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VC 100: The Top Investors in Early-Stage Startups

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VC 100: The Top Investors in Early-Stage Startups

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#56 Felicis Ventures, Palo Alto, Calif.

2014 Early-stage investments (in millions, USD): $164

2014 Early-stage deal count: 16

Industries: Apparel and accessories, capital markets/institutions, commercial products commercial services, communications and networking, computer hardware, consumer

Regions: Brazil, Canada, Estonia, Finland, Germany, Middle East, United States

Assets under management (in millions, USD): $220

2014 Deal highlights: Vicarious FPC, BitPay, Twice

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Image credit: Entrepreneur

15+ min read

Welcome to the Entrepreneur VC 100 list of top early-stage venture capital firms -- a platform highlighting the who's who of the U.S. startup ecosystem.

The ranking is based on data from PitchBook, a Seattle-based data and tech provider for the global private equity and venture capital markets. The firms are listed by total capital invested in seed and/or early-stage deals completed in the U.S. during 2014. While the ranking is focused on traditional VC firms, it also includes corporate VCs, mutual funds and other entities, as new players increasingly enter the VC game.

PitchBook's research process for VC 100 also tracks each firm's investment activity. You can check out which industries and regions these investors focus on as well as their top early-stage investments of 2014. To view the full VC 100 scrollable infographic list, click here.

VC 100: U.S. venture capital firms ranked based on capital invested in U.S. early-stage deals in 2014 (in USD millions*).

2014 Early-stage investments (in millions, USD): $1,020.23

2014 Early-stage deal count: 50

Industries: Consumer products and services, software

Regions: United States

Assets under management (in millions, USD): $4,350
2014 Deal highlights:
2014 Early-stage investments (in millions, USD): $809

2014 Early-stage deal count: 45

Industry: Software

Regions: China, United States

Assets under management (in millions, USD): $3,100
2014 Deal highlights:
#3 SV Angel, Palo Alto, Calif.

2014 Early-stage investments (in millions, USD): $736

2014 Early-stage deal count: 47

Industries: Commercial services, software

Regions: United States, with an emphasis on Silicon Valley, San Francisco, New York

Assets under management (in millions, USD): $104
2014 Deal highlights:

Delighted. Developer of a one-click customer satisfaction survey tool that helps businesses collect and analyze customer feedback using the Net Promoter System.

Harry's. Ecommerce shop specializing in shaving equipment, such as razors, blades and creams.

2014 Early-stage investments (in millions, USD): $721.59

2014 Early-stage deal count: 29

Industries: Communications and networking, consumer durables, healthcare technology systems, media, software

Regions: Europe, United States

Assets under management (in millions, USD): $9,600
2014 Deal highlights:
2014 Early-stage investments (in millions, USD): $690.65

2014 Early-stage deal count: 44

Industries: Communications and networking, energy services, exploration, production and refining, healthcare devices and supplies, IT services, pharmaceuticals and biotechnology, software

Regions: Asia, Brazil, United States

Assets under management (in millions, USD): $13,000
2014 Deal highlights:
2014 Early-stage investments (in millions, USD): $650.34

2014 Early-stage deal count: 30

Industries: Commercial services, communications and networking, pharmaceuticals and biotechnology, restaurants, hotels and leisure, semiconductors, software

Preferred regions: Americas, Asia, Europe, Middle East, United States

Assets under management (in millions, USD): $10,000
2014 Deal highlights:
#7 Venrock, Palo Alto, Calif

2014 Early-stage investments (in millions, USD): $620.26

2014 Early-stage deal count: 15

Industries: Communications and networking, pharmaceuticals and biotechnology, software

Preferred regions: United States

Assets under management (in millions, USD): $2,600
2014 Deal highlights:

Juno Therapeutics. Operator of a biotechnology company focused on bringing forward novel immunotherapies for cancer. The company is developing a T-cell reprogramming technology designed to generate an anti-tumor response from the patient's own immune system.

Coherus Biosciences. Provider of services related to delivery of biologic therapeutics. The company's business model is based on collaborating and developing bio-therapeutics similar to those already in existence, matching originator proteins.

2014 Early-stage investments (in millions, USD): $606.17

2014 Early-stage deal count: 34

Industries: Commercial services, software

Preferred regions: United States

Assets under management (in millions, USD): $633
2014 Deal highlights:
2014 Early-stage investments (in millions, USD): $542

2014 Early-stage deal count: 18

Industries: Media, software, transportation

Preferred regions: United States

Assets under management (in millions, USD): $1,825
2014 Deal highlights:
2014 Early-stage investments (in millions, USD): $535

2014 Early-stage deal count: 3

Industry: Software

Preferred regions: United States

Assets under management (in millions, USD): $516
2014 Deal highlights:

Getaround. This car-sharing platform enables car owners to rent their cars. The company also has launched a new service for car owners who want to rent their car on a full-time basis.

Agent Ace. The company offers a big data analytics platform which aggregates private MLS data and analyzes years of home transactions to identify real estate specialists in specific neighborhoods and price points.

2014 Early-stage investments (in millions, USD): $505

2014 Early-stage deal count: 1

Industries: Apparel and accessories, commercial products energy services, utilities

Preferred regions: Unspecified

Assets under management (in millions, USD): $1,100

2014 Deal highlights: Global Jet Capital

2014 Early-stage investments (in millions, USD): $490

2014 Early-stage deal count: 33

Industries: Commercial services, computer hardware, healthcare devices and supplies, media, financial services, pharmaceuticals and biotechnology, software

Preferred regions: China, United States

Assets under management (in millions, USD): $6,833

2014 Deal highlights: Crossfader, Farmers Edge Precision Consulting, Chill

2014 Early-stage investments (in millions, USD): $462

2014 Early-stage deal count: 35

Industry: Software

Preferred regions: Americas, Europe, Middle East

Assets under management (in millions, USD): $1,200

2014 Deal highlights: Airseed, Delighted, Crossfader

2014 Early-stage investments (in millions, USD): $450

2014 Early-stage deal count: 21

Industries: Commercial services, media, financial services, pharmaceuticals and biotechnology, software

Preferred regions: United States

Assets under management (in millions, USD): $2,369

2014 Deal highlights: Collective Health, Hampton Creek Foods, Oscar Health Insurance

2014 Early-stage investments (in millions, USD): $446

2014 Early-stage deal count: 9

Industries: Commercial services, healthcare devices and supplies, pharmaceuticals and biotechnology

