Access to capital is one of the fundamental constraints to growth that an entrepreneur or innovative startup has to surmount for financing growth and development. Traditional sources of funds, such as bank loans, may be out of reach due to either high risk or lack of collateral. In addition, early-stage companies find it very hard to secure investments from traditional investors who target established companies to ensure stable returns.
Venture Capitals become an important platform bridging the gap between entrepreneurial vision and money. A VC is basically an investor who provides capital for SPIPs in a startup or small business in lieu of equity or ownership stakes. Regular lenders are not so ready to take so much risk in lieu of high returns on their investment.
This is the strategic solution that venture capitalists offer by funding startup businesses and emerging ventures. By so doing, the VCs promote entrepreneurship, innovations, and general economic growth. Besides capital, the VCs have sizable experience, mentorship skills, and networking opportunities they offer to their portfolio companies, thereby enabling them to navigate challenges and sail, fine-tune their business strategies toward accelerating growth.
Through due diligence and rigorous evaluation procedures, VCs select the investments based on the potential of the targeted market, scalability, and strength in the founding team. The approach minimizes risks while maximizing the potential for success of both the investors and entrepreneurs. These investors look basically for companies with the greatest potential for exponential growth in high-growth sectors—technology, healthcare, and biotech—where innovation and disruption can make or break the big returns on investment.
VC funding serves to prove the feasibility of business ideas for entrepreneurs and gives them financial runway to increase operations, expand market reach, and attract additional talent. Many times, VC-backed startups gain credibility and visibility within their industries, setting them apart from other companies looking to attract future investors or potential partnership opportunities to do business with them.
In summary, venture capitalists drive innovation and dynamism in economies through critical funding arrangements and strategic entrepreneurship support for new ventures and businesses. With the entrepreneurial finance ecosystem in continuous evolution, VCs become that much more of a necessary catalyst toward turning great ideas into success stories.
What is Venture Capital?
Located in scenic Silicon Valley, California, the land of venture capital, the latter is best defined as financing startups and small business enterprises that bear long-term growth prospects. In Investopedia’s terms, VCs render vital funding to such fledgling companies and hence sometimes push them toward success.
It wasn’t until the past decade that venture capital had been raised to something of a cultural phenomenon, its most successful operators being catapulted into the realm of stardom. But do VCs simply invest in companies? Or is there another way to know one?
To get to the bottom of things, we invited a real venture capitalist into our studio after convincing him that we were Stanford grads with this hot new startup idea. Sheila Banat, general partner at Better Tomorrow Ventures, explained, “We find small companies. Give ’em money and time and hopefully they become big companies.”
While many entities fund projects, VCs do it differently. Banat stressed that VCs are in search for “crazy ideas” which would cause a potential change in the world if they become successful. VCs often claim to fund an innovation economy building iconic companies like Genentech, Intel, and Apple.
Risks and Rewards
Basically, Venture Capital take long-shot bets on small businesses with huge growth potential. However, contrary to the general belief, investments in a large number of startups often end up in a loss. An investor and writer at Banana Capital Ventures, Turner Novak, said that although investments in startups generally beat the market, they are risky. Because of this nature, VCs invest in various startups to diversify the risk and increase the likelihood of high returns.
The VC firm investment approach is so risky that even large institutions, like pension funds and college endowments and insurance plans, outsource this type of investment to them. Firms raise funds from a cross-section of investors for investment in a portfolio of startups, hoping that a few will be winners.
The Human Element
VCs lay strong emphasis on people behind the dots in a startup. According to Natasha Moss Greenhouse, VCs discuss “vibes” rather more than numbers when deciding prospective investments. It is how well the team executes its vision that matters. Again, this human-centric approach sets them apart from investors who are driven by financial metrics.
The VC Culture
Over the past decade, $344 billion has flowed into venture capital, making it a hypercompetitive market. In that kind of environment, it nurtures a culture in which VCs are having to move at warp speed to get deals done—sometimes within hours of laying eyes on a founder. This creates the perfect breeding ground for bad actors and incentivizes founders to exaggerate their potential.
This pressure to be loud means that we have also seen the rise of a new genre of “VC Braggs,” in which VCs take to social media platforms like Twitter to brag about their successes and establish their profiles. This has created a form of “thought leadership Olympics”, where VCs are competing with one another for who can stand out as visionaries or trendsetters in venture capital.
So, what do venture capitalists really do? They take cash from investors ready to accept the risk and invest it in startups. This requires the screening of innovative ideas, as well as teams that have backings for these ideas and how to manage one’s place within a competitive market. While sometimes VCs may act like they are doing more, at their very least, they are human investors—motivated simply by money and attention at the bottom line.
