Jan
10
Article Summary: “How Venture Capital Works” by Zider, Bob
January 10, 2009 | Comments Off on Article Summary: “How Venture Capital Works” by Zider, Bob
This is a summary I have written for Zider’s article “How Venture Capital Works”, originally as part of my Harvard Innovation and Business Transformation class assignment.
Venture capitalists buy a stake in an entrepreneur’s idea, invest in the balance sheet and infrastructure until the business grows large enough to be sold to a corporation or the public through IPO. More than 80% of venture capital money goes to the commercialization of an innovation, the money is invested in the infrastructure: expense investments (manufacturing, sales) and balance sheets (fixed assets, working capital). VCs prefer to invest in good managers and good industries that are in the adolescent phrase: fast growing with its capacity constrained in 5 years. Downside protection and favorable reinvestment options are commonly required by VCs. VCs adopts a portfolio approach, they expect 10 times return of capital over 5 years, and prefer entrepreneurs to have prior business experience, the ability to sell oneself and outstanding skills.
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