Preferred regions: United States

Assets under management (in millions, USD): $1,500

2014 Deal highlights: Blackthorn Therapeutics, Juno Therapeutics

2014 Early-stage investments (in millions, USD): $426

2014 Early-stage deal count: 6

Industry: Software

Preferred regions: United States

Assets under management (in millions, USD): $1,000

2014 Deal highlights: Juno Therapeutics, Vessel

2014 Early-stage investments (in millions, USD): $415

2014 Early-stage deal count: 21

Industries: Information technology

Preferred regions: Europe, Middle East, United States

Assets under management (in millions, USD): $3,700

2014 Deal highlights: Little Things, Affirm, Elementum

2014 Early-stage investments (in millions, USD): $391

2014 Early-stage deal count: 18

Industries: Consumer non-durables, software

Preferred regions: Unspecified

Assets under management (in millions, USD): $626

2014 Deal highlights: Harry's Razor Company, Oscar Health Insurance, Urban Compass

2014 Early-stage investments (in millions, USD): $373

2014 Early-stage deal count: 24

Industry: Software

Preferred regions: Unspecified

Assets under management (in millions, USD): $3,000

2014 Deal highlights: Oscar Health Insurance, Altiscale

2014 Early-stage investments (in millions, USD): $364

2014 Early-stage deal count: 24

Industries: Commercial services, communications and networking, retail, software

Preferred regions: Brazil, China, Europe, Middle East, United States

Assets under management (in millions, USD): $3,400

2014 Deal highlights: Beepi, Jaunt, Snowflake Computing

2014 Early-stage investments (in millions, USD): $359

2014 Early-stage deal count: 35

Industries: Commercial services, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Preferred regions: United States

Assets under management (in millions, USD): $2,800

2014 Deal highlights: Surface Oncology, Synlogic, Bicycle Therapeutics

2014 Early-stage investments (in millions, USD): $354

2014 Early-stage deal count: 9

Industries: Application software, automotive insurance,broadcasting, radio and television, business/productivity software, cable service providers, communication software, consumer finance, database software, educational software, financial software, information services (B2C), Internet service providers, Internet software, logistics, media and information services (B2B), multimedia and design software, financial services, publishing, security services (B2B), social/platform software, telecommunications service providers, vertical market software, wireless service providers

Regions: Unspecified

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Privlo, Remitly

2014 Early-stage investments (in millions, USD): $336

2014 Early-stage deal count: 20

Industries: Healthcare devices and supplies, healthcare services, software

Regions: Canada, Europe, Middle East, United States

Assets under management (in millions, USD): $3,915

2014 Deal highlights: Vessel, Grand Rounds, Avi Networks

2014 Early-stage investments (in millions, USD): $321

2014 Early-stage deal count: 18

Industries: Software

Regions: Asia, United States

Assets under management (in millions, USD): $980

2014 Deal highlights: Collective Health, Leeo, Oscar Health Insurance

2014 Early-stage investments (in millions, USD): $275

2014 Early-stage deal count: 12

Industries: Capital markets/institutions, commercial services, communications and networking, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: United States

Assets under management (in millions, USD): $3,126

2014 Deal highlights: Jet, Optimizely, Captora

2014 Early-stage investments (in millions, USD): $270

2014 Early-stage deal count: 1

Industries: Commercial services, transportation

Regions: Unspecified

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Aireon

Note: Iridium is a global satellite communications company that invested in Aireon as part of a joint venture.

2014 Early-stage investments (in millions, USD): $2670

2014 Early-stage deal count: 30

Industries: Commercial services, software

Regions: Unspecified

Assets under management (in millions, USD): $131

2014 Deal highlights: Augury, Expa Capital, Percolate Industries

2014 Early-stage investments (in millions, USD): $266

2014 Early-stage deal count: 19

Industries: Software

Regions: Canada, United States

Assets under management (in millions, USD): $41

2014 Deal highlights: Drip.fm, Hampton Creek Foods, Fundrise

2014 Early-stage investments (in millions, USD): $255

2014 Early-stage deal count: 19

Industries: Commercial services, communications and networking, software

Regions: Americas, Brazil, Europe, Middle East, United States

Assets under management (in millions, USD): $4,000

2014 Deal highlights: Flex Pharma, Stratoscale, PagerDuty

2014 Early-stage investments (in millions, USD): $250

2014 Early-stage deal count: 6

Industries: Pharmaceuticals and biotechnology, software

Regions: California, Canada, United States

Assets under management (in millions, USD): $900

2014 Deal highlights: Moderna Therapeutics, Syros Pharmaceuticals, Visterra

2014 Early-stage investments (in millions, USD): $250

2014 Early-stage deal count: 8

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: Americas, Asia, Canada, Europe, Middle East, United States

Assets under management (in millions, USD): $12,000

2014 Deal highlights: Acutus Medical, Audentes Therapeutics, ARMO BioSciences

2014 Early-stage investments (in millions, USD): $241

2014 Early-stage deal count: 15

Industries: Software

Regions: Unspecified

Assets under management (in millions, USD): $154

2014 Deal highlights: Beepi, Expa Capital, Munchery

2014 Early-stage investments (in millions, USD): $230

2014 Early-stage deal count: 5

Industries: Media, retail, software

Regions: Unspecified

Assets under management (in millions, USD): $9,874

2014 Deal highlights: 5Nine software, Wealth-X, Campaign Monitor

2014 Early-stage investments (in millions, USD): $220

2014 Early-stage deal count: 6

Industries: Commercial services, communications and networking, computer hardware, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: United States

Assets under management (in millions, USD): $4,000

2014 Deal highlights: Zenefits Insurance Services, ZipRecruiter, ThreatStream

2014 Early-stage investments (in millions, USD): $217

2014 Early-stage deal count: 33

Industries: Healthcare technology systems, insurance, software

Regions: Europe, United States

Assets under management (in millions, USD): $905

2014 Deal highlights: Crossfader, Ginger.io, ToyTalk

2014 Early-stage investments (in millions, USD): $215

2014 Early-stage deal count: 22

Industries (selected): Cable service providers, connectivity products, consulting services (B2B), food products, household products, Internet retail, legal services (B2B), media and Information Services (B2B), Information Technology, restaurants, hotels and leisure, real estate services (B2C), recreational goods, specialty retail

Regions: United States

Assets under management (in millions, USD): $600

2014 Deal highlights: Scopely, The Real Real, Avi Networks

2014 Early-stage investments (in millions, USD): $212

2014 Early-stage deal count: 13

Industries: Communications and networking, computer hardware, healthcare devices and supplies, software

Regions: United States

Assets under management (in millions, USD): $4,000

2014 Deal highlights: PernixData, Avi Networks, Munchery

2014 Early-stage investments (in millions, USD): $211

2014 Early-stage deal count: 22

Industries: Communications and networking, software

Regions: Americas, Asia, Europe, Middle East, United States

Assets under management (in millions, USD): $1,300

2014 Deal highlights: Wuxi China Cloud Technology Service Co., LeWa Technology, Eye fluence

2014 Early-stage investments (in millions, USD): $207

2014 Early-stage deal count: 14

Industries: Commercial services, communications and networking, semiconductors, software

Regions: unspecified

Assets under management (in millions, USD): $4,700

2014 Deal highlights: HomeSuite, Tomfoolery

2014 Early-stage investments (in millions, USD): $206

2014 Early-stage deal count: 7

Industries (selected): Commercial services, retail, software

Regions: Unspecified

Assets under management (in millions, USD): $9,050

2014 Deal highlights: Koudai Shopping, Youxinpai (Beijing) Information Technology Co., Harry's

2014 Early-stage investments (in millions, USD): $202

2014 Early-stage deal count: 4

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: United States

Assets under management (in millions, USD): $4,289

2014 Deal highlights: SHINE Medical Technologies, Audentes Therapeutics, N30 Pharmaceuticals

2014 Early-stage investments (in millions, USD): $200

2014 Early-stage deal count: 17

Industries: Commercial services, communications and networking, computer hardware, IT services, software

Regions: United States

Assets under management (in millions, USD): $2,100

2014 Deal highlights: Udacity, Symphony Commerce, DoorDash

2014 Early-stage investments (in millions, USD): $200

2014 Early-stage deal count: 7

Industries: Pharmaceuticals and biotechnology

Regions: Washington State

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Juno Therapeutics, Faraday Pharmaceuticals, SNUPI Technologies

Note: WRF Capital is the venture arm of the Washington Research Foundation, an organization that supports research and scholarship at Washington state research institutions.

