A venture capital primer.


I: venture capital funding

Venture capital (VC) is the best-known type of funding. It is a high-risk equity investment by experienced fund managers in companies with dramatic, short-term growth potential. Investments should yield earnings several times the size of the original equity investment over five to seven years. Venture capital firms will expect a minimum 20-percent return, usually in three to five years. Many will expect 40 to 50 percent. More patient investors--called mezzanine investors--will sometimes allow a longer lead time, make some money off interest on a loan and expect to have some warrants (equity shares) in the company. A few (but not most) Michigan VC firms finance as little as $50,000, but generally the smallest deal is in the $250,000 to $500,000 range. The average size of a "preferred" VC investment is about $2.5 million, although that can range up to $8 million to $20 million for several VCs. The venture fund intends to "exit" its investment and benefit from the substantially increased valuation of the investee through either an IPO of stock in the public markets or through sale, acquisition or merger of the investee.


BIDCOs are privately owned, non-bank financial institutions that fill the moderate risk financing gap. BIDCOs provide financing between traditional bank lending and venture capital, although some do VC-type deals, depending on the specific BIDCO. They may do either debt or equity financing. Michigan BIDCOs have in excess of $65 million under management. BIDCOs in Michigan indicate that the amount they finance ranges from $50,000 to $1.5 million. The "average" size of their preferred deal is about $500,000, although some prefer larger deals and some lower.

III: Angel investors

"Angel" capital is a loosely defined term generally referring to individual investors of high net worth who provide "first-round" financing for riskier investments. Often these "angels" are successful business people or professionals themselves and are interested in putting their expertise and capital into other entrepreneurial ventures. Sometimes angels act on their own but often they are organized in various venture forums that facilitate initial contacts between entrepreneurs and investors. These networks or forums do not become involved in completing or structuring transactions. After introducing entrepreneurs and potential investors, they leave all further interactions to the parties involved.

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