First, let's define our terms because venture capital is often misunderstood. Maybe the best way to define venture capital is to say what it is not.
It is not debt (i.e., a loan). This is equity money, money at risk of being lost and never recovered.Venture capital is not the money given to your company by your family or friends. It is money that is professionally managed and whose source is accredited investors (wealthy individuals and large institutions and corporations).
Venture capital is not short-term get-rich-quick money. The goal of venture capitalists is to recover their initial investment in a company in three to seven years. Their hope is that at some point in the 10-year life of their venture fund, each of their investments will become "liquid," i.e., be able to be easily turned into cash.
Venture capital does not come easily. From the time a venture capitalist first shows interest in the deal until he puts down his money, it may take as long as nine to 12 months. If you're desperate for cash, remember a venture capitalist takes time.
Venture capitalists prefer not to have a majority position in a start-up company, so there is room for additional investment and sufficient incentive for the entrepreneurs.
Most importantly, not all new businesses qualify, no matter how good they are, for venture capital. Venture capitalists invest in companies that have the possibility of growing rapidly and attaining sales of $20 million to $100 million a year after five years.
To attract venture investment, a "deal" or company has to have a sound product, a well-defined market, a proven marketing strategy, a strong management team and a business plan.
Why does Utah need venture capital? Venture capital fuels the formation and growth of major new high technology business in Utah. Companies such as Evans & Sutherland, Iomega and Novell were all developed with venture capital. All these companies and dozens more in Utah have received venture capital from sources outside of the state. Thanks to millions of venture capital dollars, thousands of jobs have been created and many of our universities' and local businesses' technological achievements have reached the marketplace.
This transfer of technology to the marketplace is vitally important. Utah is blessed with about $1 billion of research and development (R&D) that is done every year in this state. If it was not for venture capital, many of the fruits of these research dollars would be lost.
Thanks to venture capital, the Utah arm, artificial heart and countless other medical and high technology devices have reached the marketplace and have created jobs and new wealth for Utahns.
Unfortunately, with billions of dollars of venture capital available in this country, less than $15 million are located in Utah. While that is $15 million more than four years ago, many of our neighboring states have from five to 20 times more. Even with those venture capitalists who have already invested in Utah, it is important that the entrepreneurs of the state have direct access to as much venture money as possible. Why?
Money begets money. The more money you have looking for deals in Utah, the more outside money will invest.
Money attracts management. The more money available in a community, the easier it is to attract top management.
Access accelerates deal flow. It is easier for an entrepreneur to present his deal locally for funding than to fly to the East or West Coast.
Competing on one's home turf for money is better. It is just plain easier for a venture capitalist to watch his investments if they are located within 25 miles of his office rather than 500 to 2,000 miles away.
Venture capitalist requirements will be better understood. Handy access to venture capitalists helps entrepreneurs develop their ideas into fundable "deals."
Needless to say, the more "deals" (companies) that are developed and funded, the more jobs and wealth will be created in Utah by Utahns.
Every year the people of Utah have a rare opportunity to meet venture capitalists from all over the country. This opportunity is called the fifth annual Utah Venture Capital Conference, which will be held Jan. 25, 1990. It brings together carefully selected Utah and Intermountain area companies and venture capitalists with the hope that several companies will get funding.
The conference is ideal for entrepreneurs and service providers such as accountants, lawyers, bankers, etc., who want to know how to present a company to the venture capital community. Also, it is a rare opportunity for those wealthy deal-makers in our community to review several promising deals and to meet and mingle with venture capitalists, some of whom may develop into good joint venture partners.
The conference is sponsored by the Wayne Brown Institute and 25 prominent Utah companies and organizations. For those wanting more information about the conference, please call the Wayne Brown Institute at 584-7610.
Bradley B. Bertoch is executive director of the Wayne Brown Institute.