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This paper presents research done on the effects of the Internet
on Venture Capital and how it affects both the entrepreneur seeking
capital, and the venture capital firms. Some specific sites are
used as examples of how technology is being used to improve the
overall venture capital process.
Disclaimer
This is a student research paper conducted as part of the requirements
for the "Management of the High Technology Firm Seminar"
at the Leavey Graduate School of Business, Santa Clara University.
The report was not written by Santa Clara University, the Leavey
Graduate School of Business, or its faculty. Accordingly, neither
the University, the Leavey Graduate School of Business, nor its
faculty endorses the report's methodology or conclusions. The
University does not authorize the use of its name or the names
of the Leavey Graduate School of Business or the members of its
faculty in connection with any publication or dissemination of
its study or the results of this study.
The opinions and conclusions presented are ours and is presented without any warranties. Standard Disclaimers apply. This research may be used for any non-commercial purpose provided it is properly cited.
The Internet has become a powerful vehicle for the entrepreneur in search of venture capital funding, and conversely, for the venture capitalist looking for good investment opportunities. Information which would have previously taken an enormous amount of research to find or was completely unavailable can now be obtained with a network connection and a few keystrokes. It is now possible to easily acquire data on most existing venture firms as well as firms that are actively seeking new businesses in which to invest. In addition, information to prepare the entrepreneur for the requirements of venture funding is abundant on the web. Even the process of actually obtaining funding has been impacted by the use of the Internet.
Much of the fundamental process remains the same, however. Entrepreneurs still must prepare a compelling business plan based on sound business principles and good ideas. Venture capitalists are still interested in the same basic things such as return on investment and downside risk.
This paper describes what some of the advantages of using the
Internet are for the entrepreneur and the venture capitalist.
Next, some examples of the uses and applications of the Internet
for venture capital funding are explored. Some of the negative
impact of the Internet is presented following this. Finally,
the new investment opportunities presented by the Internet for
Venture Capital firms are discussed.
II. Compelling Advantages
If the entrepreneur is well connected and well known in his field, he will likely have little problem attracting investors. However, since venture capitalists reject a great majority of the new venture ideas that they review, the newcomer entrepreneur needs a competitive advantage over his rivals in seeking funding. The Internet can provide information which allows a better understanding of the requirements associated with venture funding as well as providing a window into what the venture community perceives as "hot" areas in which to invest. The Internet also allows the entrepreneur to target specific venture firms specializing in the entrepreneur's business. This benefits both the seeker and the venture capitalist; the seeker submits his business plan to companies where he has the best chance of receiving funds, and the venture capitalist receives the type of applications and business plans they are most interested in. With a choice of venture capitalists, entrepreneurs now have a much wider selection of firms to work with, which should result in better relationships, and a better chance for a successful investment.
Some venture firms will accept applications and business plans on-line, which increases the efficiency of the submission process. Traditionally, most venture capital firms only considered business plans brought to their attention through industry contacts or previous clients. Today, the Internet is changing this limitation because venture capital firms that have a web presence are opening their doors to all entrepreneurs. It can also be argued that this change is also a result of the increasing competition among venture capitalists to obtain and secure good start-up projects. Ann Winblad of Hummer Winblad Venture Partners prefers to receive executive summaries of business plans via email. According to Ann "Email submissions tend to go the top of our stack as they are staring us in the face on our desktops at work and at home. All of our partners share a common mail server so it also allows us to route plans quicker if we can do it digitally, even to read submissions when we are on the road."
Another historical trend that is being eroded is the "good-old-boys network" that serves as a double edged sword. While it allows members easy access to the pool of resources, it limited the resources available to outsiders and non-members. This presents a great disadvantage to a new entrepreneur who has to find a more senior entrepreneur who is willing to act as a mentor and guide before he can obtain funding from the venture capital community.