2014 Early-stage investments (in millions, USD): $199

2014 Early-stage deal count: 7

Industries: Communications and networking, media, software

Regions: Europe, United States

Assets under management (in millions, USD): $3,500

2014 Deal highlights: Tinder, Vessel, Optimizely

2014 Early-stage investments (in millions, USD): $197

2014 Early-stage deal count: 11

Industries: Software

Regions: United States

Assets under management (in millions, USD): $1,700

2014 Deal highlights: Symphony Commerce, InVisionApp, ROLI

2014 Early-stage investments (in millions, USD): $197

2014 Early-stage deal count: 20

Industries: Software

Regions: Europe, United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: DigitalOcean, URX, Layer

2014 Early-stage investments (in millions, USD): $195

2014 Early-stage deal count: 15

Industries: Communications and networking, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: India, Middle East, United States

Assets under management (in millions, USD): $4,200

2014 Deal highlights: Instacart, CarTradeExchange.com, The Real Real

2014 Early-stage investments (in millions, USD): $195

2014 Early-stage deal count: 12

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology, semiconductors, software

Regions: Europe, United States

Assets under management (in millions, USD): $3,500

2014 Deal highlights: Syros Pharmaceuticals, Visterra, Navitor Pharmaceuticals

2014 Early-stage investments (in millions, USD): $195

2014 Early-stage deal count: 5

Industries: Communications and networking, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: China, Europe, India, Japan, Middle East, United States

Assets under management (in millions, USD): $1,425

2014 Deal highlights: Spark Therapeutics, Coherus Biosciences, Audentes Therapeutics

2014 Early-stage investments (in millions, USD): $189

2014 Early-stage deal count: 9

Industries: Computer hardware, healthcare devices and supplies, healthcare services, pharmaceuticals and biotechnology, semiconductors, software

Regions: United States

Assets under management (in millions, USD): $2,800

2014 Deal highlights: Indi Molecular, Cidara Therapeutics, PMV Pharmaceuticals

2014 Early-stage investments (in millions, USD): $176

2014 Early-stage deal count: 1

Industries: Pharmaceuticals and biotechnology, software

Regions: Unspecified

Assets under management (in millions, USD): $7,600

2014 Deal highlights: Juno Therapeutics

2014 Early-stage investments (in millions, USD): $175

2014 Early-stage deal count: 5

Industries: Pharmaceuticals and biotechnology

Regions: Unspecified

Assets under management (in millions, USD): $1,532

2014 Deal highlights: PanOptica, Voyager Therapeutics, NinePoint Medical

2014 Early-stage investments (in millions, USD): $170

2014 Early-stage deal count: 14

Industry: Software

Regions: Unspecified

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: BirchBox, Helium Systems, DineInFresh

2014 Early-stage investments (in millions, USD): $168

2014 Early-stage deal count: 20

Industry: Software

Regions: Nevada

Assets under management (in millions, USD): $50

2014 Deal highlights: Surf Airlines, OrderWithMe, Banjo

Note: The venture arm of Comcast Corporation formed a partnership with Catalyst Fund, an early-stage firm, as well as investor Gil Beyda to form Genecast Ventures to drive seed-stage investing for the corporate VC.

2014 Early-stage investments (in millions, USD): not applicable

2014 Early-stage deal count: 12

Industry: Software

Regions: United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: BirchBox, FlightCar, Hired

2014 Early-stage investments (in millions, USD): $164

2014 Early-stage deal count: 16

Industries: Apparel and accessories, capital markets/institutions, commercial products commercial services, communications and networking, computer hardware, consumer

Regions: Brazil, Canada, Estonia, Finland, Germany, Middle East, United States

Assets under management (in millions, USD): $220

2014 Deal highlights: Vicarious FPC, BitPay, Twice

2014 Early-stage investments (in millions, USD): $163

2014 Early-stage deal count: 11

Industries: Commercial services, communications and networking, media, software

Regions: Asia, United States

Assets under management (in millions, USD): $3,150

2014 Deal highlights: Human Longevity, Shift Technologies, Kiwi

2014 Early-stage investments (in millions, USD): $163

2014 Early-stage deal count: 11

Industries: Commercial services, software

Regions: Canada, Middle East, United Kingdom, United States

Assets under management (in millions, USD): $92

2014 Deal highlights: Rinse, Surf Airlines, Ionic Security

2014 Early-stage investments (in millions, USD): $161

2014 Early-stage deal count: 10

Industries: Communications and networking, computer hardware, software

Regions: India, Middle East, United States

Assets under management (in millions, USD): $5,000

2014 Deal highlights: IFTTT, Kendra Scott, Bitglass

#60 Silicon Valley Bank (SVB Capital), Santa Clara, Calif.

2014 Early-stage investments (in millions, USD): $159*

2014 Early-stage deal count: 10*

*These figures are based on PitchBook data, upon contacting SVB, a spokesperson declined to confirm both the capital invested and deal count for 2014.

Industry: Software, technology

Regions: United States, with some global exposure

Assets under management (in millions, USD): $2,025

2014 Deal highlights: Metacloud, Hired, Build.com

Notes: Silicon Valley Bank is a large commercial bank that also runs SVB Capital. The bank business lends debt (not equity) to innovation companies, along with other business banking products and services. SVB Capital, separately, has a funds business that invests across a family funds including funds of funds and direct equity funds.

2014 Early-stage investments (in millions, USD): $158

2014 Early-stage deal count: 5

Industry: Pharmaceuticals and biotechnology

Regions: United States

Assets under management (in millions, USD): $685

2014 Deal highlights: Audentes Therapeutics, EPIRUS Biopharmaceuticals, Cidara Therapeutics

2014 Early-stage investments (in millions, USD): $158

2014 Early-stage deal count: 3

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: Unspecified

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Spark Therapeutics, Coherus Biosciences, N30 Pharmaceuticals

#63 GGV Capital, Menlo Park, Calif.

2014 Early-stage investments (in millions, USD): $157

2014 Early-stage deal count: 8

Industries: Communications and networking, pharmaceuticals and biotechnology, software

Regions: Asia, United States

Assets under management (in millions, USD): $2,200

2014 Deal highlights: Petkit, ExaCloud Systems, GrabTaxi Holdings

2014 Early-stage investments (in millions, USD): $153

2014 Early-stage deal count: 13

Industry: Software

Regions: United States

Assets under management (in millions, USD): $550

2014 Deal highlights: Mango Games, Collective Health, Netskope

2014 Early-stage investments (in millions, USD): $152

2014 Early-stage deal count: 19

Industry: Software

Regions: United States

Assets under management (in millions, USD): $194

2014 Deal highlights: Good Eggs, Splice Machine, Gild

2014 Early-stage investments (in millions, USD): $150

2014 Early-stage deal count: 16

Industry: Software

Regions: Asia, Middle East, United States

Assets under management (in millions, USD): $500

2014 Deal highlights: Birds Eye Systems, Cambridge Wowo, Traffline

2014 Early-stage investments (in millions, USD): $149

2014 Early-stage deal count: 14

Industry: Software

Regions: Unspecified

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: BitPay, Altiscale, Hampton Creek Foods

#68 DCM, Menlo Park, Calif.

