preferences, such as conversion to common stock, liquidation preferences, cumulative or non-cumulative dividends, redemption rights, and participation. Each is highly important to a deal's success; it's often possible to structure a deal with these preferences such that only true failure and the bankruptcy of a business would pose a significant risk of loss. Preferred stock transactions that lack some of these terms, or transactions that are poorly negotiated, will undoubtedly increase the risk to the venture investor. Whether by merger, acquisition, management buy-back, or public offering, an exit has to materialize within three to eight years of initial investment, and predicting such exits is an important part of evaluating an opportunity. While it is difficult to establish by which means a portfolio company may liquidate, it is often possible to rule out an initial public offering, often by virtue of identifying that the company may not ever generate north of $150 million in revenues (a number often required for larger investment banks to get interested in a potential initial public offering). If a merger or acquisition transaction is more feasible, as in the majority of all venture capitalist-backed companies (about 80 percent exit through merger and acquisition historically), financial models and exit theory should be based on multiples that can be accomplished under such circumstances. Establishing exit strategies up front can help the venture capitalist negotiate better deal terms and make smarter investment decisions, all leading to a higher investment success rate. Challenges of the Industry The first challenge in venture capitalism is the significant investment of time, energy, and money necessary to raise a fund. This is often a tremendous hurdle for the general partners and may seem like a project of its own. Further, another difficult aspect of establishing a fund is ensuring access to meaningful deal flow. Regardless of the amount of capital a firm has under management, a lack of quality deal flow will cause tremendous challenges. Making investments in bad deals due to a lack of deal flow (quantitative or qualitative) can have equally negative affects on returns. Creating deal flow 31