Venture Capital in the United States
Venture Capital: the Small Business Investment Company
This Small Business Investment Company (SBIC) program was created in 1958 to ?ll the gap between the availability of venture capital and the needs of small businesses in startup and growth situations. The structure of the program is unique in that Small Business Investment Companies are privately owned and managed venture capital funds, licensed and regulated by the Small Business Administration (SBA), that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses. The New Markets Venture Capital (NMVC) program is a sister program focused on low-income areas, which augments the contribution made by Small Business Investment Companies to small businesses in the United States. In addition, New Markets Venture Capital companies may make technical assistance grants to potential portfolio companies.
The Government itself does not make direct investments or target speci?c industries in the Small Business Investment Company program. Fund portfolio management and investment decisions are left to quali?ed private fund managers. To obtain a Small Business Investment Company license, an experienced team of private equity managers must secure minimum commitments from private investors. Small Business Investment Companies may only invest in small businesses having net worth of less than $18 million and average aftertax income for the previous 2 years of less than $6 million. For further information, contact the Investment Division by Internet here: http://www.sba.gov/inv.
Private Equity and Venture Capital Legal Materials
“Venture Capital” and “Private Equity” are both ways for a company to raise money without “going public” and conforming to the securities regulations, stock exchange rules and disclosure requirements required of public companies.
I believe that, technically, “Private Equity” means selling equity securities not listed on a stock exchange, and “Venture Capital” is a type of “Private Equity.” In common parlance, though, there are subtle but significant differences between the two. Private Equity companies generally buy entire companies, and the companies are generally established enterprises. Venture Capital funds generally invest in start-ups and other early-stage companies without access to the capital markets yet. Venture Capital investors generally take a minority ownership share in the company and do not buy the whole thing. As a result, Venture Capital investments are generally smaller than Private Equity deals. Other differences: Private Equity sometimes uses buys a company with a combination of debt and cash, while Venture Capital generally uses just cash.
Research Resources: Databases for researching venture capital firms and deals include Dow Jones VentureSource, CB Insights, CB Insights, the Private Equity module in Thomson ONE (formerly VentureXpert), and Capital IQ. These are expensive subscription services, but I hear they’re key tools for serious VC research.
You can search a basic database of private equity deals by clicking Private Equity > M&A on the toolbar of The Deal.
The Practical Law Company provides practical advice on how to structure private equity and venture capital transactions including model forms (with commentary), sample clauses, checklists and detailed explanations. See also Structuring Venture Capital, Private Equity and Entreprenurial Transactions (Aspen Publishers) and DealLawyers.com.
Directories of VC firms include private equity info, Galantes and Pratt’s Guide to Private Equity and Venture Capital Sources. All three are available as subscription database; Pratt’s is also available in print. private equity info has affordable 1-month and 3-month subscriptions. Also, Massinvestor, Inc. publishes a series of regional directories (e.g.,Rocky Mountain Venture Capital or New York Venture Capital).
You can identify the biggest VC deals and players through the PCW Reports available on the MoneyTree Report (free, though registration is required for some reports) and the National Venture Capital Association web site. WhoGotFunded.com compiles and organizes information on publicly announced deals, starting February 2012 (free registration required).
For definitions, see The Glossary of Private Equity and Venture Capital (free).
The The Encyclopedia of Private Equity and Venture Capital discusses major topics in Venture Capital financing (subscription required, but you can sign up for just one month).
Fund management: For information on how to structure funds, including management fees, see Private Equity Partnership Terms & Conditions in print or online (Dow Jones), the PE/VC Partnership Agreements study (ThomsonReuters/Herrick), and the treatisePrivate Equity (Practicing Law Institute).
League Tables: The PEI 300 by Private Equity International lists the 300 biggest private equity groups in the world based on “how much capital they have raised for private equity in the last five years (free registration required). The LP 50, also by Private Equity International, lists the 50 limited partners that have directly invested the most equity capital free registration required).
Statistics: See The MoneyTree Report, a quarterly study of venture capital investment activity in the United States, published as a collaboration between PricewaterhouseCoopers and the National Venture Capital Association based upon data from Thomson Reuters.
Term Sheets: A “Term Sheet” is a non-binding list of terms proposed by a Venture Capital company at the beginning stages of a deal. A Term Sheet is similar to a Letter of Intent but a term sheet is generally drafted as a bulleted list rather than a letter. Useful resources include:
- “How to Negotiate a Term Sheet,” Part I and Part II, for an overview of common term sheet terms;
- “A Pragmatic View of Term Sheets and Ancillary Agreements” in the PLI Course Handbook Drafting and Negotiating Corporate Agreements 2010 (and 2011, etc.);
- Advanced Private Equity Term Sheets and Series A Documents (Law Journal Press).
- If you subscribe, the Term Sheet chapter of The Encyclopedia of Private Equity and Venture Capital.
Blue Sky Laws