fusion point research Marketing Research Reports

Marketing to Venture Capital & Private Equity Leaders in Investment Banking

Understanding Their Role

Venture Capital organizations collect pools of money from investors for the purpose of investing these funds in private entrepreneurial companies. Since the Investment Bank managing the venture capital function receives equity (or partial ownership) of these companies in exchange for the funding, these types of investments are often referred to as a form of Private Equity.

 

Investors are attracted to Venture Capital investments because the returns can be higher than other forms of investing. Even though many venture capital investments turn sour, the successful ones are so profitable that the overall annual returns are often quite attractive. The Cambridge Associates U.S. venture capital index returned 18.9 percent annually during the recent 25-year period as of 2010. During the same period, the annual return for the S&P 500 index was 9.9 percent.1

 

The companies that receive funds from Venture Capital use the money for three broad purposes:2

 

  • Seed capital is used to cover expenses during the setting up, development, and testing stages of a new product, process, or business.
  • Working capital is raised to pay for outlays during the development stage when the product is near market potential
  • Acquisition capital is to fund the purchase of a new business

 

In addition to financial support, Venture Capital organizations may provide other value and services to the companies they fund. Examples include:3

 

  • Financial engineering refers to efforts to add value by improving a company’s capital structure. This is achieved by adding leverage from new outside sources.
  • Operational engineering refers to efforts by private equity firms to improve their portfolio companies through formal and informal consulting services. This consulting may help improve production processes, marketing, and product mix decisions and, ultimately, increase working capital.
  • Governance engineering refers to initiatives by private equity firms to create value in portfolio companies by improving incentives and creating monitoring processes that focus on improvements in cash flow through cost reductions and increases in revenue.

 

A typical Venture Capital fund lasts for about ten to twelve years, and its activities include four stages. The first stage is fundraising, and it usually takes several months to a year to obtain capital commitment from investors. The second stage is investment, where due diligence is conducted on prospective portfolio companies until one is chosen for investment- this phase typically lasts for about three to seven years. The next stage, which lasts until the closing of the fund, is to help portfolio companies grow. The final stage in the life of a Venture Capital fund is its closing, where the firm liquidates its position in all of its portfolio companies by the expiration date of the fund. Liquidation takes one of three forms: an initial public offering, a sale of the company, or bankruptcy.4

“Sponsors want to work with someone they can trust, and we've been very fortunate to earn their trust. Because of that trust, you are rewarded with the ability to finance their companies.”

- GE Antares CEO David Brackett5

1 Liaw, K. Thomas. The Business of Investment Banking: A Comprehensive Overview. 3rd ed. Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030.

2 Ibid

3 Stowell, David. Investment Banks, Hedge Funds, and Private Equity. 2nd ed. 225 Wyman Street, Waltham, MA 02451, USA The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1 GB, UK: Academic Press, 2012.

4 Thomas. The Business of Investment Banking: A Comprehensive Overview . 3rd ed.

5 Collins, Allison. “Interest Rate Environment is "Favorable," Says GE Antares CEO David Brackett.” SourceMedia. Accesses 11/19/15, available at: http://www.themiddlemarket.com/news/lender_news/buyers-want-to-close-quickly-says-ge-antares-ceo-david-brackett-256061-1.html

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Venture Capital and Private Equity are direct investments made in smaller companies by investment banks. They are riskier than most investments, but offer the potential of higher returns by funding new technologies, innovations and by the business expertise the investment bank provides.
fusion point research Marketing Research Reports
Venture Capital and Private Equity are direct investments made in smaller companies by investment banks. They are riskier than most investments, but offer the potential of higher returns by funding new technologies, innovations and by the business expertise the investment bank provides.
  • Seed capital is used to cover expenses during the setting up, development, and testing stages of a new product, process, or business.
  • Working capital is raised to pay for outlays during the development stage when the product is near market potential
  • Acquisition capital is to fund the purchase of a new business
  • Financial engineering refers to efforts to add value by improving a company’s capital structure. This is achieved by adding leverage from new outside sources.
  • Operational engineering refers to efforts by private equity firms to improve their portfolio companies through formal and informal consulting services. This consulting may help improve production processes, marketing, and product mix decisions and, ultimately, increase working capital.
  • Governance engineering refers to initiatives by private equity firms to create value in portfolio companies by improving incentives and creating monitoring processes that focus on improvements in cash flow through cost reductions and increases in revenue.