How Venture Capital Works.pdf

ACCOUNTING How?Venture?Capital?Works by?Bob?Zider FROM?THE?NOVEMBER-DECEMBER?1998?ISSUE Invention and innovation drive the U.S. economy. What’s more, they have a powerfulgrip on the nation’s collective imagination. The popular press is filled with against-all-odds success stories of Silicon Valley entrepreneurs. In these sagas, the entrepreneur is the modern-day cowboy, roaming new industrial frontiers much the same way that earlier Americans explored the West. At his side stands the venture capitalist, a trail-wise sidekick ready to help the hero through all the tight spots—in exchange, of course, for a piece of the action. As with most myths, there’s some truth to this story. Arthur Rock, Tommy Davis, Tom Perkins, Eugene Kleiner, and other early venture capitalists are legendary for the parts they played in creating the modern computer industry. Their investing knowledge and operating experience were as valuable as their capital. But as the venture capital business has evolved over the past 30 years, the image of a cowboy with his sidekick has become increasingly outdated. Today’s venture capitalists look more like bankers, and the entrepreneurs they fund look more like M.B.A.’s. The U.S. venture-capital industry is envied throughout the world as an engine of economic growth. Although the collective imagination romanticizes the industry, separating the popular myths from the current realities is crucial to understanding how this important piece of the U.S. economy operates. For entrepreneurs (and would-be entrepreneurs), such an analysis may prove especially beneficial. Venture?Capital?Fills?a?Void Profile?of?the?Ideal?Entrepreneur From?a?venture?capitalist’s?perspective,?the ideal?entrepreneur: is qualified in a “hot” area of interest, delivers sales or technical advances such as FDA approval with reasonable probability, tells a compelling story and is presentable to outside investors, recognizes the need for speed to an IPO for liquidity, has a good reputation a