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1 1 (May 25, 2023)

handle is hein.crs/goveltk0001 and id is 1 raw text is: Congressional Research Service nforming 1h legisIlive debate since 1914 Venture Capital Operations and Regulation May 25, 2023 Venture capital (VC) funds are sources of startup financing for early-stage, high-growth firms, such as technology startups. According to the Securities and Exchange Commission (SEC), as of the second quarter of 2022, more than 2,000 VC funds were managing about $330 billion in assets. Although the size of VC investments appears small compared to the overall size of U.S. capital markets (which exceeds $100 trillion) the industry nonetheless plays a key role in funding entrepreneurs that carry out innovations. These startups form the pipeline for potentially transformative companies that could become drivers of economic growth. Many well-known publicly traded technology companies-such as Alphabet (Google's parent company), Apple, Meta, and Amazon-were once VC funded. This In Focus explains VC operations, regulatory frameworks, and policy proposals. Startup Funding Cycle Figure 1 illustrates the typical stages of a startup funding cycle. VC funds could participate in all stages of a cycle but generally focus on earlier to middle stages. Depending on a startup's specific development phase, the firm's funding needs and financing sources could differ. A startup's development stage is typically measured by revenue growth, time in existence, and product maturity, among other factors. In general, the later the stage, the larger the startup's size and funding needs. Figure I. Startup Funding Cyc [wjPe-edn ErV tage Z'Sd W . I B Seed stage. During the seed stage, startups have developed initial business operations, including operational readiness for products or product prototypes. But the business typically remains pre-revenue. Early VC, SFF, and angel investors are common sources of funding at this stage. Series A. This is generally the first round where VC becomes the dominant source of funding. A startup at this stage has generally developed marketable products and a customer base. This is also the stage when startups have developed their business plans and started to proactively approach different institutional investors for fundraising. Series B. During a Series B funding round, VC investors usually focus on the acceleration of business expansion and commercialization of the products. Series B round startups are relatively established and have begun to achieve more substantial performance milestones. Series C. Late-stage VC and other institutional investors (including private equity firms, investment banks, and hedge funds) provide series C funding to more mature companies. Series C funding helps startups to further expand their products and markets. A startup at this stage has ordinarily demonstrated strong growth, a trajectory toward profitability, and a customer base. Mezzanine. This is the last stage of VC involvement before le a final exit to sell their investment positions for cash. ti .r Startups at this stage have matured and are ready to be acquired or become publicly traded. TIME Source: CRS. Notes: A stylized graphical depiction of a startup funding cycle and startup company growth line. Pre-seed stage. At this early stage, the startup has gone through concept formation but has typically not yet commenced business operations or sold products. Self, family, and friends (SFF, also called bootstrapping) and angel investors (e.g., accredited investors, see CRS In Focus IF11278, Accredited Investor Definition and Private Securities Markets) typically provide major sources of funding. Exit. Most VCs aspire to exit their investments via initial public offerings (IPOs). At this stage, the startup could issue securities to the public. But other forms of exit also exist, including sales to other corporations or private funds. A startup could also merge with a special purpose acquisition company (see CRS In Focus IF11655, SPAC IPO: Background and Policy Issues) at this stage. Business Modeks and Practices VC investors assume high risks in the hopes of making high returns. VC firms often have several dozen startup companies in their portfolios and are actively involved in their operations. While some of these portfolio companies may fail, VC investors can still reap substantial rewards if some surviving portfolio companies achieve major success (e.g., receive 5, 10, or 20 times the initial investment). VCs have varying levels of size, expertise, and depth of financial strength. Different VCs may show different preferences for a particular industry segment or startup development stage. VCs are often associated with high innovation and performance. An academic study of IPOs, shows that VC- backed IPOs outperformed other IPOs in key financial

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