The venture capitalist can also use the Internet for doing due
diligence on business plans because they have easy access to research
reports, information on who is working on what technology, news,
etc. It also allows the venture capitalist to use personal resources
to stay abreast of what is happening, providing a quantum leap
in productivity according to Kevin Fong of the Mayfield Fund.
III. Examples of Uses and Applications
There are many web sites with information on the basics of venture capital such as the preliminary evaluation of an idea, how to prepare a business plan, how to find and attract a venture capital firm and what are some of the keys to success. For example, Venture Planning Associates' "Venture Capital Basics" lists 5 critical questions that investors will ask, which include the expected ROI, the potential downside, the market feasibility of the project, the management team and the exit strategy. Next, it provides guidelines on the documentation process, which includes the Executive Summary, the business plan, Due Diligence material, Business Valuations and the Deal Structures. Finally, there are tips for success tips and advise to the new entrepreneur.
Another good source of information on venture capital basics is "Venture Capital 101" by Capital Venture. This site provides an overview on the buy and sell sides of the financial industry and where venture capital fits into the model in relation to other funding sources such as Angels, private placements, LBOs and IPOs. There is also a comprehensive list of different funding stages, such as Seed, Start-up, First Stage (or Early Stage), Second Stage (or Later Stage), Third Stage (Mezzanine) and Bridge. Finally, there is a section on understanding venture capital from the investor's side of view.
The "Venture Capital Process" is described in more detail by Venture Planning Associates. Successful venture capital is described as "a process of reducing perceived risk to the lowest possible level." Venture Planning Associates recommends seven levels of research and planning for a startup, which are: the feasibility study, the business plan, the financial plan, the operations plan, identifying funding sources, business evaluation analysis and exit strategies.
The Internet is also a source for entrepreneur training and development opportunities. The Kauffman Fellows Program, a partnership between the Center for Entrepreneurial Leadership and numerous venture capital firms, is one of many programs created to develop new entrepreneurs through mentoring by senior entrepreneurs and venture capitalists. A list of Venture Capital information sources is given in Appendix 1, under "Information on Venture Capital"
In addition to providing elementary information about venture capital, the Internet has also become one of the most comprehensive sources for listing for venture capital firms. These on-line directories provide the names and contact information for hundreds of venture capital sources. Most of the venture capital firms on the web will also present information on the types of products and markets that they are interested in, their investment philosophy, their requirements and the services they offer.
One of the most comprehensive list of venture capital firms is provided by Yahoo, with about 150 different companies. Other directories include Capital Venture, FinanceHub, Venture Capital World, Venture Capital Institute and Price Waterhouse. Price Waterhouse also sorts the companies by industry and state, making it easier to pick specific firms. The web sites for all these directories are listed in Appendix 1, under "Networking and VC Contacts."
New tools and services have also evolved as a result of the explosive growth in the use of the Internet. For example, there are now search engines and databases that specialize in matching entrepreneurs and venture capital investors, based on the amount and type of investment, the business industry or geographical preference. These tools increase the number of successful matches in a much shorter time which benefits both the entrepreneur and the venture firm. Some firms have commercialized this service. One example is Venture Planning Associates who charge $95 for a guaranteed match from their U.S. and Asian database of venture capital sources. A few other search engines are provided by $earch$can, FinanceHub and the American Business Funding Directory. "Venture Capital Services and Searches" in Appendix 1 lists the actual web sites.
The Internet has also made it easier for entrepreneurs and venture capitalists to stay in touch with the current developments in the venture capital world. Daily Venture Capital News is a service that provides free daily news articles on venture capital activities across the United States. The San Jose Mercury News has recently added a web page for Venture Capital news, where it has posted some recent news articles related to venture funding. There are also venture capital mailing lists where subscribers can send and receive e-mails related to venture capital discussions and issues.
