According to Pricewaterhouse Coopers, the investment of institutional venture capitalists in startups grew from less than $3 billion in the early 1990s to $106 billion in 2000. Although the amount of venture capital has declined significantly since the economic "bubble" in the late 1990s, sales of approximately $19 billion per year are still a significant growth rate. Venture capitalists will fund more than 2,500 high-growth startups in the US this year.
The growth of venture capital investment has led to a relatively new and expanding field of equipment leasing, namely "risk leasing". What exactly is risk leasing and the factors that have driven its growth since the early 1990s? Why is risk leasing so attractive to venture capital-backed startups? In order to find the answer, we must consider some important developments that support the growth of this important equipment leasing business.
The term risk leasing describes equipment financing provided by equipment leasing companies to venture capitalists funded by start-up companies. Like most growth companies, these startups require computers, networking equipment, furniture, telephone equipment, and production and R&D equipment. They rely on external investor support until they prove their business model or achieve profitability. Promoting the growth of risk leasing is a combination of several factors, including: new expansion of the economy, improvement of the IPO market, enriched entrepreneurial talent, promising new technologies, and the formation of risk capital preferred by government policies.
In this environment, venture capitalists have formed a considerable pool of venture capital to initiate and support the development of many new technologies and business concepts. In addition, there are now a range of services available to support the development of start-up companies and promote their growth. CPA firms, banks, lawyers, investment banks, consultants, lessors and even search companies provide a lot of resources for this emerging market.
Where is equipment leasing suitable for a venture capital portfolio? The relatively high cost of venture capital and lease leasing illustrates this. Financing new businesses is a high-risk proposal. To compensate for the risks of venture capitalists, they often need to have a significant stake in the companies they finance. They usually invest at least 35% of their return on investment in five to seven years. Their return is achieved through an initial public offering or other sale of equity. In contrast, venture capitalists seek a return of 15%-22%. These transactions are amortized over two to four years and are guaranteed by the underlying equipment.
Although the risks of venture capitalists are also high, venture capitalists reduce risk by having a security interest in the leased equipment and building amortization transactions. Given the obvious cost advantages of venture capital for venture capital, startups have used risk leasing as an important source of financing to support their growth. Other advantages of risk leasing initiation include traditional leasing advantages - cash protection of working capital, management of cash flow, flexibility, and complementing other available capital.
What makes a good ' risk rental transaction? Venture capitalists focus on several factors. The two main components of a successful new business are the quality of its management team and the quality of the venture capital sponsor. In many cases, these two groups seem to have found each other. A good management team has traditionally proven the previous success of the active areas of new businesses. In addition, they must have experience in key business functions - sales, marketing, R&D, production, engineering and finance. Although many venture capitalists provide financing for new businesses, their capabilities, endurance and resources may vary widely. Better venture capitalists have a successful track record and have direct experience with the types of companies they fund.
The best venture capital firms have industry specialization, and many venture capital firms have employees who have direct operational experience in the industries they fund. It is also important that venture capitalists allocate capital to the startups for future rounds. Other good venture capital groups that have exhausted their allocated funds may have problems.
By determining the level of management and venture capitalists, by reducing the business model and market potential of venting. It is unrealistic to expect expert evaluation of technology, markets, business models and competitive environments through equipment leasing companies. Many leasing companies rely on experienced and reputable capital capitalists who evaluate these factors during due diligence. deal with. However, the lessor must still conduct a major independent assessment. During this evaluation, he considered the following question: Does the business plan make sense? Is the product/service necessary, who is the target customer and how big is the potential market? How are products and services priced and what is expected revenue? What is the production cost and what are the other estimated costs? Do these predictions seem reasonable? According to the forecast, how much cash is there and how long will it last? When does the startup need the next round of equity? These and similar questions help the lessor determine if the business plan and model are reasonable
The most basic credit issue for leasing companies considering leasing equipment to leasing companies is whether there is enough cash to support the startup for most of the lease term. If the venture capital is no longer raised and the venture capital is not cash enough, the lessor is less likely to receive the lease. To reduce this risk, most experienced venture capitalists require startups to have at least nine months or more of cash before continuing to operate. Typically, startups approved by venture capitalists have raised $5 million or more of venture capital and have not exhausted the healthy portion of this amount.
Where do startups get rental funds? Part of the infrastructure supporting the ventilation startup is a state-level leasing company specializing in risk leasing transactions. These companies have experience in building, pricing and recording transactions, performing due diligence and working with startups. Better risk investors quickly respond to requests for lease proposals, speed up the credit review process, and work closely with startups to obtain document execution and ordering equipment. Most venture capitalists provide leases to start-up companies based on credit lines so that tenants can arrange multiple relocations within one year. These lease lines typically range from $200,000 to $5,000,000, depending on startup demand, projected growth, and risk capital support levels.
Better risk leasing providers also directly or indirectly help customers identify other resources to support their growth. They help startups buy equipment at a better price, arrange for the removal of existing equipment, find additional working capital, find temporary CFOs, and provide introductory information to potential strategic partners – these are the best venture capital for value-added services. People brought the negotiating table.
What is the prospect of risk leasing? Risk leasing has really worked since the early 1990s. As risk investors invest tens of billions of dollars a year in startups, this market segment has grown into an attractive market for the equipment leasing industry. The most attractive industries for risk leasing include life sciences, software, telecommunications, information services, medical services and equipment, and the Internet. As long as the factors supporting the formation of startups are still favorable, the prospects for risk leasing are still promising.
Orignal From: Risk leasing: the rise of start-up financing
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