2014 Early-stage investments (in millions, USD): $149

2014 Early-stage deal count: 10

Industries: Communications and networking, media, financial services, software

Regions: China, Japan, United States

Assets under management (in millions, USD): $2,500

2014 Deal highlights: Huodongxing, Zhuo Yi's Beijing Chang Technology Co., Yik Yak

2014 Early-stage investments (in millions, USD): $149

2014 Early-stage deal count: 15

Industries: Retail, software

Regions: United States

Assets under management (in millions, USD): $967

2014 Deal highlights: Spare5, Igneous Systems, Context Relevant

2014 Early-stage investments (in millions, USD): $147

2014 Early-stage deal count: 8

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: Africa, Americas, Asia, Canada, Europe, Middle East, Oceania, United States

Assets under management (in millions, USD): $2,113

2014 Deal highlights: Mitokyne, Raze Therapeutics, True North Therapeutics

2014 Early-stage investments (in millions, USD): $147

2014 Early-stage deal count: 9

Industry: Software

Regions: United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Grand Rounds, AltSchool, PagerDuty

#72 500 Startups, Mountain View, Calif.

2014 Early-stage investments (in millions, USD): $143

2014 Early-stage deal count: 29

Industries: Commercial services, software

Regions: Asia, Europe, India, Japan, United States

Assets under management (in millions, USD): $125

2014 Deal highlights: mClinica, Airseed, Eventup

2014 Early-stage investments (in millions, USD): $142

2014 Early-stage deal count: 14

Industries: Financial services, software

Regions: United States

Assets under management (in millions, USD): $1,030

2014 Deal highlights: Vaurum, Kik Interactive, BitPay

2014 Early-stage investments (in millions, USD): $141

2014 Early-stage deal count: 17

Industry: Software

Regions: California

Assets under management (in millions, USD): $1,025

2014 Deal highlights: Delighted, TigerText, Doctor on Demand

2014 Early-stage investments (in millions, USD): $141

2014 Early-stage deal count: 4

Industry: Pharmaceuticals and biotechnology

Regions: United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Syros Pharmaceuticals, Indi Molecular, Visterra

2014 Early-stage investments (in millions, USD): $139

2014 Early-stage deal count: 18

Industry: Software

Regions: Unspecified

Assets under management (in millions, USD): $335

2014 Deal highlights: Clusterk, DoxIQ, Omniome

2014 Early-stage investments (in millions, USD): $138

2014 Early-stage deal count: 4

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: Americas, Europe

Assets under management (in millions, USD): $1,900

2014 Deal highlights: Thesan Pharmaceuticals, PanOptica, Spinal Kinetics

2014 Early-stage investments (in millions, USD): $134

2014 Early-stage deal count: 8

Industries: Commercial services, communications and networking, computer hardware, media, software

Regions: United States

Assets under management (in millions, USD): $2,800

2014 Deal highlights: Caliber, Alchemist Accelerator, Beepi

2014 Early-stage investments (in millions, USD): $134

2014 Early-stage deal count: 1

Industries: Pharmaceuticals and biotechnology, software

Regions: Europe, United States

Assets under management (in millions, USD): $320,717.8 (*Fidelity Investments is also a financial services firm that manages one of the largest mutual fund groups in the world. Its VC arm, Fidelity Ventures, manages approximately $1,500.)

2014 Deal highlights: ProQR Therapeutics, Juno Therapeutics

2014 Early-stage investments (in millions, USD): $131

2014 Early-stage deal count: 3

Industry: Pharmaceuticals and biotechnology, software

Regions: United States

Assets under management (in millions, USD): $391

2014 Deal highlights: Coherus Biosciences, Lumena Pharmaceuticals, N30 Pharmaceuticals

#81 BoxGroup, New York City

2014 Early-stage investments (in millions, USD): $130

2014 Early-stage deal count: 17

Industry: Software

Regions: United States, Europe

Assets under management (in millions, USD): Declined to comment

2014 Deal highlights: Handy, Studio SBV, ID.me

2014 Early-stage investments (in millions, USD): $130

2014 Early-stage deal count: 1

Industry: Healthcare services

Regions: United States

Assets under management (in millions, USD): Not applicable

2014 Deal highlights: Flatiron Health

Note: Laboratory Corporation of America, or LabCorp, is a medical lab testing and services company that participated in an investment in FlatIron Health in early 2014. The financing round was led by Google Venture and First Round Capital.

2014 Early-stage investments (in millions, USD): $129

2014 Early-stage deal count: 16

Industries: Commercial services, communications and networking, media, software

Regions: Europe, United States

Assets under management (in millions, USD): $2,087

2014 Deal highlights: Vaurum, Postmates, Hired

2014 Early-stage investments (in millions, USD): $128

2014 Early-stage deal count: 11

Industries: Apparel and accessories, commercial services, consumer durables, media, software

Regions: Unspecified

Assets under management (in millions, USD): $750

2014 Deal highlights: Deltamethod, Auctionata, Munchery

#85 Revolution, Washington, D.C.

2014 Early-stage investments (in millions, USD): $126

2014 Early-stage deal count: 4

Industry: Software

Regions: United States

Assets under management (in millions, USD): $658

2014 Deal highlights: Handy, Insikt Ventures, OrderUp

2014 Early-stage investments (in millions, USD): $125

2014 Early-stage deal count: 16

Industries: Media, software

Regions: Asia, United States

Assets under management (in millions, USD): $2,800

2014 Deal highlights: FlightCar, NatureBox, Chloe and Isabel

2014 Early-stage investments (in millions, USD): $124

2014 Early-stage deal count: 5

Industries: Pharmaceuticals and biotechnology, software

Regions: Europe, Asia, United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: Coherus Biosciences, Surface Oncology, Dimension Therapeutics

2014 Early-stage investments (in millions, USD): $123

2014 Early-stage deal count: 2

Industry: Software

Regions: Asia, United States

Assets under management (in millions, USD): $731,200 (T. Rowe Price is also a multi-disciplinary financial services firm with a venture arm. This figure takes into account the parent firm's total assets.)

