today, as well as help in accessing the dollars they'll likely need later, along with the advice and professional help that may be even more critical to their ultimate success.
While this book was written to help both the investor and the entrepreneur learn what they need to know to succeed today, it should remain helpful for many years to come. Sure, like the economy and other markets in general, the venture capital playing field will change over time, just as it has always been changing and evolving. Nevertheless, the fundamentals will still apply.
Very simply, the venture capital marketplace exists to bring together: (1) investors willing to accept considerable risk in exchange for potential exceptional return on investment, and (2) entrepreneurs whose innovative developments are characterized by considerable uncertainty and risk as well as potential for outstanding wealth creation.
For anyone who thinks the greatest innovations are behind us and questions how much is still left to “invent,” we say thank you for leaving the wealth opportunity from future innovations in the hands of those of us who can still dream and think big. Humankind's ever‐increasing expectations and aspirations will inevitably motivate continued innovation. Add to that the needs resulting from natural resource constraints, climate change, and other environmental concerns, which we believe will drive even more innovation than we can imagine.
Here is a list of a dozen categories we believe will be huge opportunity areas for future innovation and new wealth creation, and we're betting there will be even more:
1. Advanced materials
2. Artificial intelligence
3. Big data and predictive analytics
4. Biological computers
5. Biomedical
6. The conquest of aging
7. The genome
8. Immunology
9. The Internet of Things and of Everything
10. Nanotechnology
11. Robotics
12. Virtual reality
Changes in the venture capital playing field will also contribute to making the coming years good ones for venture capital investors and great ones for entrepreneurs.
As we mentioned earlier, the accessibility of venture capital investment opportunities is becoming democratized. Today there are roughly a half million individual venture capital investors in the United States alone, and that number should expand dramatically in the coming years.
Recently launched online venture capital portals have opened investment access to America's estimated 10 million accredited investors (i.e., individuals and couples with net worth, excluding the value of their primary residence, of $1 million or more, as well as individuals with annual income of $200,000+ or couples with annual income of $300,000+). Further, the JOBS (Jumpstart Our Business Startups) Act allows venture capital firms to advertise to these accredited investors.
On top of that, regulations implementing Title III of the JOBS Act, enacted by the SEC in the spring of 2016, open venture capital investment access, albeit with tight limitations, to the rest of America, too. These JOBS Act provisions should increase substantially the availability of venture capital investment dollars. What a great time to be an aspiring entrepreneur!
Entrepreneurs will be helped further by advances in software and Internet technology already behind us, which have brought down the costs of initial startup requirements. Lower‐cost startups are ideal for many online venture capital portals, even those restricted to accredited investors. These online portals typically set much lower minimum investment requirements than the more traditional firms, and so tend to invest fewer dollars in each of their deals. The new online portals open to non‐accredited investors, which are further limited by the SEC as to how much they can invest in a single deal, are also particularly well suited to startups with lower early capital needs.
Ironically, more traditional venture capital firms like ours, which only allow investments from accredited investors and, even though accessible online, set a higher minimum investment requirement (our new firm, VCapital, has a minimum individual investment requirement of $25,000), welcome these new firms that are democratizing the industry. Frankly, they are so new relative to the typical lead time from investment to return that it's too soon to say how well they will do for investors (more on that later).
Nevertheless, for us, the ability of a venture to attract a large number of these firms' smaller investors represents valuable market intelligence, demonstrating early concept appeal. It's somewhat like virtual market research. If the venture goes on to show progress and has greater subsequent funding needs for expansion, we may be more likely to invest. We may not get in quite as early, but the risk when we do get in (which will likely still be early in the venture's growth) will probably be less, too – an acceptable tradeoff.
Notwithstanding possibly lower initial startup funding needs, most ventures with considerable potential will have increasing funding needs as they progress. In some cases, particularly in fields dealing with information technology, the importance of speed to market may require quite sizeable later‐stage investments in order to accelerate expansion. In other fields, such as pharmaceuticals and biotechnology, later‐stage FDA testing requirements carry extremely large costs. The risks even at these later stages are still inappropriate for banks or most alternative lenders, requiring a venture capitalist's perspective and risk tolerance.
Putting all this together, it looks like we are actually just now entering the golden age of venture capital for individual investors and the entrepreneurs whose dreams they will be able to fund and then benefit from financially. This book is written for both groups – individual investors and entrepreneurs – to help guide them along the path to potential wealth.
PART I
Understanding the Major Players
CHAPTER 1
The Venture Capitalist: Funder of Dreams
At the center of the venture capital playing field is the venture capitalist. The practical knowledge needed by both investors and aspiring entrepreneurs begins with a general understanding of this strange and extremely small population of individuals.
This chapter will get into a general description of our unique breed. Chapters 4 and 8 will then get into the distinguishing characteristics that investors and entrepreneurs, respectively, should consider in deciding which ones to invest with or to seek out for funding.
There are many ways to think about the venture capitalist. One is to liken him or her to a marriage broker. At its most basic level, the venture capitalist's reason for being is to bring together investors' dollars with entrepreneurs who need their money. Of course, the investor has to want to invest in that entrepreneur's venture, and the entrepreneur has to be willing to accept the investor's terms. The venture capitalist as marriage broker needs to sell both sides.
The venture capitalist is also like a marriage counselor. The “VC” helps the two sides – investors and entrepreneur – communicate with one another, often counseling the entrepreneur to enhance his or her venture's success odds. After all, the venture's continued progress and potential for ultimate success along with its attendant rewards are what will keep the relationship between investor and entrepreneur together.
Of course, one could describe the venture capitalist in other ways, too. The venture capitalist is part riverboat gambler, part security analyst, part trader, and part entrepreneurial voyeur.
Venture capital is a high‐risk/high‐potential‐reward endeavor, so not surprisingly, venture capitalists are calculating gamblers, instinctively balancing the risks and rewards. No venture capitalist can win every time, but the successful ones' winners will handily compensate for the losers.
Successful venture capitalists have intuitive and analytical skills. They must be able to assemble and digest large amounts of data – some precise but some pretty vague and incomplete – and integrate all that information in order to make