Venture Capitalism – Fueling the Entrepreneurial Revolution

While venture capitalists offering a cash injection can be attractive for any new company, it’s important to remember that rapid business growth requires more than just funding. While funding is essential, it’s not the only factor determining success. Entrepreneurs focused on building a sustainable business that provides real value to their customers are more likely to succeed in the long run. Entrepreneurs can turn venture seas into successful ventures with a clear vision, a solid plan, and a commitment to hard work.

Investing in Good Ideas

In addition to capital, venture capital firms provide business and institutional knowledge. They are well-connected with other businesses that could benefit startups, professionals they may want to recruit, and other investors. Venture capitalists, for example, Brad Kern, also have the experience and expertise to evaluate risk. The VC model fills the void that capital markets and traditional bank debt leave for companies with limited operating history or no collateral. It also allows them to commercialize innovation that otherwise lay dormant in corporations or universities. Unlike angel investing and equity crowdfunding, which involve no return on investment until the company is sold or terminated, VC firms expect to recoup their money and profit from investments in early-stage companies. They usually get a significant share of the company’s ownership and value in exchange for funding and substantial influence over management decisions.

Investing in Good Industries

While the popular press is filled with against-all-odds success stories of Silicon Valley entrepreneurs, in reality, most venture capital firms are just like any other money management business. Their financial incentive is to maximize the return on their managed investments, and their time to counsel entrepreneurs is limited. Venture capital firms typically pool investors’ funds and then invest in promising emerging growth companies in exchange for a sizable stake of the company’s equity. In this way, the industry fills a void between sources of funds for innovation (corporate research and development departments, government bodies, universities) and lower-cost, ongoing sources of cash (capital markets, banks, and a new generation of family and friends). The best venture capital firms focus on the later stages of industrial growth when established technologies are maturing but still offer substantial market potential. Examples include marketing automation software, food delivery apps, and networking chipsets. But the future holds a far more significant opportunity: industrial transformation using massive cloud computing, artificial intelligence, and molecular and biological science – a “Deep Tech” that can offset and even reverse the worst environmental impacts of capitalism.

Investing in Good People

Unlike corporate or university funding, which often caps the upside of basic research, venture capital offers a substantial upside to entrepreneurs and management teams for commercializing their inventions. Venture capital-backed companies have a significant and growing role in the U.S. economy, and many of the world’s most valuable companies are VC-backed. Venture capital funds offer opportunities for entrepreneurs whose businesses are too small to raise capital in the stock markets or get bank loans (because of usury laws that restrict the rates banks can charge and the risks inherent in startups). In return for their risk, venture capitalists usually get significant control over company decisions and a chunk of the company’s ownership and value—so-called Unicorns.

Investing in Good Management

The investment industry’s cult of the venture capitalist has created several myths about the U.S. economy’s most dynamic growth engine. Separating the myths from the current realities can help entrepreneurs make more intelligent decisions about venture capital. Investing in good management is crucial for a VC firm. VCs typically invest in early-stage companies and seek a stake in the company and significant control rights. This includes a right to participate in major decisions, such as the choice of board members and a say in company policies. The VC business model is designed to create opportunities for entrepreneurs. They invest in industries with high growth potential and promise above-average returns. The VC industry tends to refrain from investing in low-growth market segments. This is why the flow of VC funds has shifted rapidly from genetic engineering, specialty retailing, and computer hardware to CD-ROMs, multimedia, telecommunications, and software. These industries are more competitively forgiving and offer a faster path to profit.