Exiting an investment is the moment of truth for venture capitalists. That is when they learn the real value of the enterprise they have been funding. They measure its success by the multiple of the original investment they receive on exit.

The path from the start of an investment to the exit point can be long and tortuous, and forecasting the future value of a young company is a very uncertain science. A host of internal and external factors can conspire to hinder or promote a technology company's progress over the several years it takes to mature. But venture capitalists chance it anyway, trusting that their experience in selecting and managing investments and their active involvement in the company's development will improve its chances of success.

Understanding the environment in which a prospective portfolio company is expected to prosper is an essential part of the venture capitalist's job. This chapter discusses some of the major factors that affect technology companies and their markets. Although the information is general in nature, it serves to set the stage for the case studies we will consider in the next four chapters.

We begin with the fundamental driver of all technology businesses: the innovations they are bringing to market.