The Role of Research in Venture Capital Investing: The Research Skills Required to Sort through the Markets, Companies, Issues and Individuals Related to a Potential Deal Are Perfectly Suited to the Modern Information Professional
Hill, Michael, Information Outlook
According to the latest research from the National Venture Capital Association (NVCA 2012), venture capital is responsible for roughly 12 million jobs and $3 trillion in revenue in the United States and accounts for 21 percent of its gross domestic product and 11 percent of its private sector employment. In 2010 alone, venture capitalists invested approximately $22 billion into more than 2,700 companies, 1,001 of which received funding for the first time.
For those who know the term "venture capita!" but aren't entirely sure what it entails, venture capital firms (there are about 460 of them in the United States) raise funds from large, institutional-type investors--think pension funds, endowments and the like--and invest that money in new companies or ideas they believe will become commercially successful. The goal is to have the start-up companies either go public (i.e., sell shares of their stock to the public) or be acquired (bought) by another company so that the venture capital (VC) firm can pay back the institutional investors who provided the "seed" money and also make a little profit for themselves.
Given the unpredictability of the business world, it's no surprise that these investments are essentially high-stakes gambles by VC firms. The NVCA estimates that 40 percent of companies that receive venture capital fail, and a similar share produce only "moderate" returns (NVCA 2012). Only about one in every five investments produces significant profits, and it is these returns that make it possible for the venture capital industry to consistently perform better than the public markets.
While making money is certainly important to venture capitalists, the highest ideal in this particular industry is to drive job creation, economic growth and technological advancement by giving a "leg up" to entrepreneurs and helping them turn their bright ideas into products and services that influence our everyday lives. Since 1970, VC firms have invested more than $450 billion in 27,000-plus start-up companies (NVCA 2011), the most famous of which include Google, Microsoft, FedEx, Apple, eBay, Intel and Facebook.
Researching the Deal
So, where do librarians fit into all of this? Well, given that the average venture capital investment is around $7 or $8 million (though investments of $30 to $50 million are not uncommon), venture capitalists don't just throw their money at every start-up idea that happens to walk in the door. Vetting, or "due diligence," is crucial to the success of a VC firm. And while it is best to let those with investing experience pore over the financial statements, the research skills required to sort through the various markets, companies, technologies, regulatory issues and individuals related to a potential deal are perfectly suited to the modern information professional.
I should know--I am a research analyst for a top-ranked VC firm in Texas. I don't have a business degree, but I do have a library degree, not to mention a passion for competitive intelligence and a time-honed knack for unearthing the kind of deeply buried information--especially information about private companies, which tends to live under the radar if it lives anywhere at all--that is invaluable to a venture capitalist. And although the world of investing was outside my comfort zone coming into this job (my background is in library science and journalism), I've also learned more than I ever imagined about the ins and outs of successful companies and investments. These days, I can even look at a balance sheet and make some sense of it.
At my firm, I work with another MLIS-degreed research analyst to provide research support to roughly 25 investment professionals. We also offer services to the companies in our portfolio and to our "CEOs in residence" (my firm partners with proven, entrepreneurial CEOs to pursue value creation opportunities in segments of mutual interest), as well as to entities or individuals closely related to the firm. …