A handful of business contacts and friends have inquired about the world of venture capital. To answer some of their questions, I thought I would start blogging more about VC 101, starting today.

The basic intro is the financial realm is split into the private and public markets, with investments in private companies known as private equity. Private companies, much like public companies, are broken down into segments by their revenues (or market cap in the case of public companies) and investors often have a preference on the size of company they target for investments.

The private equity world is split into the following segments:

The lines between the stages are quite blurry, but a general description would be the following. Note that most PE investors invest in a specific stage.

• Seed stage: startup company, little or no revenues, not profitable, needs financing to build concept / complete research
• Early Stage: startup company, revenues between $2 - 10m, may or may not be profitable, needs financing to build concept and bring on team
• Expansion: established company, revenues in the $10 - 25m range, profitable, needs capital to make a big push into the market or to grow sales force
• Mezzanine: established company, millions in revenue ($25m +), profitable, needs capital to increase sales and operations before going public

A venture capital firm has groupings of capital called funds which it invests into a number of companies. The usual success breakdown out of 10 companies is 5 will fail, 3 will be mediocre and 2 will be a huge success, returning enough capital (hopefully) to cover the losses of the 5 failures. These successes occur when the business either merges with another company, is acquired, goes public or is bought by a private equity firm. Each of these events provides the VC investor an exit, or the chance to liquidate the position, hopefully which has increased in value over the 4-7 holding period.

The VC funds consist of millions of dollars and consist of investments made by banks, pension funds, foundations, insurance companies, wealthy individuals, fund of funds, etc. These investors, known as limited partners, would have a portfolio of their own, allocating a small percentage to venture capital investing or, in the case of a Fund to Funds, amongst a number of different venture capital firms.

A VC firm continues to raise new funds, approximately every 3 -4 years, by providing a high return to its investors, enticing them to continue to allocate a portion of their funds to this alternative asset.