Private Equity, Venture Capital, Angel Investing, there are many names for the type of investments you see on ABC’s show Shark Tank, as well as CBC’s show Dragon’s Den.
To the general public, it is an entertaining look at people pitching their ideas to well capitalized investors who are willing to bet on the next big thing.
I will start by describing what Venture Capital actually is, and will describe why these investors will be needed so much in the future.
Venture Capital Investment: Some Useful Information
- A product / service that is cutting edge and groundbreaking (almost by definition)
- A great deal of uncertainty in regards to future success / sales / cash flows / survival
- Risk for the investor is extremely difficult to quantify due to a lack of company history, and market knowledge
- Investors must view the investments prospectively due to the lack of history. More important is the entrepreneurial skill as well as the market potential and competitive advantage.
- A high probability of failure, especially if sufficient funding is not available
- Because of the inherent risks and uncertainties, investors demand a substantial return on their investment (40% – 60% per year is quite common)
- A serious time and capital commitment may be required due to a lengthy research and development phase, as well as a potentially long period to ramp up sales
- If the investment is underperforming, it is common for the investor to step in and ‘fire the management.’ Quite often the investor has a great track record of success and a ton of knowledge specific to the industry, so if need be, the investor would be capable to take over
- Potential payoffs can be massive, especially if the end result is an Initial Public Offering (IPO), and to a lesser extent, a management buyout. The big payoffs on the few investments that succeed make all the stress, risk, and uncertainty worth it in the end. This is especially true if the investor is skilled in picking the top performers
Where is Venture Capital Headed?
The future for this industry is very bright in the next few decades for some very important reasons.
For one, the High Tech industry is entering what many describe as the creative phase. Gone are the days of cumbersome systems, closed networks and isolation of information. With the implementation of cloud computing and open source projects, as well as the expanding tech-savvy population throughout the world, the barriers to entry for idea generators have diminished.
In today’s world, to make a cutting edge idea hit the market you only need 3 important things.
- A creative idea that solves a really big problem in a really clever way
- Some geeks to implement this idea
- Money to make it all happen. (this is where the venture capitalists come in)
It seems like everyone has already invented everything. How do I come up with some new solutions?
There are some obvious and massive problems that need to get solved in the near future. The problems of today are easier to tackle with a small team because of the availability of information, and mass collaboration.
With the heightened complexity of the world, it only leads to bigger problems to solve. Here are a couple:
- There are too many people in this world, and this number is growing exponentially. To make matters worse, we have a constant level of food. On top of this, the fertilizers and pesticides we use to produce this food is spilling into the ocean and killing all the marine life. If we were to stop using these agricultural chemicals, half of the world’s population would die in the next year due to starvation. If we use these chemicals even more, our oceans will become a massive dead zone and then we are really screwed. How can you produce more food, without upsetting the biosphere?
- With our growing population, we need energy and we need a lot of it. Additionally, the developing world is becoming wealthier and is consuming much more on a per capita basis. The fossil fuels extracted over the past century are the very reason why the economies of the world have ‘electrified’ with production and why we are able to live so comfortably. The only problem is this energy was concentrated over many thousands of years in the form of fossil fuels and we are running out of this concentrated supply. For the next few decades we can survive on the remaining oil reserves (but we will have to dig deeper under the ocean, or extract it from tar). To let future generations survive, we must find solutions that utilize the ‘un-concentrated’ forms of energy (Solar, Geothermal, Algae, Biomass) so there is a sustainable supply.
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