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Learning Objectives How venture capital fund structure is influenced by regulation and other factors. How venture capital fund structure influences the kinds of investors who can invest. How the role of the fund’s general partner changes over the life of the fund. How the contract structure of venture capital funds promotes efficient investment and management. The role of reputation in defining relationships among the venture capitalist, investors, and portfolio companies. ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Historical Development of Venture Capital As an Institution ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14 Legal environment: – 1933 and 1934 SEC Acts – Investment Company Act of 1940 – ERISA Act (1974 and 1979). Fund structure: – Closed-end mutual fund. – Limited partnership.

Fig 14-1 ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Figure 14-2 ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Figure 14-3 ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Organizational Structure of Venture Capital Investment ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14 Figure 14-4

Summary of Terms: Venture Capital Limited Partnership Agreement ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Managing The Investment Portfolio ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

The Venture Capital Investment Process (Figure 14-6) ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Allocation of Venture Capitalist Time (Figure 14-7) ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

Incentive Conflicts and Structures ©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 14 Figure 14-8