Introduction to Corporate Finance

ONLINE CHAPTERS

20-2d VENTURE CAPITAL AND PRIVATE EQUITY INVESTMENT BY

STAGE OF COMPANY DEVELOPMENT

The popular image of VCs holds that they specialise in making investments in startup or very early-stage

companies. This is not necessarily true, and varies by year. However, in general, although the number of

investments in startup, seed or early-stage investments may be relatively high, the typical investment sizes

are substantially smaller than for later-stage investments. As can be seen from Table 20.3, in financial year

2015 Australian early-stage financing (seed, startup and other early stage funding) typically accounted for

about 6% of total investment in the industry, by value, although these investments comprised 44% of the

total number of industry investments. Being rational investors, venture capitalists are as leery as anyone

else of backing extremely risky new companies. They are more likely to invest if the entrepreneur–founder

is well known to the venture capitalists or the venture is exceptionally promising, or both.

Expansion financing represented around 38% of total Australian industry investment in FY 2015, and the

buyout sector attracted 41% of all investment. (Although the buyout sector represented only 12% of the total

number of industry investments.) This bias towards the expansion capital and buyout sector in Australia reflects

the investment choices and risk preferences of many institutional investors. As we saw earlier (in Figure 20.2

on page 694), institutional investors (including superannuation funds, pension funds and sovereign funds)

account for a large part of the investment into the VC and PE industry. They often perceive early stage VC

investment as being too high risk to include in their portfolios. In many cases, their investment mandates may

specifically prevent them from investing in such investments. Thus, in order to reap the diversification benefits

from investing in the private equity sector, they tend to focus on the expansion and buyout sectors.

In the US, pension funds and endowment funds tend to be more aggressive in their attitude towards

risk, making early stage VC investments more acceptable as portfolio choices.

Although the distribution between early- and later-stage funding varies from year to year, one principle

of venture capital funding never changes – the earlier the development stage of the company being

financed, the higher the expected return on investment demanded by the venture capitalist. Professional

venture management skills of uniseed’s and the

universities’ commercialisation personnel; and the

option to provide direct follow-on funding into

uniseed investee companies.

The university partners benefit from three main

financial outcomes: research income; investment

return; and value generated from intellectual

property. In addition, uniseed investee companies

have provided the following to its university

shareholders:

Over 800 patents have been supported by

Uniseed investee companies (over 100 patent

families)

Over 300 people have been employed through

the support of Uniseed investee companies,

with many of thse employed at our research

partners

Over 130 journal articles have been published on

research projects funded by these companies

Over 600 media releases and news articles

have been published on Uniseed investee

companies

Over 200 presentations have been made

at conferences and seminars, or in industry

magazines, based on research funded by

Uniseed investee companies

More than 40 key inventors have been able to

lead the formation of new companies, which

under Uniseed’s funding and development

model can be done while remaining in their

academic posts.

Source: Uniseed. Used with permission. http://www.uniseed.com.au,

accessed 22 January 2016.

LO20.3