What types of industries fit the private capital investment model?

 

Investments in high-technology firms make up most of the venture capital (VC) investing in North America. Canada’s Venture Capital& Private Equity Association (CVCA) publishes online the annual investment statistics collected by Thomson Reuters on behalf of the industry. The CVCA also lists their current investment classifications (similar to those used in U.S. publications) and the breakdown by sector of venture capital investment. In general, they cite four main sectors:

• information technology (IT)
• life sciences
• energy and environmental technologies (clean tech)
• traditional—including consumer and business services, consumer products, and manufacturing

In the US and the UK, a number of firms focus on investing in socially-responsible start-ups, and this type of investment firm is starting to emerge in Ontario.

Case study: High-technology and the venture capital model

Home to a large number of VCs, Silicon Valley got its name from the semiconductor industry that was born there, flourished, and continues to attract a significant amount of capital. So what is it about the semiconductor industry that appealed to VCs?

• A disruptive invention (something that is TEN times faster, better, smaller or cheaper) will encourage a fresh round of growth opportunity. For example, a company that delivers a chipset with the highest quality of video output for a mobile device and which takes up a small footprint and is priced well for the value it delivers will have a large market opportunity to be designed into millions of mobile devices.
• The industry uses a production model where third party-fabrication plants (“Fab”) are common, enabling start-ups to access the same production capability as a mature player in the industry. Start-ups require capital only for the design and testing of the new chipset, as well as the marketing, sales and distribution.
• Chips are often designed for a single specific purpose, making the value proposition easy to explain.
• Large-scale electronics providers (customers) are relatively easy to identify, and their planning cycles provide an opportunity for a product to be included in the design before the product is commercially available.
• While the chip industry is attractive, it also carries a reasonably high level of risk; this includes risks associated with concentration of customers, competition, and the possible failure to create a disruptive technology that can be produced in scale.
• VC investors have demonstrated that they will engage a higher degree of risk if the potential for a significant return exists from a large market opportunity and if they have a high degree of confidence in the management team to execute their business plan.

 

References

Canada’s Venture Capital& Private Equity Association. Retrieved April 19, 2009, from http://www.cvca.ca.
National Venture Capital Association. Retrieved April 19, 2009, from http://www.nvca.org/def.html.

Tags: investors