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The Venture Capital Cycle
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The Venture Capital Cycle

Paul Gompers and Josh Lerner
MIT Press, 1999
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Editorial Rating

5

Qualities

  • Comprehensive
  • Overview
  • For Beginners

Recommendation

The Venture Capital Cycle is a thorough overview of the venture capital market that will be edifying to those who know little about the mysterious methods of private equity financiers, but self-evident to those with a background in corporate finance. Readers who have worked in or studied finance already are familiar with the tidal cycles that govern the flow of capital into early-stage companies, as well as the process through which money moves from institutions and individuals to fledgling enterprises. But getAbstract strongly recommends that entrepreneurs read this book, which provides an exhaustive tour that will answer many - if not all - of your questions about where venture capital comes from, how you can get a hold of some, and how your life and business will change after you do. And if, along the way, you think that the authors sound too much like professors with their dense, academic prose, you’re right.

Summary

The Venture Capital Surge

Venture capital has boomed over the past two decades. Venture funds were essentially nonexistent in the mid-70s, but by 1998, they counted $17 billion in annual inflows. Venture capitalists backed high flyers, including Apple Computer, Microsoft, Intel, Lotus, and Genentech. In spite of their successes, venture capitalists are often misunderstood. For instance, people believe that venture capitalists are passive investors who do little to earn their returns and rarely risk their own money. But in reality, venture capitalists invest in high-risk industries. They face large information gaps between the entrepreneurs who run promising companies and the venture investors who provide growth capital. Determining a start-up’s value is difficult because often much of it is tied up in intangible assets, which are not readily saleable if a firm fails.

Venture capital is invested as part of a cycle that begins with raising money from investors. Then the venture capitalists use the money to invest in firms that they subsequently monitor. They work to add value to their firms. Finally, venture capitalists leave deals and put their money into new companies...

About the Authors

Paul Gompers is an associate professor of business administration at Harvard Business School, where Josh Lerner is a professor of business administration. Both are faculty research fellows at the National Bureau of Economic Research.

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