Venture capital (VC) is the 3ed trail of risk financing. It is highly loaded and usually misunderstood. The assumption is that there is a shortage of VC, which implies that more VC will result in more home runs, more wealth, and more job creation. Still, a few VCs earn the most VC profits and very few entrepreneurs take advantage of VC.
VC was developed in the USA. The first VC fund has arrived Boston and Silicon Valley has perfected the funding strategy. So VC is not just an American invention, but could only have been developed in the US. Here’s why.
#1. VC is about financing risky ventures. The US accepts high risk.
The US is the most entrepreneurial country in the world. VC is about opening new frontiers by financing emerging technologies and emerging industries. VC is high risk because many end up in emerging industries, but few succeed and dominate less. About 80% of venture capital-funded ventures would fail. Without funding from successes and home runs, VC fails. This is similar to the American spirit of seeking new frontiers and risking personal fortunes and lives.
#2. VC is about making the pie bigger. So is America.
America is about growth and so is VC. Without growth, the US will lose its dream. Increasing the size of the pie allows more people to share in the American dream.
#3. VC promotes emerging industries. America does too.
VCs like to capitalize on an emerging trend and grow with the upward trajectory of the emerging industry wave. The US is the leader in emerging industries Intel and semiconductors in the 1960s to PCs to the Internet and AI. This creation and emergence of new trends and industries has been the basis for VCs and the reason for their high returns. And America made them all.
#4. VC is about dominating potentially large markets. So is America.
The concept of America has been to create huge markets and dominate them. Likewise, any VC would love to fund an early stage venture that can dominate a potentially huge market. This has been the case with home runs from Microsoft to Airbnb.
#5. VC accepts failure. America does too.
80% of VC funded ventures fail. VCs accept failure as a cost of doing business. America does too. Failure in a business is not seen as the end of business life. Entrepreneurs can and must come back. Second chances are available and comebacks are announced.
#6. VC is a pyramid. So is America.
As I noted earlier, it is said that 3% of VCs earn about 95% of VC profits and about 15 companies account for about 97% of VC profits. That means very few companies benefit from VC and very few VCs benefit from home runs. America is the same. The top 1% are said to own $41.5 trillion in wealth, compared to about $2.6 trillion owned by the bottom 50%.
#7. VC destroys dinosaur industries. America does too.
VCs fund unicorns that build new giants while destroying the old ones. America is better at destroying obsolete businesses and industries, unlike many countries that try to protect their aging industries and obsolete hierarchies.
#8. Most importantly, VC needs unicorn entrepreneurs. America develops, attracts and rewards Unicorn entrepreneurs.
VCs don’t create unicorns. Unicorn entrepreneurs do. VCs need unicorn entrepreneurs like Steve Jobs who can take an ordinary idea like music downloads on an emerging trend and build a global juggernaut. VC depends on Unicorn entrepreneurs like Jensen Huang (Nvidia) who come to America and build their unicorns here. America depends on Unicorn-Entrepreneurs to create new unicorns and maintain America’s competitiveness.
MY TAKE: VC could have been developed only in America. VC is about growth and change. So is America. VC depends on Unicorn-Entrepreneurs. So is America. For more unicorns in America, we need more unicorn entrepreneurs before we need more VC.