Research data which traditionally took a long time to gather, analyze and publish has also benefited from technology's progress. Price Waterhouse conducts a quarterly survey on all venture capital activity and publishes its findings on the Internet showing the amount of venture capital invested, the top industries and geographical markets funded and other general market trends. In the third quarter of 1996, 369 venture capital companies participated in the survey. 444 companies received funding totaling $2 billion, and increase of 25% over the same period in 1995. Here is a chart showing the amount of investments in each geographical region in the United States. With timely data like this, entrepreneurs and venture capitalists can get a more accurate measure of the overall investment market which may affect their financing decisions.
These tools and resources mentioned in this section are listed
in Appendix 1, under "Venture Capital News and Statistics"
and "Venture Capital Mailing Lists."
IV. Investment Opportunities
In addition to facilitating the relationship between the venture capitalist and the entrepreneur, the Internet itself is providing investment opportunities for venture capital funds. Most opportunities fall into two basic categories: Tools and content. The tools portion includes any software or hardware that makes the Internet easier to use, easier to manage, provides a better search and retrieval capability, or allows secure transactions to occur over the Internet. This area has exploded over the last few years including the emergence of brouser companies such as Netscape and the creation of Internet service providers. Demand for bandwidth had already begun to skyrocket, providing opportunities for companies that can provide adequate solutions.
The content portion includes service and information providers who are developing new and innovative sales channels that are lower in expense but more efficient as a mass-medium sales channel. This area has yet to blossom, and according to some experts will be the largest part of the picture.
In the future, we will see the capability to download movies,
television programs, music and other information - the fusion
of the personal computer and the television. Interpersonal video
communication will be as ubiquitous as audio communication is
today. This revolution will change the very fabric of society
in ways unimagined today.
V. Negative Impact
Not all the changes brought by the Internet are positive. As with any change, there are associated problems. First of all, there is the cost of training people to be proficient in the use of the Internet and its tangled web of tools, applications, restrictions, copyright issues and security concerns. The Internet is an inherently insecure environment, and there is always the risk that any information sent through the Internet may be intercepted by the wrong parties. The solution to this is to use yet more technology, namely data encryption.
Internet access is not free and now entrepreneurs and venture capital firms have to add a budget for their Internet resources. Next, there is the on-going cost of keeping up with the latest changes in hardware, software, user applications and hot new tools. These factors affect both the entrepreneur and the venture capital firms because in most cases, these activities serve as distractions from their core competencies and purpose. Trying to figure out how to encode or decode a business plan document submitted over the Internet is not effective use of the entrepreneur's or venture capitalist's time.
The Internet revolution has also created a society of virtual-relationships. Today, hundreds of thousands of business transactions are completed without the transacting parties ever meeting face to face. This "impersonal" touch is not suitable for the venture capital process where the investor usually needs to evaluate the quality of the entrepreneur's management team.
Another impact of the Internet relates to the quality versus quantity
of business plan submissions. Traditionally, venture capitalists
only received business plans which have already been scrutinized
by a senior entrepreneur or angel. With electronic submissions,
eager new entrepreneurs will fill the venture capital investor's
mailbox with less thoroughly developed business plans. This takes
up more of the VC's time, and may reflect poorly on the inexperienced
entrepreneur.
VI. Conclusion
The Internet has impacted the venture capital funding process in many ways, most of which are positive. Instant access to information, direct contact between entrepreneurs and investors, electronic business plans and the elimination of physical boundaries are but just a few of these advantages. However, the cost for these advancements may not come cheap. Entrepreneurs and Venture firms now have to keep up with rapidly changing technology or get left behind by their competitors.
Still, the world of venture capital is changing as fast as the changes in technology today. More changes and improvements will come, fueled by increasing competition for venture capitalists who must embrace every competitive advantage to survive. For tenderfoot entrepreneurs, the Internet has given them a better chance at securing financial resources. However, some things will never change: the need for a compelling new product or idea, a sound business plan, due diligence, and a lot of luck.
Information on Venture Capital:
Venture Capital Services and Searches:
Venture Capital News and Statistics:
Venture Capital Mailing Lists: