| > | | | | capitalists have successful track records and direct |
| According to Pricewaterhouse Coopers, investment | | | | experience with the type of companies they |
| by institutional venture capitalists in startups grew | | | | financed. The best VCs have industry specialization |
| from less than $3.0 billion at the beginning of the | | | | and many are staffed by individuals with direct |
| 1990’s to over $106 billion in 2000. Although | | | | operating experience within the industries they |
| venture capital volume has retreated significantly | | | | finance. The amount of capital a venture capitalist |
| since the economic bubble years of the late | | | | allocates to the startup for future rounds is also |
| 1990’s, the present volume of around $ 19 | | | | important. An otherwise good VC group that has |
| billion per year still represents a substantial rate of | | | | exhausted its allocated funding can be problematic. |
| growth. Venture capitalists will fund more than 2,500 | | | | After determining that the caliber of the |
| high growth startups in the U.S. this year. The growth | | | | management team and venture capitalists is high, a |
| in venture capital investing has given rise to a | | | | venture lessor looks at the startup’s business |
| relatively new and expanding area of equipment | | | | model and market potential. It is unrealistic to expect |
| leasing known as venture leasing’. Exactly | | | | expert evaluation of the technology, market, |
| what is venture leasing and what has fueled its | | | | business model and competitive climate by equipment |
| growth since the early 1990’s? Why has | | | | leasing firms. Many leasing firms rely on experienced |
| venture leasing become so attractive to venture | | | | and reputable venture capitalists who have evaluated |
| capital-backed startups? To find answers, one must | | | | these factors during their due diligence’ |
| look at several important developments that have | | | | process. However, the lessor must still undertake |
| bolstered the growth of this important equipment | | | | significant independent evaluation. During this |
| leasing segment. | | | | evaluation he considers questions such as: Does the |
| The term venture leasing describes equipment | | | | business plan make sense? Is the product/ service |
| financing provided by equipment leasing firms to | | | | necessary, who is the targeted customer and how |
| pre-profit, early stage companies funded by venture | | | | large is the potential market? How are products and |
| capital investors. These startups, like most growing | | | | services priced and what are the projected |
| businesses, need computers, networking equipment, | | | | revenues? What are the production costs and what |
| furniture, telephone equipment, and equipment for | | | | are the other projected expenses? Do these |
| production and R&D. They rely on outside investor | | | | projections seem reasonable? How much cash is on |
| support until they prove their business models or | | | | hand and how long will it last the startup according to |
| achieve profitability. Fueling the growth in venture | | | | the projections? When will the startup need the next |
| leasing is a combination of several factors, including: | | | | equity round? These, and questions like these, help |
| renewed economic expansion, improvement in the | | | | the lessor determine whether the business plan and |
| IPO market, abundant entrepreneurial talent, | | | | model are reasonable. |
| promising new technologies, and government policies | | | | The most basic credit question facing the leasing |
| favoring venture capital formation. In this | | | | company considering leasing equipment to a startup is |
| environment, venture investors have formed a | | | | whether there is sufficient cash on hand to support |
| sizeable pool of venture capital to launch and support | | | | the startup through a significant part of the lease |
| the development of many new technologies and | | | | term. If no more venture capital is raised and the |
| business concepts. Additionally, an array of services is | | | | venture runs out of cash, the lessor is not likely to |
| now available to support the development of | | | | collect lease payments. To mitigate this risk, most |
| startups and to promote their growth. CPA firms, | | | | experienced venture lessors require that the startup |
| banks, attorneys, investment banks, consultants, | | | | have at least nine months or more of cash on hand |
| lessors, and even search firms have committed | | | | before proceeding. Usually, startups approved by |
| significant resources to this emerging market | | | | venture lessors have raised $ 5 million or more in |
| segment. | | | | venture capital and have not yet exhausted a |
| Where does equipment leasing fit into the venture | | | | healthy portion of this amount. |
| financing mix? The relatively high cost of venture | | | | Where do startups turn to get their leases funded? |
| capital versus venture leasing tells the story. Financing | | | | Part of the infrastructure supporting venture startups |
| new ventures is a high risk proposition. To | | | | is a handful of national leasing companies that |
| compensate venture capitalists for this risk, they | | | | specialize in venture lease transactions. These firms |
| generally require a sizeable equity stake in the | | | | have experience in structuring, pricing and |
| companies they finance. They typically seek | | | | documenting transactions, performing due diligence, |
| investment returns of at least 35% on their | | | | and working with startup companies through their |
| investments over five to seven years. Their return is | | | | ups and downs. The better venture lessors respond |
| achieved via an IPO or other sale of their equity | | | | quickly to lease proposal requests, expedite the |
| stake. In comparison, venture lessors seek a return in | | | | credit review process, and work closely with startups |
| the 15% — 22% range. These transactions | | | | to get documents executed and the equipment |
| amortize in two to four years and are secured by | | | | ordered. Most venture lessors provide leases to |
| the underlying equipment. Although the risk to | | | | startups under lines of credit so that the lessee can |
| venture lessors is also high, venture lessors mitigate | | | | schedule multiple takedowns during the year. These |
| the risk by having a security interest in the leased | | | | lease lines typically range from as little as $200,000 to |
| equipment and structuring transactions that amortize. | | | | over $ 5,000,000, depending on the start-up’s |
| Appreciating the obvious cost advantage of venture | | | | need, projected growth and the level of venture |
| leasing over venture capital, startup companies have | | | | capital support. The better venture lease providers |
| turned to venture leasing as a significant source of | | | | also assist customers, directly or indirectly, in |
| funding to support their growth. Additional | | | | identifying other resources to support their growth. |
| advantages to the startup of venture leasing include | | | | They help the startup acquire equipment at better |
| the traditional leasing strong points --- conservation of | | | | prices, arrange takeouts of existing equipment, find |
| cash for working capital, management of cash flow, | | | | additional working capital funding, locate temporary |
| flexibility, and serving as a supplement to other | | | | CFO’s, and provide introductions to potential |
| available capital. | | | | strategic partners--- these are all value-added |
| What makes a good’ venture lease | | | | services the best venture lessors bring to the table. |
| transaction? Venture lessors look at several factors. | | | | What is the outlook for venture leasing? Venture |
| Two of the main ingredients of a successful new | | | | leasing has really come into its own since the early |
| venture are the caliber of its management team and | | | | 1990s. With venture investors pouring tens of billion |
| the quality of its venture capital sponsors. In many | | | | of dollars into startups annually, this market segment |
| cases the two groups seem to find one another. A | | | | has evolved into an attractive one for the equipment |
| good management team has usually demonstrated | | | | leasing industry. The most attractive industries for |
| prior successes in the field in which the new venture | | | | venture leasing include life sciences, software, |
| is active. Additionally, they must have experience in | | | | telecommunications, information services, medical |
| the key business functionssales, marketing, R&D, | | | | services and devices, and the Internet. As long as |
| production, engineering, and finance. Although there | | | | the factors supporting the formation of startups |
| are many venture capitalists financing new ventures, | | | | remain favorable, the outlook for venture leasing |
| there can be a significant difference in their abilities, | | | | continues to look promising. |
| staying power, and resources. The better venture | | | | |