Content area
Full text
The leasing industry has grown in tandem with the high-technology boom of the late 1990s. It is a highly entrepreneurial climate, and venture lease financing has emerged as a way of providing secured equipment financing to early-stage companies backed by venture capitalists. Commissioned by the Equipment Leasing and Finance Foundation, this study profiles the reasons behind and characteristics of this type of financing.
In the United States, venture leasing has been an established concept since the late 1980s. Venture lessors typically provide financing for general purpose equipment such as computers, telecommunication systems, test and measurement devices, and laboratory and office equipment for start-up and early-stage companies. However, one-of-a-kind specialized items are excluded. In exchange for the lease financing, the venture lessor receives monthly equipment lease payments, the equipment's residual value, and equity warrants in the company. The warrants provide the venture lessor with the opportunity to purchase common stock at a stated price up to a specified expiration date based on the price paid by venture capitalists in the latest round of financing.
Major firms involved in the industry include Comdisco, which has the largest market share in the industry, Dominion Ventures, and Phoenix Leasing. Venture lessors work closely with venture capitalists to identify well-positioned companies in the most promising high-growth industries. Obtaining venture capital is typically a prerequisite to obtaining venture lease financing. However, in contrast to the venture capitalists, venture lessors typically take less of an advisory role in portfolio companies, and generally do not serve on corporate boards of directors.
Furthermore, venture capital represents a more diluted type of financing than venture leasing since venture capitalists generally require significant ownership positions when they make an investment in a company. Because most venture capitalists have significant strategic involvement with management of the companies in which they invest, they are limited in their abilities to invest in multiple companies within a single industry. Venture lessors, however, due to their limited involvement, can spread their holdings across multiple firms in a single industry.
The leasing industry has grown in tandem with the high technology boom of the late 1990s. As evidence of this growth, Comdisco's venture lease commitments have grown from $77.3 million in 1995 to $738 million in 2000 (fig. 1). However,...