Introduction to Corporate Finance

ONLINE CHAPTERS

20-2a TYPES OF VENTURE CAPITAL FUNDS

When discussing venture capital, it is important to differentiate carefully between institutional venture

capital funds and angel capitalists. Institutional venture capital funds are formal business entities in which full-

time professionals seek out and fund promising ventures, whereas angel capitalists (or angels) are wealthy

individuals who make private-equity investments on a more ad hoc basis. A vibrant market for angel

capital routinely provides billions per year in total equity investment to private businesses in the United

States. In many years, the amount of capital provided by angel capitalists rivals that invested by venture

capitalists. Nonetheless, we focus on the former group because these companies operate nationally and

provide the performance benchmark against which all private equity investment is compared. Although

statistics on angel capitalists are difficult to find, the role of angel investors in nurturing the growth of

new businesses has been highlighted in a successful television program, Dragon’s Den, which originated

in the UK but has been copied in a number of countries, including Australia. (A current version of the

series is named Shark Tank.) On the show, entrepreneurs and inventors pitch their ideas to try to obtain

funding and advice from a number of angel investors.

There are a number of main categories of institutional venture capital funds. First, financial venture

capital funds are subsidiaries of financial institutions, particularly commercial banks. These are generally set

up both to nurture companies, which will ultimately become profitable customers of the corporate parent,

and to earn high investment returns by leveraging the financial expertise and contacts of existing corporate

staff. Second, corporate venture capital funds are subsidiaries or stand-alone companies established by non-

financial corporations, which are eager to gain access to emerging technologies by making early-stage

investments in high-tech companies. Finally, venture capital limited partnerships are funds that are established

by professional venture capital companies. These companies act as the general partners – organising,

investing, managing and ultimately liquidating the capital raised from the limited partners. Most limited

partnerships have a single-industry focus that is determined by the expertise of the general partners.

In the US, there are also small business investment companies (SBICs), which are federally chartered

corporations established as a result of the Small Business Administration Act of 1958.

LO20.2

institutional venture
capital funds
Formal business entities
with full-time professionals
dedicated to seeking out and
funding promising ventures

angel capitalists
Wealthy individuals who make
private equity investments on
an ad hoc basis

financial venture capital
funds
Subsidiaries of financial
institutions, particularly
commercial banks

corporate venture capital
funds
Subsidiaries or stand-alone
companies established by
non-financial corporations
to gain access to emerging
technologies

venture capital limited
partnerships
Funds established by
professional venture capital
companies, and organised as
limited partnerships

FIGURE 20.1 FUNDS RAISED BY THE AUSTRALIAN VC AND PE INDUSTRY

This figure details the funds raised by Australian VC and PE funds over the 10-year period to June 2014.

FY06FY07FY08FY09FY10FY11

VC funds PE funds

FY12FY13FY14FY15

No. of funds

A$m

0

3

6

9

12

15

0

100

200

300

400

No. of funds

A$m

FY06FY07FY08FY09FY10FY11FY12FY13FY14FY15

0

5

10

15

20

0

2,000

4,000

6,000

8,000

10,000

Amount (A$m)

No. of funds

Amount (A$m)

No. of funds

Source: Australian Private Equity and Venture Capital Association Limited. Used with permission. 2015 Yearbook: Australian Private Equity and Venture Capital Activity Report, November

2015. AVCAL in partnership with Ernst & Young, p. 8.