Venture capitalists were instrumental in the enormous increase in the number of dot-com startups of recent years. Because the Internet was a new and untried business venue with enormous potential, many analysts feel that standard business rules were too frequently suspended in what was
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a very optimistic market. Internet-based enterprises were expected to enjoy unprecedented success; many venture capitalists were said to have encouraged dot-coms to focus on scaling upward rather than on realizing early profits. According to VentureWire, U.S. venture capital funding for 2000 was $105 billion, more than the total funding available in all the 15 years before that. However, in April of that same year, severe market corrections brought about a radical change in the financial climate, and since then online businesses have been failing at rates similar to the rates of startups in the early days of the dot-com boom. Vulture capitalist, a term coined in the volatile financial environment of the 1980s, has been revived to refer to the venture capitalists that have recently begun to buy up failing dot-com enterprises at rock-bottom prices.
Venture capital is the second or third stage of a traditional startup financing sequence, which starts with the entrepreneurs putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest - angels are sometimes said to invest "emotional money," while venture capitalists are said to invest "logical money" - that is willing to help give the new enterprise a more solid footing. First-round venture capital funding involves a significant cash outlay and managerial assistance. Second-round venture capital involves a larger cash outlay and instructions to a stock or initial public offering (IPO) underwriter, who will sell stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an investment bank is commissioned to sell shares to the public.
In the currently sober economic climate, a return to traditional business wisdom has meant that enterprises are generally expected to show a clear path to profitability if they want to attract investment funds.