Saturday, May 19, 2007

Nanotechnology Now - Does Nanotechnology need Venture Capital to be Successful?

"To exit in venture capital (VC) means to sell the business with sufficient return on capital invested. Typically this can be done by an initial public offering (IPO) or through an acquisition by a company that needs and can afford to pay for the business. Their return is expected from the exit in cash or some other liquid or saleable shares, but not stock. So cash flow, per se, is not that important to VC's with regard to business revenues. However, what is important to them is the value of the company because that is for what they can sell the business. The value of the business is calculated based on future or forecasted revenues or cash flow (see previous article on January 2006 on how to value a company).

The typical venture capital fund is a limited partnership (LP) of investors, investing over a fixed period. Those investors or limited partners (LP's) commit to putting up into the fund a defined amount of capital, which is drawn down when needed and requested and invested. This period is typically seven to ten years with options for extension for a few more years. The capital is invested and controlled by a management company. This management company is usually organized as a limited liability company (LLC), and is the general partner (GP) of the LP. Each of the 15-25 venture investments made within a fund is usually in a private company. The LP's expect their money back with a healthy return before the end of the investment period. Usually this return is 10 times the invested capital. GP, LP, and LLC are different types of business legal structures such as a corporation (Corp or Inc)."

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