2014 Deal highlights: Spark Therapeutics, Diplomat Pharmacy

2014 Early-stage investments (in millions, USD): $119

2014 Early-stage deal count: 7

Industry: Software

Regions: Europe, United States

Assets under management (in millions, USD): $155

2014 Deal highlights: DigitalOcean, TransferWise, DataRobot

2014 Early-stage investments (in millions, USD): $119

2014 Early-stage deal count: 8

Industries: Communications and networking, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: Middle East, United States

Assets under management (in millions, USD): $2,325

2014 Deal highlights: Jet, Madison Reed, Pley

2014 Early-stage investments (in millions, USD): $117

2014 Early-stage deal count: 12

Industries: Commercial services, communications and networking, computer hardware, software, transportation

Regions: United States

Assets under management (in millions, USD): $3,311

2014 Deal highlights: Alchemy Web, Beijing Peak Technology, Poynt Co.

2014 Early-stage investments (in millions, USD): $116

2014 Early-stage deal count: 2

Industries: Commercial services, communications and networking, healthcare devices and supplies, healthcare services, IT Services, retail, software

Regions: Americas, Asia, Europe

Assets under management (in millions, USD): $16,000

2014 Deal highlights: City Practice Group Of New York, Gainsight

2014 Early-stage investments (in millions, USD): $114

2014 Early-stage deal count: 3

Industries: Healthcare devices and supplies, pharmaceuticals and biotechnology

Regions: Americas

Assets under management (in millions, USD): $870,000 (Wellington Management is a large private, independent investment management company that also runs a venture arm. This figure takes into account the entire firm's total assets under management.)

2014 Deal highlights: Coupang, Spark Therapeutics, N30 Pharmaceuticals

2014 Early-stage investments (in millions, USD): $114

2014 Early-stage deal count: 12

Industries: Communications and networking, healthcare devices and supplies, pharmaceuticals and biotechnology, software

Regions: United States

Assets under management (in millions, USD): $1,100

2014 Deal highlights: Fieldwire, MasteryConnect, Docker

2014 Early-stage investments (in millions, USD): $113

2014 Early-stage deal count: 6

Industries: Pharmaceuticals and biotechnology

Regions: Unspecified

Assets under management (in millions, USD): $1,600

2014 Deal highlights: Syros Pharmaceuticals, Cidara Therapeutics, Loxo Oncology

2014 Early-stage investments (in millions, USD): $112

2014 Early-stage deal count: 16

Industry: Software

Regions: unspecified

Assets under management (in millions, USD): $265

2014 Deal highlights: Codified, Pantheon, Chloe and Isabel

2014 Early-stage investments (in millions, USD): $112

2014 Early-stage deal count: 6

Industry: Software

Regions: Canada, China, Europe, India, Middle East, United States

Assets under management (in millions, USD): $2,000

2014 Deal highlights: Covacsis Technologies, Platfora, Stratoscale

2014 Early-stage investments (in millions, USD): $110

2014 Early-stage deal count: 8

Industries: Consumer non-durables, retail, software

Regions: United States

Assets under management (in millions, USD): $100

2014 Deal highlights: Dollar Shave Club, Chloe and Isabel

2014 Early-stage investments (in millions, USD): $104

2014 Early-stage deal count: 4

Industries: Consumer products and services

Regions: United States

Assets under management (in millions, USD): Unspecified

2014 Deal highlights: SeatGeek, EPIRUS Biopharmaceuticals, Spire

2014 Early-stage investments (in millions, USD): $103

2014 Early-stage deal count: 7

Industries: Media, enterprise IT and consumer

Regions: United States

Assets under management (in millions, USD): $3,700

2014 Deal highlights: Fastly, Crux

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VC 100: The Top Investors in Early-Stage Startups

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Check out this 2014 snapshot of the top 100 U.S. venture capital firms, corporate VCs, and other market players funding early-stage deals.

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GrabCAD, which was founded in 2009 by Hardi Meybaum and Indrek Narusk, is a cloud-based collaboration network that helps designers build physical products faster and easier by connecting engineers, content & technology. GrabCAD grew to the world’s largest community of mechanical engineers and was in 2014 acquired by Stratasys, a US-Israeli 3D printing giant. The deal was estimated to be worth around 100m USD making it largest exit in Estonia since Skype. To find out about GrabCAD's journey, check out this video.

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Seminar on Corporate & Int ' l Venture Capital

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Venture Capital Financing Introduction and Methods

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Finance & Capital Markets | Khan Academy

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GrabCAD, which was founded in 2009 by Hardi Meybaum and Indrek Narusk, is a cloud-based collaboration network that helps designers build physical products faster and easier by connecting engineers, content & technology. GrabCAD grew to the world's largest community of mechanical engineers and was in 2014 acquired by Stratasys, a US-Israeli 3D printing giant.

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Future of innovation!

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Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

The role of man has always been to innovate and create. Since the beginning of time, mankind has progressed because of our ability to invent and adapt. As the tools available to create new things proliferate, they allow us to leverage our creative intellect further and not be bogged down with administrative and logistical tasks.

The exponential rise of technology means innovation will progress faster than our linear minds can fathom.

There were more significant technological changes in the past 10 years than in the past 100 years, and more in the past 100 years than in the past 1000 years. Today, all of human knowledge is accessible in our pocket through our smartphone. Communication has become pervasive and instantaneous, almost creating a unified human consciousness whose pressing issues emerge in the form of a trending topic on Twitter. This makes it imperative to keep up with international technological progress, especially as it greatly increases our productivity, which is a leading contributor to GDP growth.

According to a report released by the International Data Corporation (IDC), every country in the Middle East is projected to spend millions more on technology in 2014 than in 2013. Venture capital plays a significant role in fuelling this innovation. In the Middle East especially, venture capital has proven to be a route that increases the visibility of the region as an innovation hub while at the same time providing new technologies with a place to grow and prosper. IDC also reported that the ICT market will hit the US$96 billion mark in 2014, which indicates incredible investment and optimism in the technology sector. That, coupled with the m-Government initiative and the investments that will inevitably follow the Expo 2020 announcement, makes the technology sector, particularly in Dubai, a vibrant and exciting market for VCs to explore.

To innovate on a global scale you need a relatively level playing field; basically you need the infrastructure to educate, develop, integrate, and roll out ideas. The Middle East is still developing the ecosystem for the virtuous cycle of innovation to take hold but global trends makes this inevitable; it's just a matter of time. There is a boom on the horizon for the Middle East, and it is this changing landscape that makes investing in this region so exciting.

A large part of the role of venture capital is to fuel innovation and mass adoption. This fuel comes in the form of capital, structure, access, and expertise. Each of these factors plays a critically important role in aiding start-ups and entrepreneurs - the expertise is just as important as the capital that a VC can provide.

When I first started investing, it was something that I did on my own, as a kind of hobby. I ended up investing in 27 startups. I learned a lot about various sectors and regions but more importantly the common pitfalls, the founder's dilemma and the life of a company after the investing honeymoon period. Now that this interest has pivoted into an institution, it has taken on a whole new meaning. We are investing in the structural building blocks of the technology industry and look at VC as a way to build upon the talent and resources in the region. This includes e-commerce logistics, online payment gateways, effective cloud computing, incubation ecosystems, knowledge sharing platforms and engaging content. It is investments like these that will provide the platform from which the Middle East can grow and thrive as a technological hub as well as an entrepreneurial one, creating the demand for further participation from venture capitalists.

Having lived in Dubai for over 28 years, I have seen first-hand the transformation a structured vision accompanied by resources can achieve. The talent and ideas from a diverse range of entrepreneurs that abound the Middle East has only made me, and I'm sure many others, that much more resolute about investing in this region. All the quantitative and qualitative metrics demonstrate a region and sector that is ready to outperform.

I believe in this region, and in its innovation potential. The Middle East, and the UAE in particular, is in the second inning of mini technology boom, and we expect this to continue as locally based companies continue to bring their new ideas to life. Hopefully, we can help.

