and by 1988 there were already 40 companies. In 1987, DM 1.2 billion in venture capital was accumulated, of which around DM 540 million were invested primarily in the areas of high technology, electronics and microelectronics.
In December 1987, 12 venture capital companies in West Berlin merged to form the German Venture Capital Association (DVCA), which had around 600 million DM and invested 120 million DM. The main donors were banks and industrial companies. In December 1989 the DVCA merged with the Bundesverband Deutscher Kapitalbeteiligungsgesellschaft (BVK) , which was also founded in West Berlin on January 29, 1988 .
- Seed capital
- Social risk capital
- Media for Equity
- Small Investor Protection Act
- Corporate venture capital
- See Wolfgang Weitnauer: Handbook Venture Capital - From Innovation to IPO. 2nd, revised edition. Munich 2001, p. 271. as well as Knud Hinkel: Success factors of early stage financing by venture capital companies. Wiesbaden 2001, pp. 191-192.
- For this statement and a different classification see: Federal Ministry for Economic Affairs and Energy (Ed.): Gründerzeiten 28. Start-ups: Financing and venture capital . Druck- und Verlagshaus Zarbock GmbH & Co. KG, Frankfurt August 2018 ( existenzgruender.de [PDF; 2,3 MB ; accessed on November 22, 2018]).
- investment phases. In: German Startups. Retrieved November 22, 2018 .
- Private Equity: Venture Capital for founders and start-ups. In: fuer-gruender.de. Retrieved November 22, 2018 .
- G. Gebhardt, KM Schmidt: The market for venture capital: incentive problems, governance structures and state interventions. In: Perspectives of Economic Policy. 3 (3), 2002, pp. 235-255.
- William D. Bygrave (Ed.): The Financial Times Handbook Risk Capital. Financial Times Prentice Hall, Munich / Amsterdam a. a. 2000, ISBN 3-8272-7012-X .
- Michael Dowling (ed.): Start-up management: From a successful start-up to permanent growth. Springer, Berlin a. a. 2002, ISBN 3-540-42182-3 .
- Paul Gompers, Josh Lerner: The venture capital cycle. Cambridge, Mass., MIT Press 2004, ISBN 0-262-07255-6 .
- Christoph Kaserer, Christian Diller: European Private Equity Funds - A Cash Flow Based Performance Analysis. Research Paper of the European Private Equity and Venture Capital Association (EVCA) and CEFS Working Paper 2004 - No 1.
- Tobias Kollmann, Andreas Kuckertz: E-Venture-Capital: Corporate Finance in the Net Economy: Fundamentals and Case Studies. Gabler, Wiesbaden 2003, ISBN 3-409-12410-1 .
- Klaus Nathusius : Fundamentals of start-up financing: instruments, processes, examples . Gabler, Wiesbaden 2001, ISBN 3-409-11869-1 .
- Jens Ortgiese: Value Added by Venture Capital Firms . Eul Verlag, 2007, ISBN 978-3-89936-621-1 .
- Michael Schefczyk : Success strategies of German venture capital companies , Schäffer-Poeschel, Stuttgart 2004, ISBN 3-7910-1993-7 .
- Wolfgang Weitnauer: Handbook Venture Capital: From Innovation to IPO. 4th edition. Beck, Munich 2011, ISBN 978-3-406-60864-3 .
- Isabell M. Welpe : Venture capital providers and their portfolio companies: Success factors for cooperation. (= Gabler Edition Wissenschaft. Entrepreneurship ). Wiesbaden 2004, ISBN 3-8244-8079-4 .