Venture capital

New ways of financing technology innovation

2001 Occasional Paper
By Pfeil, Andreas

During the 1990s, venture capital (VC) emerged as a new source to finance technology innovation in the private sector. Especially in the United States many small high-tech start-up companies in Silicon Valley or outside Boston received financing from VC funds. Lately VC has also begun to play an increasingly important role in European and Asian countries. Although empirical evidence is still scarce, there is no question that VC stimulates innovative activity. What is venture capital? The OECD (1996) defines venture capital “as capital provided by firms who invest alongside management in young companies that are not quoted on the stock market. The objective is high return from the investment. Value is created by the young company in partnership with the venture capitalist’s money and professional expertise.” In practice, VC firms raise funds, invest them in start-up companies and buy existing businesses. Venture capital firms are profit-driven. A successful investment may yield up to 100% rate of return on invested capital or even more. During the last years the average rate of return has been around 15% to 20%. American experts usually emphasize that venture capital is risky business - many investments fail or do not generate significant rates of return.