Financing Your Dream ◾ 127
technology industries, for example, biotechnology, IT, or software. The typi-
cal VC investment occurs after the seed-funding round, frequently referred
to as growth funding round (or Series A round). The VC seeks to generate
returns through an eventual realization event, such as an IPO or a trade sale
of the company.
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VC is a subset of private equity.
One of the rst steps toward a professionally managed VC industry was
the passage of the Small Business Investment Act of 1958; this Act ofcially
permitted the U.S. Small Business Administration (SBA) to license private
“Small Business Investment Companies” (SBICs) to help nance and manage
small entrepreneurial businesses in the U.S.
Before World War II, money orders (originally known as “development
capital”) were primarily the exclusive domain of wealthy individuals and
families. Modern private equity investments began to emerge after World War
II with the founding of the rst two VC rms in 1946—American Research
and Development Corporation (ARDC) and J.H. Whitney & Company.
ARDC was founded by Georges Doriot,
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the “father of venture capital-
ism” (and former dean of Harvard Business School and founder of INSEAD),
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with Ralph Flanders and Karl Compton (former president of MIT), to encour-
age private sector investments in businesses run by soldiers returning from
World War II. ARDC was the rst institutional private equity investment rm
that raised capital from sources other than wealthy families, although it had
several notable investment successes as well. ARDC is credited with the rst
trick when its 1957 investment of $70,000 in Digital Equipment Corporation
(DEC) would be valued at over $355 million after the company’s IPO in 1968
(representing a return of over 1200 times on its investment and an annual-
ized rate of return of 101%).
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6.8 Principles of Raising Capital
The amount of money you plan to raise should be sufcient to accomplish
key milestones that will either (1) make your startup self-sufcient or (2)
enable you to raise additional capital at a higher valuation. Higher valuations
enable management to keep a greater percentage of the company.
The entrepreneur needs to prepare for the due diligence process. Due
diligence is the analysis and evaluation conducted by rms considering an
investment in your company, and focuses primarily on (1) your management
team, (2) the market opportunity, and (3) your technology, including intellec-
tual property protection.