Chicago — When the Illinois Development Finance Authority provided $2 million in seed money for the Illinois Venture Fund, it earmarked it for growth enterprises - those that are just well-thought-out dreams, or as very small companies starting the growth cycle. Normally, they wouldn't qualify for investment funds from venture capital firms.
They wouldn't qualify because, despite warnings to their customers that investments are high-risk and that payoffs might be five to 10 years away, venture capital firms get very conservative when they actually begin investing their clients' money.
''Three parties are involved in venture capital,'' says Dr. David Brophy of the University of Michigan. ''First there's the ultimate investor - the pension fund, large corporation, wealthy family, foundation, university endowment fund, or mutual fund.
Then there's the venture capital investment fund, which seeks growth enterprises in which to invest.
''The third party is the small business itself, which promises the venture capital firm very high return, a return higher than justified by the risk it represents. In turn, the venture capital firm promises its investors, implicitly , that they'll get a super return,'' he says. Most practitioners say investors won't look at a venture capital project that promises less than a 40 to 50 percent return.
Dr. Brophy counts 110 venture firms in the United States, each of which looks at an average of 500 business plans each year from fledgling enterprises.
Of those, fewer than 10 are selected by most and only two or three are likely to realize profits. Frontenac Venture Group's Rodney Goldstein says one reason the share of risks accepted is so low is that much of the capital goes to big companies. Venture funds find themselves backing projects and reorganizations initiated by companies as big as $1 billion in revenues, especially leveraged buyouts.