What is venture capital? ''The pilot light of American industry,'' says San Francisco financier Thomas Perkins - a ''very small flame,'' he explains, which is capable of igniting entire new industries.
Essentially it is seed money used to back a hot and promising idea - often no more than a conception needing years of further research - that could one day produce salable products.
Sometimes the ideas fail, taking 100 percent of the investors' money with them. Sometimes they splutter along for years and just break even.
But when they succeed, they can provide healthy returns on the initial investment. Winners include Wang Laboratories, Federal Express, Apple Computers, and hundreds more - all started by individual entrepreneurs with little money but plenty of imagination.
Mr. Perkins, a partner in the venture capital firm of Kleiner, Perkins, Caulfield & Byers, has his own pet example. He once put $100,000 behind a few biologists with some untried ideas. The result: Genentech, the pioneering genetics engineering firm that has since raised $160 million to fund its own expansion and has been instrumental in creating a whole new industry.
The payoff to the venture capitalists (who typically own a substantial share of the companies they support) comes when the firms start making money and begin selling stock on the public market.
Usually that takes time (5 to 7 years), additional second- and third-stage (or ''mezzanine'') financing, and a lot of consultation between entrepreneurs and the capital managers. But sometimes it happens quickly. Harry J. Healer Jr. of The Venture Capital Fund of New England recalls a recent deal that matured in 16 months - and produced a 400 percent return on investment.
Money for venture capital investments flows through three channels. Most important are the private funds, typically in the $15 million to $100 million range and usually made up of the pooled resources of a small number of individual partners.
There are also some 360 ''SBICs'' - federally licensed firms formed under the Small Business Investment Act of 1958 - and some 100 major corporations (Xerox, Exxon, General Electric, and others) that make venture capital investments.
But it is ideas, rather than money, that initiates the process: It is up to the entrepreneur to come forth with an attractive idea that pulls out the financing. It does not seem to work in reverse. As Venture capital analyst Stanley E. Pratt quips, ''You can't push a string.''