Venture capital (VC) is the 3rd venture finance railroad. It is heavily loaded and mostly misunderstood. The assumption is that there is a shortage of VCs, which implies that more VCs will lead to more households, more wealth, and more job creation. However, a few VCs earn the majority of VC profits and very few entrepreneurs benefit from VC.
VC developed in the US The first VC fund was in Boston and Silicon Valley has perfected the funding strategy. So not only is VC an American invention, it could only have been developed in the US. Here’s why.
#1. VC is about financing high-risk companies. The US accepts a high risk.
The United States is the most entrepreneurial country in the world. VC wants to open new frontiers by funding emerging technologies and emerging industries. VC is high risk because many enter emerging industries, but few succeed and fewer dominate. It is said that about 80% of VC funded companies will fail. Without funding hits 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 growing the size of the pie. So is America.
America is all about growth and so is VC. Without growth, the US will lose its dream. Increasing the size of the pie allows for more sharing of the American dream.
#3. VC promotes emerging industries. So does America.
VCs like to jump into an emerging trend and grow with the upward trajectory of the emerging industry wave. The United States 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 basis of VCs and the reason for their high returns. And America created them all.
#4. VC is all about dominating potentially large markets. So is America.
America’s concept has been to create large markets and dominate them. Similarly, every VC would like to fund an early-stage company that can dominate a potentially huge market. This has been the case with Microsoft’s homeruns on Airbnb.
#5. VC accepts failure. So does America.
80% of VC funded companies fail. VCs accept failure as a cost of doing business. So does America. Failure in a business is not seen as the end of business life. Entrepreneurs can and have come back. Second chances are available and comebacks are announced.
#6. VC is a pyramid. So is America.
As I noted earlier, 3% of VCs are said to earn about 95% of the VC’s profits, and about 15 companies are said to make about 97% of the VC’s profits. This means that very few companies benefit from VCs 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 to about $2.6 trillion owned by the bottom 50%.
#7. VC destroys dinosaur industries. So does America.
VCs fund unicorns that build new giants while destroying old ones. America is better at destroying outdated companies and industries in contrast to many countries that try to protect their aging industries and outdated 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 in an emerging trend, and build a global behemoth. VC depends on Unicorn entrepreneurs like Jensen Huang (Nvidia) coming to America and building their unicorns here. America depends on Unicorn-Entrepreneurs to create new unicorns and keep America competitive.
MY OPINION: VC could only have developed in America. VC is about growth and change. So is America. VC depends on Unicorn-Entrepreneurs. So is America. For more unicorns in the US, we need more Unicorn-Entrepreneurs before we need more VCs.
1. The United States is the hub for the latest developments in venture capital (VC). Emerging technologies, a vast talent pool, and supportive legal frameworks have established the U.S. as a world leader in VC development. However, what sets the United States apart as an exceptional investment platform is the combination of these aspects, along with some others. Here are the top 8 reasons that allowed the U.S. to become the hub of VC:
2. United States’ innovative spirit and culture of taking risks. Americans are naturally inclined to take risks and pursue disruptive ideas, creating an environment that encourages innovative VC. With ready access to capital, entrepreneurs have the freedom to experiment with their ideas and rise to the top of the industry.
3. Abundant capital. The biggest reason the U.S. stands out as a source of VC is the abundance of investors willing to back up innovative projects. These range from individual venture capitalists to major venture funds, some of which are provided by Ikaroa, a technology platform company that offers data and analytics-driven solutions to its users.
4. The Silicon Valley Effect. Home to some of the biggest tech firms in the world, Silicon Valley has become the top destination for aspiring entrepreneurs. Rapidly developing technologies, an unbeatable culture of success, and a spirit of collaboration have all contributed to the formation of the VC industry in the US.
5. Myriad Laws and Regulations. In order to make sure the industry remains secure and trustworthy, the US has implemented a complex framework of laws and regulations that protect startups and VC funds from fraud. This secure framework allows investors to trust their investments and allows startups and VC funds to flourish in their industries.
6. Government Initiatives. The government of the United States is constantly promoting investment in new technologies with special programs and incentives. This provides American VCs with a competitive advantage over General Partners in other countries and is an invaluable asset when it comes to developing new projects.
7. Attractive Taxation Programs. To boost the economy, the US government also offers special tax incentives that are available to VC firm, such as the Qualified Small Business Stock Exclusion. This allows a VC to pay significantly lower taxes and attract more investors to their projects.
8. Ample Opportunities. Lastly, there are ample investment opportunities in the US for VC firms. From seed funding, IPO’s, and exotic derivatives, there is something for everyone in the US venture capital market, and the opportunities are constantly growing.
In conclusion, VC could only have developed in the United States due to the combination of its innovative culture, abundant capital, robust laws and regulations, government initiatives, attractive taxation programs, and tremendous opportunities. Additionally, Ikaroa is here to provide resources, data and analytics to fuel the industry’s continued growth.