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Venture Capital As The Future Of Innovation

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In the Middle East especially, venture capital has proven to be a route that increases the visibility of the region as an innovation hub.

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How Venture Capital Works

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Invention and innovation drive the U.S. economy. What's more, they have a powerful grip on the nation's collective imagination. The popular press is filled with against-all-odds success stories of Silicon Valley entrepreneurs. In these sagas, the entrepreneur is the modern-day cowboy, roaming new industrial frontiers much the same way that earlier Americans explored the West. At his side stands the venture capitalist, a trail-wise sidekick ready to help the hero through all the tight spots-in exchange, of course, for a piece of the action.

As with most myths, there's some truth to this story. Arthur Rock, Tommy Davis, Tom Perkins, Eugene Kleiner, and other early venture capitalists are legendary for the parts they played in creating the modern computer industry. Their investing knowledge and operating experience were as valuable as their capital. But as the venture capital business has evolved over the past 30 years, the image of a cowboy with his sidekick has become increasingly outdated. Today's venture capitalists look more like bankers, and the entrepreneurs they fund look more like M.B.A.'s.

The U.S. venture-capital industry is envied throughout the world as an engine of economic growth. Although the collective imagination romanticizes the industry, separating the popular myths from the current realities is crucial to understanding how this important piece of the U.S. economy operates. For entrepreneurs (and would-be entrepreneurs), such an analysis may prove especially beneficial.

Venture Capital Fills a Void

Contrary to popular perception, venture capital plays only a minor role in funding basic innovation. Venture capitalists invested more than $10 billion in 1997, but only 6%, or $600 million, went to startups. Moreover, we estimate that less than $1 billion of the total venture-capital pool went to R&D. The majority of that capital went to follow-on funding for projects originally developed through the far greater expenditures of governments ($63 billion) and corporations ($133 billion).

From a venture capitalist's perspective, the ideal entrepreneur:

is qualified in a "hot" area of interest,

delivers sales or technical advances such as FDA approval with reasonable probability,

tells a compelling story and is presentable to outside investors,

recognizes the need for speed to an IPO for liquidity,

has a good reputation and can provide references that show competence and skill,

understands the need for a team with a variety of skills and therefore sees why equity has to be allocated to other people,

works diligently toward a goal but maintains flexibility,

gets along with the investor group,

understands the cost of capital and typical deal structures and is not offended by them,

is sought after by many VCs, and

has realistic expectations about process and outcome.

Where venture money plays an important role is in the next stage of the innovation life cycle-the period in a company's life when it begins to commercialize its innovation. We estimate that more than 80% of the money invested by venture capitalists goes into building the infrastructure required to grow the business-in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital).

Venture money is not long-term money. The idea is to invest in a company's balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be sold to a corporation or so that the institutional public-equity markets can step in and provide liquidity. In essence, the venture capitalist buys a stake in an entrepreneur's idea, nurtures it for a short period of time, and then exits with the help of an investment banker.

Venture capital's niche exists because of the structure and rules of capital markets. Someone with an idea or a new technology often has no other institution to turn to. Usury laws limit the interest banks can charge on loans-and the risks inherent in start-ups usually justify higher rates than allowed by law. Thus bankers will only finance a new business to the extent that there are hard assets against which to secure the debt. And in today's information-based economy, many start-ups have few hard assets.

Furthermore, investment banks and public equity are both constrained by regulations and operating practices meant to protect the public investor. Historically, a company could not access the public market without sales of about $15 million, assets of $10 million, and a reasonable profit history. To put this in perspective, less than 2% of the more than 5 million corporations in the United States have more than $10 million in revenues. Although the IPO threshold has been lowered recently through the issuance of development-stage company stocks, in general the financing window for companies with less than $10 million in revenue remains closed to the entrepreneur.

Venture capital fills the void between sources of funds for innovation (chiefly corporations, government bodies, and the entrepreneur's friends and family) and traditional, lower-cost sources of capital available to ongoing concerns. Filling that void successfully requires the venture capital industry to provide a sufficient return on capital to attract private equity funds, attractive returns for its own participants, and sufficient upside potential to entrepreneurs to attract high-quality ideas that will generate high returns. Put simply, the challenge is to earn a consistently superior return on investments in inherently risky business ventures.

Sufficient Returns at Acceptable Risk

Investors in venture capital funds are typically very large institutions such as pension funds, financial firms, insurance companies, and university endowments-all of which put a small percentage of their total funds into high-risk investments. They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude. What leads these institutions to invest in a fund is not the specific investments but the firm's overall track record, the fund's "story," and their confidence in the partners themselves.

How do venture capitalists meet their investors' expectations at acceptable risk levels? The answer lies in their investment profile and in how they structure each deal.

The Investment Profile.

One myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries-that is, industries that are more competitively forgiving than the market as a whole. In 1980, for example, nearly 20% of venture capital investments went to the energy industry. More recently, the flow of capital has shifted rapidly from genetic engineering, specialty retailing, and computer hardware to CD-ROMs, multimedia, telecommunications, and software companies. Now, more than 25% of disbursements are devoted to the Internet "space." The apparent randomness of these shifts among technologies and industry segments is misleading; the targeted segment in each case was growing fast, and its capacity promised to be constrained in the next five years. To put this in context, we estimate that less than 10% of all U.S. economic activity occurs in segments projected to grow more than 15% a year over the next five years.

In effect, venture capitalists focus on the middle part of the classic industry S-curve. They avoid both the early stages, when technologies are uncertain and market needs are unknown, and the later stages, when competitive shakeouts and consolidations are inevitable and growth rates slow dramatically. Consider the disk drive industry. In 1983, more than 40 venture-funded companies and more than 80 others existed. By late 1984, the industry market value had plunged from $5.4 billion to $1.4 billion. Today only five major players remain.

Growing within high-growth segments is a lot easier than doing so in low-, no-, or negative-growth ones, as every businessperson knows. In other words, regardless of the talent or charisma of individual entrepreneurs, they rarely receive backing from a VC if their businesses are in low-growth market segments. What these investment flows reflect, then, is a consistent pattern of capital allocation into industries where most companies are likely to look good in the near term.

During this adolescent period of high and accelerating growth, it can be extremely hard to distinguish the eventual winners from the losers because their financial performance and growth rates look strikingly similar. (See the chart "Timing Is Everything.") At this stage, all companies are struggling to deliver products to a product-starved market. Thus the critical challenge for the venture capitalist is to identify competent management that can execute-that is, supply the growing demand.

Picking the wrong industry or betting on a technology risk in an unproven market segment is something VCs avoid. Exceptions to this rule tend to involve "concept" stocks, those that hold great promise but that take an extremely long time to succeed. Genetic engineering companies illustrate this point. In that industry, the venture capitalist's challenge is to identify entrepreneurs who can advance a key technology to a certain stage-FDA approval, for example-at which point the company can be taken public or sold to a major corporation.

By investing in areas with high growth rates, VCs primarily consign their risks to the ability of the company's management to execute. VC investments in high-growth segments are likely to have exit opportunities because investment bankers are continually looking for new high-growth issues to bring to market. The issues will be easier to sell and likely to support high relative valuations-and therefore high commissions for the investment bankers. Given the risk of these types of deals, investment bankers' commissions are typically 6% to 8% of the money raised through an IPO. Thus an effort of only several months on the part of a few professionals and brokers can result in millions of dollars in commissions.

