Handbook of Finance: Financial Markets and Instruments

Chapter 54. Introduction to Venture Capital

MARK J.P. ANSON, PhD, JD, CPA, CFA, CAIA

President and Executive Director of Nuveen Investment Services

Abstract: The private equity sector purchases the private stock or equity-linked securities of nonpublic companies that are expected to go public or provides the capital for public companies (or their divisions) that may wish to go private. The key component in either case is the private nature of the securities purchased. Private equity by definition, is not publicly traded. Therefore, investments in private equity are illiquid. Investors in this marketplace must be prepared to invest for the long haul—investment horizons may be as long as 5 to 10 years. Private equity is a generic term that encompasses four distinct strategies in the market for private investing. First, there is venture capital, the financing of start-up companies. Second, there are leveraged buyouts (LBOs) where public companies repurchase all of their outstanding shares and turn themselves into private companies. Third, there is mezzanine financing, a hybrid of private debt and equity financing. Finally, there is distressed debt investing. These are private equity investments in established (as opposed to start-up) but troubled companies.

Keywords: venture capitalist, limited partnership, limited liability company, investment restrictions, management fees, profit sharing, business plan, intellectual property, management team, exit plan, J curve, angel investor, seed ...