Venture Capital Is Key To Making Innovative Ideas Succeed

Clean technology is fastest growing sector attracting venture capital

By Jeffrey Thomas / SINFO Staff Writer
19 December 2007

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.

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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