{"id":106,"date":"2008-01-13T00:00:51","date_gmt":"2008-01-13T06:00:51","guid":{"rendered":"http:\/\/www.financenewmexico.org\/articles\/?p=106"},"modified":"2013-06-24T13:35:53","modified_gmt":"2013-06-24T19:35:53","slug":"venture-capital-why-investors-invest-trevor-loy-managing-partner-flywheel-ventures","status":"publish","type":"post","link":"https:\/\/financenewmexico.org\/sandbox\/articles\/obtaining-equity-investment\/venture-capital-why-investors-invest-trevor-loy-managing-partner-flywheel-ventures\/","title":{"rendered":"Venture Capital: Why Investors Invest"},"content":{"rendered":"
\"Trevor

Trevor Loy, Partner, Flywheel Ventures<\/p><\/div>\n

Over the past year, my colleagues and I at Flywheel Ventures <\/span><\/strong><\/a>have received 494 business proposals from entrepreneurs seeking funding.\u00a0We followed up with initial inquiries to 98 entrepreneurs; 23 were then invited to an initial meeting with the entire Flywheel investment team.\u00a0\u00a0 We then pursued additional \u201cdue diligence\u201d research on about half of the presenters.\u00a0Ultimately, we invested an average of $365,000 in initial funding in each of just four new ventures.<\/p>\n

From the initial submissions, then, we invested in just 0.8 percent.\u00a0\u00a0 These statistics, while specific to our firm, are typical of the venture capital industry.<\/p>\n

In any field of investment, achieving higher returns requires the acceptance of higher risk.\u00a0Venture capital investors search for high-risk investments based on innovations in information technology, life sciences, and clean technologies such as renewable energy.\u00a0\u00a0 Investments in these types of firms require an extreme tolerance for risk, uncertainty, and failure.<\/p>\n

Most venture investors expect approximately one-third of the companies in which they invest to completely fail and lose the entire investment.\u00a0In another third, we expect to effectively get our money back \u2013 a rate of return that does not nearly cover the risk taken.\u00a0The final third, however, will typically provide us with five to ten times our invested capital.\u00a0The financial rewards from these \u201chome runs\u201d easily pay for the losses of the other two-thirds that were not successful.<\/p>\n

These \u201chome runs\u201d also go on to become the anchors for regional economic growth and job creation.\u00a0In fact, a 2005 study showed that the \u201chome run\u201d companies funded by venture capital investors over the past 30 years now account for nearly ten percent of the entire GDP \u2013 Gross Domestic Product \u2013 of the United States, and nearly ten percent of all private sector employment. \u00a0\u00a0Even more impressive is that the total amount of all capital invested by venture investors during the same time period was less than two percent of the U.S. GDP.\u00a0The high reward \u2013 and associated high risk \u2013 is what drives the unique selectivity of venture capitalists and the investment process.<\/p>\n

Most venture investors analyze the risk associated with each new venture in four key areas:\u00a0the team, the market opportunity, the product and technology, and the financial projections.<\/p>\n

Many entrepreneurs and innovators are initially surprised to learn that almost all venture investors consider the team and the market opportunity \u2013 not the product or technology \u2013 as the most important of these factors.\u00a0An ongoing industry dialogue rages over which of the top two, market opportunity or team, is triumphant, yet product and technology still falls behind in importance.<\/p>\n

At Flywheel, our most important investment consideration is the entrepreneurial team.\u00a0A famous Hollywood proverb states that \u201cninety percent of directing is casting,\u201d and we believe our industry is no different.<\/p>\n

When assessing a team, we consider the usual aspects: experience, skill, passion, commitment, and a history of previous successes.\u00a0Most of all, though, we care about the character of the individuals on the team and the culture they are creating as a team; these elements are the only long-term predictors of how the venture will react to the inevitable challenges and stresses associated with such high risk activity.\u00a0The importance of our concern for character and culture is further underscored when one considers that the average period of time from our initial investment in a company to the achievement of liquidity is over six and one-half years \u2013 which is now longer than the average marriage in the U.S.<\/p>\n

Download 15_Venture Capital_Why Investors Invest PDF<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

If you know why venture capitalists invest, you will be better prepared to approach them about investing in your business or idea. Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[7],"tags":[],"_links":{"self":[{"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/posts\/106"}],"collection":[{"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/comments?post=106"}],"version-history":[{"count":10,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/posts\/106\/revisions"}],"predecessor-version":[{"id":5977,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/posts\/106\/revisions\/5977"}],"wp:attachment":[{"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/media?parent=106"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/categories?post=106"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financenewmexico.org\/sandbox\/wp-json\/wp\/v2\/tags?post=106"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}