Venture capital funding is generally in the form of equity. Venture capitalists manage funds, generally on a hands-off basis on behalf of other investors with the specific aim of making high returns. The other investors they might act for may include banks or superannuation/pension funds. Most venture capital funds expect to return a yield by exiting from their investment within five to ten years.
Many new high-tech firms, particularly those reliant more on a service than a manufacturing base, are not built on a substantial asset base. This is particularly true of the new biotech firm, although in some cases investors are prepared to consider patents as assets in the more traditional sense.
There are three major categories of businesses that seek venture capital. These are seed, start-up and growth firms. Start-up firms are probably the most common in biotech. They are firms in which the owner has a new, usually innovative, product that requires financial support for its commercialization. These are often considered to be high-risk ventures because they haven't proven themselves in the market.
Venture capital investment decisions take considerable time (from two to 12 months), and may involve lengthy due diligence processes and negotiations regarding equity and milestones. In many cases the venture capitalist will seek to play a significant role in the operation of the firm, such as a seat on the board and possibly day-to-day operational management involvement too. The degree of intervention of the venture capitalist in the running of the business is dependent upon the degree of development of the business concept. This is explained further in the next chapter.
Frequently, venture capital managers will seek to syndicate their investments by bringing in other investors to spread the risk and add to their pool of expertise. The fund managers will also generally take a portfolio approach to investment by mixing their investments across a range of firm types and stages, again to reduce risk. Generally the degree of expertise required results in focus on a specific industry sector such as drug development, devices, or agricultural biotechnology.
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