As long as venture capitalists are able to exit the company and industry before it tops out, they can reap extraordinary returns at relatively low risk. Astute venture capitalists operate in a secure niche where traditional, low-cost financing is unavailable. High rewards can be paid to successful management teams, and institutional investment will be available to provide liquidity in a relatively short period of time.

The Logic of the Deal.

There are many variants of the basic deal structure, but whatever the specifics, the logic of the deal is always the same: to give investors in the venture capital fund both ample downside protection and a favorable position for additional investment if the company proves to be a winner.

In a typical start-up deal, for example, the venture capital fund will invest $3 million in exchange for a 40% preferred-equity ownership position, although recent valuations have been much higher. The preferred provisions offer downside protection. For instance, the venture capitalists receive a liquidation preference. A liquidation feature simulates debt by giving 100% preference over common shares held by management until the VC's $3 million is returned. In other words, should the venture fail, they are given first claim to all the company's assets and technology. In addition, the deal often includes blocking rights or disproportional voting rights over key decisions, including the sale of the company or the timing of an IPO.

The contract is also likely to contain downside protection in the form of antidilution clauses, or ratchets. Such clauses protect against equity dilution if subsequent rounds of financing at lower values take place. Should the company stumble and have to raise more money at a lower valuation, the venture firm will be given enough shares to maintain its original equity position-that is, the total percentage of equity owned. That preferential treatment typically comes at the expense of the common shareholders, or management, as well as investors who are not affiliated with the VC firm and who do not continue to invest on a pro rata basis.

Alternatively, if a company is doing well, investors enjoy upside provisions, sometimes giving them the right to put additional money into the venture at a predetermined price. That means venture investors can increase their stakes in successful ventures at below market prices.

VC firms also protect themselves from risk by coinvesting with other firms. Typically, there will be a "lead" investor and several "followers." It is the exception, not the rule, for one VC to finance an individual company entirely. Rather, venture firms prefer to have two or three groups involved in most stages of financing. Such relationships provide further portfolio diversification-that is, the ability to invest in more deals per dollar of invested capital. They also decrease the workload of the VC partners by getting others involved in assessing the risks during the due diligence period and in managing the deal. And the presence of several VC firms adds credibility. In fact, some observers have suggested that the truly smart fund will always be a follower of the top-tier firms.

Attractive Returns for the VC

In return for financing one to two years of a company's start-up, venture capitalists expect a ten times return of capital over five years. Combined with the preferred position, this is very high-cost capital: a loan with a 58% annual compound interest rate that cannot be prepaid. But that rate is necessary to deliver average fund returns above 20%. Funds are structured to guarantee partners a comfortable income while they work to generate those returns. The venture capital partners agree to return all of the investors' capital before sharing in the upside. However, the fund typically pays for the investors' annual operating budget-2% to 3% of the pool's total capital-which they take as a management fee regardless of the fund's results. If there is a $100 million pool and four or five partners, for example, the partners are essentially assured salaries of $200,000 to $400,000 plus operating expenses for seven to ten years. (If the fund fails, of course, the group will be unable to raise funds in the future.) Compare those figures with Tommy Davis and Arthur Rock's first fund, which was $5 million but had a total management fee of only $75,000 a year.

The real upside lies in the appreciation of the portfolio. The investors get 70% to 80% of the gains; the venture capitalists get the remaining 20% to 30%. The amount of money any partner receives beyond salary is a function of the total growth of the portfolio's value and the amount of money managed per partner. (See the exhibit "Pay for Performance.")

Thus for a typical portfolio-say, $20 million managed per partner and 30% total appreciation on the fund-the average annual compensation per partner will be about $2.4 million per year, nearly all of which comes from fund appreciation. And that compensation is multiplied for partners who manage several funds. From an investor's perspective, this compensation is acceptable because the venture capitalists have provided a very attractive return on investment and their incentives are entirely aligned with making the investment a success.

What part does the venture capitalist play in maximizing the growth of the portfolio's value? In an ideal world, all of the firm's investments would be winners. But the world isn't ideal; even with the best management, the odds of failure for any individual company are high.

On average, good plans, people, and businesses succeed only one in ten times. To see why, consider that there are many components critical to a company's success. The best companies might have an 80% probability of succeeding at each of them. But even with these odds, the probability of eventual success will be less than 20% because failing to execute on any one component can torpedo the entire company.

If just one of the variables drops to a 50% probability, the combined chance of success falls to 10%.

These odds play out in venture capital portfolios: more than half the companies will at best return only the original investment and at worst be total losses. Given the portfolio approach and the deal structure VCs use, however, only 10% to 20% of the companies funded need to be real winners to achieve the targeted return rate of 25% to 30%. In fact, VC reputations are often built on one or two good investments.

A typical breakout of portfolio performance per $1,000 invested is shown below:

Those probabilities also have a great impact on how the venture capitalists spend their time. Little time is required (and sometimes best not spent) on the real winners-or the worst performers, called numnuts ("no money, no time"). Instead, the VC allocates a significant amount of time to those middle portfolio companies, determining whether and how the investment can be turned around and whether continued participation is advisable. The equity ownership and the deal structure described earlier give the VCs the flexibility to make management changes, particularly for those companies whose performance has been mediocre.

Most VCs distribute their time among many activities (see the exhibit "How Venture Capitalists Spend Their Time"). They must identify and attract new deals, monitor existing deals, allocate additional capital to the most successful deals, and assist with exit options. Astute VCs are able to allocate their time wisely among the various functions and deals.

Assuming that each partner has a typical portfolio of ten companies and a 2,000-hour work year, the amount of time spent on each company with each activity is relatively small. If the total time spent with portfolio companies serving as directors and acting as consultants is 40%, then partners spend 800 hours per year with portfolio companies. That allows only 80 hours per year per company-less than 2 hours per week.

The popular image of venture capitalists as sage advisors is at odds with the reality of their schedules. The financial incentive for partners in the VC firm is to manage as much money as possible. The more money they manage, the less time they have to nurture and advise entrepreneurs. In fact, "virtual CEOs" are now being added to the equity pool to counsel company management, which is the role that VCs used to play.

Today's venture capital fund is structurally similar to its late 1970s and early 1980s predecessors: the partnership includes both limited and general partners, and the life of the fund is seven to ten years. (The fund makes investments over the course of the first two or three years, and any investment is active for up to five years. The fund harvests the returns over the last two to three years.) However, both the size of the typical fund and the amount of money managed per partner have changed dramatically. In 1980, the average fund was about $20 million, and its two or three general partners each managed three to five investments. That left a lot of time for the venture capital partners to work directly with the companies, bringing their experience and industry expertise to bear. Today the average fund is ten times larger, and each partner manages two to five times as many investments. Not surprisingly, then, the partners are usually far less knowledgeable about the industry and the technology than the entrepreneurs.

The Upside for Entrepreneurs

Even though the structure of venture capital deals seems to put entrepreneurs at a steep disadvantage, they continue to submit far more plans than actually get funded, typically by a ratio of more than ten to one. Why do seemingly bright and capable people seek such high-cost capital?

