Venture Capital Tax Credits
Caution. A potential point of confusion with five tax credit programs structured for venture Capital investments. One of the five, 68 OS Sec. 2357.7, is titled "Credit Against Tax for Investments in Qualified Venture Capital Companies - Pass-Through Entities."
Venture Capital, in general, refers to Capital invested in a project in which there is a substantial element of risk v high rewards, typically a new or expanding business.
Venture Capital Tax Credits is also the name of one of Oklahoma's specific tax credit programs 68 OS Sec. 2357.7, and .8. In addition to meeting the general venture Capital requirements, has additional eligibility, restrictions, and reporting requirements are consistently violated.
Key terms: High risk, high reward if successful (3 to 10 years out). Too risky for the standard Capital markets or bank loans. They invest in companies exploiting breakthroughs in electronic, medical, or data-processing technology. A key factor is a proactive involvement by those whose money is at risk.
None of the above apply in Oklahoma. Claims for investing in PO Boxes, shell LLC, or real companies where no money was invested. Rather they claim to invest in mature businesses with assets to back a bank loan claimed as the investment.
Venture Capital (also known as VC or Venture) is a type of private equity Capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture Capital investments are generally made as cash in exchange for shares in the invested company.
Venture Capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.
A venture Capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture Capitalists are expected to bring managerial and technical expertise as well as Capital to their investments.
A venture Capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial Capital of third-party investors in enterprises that are too risky for the standard Capital markets or bank loans.
Venture Capital is most attractive for new companies with a limited operating history that are too small to raise Capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for the high risk that venture Capitalists assume by investing in smaller and less mature companies, venture Capitalists usually get significant control over company decisions, in addition to a substantial portion of the company's ownership (and consequently value).
During the 1960s and 1970s, venture Capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical or data-processing technology. As a result, venture Capital came to be almost synonymous with technology finance.
Structure of venture Capital firms
Venture Capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture Capital funds raised. Venture Capital firms in the United States may also be structured as limited liability companies, in which case the firm's managers are known as managing members. Investors in venture Capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available Capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds.
Roles within venture Capital firms
Within the venture Capital industry, the general partners and other investment professionals of the venture Capital firm are often referred to as "venture Capitalists" or "VCs." Typical career backgrounds vary but broadly speaking venture Capitalists come from either an operational or a finance background. Venture Capitalists with an operational background tend to be former founders or executives of companies similar to those in which the partnership finances or will have served as management consultants. Venture Capitalists with finance backgrounds tend to have investment banking or other corporate finance experience.
Structure of the funds
Most venture Capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.
It can take anywhere from a month or so to several years for venture Capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison.
Venture Capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement:
- Management fees: an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations. In a typical venture Capital fund, the general partners receive an annual management fee equal to up to 2% of the committed Capital.
- Carried interest: - a share of the profits of the fund (typically 20%), paid to the private equity fund management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors  Strong Limited Partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 25-30% on their funds.
Venture Capital funding.
Venture Capitalists are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in one in four hundred opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3-7 years) that venture Capitalists expect.
Because investments are illiquid and require 3-7 years to harvest, venture Capitalists are expected to carry out detailed due diligence prior to investment. Venture Capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching a IPO stage when valuations are higher.
Venture Capital Investment Tax Credits.
Venture Capital in general refers to Capital invested in a project in which there is a substantial element of risk v high rewards typically a new or expanding business.
There are typically six stages of financing offered in Venture Capital, that roughly correspond to these stages of a company's development.
- Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors")
- Start-up: Early stage firms that need funding for expenses associated with marketing and product development
- First-Round: Early sales and manufacturing funds
- Second-Round: Working Capital for early stage companies that are selling product, but not yet turning a profit
- Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company
- Fourth-Round: Also called bridge financing, 4th round is intended to finance the going public process
- Reference: Wikipedia.org