Note on “Venture Capital” Martin Kenney BRIE Working Paper 142 E.pdfVIP

Note on “Venture Capital” Martin Kenney BRIE Working Paper 142 E-conomy Project Working Paper 17 ©Copyright 2000, by the author This paper was originally prepared for International Encyclopedia of the Social and Behavioral Sciences, N.J. Smelser and P.B. Baltes, eds., Elsevier Science Limited, Oxford, forthcoming 2000. (Article # 5.1 68) Martin Kenney is Professor, Department of Human and Community Development, University of California, Davis and Senior Project Director, BRIE, University of California, Berkeley. Generous support for production of the BRIE Working Papers Series was provided by the Alfred P. Sloan Foundation. 1. Venture Capital Apparently, venture capital was first used as a term in a public forum by Jean Witter in his presidential address to the 1939 Investment Bankers Association of America convention (Reiner, 1989). Since then venture capital has evolved into a specialized form of finance supporting small privately owned companies judged to have the potential for fast growth. With few exceptions, the overriding goal of venture capitalists is to reap capital gains in excess of ten times their original investment in less than seven years. A most strict definition of venture capital excludes buyouts, loans, and other financial transactions. Venture capitalists invest in equity in the form of common stock, or preferred stock, convertible debentures, or other financial instruments convertible into common stock when the small company is sold either through a merger or a public equity offering. At this liquidity event venture capitalists realize their profits in the form of capital gains. 2. The Venture Capital Industry During the last 50 years a number of the fastest growing firms, particularly in the technology area,