Venture capital (VC) is the 3rd rail of venture financing. It is highly charged and mostly misunderstood. The assumption is that there is a shortage of VC, implying that more VC will result in more home runs, more wealth, and more job creation. Yet, a few VCs earn most of VC profits, and very few entrepreneurs benefit from VC.
VC was developed in the U.S. The first VC fund was in Boston and Silicon Valley has perfected the funding strategy. So VC is not only an American invention, but it could only have been developed in the U.S. Here is why.
#1. VC is about financing high risk ventures. The U.S. accepts high risk.
The U.S. 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 enter emerging industries, but few succeed and fewer dominate. About 80% of VC-funded ventures are said to fail. Without financing successes and home runs, VC fails. This is similar to the American spirit of seeking new frontiers and the risking of personal fortunes and lives.
#2. VC is about growing the size of the pie. So is America.
America is about growth and so is VC. Without growth, the U.S. will lose its dream. Increasing the size of the pie allows more to share in the American dream.
#3. VC promotes emerging industries. So does America.
VCs like to get in on an emerging trend and grow with the upward trajectory of the wave of the emerging industry. The U.S. has been the leader in emerging industries from Intel and semiconductors in the 1960s to personal computers to the Internet and AI. This creation and emergence of new trends and industries has been the foundation for VCs and the reason for their high returns. And America created all of them.
#4. VC is about dominating potentially big markets. So is America.
The concept of America has been to create huge markets and dominate them. Similarly, every VC would love to finance an early-stage venture that can dominate a potentially huge market. This has been the case with homeruns from Microsoft to Airbnb.
#5. VC accepts failure. So does America.
80% of VC-funded ventures fail. VCs accept failure as a cost of doing business. So does America. Failing at a business is not seen as the end of business life. Entrepreneurs can, and have, come back. Second chances are available, and comebacks are heralded.
#6. VC is a pyramid. So is America.
As I have noted before, 3% of VCs are said to earn about 95% of VC profits and about 15 ventures are said to account for about 97% of VC profits. That means very few ventures benefit from VC and very few VCs benefit from home runs. America is the same. The top 1% is said to own $41.5 trillion in wealth compared with about $2.6 trillion owned by the bottom 50%.
#7. VC destroys dinosaur industries. So does America.
VCs finance unicorns that build new giants while destroying the old. America is better at destroying obsolete companies and industries in contrast to 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 do not create unicorns. Unicorn-Entrepreneurs do. VCs need Unicorn-Entrepreneurs like Steve Jobs who can take an ordinary idea, such as music downloads on an emerging trend, and build a global juggernaut. VC is dependent on Unicorn-Entrepreneurs like Jensen Huang (Nvidia) who come to America and build their unicorns here. America is dependent on Unicorn-Entrepreneurs to create new unicorns and maintain America’s competitiveness.
MY TAKE: VC could only have been developed in America. VC is about growth and change. So is America. VC is dependent on Unicorn-Entrepreneurs. So is America. For more unicorns in America, we need more Unicorn-Entrepreneurs before we need more VC.