Exploring the Dynamics of Venture Capital Success and Failure
Venture capital (VC) is a dynamic and high-risk investment landscape that fuels innovation and entrepreneurship. VCs provide essential funding and expertise to startups and early-stage companies with the aim of generating substantial returns. However, amidst the glamour of successful investments, pertinent questions arise:
Do venture capitalists themselves experience failure?
Why do venture capitalists often rely on superficial factors when choosing which companies to invest in?
The Suppossed High-Risk, High-Reward Nature of Venture Capital
According to Gil Silberman Managing partner at a VC firm;
“Almost no fund would fail in the way an operating business fails – going out of business quietly or in spectacular fashion. If you put money into a fund today, chances are that the fund will be around ten years from now to tell you how you did.
A well-run fund has many mechanisms to deal with the things that can kill a typical business – death, incapacity, poor management, cash shortfalls, lack of business, and so on. They are bankruptcy proofed, and there is usually a backup servicer to take over the fund in case something happens to the fund managers or their key personnel. Even if something bad happens, fund investors would have a way to take over the fund for themselves and hire new management. Absent fraud, or complete economic collapse, there would be some value to the fund, and it would return at least some of your money back.”
At its core, venture capital is supposed to be a calculated gamble. VCs invest in unproven, often technology-driven startups with the hope that a few will skyrocket in value, offsetting the losses incurred from those that fail to gain traction.
But is this true for the VCs as it is for their Limited Partners(LPs)?
According to a 2017 TechCrunch article by Israeli serial entrepreneur Tomer Dean;
“Even when they (VCs) don’t generate great returns — and most don’t — their personal compensation is guaranteed from the fee stream. If that’s not enough, remember this: If one of their startups does see a liquidation event, they get 20 percent of the profits as a bonus. They’re sharing the upside, without any risk if things go south.”
Conclusion: The Dichotomy of VC Success and Failure
Given the assurance of minimized risk and substantial gains upon success, it’s improbable that the majority of venture capitalists would alter their portfolio selection methodology. The truly successful VCs will persist as those who adopt a distinct, comprehensive approach, departing from generic norms.
Thus, the significance of VC failure to VCs remains uncertain. While a catastrophic disruption capable of reshaping the industry might not be immediate, it is plausible that such a transformative event could eventually materialize.