Can Venture Capital Create a Better Future? The Facts You Need to Know
The global rise of capitalism has lifted hundreds of millions of people out of poverty whilst driving incredible technological advancements. Read on to explore the impact of venture capitalism and how it can help solve technological, environmental, economic, and social challenges all over the world.
How does venture capital work?
The United States’ economy is driven by invention and innovation, fueled by stories of Silicon Valley entrepreneurs rising to the top, against all the odds. The truth is, most would not get very far without some help and the majority of startups need a venture capitalist to help the business get off the ground.
It is often difficult for a business to secure funding from traditional lenders in its early formative stages. Yet without funding, it is impossible for that business to flourish. Venture capital fills that void — or at least a significant part of it. Moreover, venture capitalists provide entrepreneurs with more than just collateral. Their operating experience and inside business knowledge can be equally, if not more, valuable.
Over the last 30 years, venture capitalism has evolved considerably. Today, the US leads the world in using venture capital to drive massive economic growth. Analysts estimate that around 80% of venture capital goes into building key infrastructure, enabling the business to grow.
However, venture capital is often a relatively short-term investment. Money is invested in a business that shows commercial potential, enabling it to grow to such a size that it can then be sold or floated on the public equity market.
Essentially, a venture capitalist invests in the entrepreneur’s idea, nurtures it for a short time, and when a third-party investor comes along, takes their return and exits the company.
Interestingly, the rules and structure of capital markets created the gap in which venture capital exists. An individual who has developed a new technology, or even just has an idea, is unlikely to appeal to banks at this stage of the business. However, without funding, a new business could never get off the ground — particularly one involved in developing new technologies, a process that is often exorbitantly expensive.
US legal regulations limit the amount of interest banks are allowed to charge on loans. Combined with the inherent risks associated with investing in startups, many banks will only finance ventures to the extent where there are hard assets to secure debts against. Many new startups do not have hard assets; indeed, they are seeking financing to buy them, creating a catch-22.
It is true to say then that venture capital drives innovation, since without it, some of the world’s most forward-thinking companies would have never progressed. However, investing in unproven startups is inherently risky. In order to appeal to venture capitalists, there need to be significant returns.
Venture capital could transform the way we source food
The US Department of Agriculture estimates that food, agriculture, and related industries account for around $1 trillion of the US GDP. American farms alone contribute approximately $137 billion. None of this would be achievable without chemical fertilizers. Without them, around 3.5 billion people would have starved in 2015 alone.
Nevertheless, chemical fertilizers have disadvantages. The manufacturing process is extremely labour intensive, creating pollutants and potent greenhouse gases, and the chemicals wash into waterways, creating dead zones in our oceans.
Technological breakthroughs over the past two decades have created a shift in agricultural processes, reducing and even eliminating the need for chemical fertilizers. Thanks to new biological approaches, farmers can continually produce elements vital to growing wheat, corn, and other staple crops. This allows them to increase yields, which, in turn, boosts food supply, makes agriculture more sustainable, and improves profitability for farmers.
Venture capital has helped the AI industry flourish
Artificial intelligence (AI) has advanced exponentially over the last 20 years. Today, AI plays an integral role in many aspects of industry, automating processes in product development, manufacturing, and field operations.
49% of companies in the manufacturing and automotive sectors agree that AI is absolutely critical to the success of their business. Without venture capital funding, many technological advancements simply would not have been possible.
Advanced robotics accounts for $4 trillion of the automotive industry, where the use of robotics has expanded beyond the assembly line into broader aspects of manufacturing.
Venture capital has had a revolutionary impact on the energy market
The global energy market is worth more than $7 trillion, with electricity accounting for one third of revenues. Many countries around the world are transitioning away from fossil fuels, creating huge opportunities in the renewables sector.
Today, there are venture capital funds that work solely within the renewable energy sector. They invest in promising energy innovators, building and scaling new ventures and finding ways to meet growing global demand for affordable, reliable energy.