Venture-funded companies attract talented people by appealing to a "lottery" mentality. Despite the high risk of failure in new ventures, engineers and businesspeople leave their jobs because they are unable or unwilling to perceive how risky a start-up can be. Their situation may be compared to that of hopeful high school basketball players, devoting hours to their sport despite the overwhelming odds against turning professional and earning million-dollar incomes. But perhaps the entrepreneur's behavior is not so irrational.

Consider the options. Entrepreneurs-and their friends and families-usually lack the funds to finance the opportunity. Many entrepreneurs also recognize the risks in starting their own businesses, so they shy away from using their own money. Some also recognize that they do not possess all the talent and skills required to grow and run a successful business.

Most of the entrepreneurs and management teams that start new companies come from corporations or, more recently, universities. This is logical because nearly all basic research money, and therefore invention, comes from corporate or government funding. But those institutions are better at helping people find new ideas than at turning them into new businesses (see the exhibit "Who Else Funds Innovation?"). Entrepreneurs recognize that their upside in companies or universities is limited by the institution's pay structure. The VC has no such caps.

The venture model provides an engine for commercializing technologies that formerly lay dormant in corporations and in the halls of academia. Despite the $133 billion U.S. corporations spend on R&D, their basic structure makes entrepreneurship nearly impossible. Because R&D relies on a cooperative and collaborative environment, it is difficult, if not impossible, for companies to differentially reward employees working side by side, even if one has a brilliant idea and the other doesn't. Compensation typically comes in the form of status and promotion, not money. It would be an organizational and compensation nightmare for companies to try to duplicate the venture capital strategy.

Furthermore, companies typically invest in and protect their existing market positions; they tend to fund only those ideas that are central to their strategies. The result is a reservoir of talent and new ideas, which creates the pool for new ventures.

For its part, the government provides two incentives to develop and commercialize new technology. The first is the patent and trademark system, which provides monopolies for inventive products in return for full disclosure of the technology. That, in turn, provides a base for future technology development. The second is the direct funding of speculative projects that corporations and individuals can't or won't fund. Such seed funding is expected to create jobs and boost the economy.

Although many universities bemoan the fact that some professors are getting rich from their research, remember that most of the research is funded by the government. From the government's perspective, that is exactly what their $63 billion in R&D funding is intended to do.

The newest funding source for entrepreneurs are so-called angels, wealthy individuals who typically contribute seed capital, advice, and support for businesses in which they themselves are experienced. We estimate that they provide $20 billion to start-ups, a far greater amount than venture capitalists do. Turning to angels may be an excellent strategy, particularly for businesses in industries that are not currently in favor among the venture community. But for angels, these investments are a sideline, not a primary business.

Downsizing and reengineering have shattered the historical security of corporate employment. The corporation has shown employees its version of loyalty. Good employees today recognize the inherent insecurity of their positions and, in return, have little loyalty themselves.

Additionally, the United States is unique in its willingness to embrace risk-taking and entrepreneurship. Unlike many Far Eastern and European cultures, the culture of the United States attaches little, if any, stigma to trying and failing in a new enterprise. Leaving and returning to a corporation is often rewarded.

For all these reasons, venture capital is an attractive deal for entrepreneurs. Those who lack new ideas, funds, skills, or tolerance for risk to start something alone may be quite willing to be hired into a well-funded and supported venture. Corporate and academic training provides many of the technological and business skills necessary for the task while venture capital contributes both the financing and an economic reward structure well beyond what corporations or universities afford. Even if a founder is ultimately demoted as the company grows, he or she can still get rich because the value of the stock will far outweigh the value of any forgone salary.

By understanding how venture capital actually works, astute entrepreneurs can mitigate their risks and increase their potential rewards. Many entrepreneurs make the mistake of thinking that venture capitalists are looking for good ideas when, in fact, they are looking for good managers in particular industry segments. The value of any individual to a VC is thus a function of the following conditions:

the number of people within the high-growth industry that are qualified for the position;

the position itself (CEO, CFO, VP of R&D, technician);

the match of the person's skills, reputation, and incentives to the VC firm;

the willingness to take risks; and

the ability to sell oneself.

Entrepreneurs who satisfy these conditions come to the table with a strong negotiating position. The ideal candidate will also have a business track record, preferably in a prior successful IPO, that makes the VC comfortable. His reputation will be such that the investment in him will be seen as a prudent risk. VCs want to invest in proven, successful people.

Just like VCs, entrepreneurs need to make their own assessments of the industry fundamentals, the skills and funding needed, and the probability of success over a reasonably short time frame. Many excellent entrepreneurs are frustrated by what they see as an unfair deal process and equity position. They don't understand the basic economics of the venture business and the lack of financial alternatives available to them. The VCs are usually in the position of power by being the only source of capital and by having the ability to influence the network. But the lack of good managers who can deal with uncertainty, high growth, and high risk can provide leverage to the truly competent entrepreneur. Entrepreneurs who are sought after by competing VCs would be wise to ask the following questions:

Who will serve on our board and what is that person's position in the VC firm?

How many other boards does the VC serve on?

Has the VC ever written and funded his or her own business plan successfully?

What, if any, is the VC's direct operating or technical experience in this industry segment?

What is the firm's reputation with entrepreneurs who have been fired or involved in unsuccessful ventures?

The VC partner with solid experience and proven skill is a true "trail-wise sidekick." Most VCs, however, have never worked in the funded industry or have never been in a down cycle. And, unfortunately, many entrepreneurs are self-absorbed and believe that their own ideas or skills are the key to success. In fact, the VC's financial and business skills play an important role in the company's eventual success. Moreover, every company goes through a life cycle; each stage requires a different set of management skills. The person who starts the business is seldom the person who can grow it, and that person is seldom the one who can lead a much larger company. Thus it is unlikely that the founder will be the same person who takes the company public.

Ultimately, the entrepreneur needs to show the venture capitalist that his team and idea fit into the VC's current focus and that his equity participation and management skills will make the VC's job easier and the returns higher. When the entrepreneur understands the needs of the funding source and sets expectations properly, both the VC and entrepreneur can profit handsomely.

. . .

Although venture capital has grown dramatically over the past ten years, it still constitutes only a tiny part of the U.S. economy. Thus in principle, it could grow exponentially. More likely, however, the cyclical nature of the public markets, with their historic booms and busts, will check the industry's growth. Companies are now going public with valuations in the hundreds of millions of dollars without ever making a penny. And if history is any guide, most of these companies never will.

The system described here works well for the players it serves: entrepreneurs, institutional investors, investment bankers, and the venture capitalists themselves. It also serves the supporting cast of lawyers, advisers, and accountants. Whether it meets the needs of the investing public is still an open question.

A version of this article appeared in the November-December 1998 issue of Harvard Business Review.

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The popular mythology surrounding the U.S. venture-capital industry derives from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk-taking and for their hands-on operating experience. But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S.

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EstVCA / Estonian Private Equity And Venture Capital Association

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Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. For startups without access to capital markets, venture capital is an essential source of money. Risk is typically high for investors, but the downside for the startup is that these venture capitalists usually get a say in company decisions.

(http://www.investopedia.com/terms/v/venturecapital.asp)