Venture Capital
for the
Communications and Software & Information Industries
Prepared by:
Donn W. Grimm
Venture capital is defined as funds supplied to companies in the formation or growth stage of development by wealthy individuals, partnerships, or corporations. These funded companies usually have proprietary products or services, large market potential, proven management talent, and/or extraordinary anticipated returns. Communications and Software & Information Industries venture-funded companies are expected to be able to grow $50-$100M in five to seven years and produce returns of 35-50% per year. On average, venture capital firms fund fewer than one in a hundred of the business plans they receive and only expect one in ten of those businesses to produce a "home run." While venture capital is typically associated with "seed" or "concept" businesses, the majority of investments go to more established companies -- generally those in the startup, first, or second phase of development. This occurs primarily because venture capital firms shy away from companies that have no equity investors or management structure in place. Since private equity is usually obtained during the startup phase of a business, venture capital firms prefer to invest during later stages of development.
In the first quarter of 1998, 703 companies received $3.6B of funding from 735 venture capital firms. The total companies funded and the average investment increased approximately 23% each over the previous year. The $3.6B of funding was the second largest amount of venture capital invested during any three-month period in history. At the forefront of this venture capital surge are the Communications and Software & Information industries.
In the first quarter of 1998, the Communications and Software & Information industries accounted for 49% of all companies funded by venture capital. These companies also represented 51% or $1.82B of the total venture capital contributed. The average venture capital investment of $5.3M per Communications and Software & Information company also outpaced the overall market venture capital investment average of $5.1M.
There are currently several hundred venture capital firms that invest in the Communications and Software & Information industries. Among the most active firms in the first quarter of 1998 were BancBoston Capital, Chase Capital Partners, St. Paul Venture Capital, and Summit Partners. During January, February, and March, these four companies invested a total of $270M in 50 Communications and Software & Information companies, an average of $5.4M per company. St. Paul Venture Capital was the most active of the group, investing in 21 companies, while Chase Capital Partners averaged the largest investment per company of $11.2M. Summit Partners invested the most of any of these companies, a total investment amount of $104M.
Silicon Valley is currently the hotbed for most venture-funded Software & Information companies. During the first quarter, Silicon Valley accounted for nearly 40% of all Software & Information investments nationally. Communications investments, on the other hand, were more diverse with Washington, DC, New England, and New York Metro all attracting significant shares.
Understanding the intricacies of venture capital and how it can be used to support Communications and Software & Information Industries is very difficult. Currently there is a plethora of information on venture capital available; however, sifting through all of this data to find pertinent information can be very time consuming. Knowing that entrepreneurs have very little time for extensive research, I have attempted to find the needles in the haystack.
To better understand and obtain information on when is the appropriate time to seek venture capital for your Communications and Software & Information company; where venture capital can be obtained for Communications and Software & Information business opportunities, including contact information for the majority of venture capital firms focusing on this industry; and how your company can attract interest from the venture capital community, including notifying venture capital firms of your opportunity, please visit the following World Wide Web addresses: