Factors Influencing the Growth of Venture Capital
Introduction
Many people dream of starting their businesses. There are several reasons why entrepreneurs would be willing to start their businesses. However, many of them get stuck because of a lack of capital since many financial institutions don't lend in the absence of collateral security. Some get lucky enough to get financial support from their savings or families and friends. But for others, there is only one alternative to obtain funds and start their businesses, and that is through venture capital. This is a part of private equity capital that is normally given for new start-ups that promise potential growth in the aim of getting a return on investment. In other words, venture capital investment is generally refers to cash in exchange for a share in the invested business.
Structure of Venture Capital
Venture capitalists (VC) refer to an investment firm or a person making venture investments. Apart from the issuance of capital, venture capitalists (VCs) also play a role in managing the business at an early stage, thus adding expertise skills. Kwak (2019) tells us that because there is a high risk of losing all investment in a given start-up company, most venture capital investments are done a pool format, where investors combine their portfolios into one large fund that invests in different start-ups. By doing this, they spread out risks hence improve their return on investments
According to Wallmeroth, Wirtz & Groh (2018), venture capital is generally used as a tool for economic development in underdeveloped countries. For the past few decades, venture capital has attained substantial growth especially in the developing economies where a considerable increase in economic activities has been observed of late. The main reason for this could be the search for different profitable markets that have gone through economic maturity, given that the developed markets have shown a slight decrease in profitability levels due to trade wars currently at play. Despite venture capital being widely disseminated worldwide, but the activity is mostly concentrated in America. In this paper, I will aim to understand the factors that drive the growth of venture capital.
Motives that drive Venture Capital
The venture capital market contains three elements namely management organization, capitalists, and invested corporations. In simplifying the dynamic market, capitalists invest their investments which are controlled by management organizations, which in turn, buy a stake in investment firms for a specified period (Maula, Autio & Murray, 2010).
· Organization Innovativeness
To clearly illustrate motives for venture capital, it’s essential to analyze the level of growth and development as a result of the effectiveness of measures at the organizational level. Generally, the organizations’ interest in creating venture funds has been largely influenced by the venture capital climate. Most companies generally use the internal R&D system as the primary source of innovativeness. In spite of these systems having a high prevalence use in many organizations, venture capitalists are cautioned against limiting organizations to sourcing its innovativeness from internal R&D. Research has it that most monopolies lack efficiency, and so, the costs related to inefficiency are automatically borne by the end consumer. Napp & Minshall (2011) tells us that heightened R&D expense at the firm’s level is an indication of internal inefficiencies as well as increase in costs rather than successful innovative strategies.
This said it is therefore a necessity for organization structure to eradicate the dominance enjoyed by the R&D units. To accomplish this, it is material for entities to structure technological measures through effective approaches such as corporate venture capital. The option for multiple technological initiatives founded on corporate venture capital is common among the world's leading corporations. The introduction of this technique at the organizational level has been found to eliminate inefficiencies and a tool used for cost reduction.
· Agency Problem
Agency theory focuses on inefficiencies that hinder contract association between firms. In this matter, both participants in a contract are opportunistic and risk-averse. Consequently, the opportunistic behavior of both parties may not align with the best interest of the organization. Moreover, any form of disagreement between both parties implies an enduring loss for the business. A typical example where an agency problem exists is the case of the relationship between the organization's R&D unit and the top management involved in technological advancement. So, if the R&D department starts a project beyond its limits and takes actions that cannot be accounted for or verified, it may create conflicts. Also, hold up challenges may emerge causing funded internal investments to halt in spite of significant corporate expenditure. Therefore, creating a corporate venture capital initiative is the ideal solution to some of the challenges related to agency problems. In regards to this, the corporate venture capital will give the internal R&D unit with a healthy challenge over their dominance on innovativeness. Gaba & Bhattacharya (2012) tell us that challenging the dominance by internal R&D unit on innovation productions has aided several businesses to successfully achieve their objectives.
· Detachment
Research has also established that venture capital offers an inside perspective of new technology areas that can be exploited as well as an approach that allows businesses to respond swiftly to market changes. According to a study done by Maula, Autio & Murray (2010) about venturing initiatives, the findings showed that organizations which were able to make successful technological investment experienced better success levels. Another positive aspect of venturing is that it provides the firm with the ability to speed up its response to threats. In particular, it offers a quicker approach for the organizational management to detach from portfolios that appear doomed to fail. Since the relationship between the organization and the venture funds is normally at arm's length, this is a significant advantage to market players. Because, as much as organizations may seem reluctant to abandon an unpromising project, the presence of other venture capitalists provides a platform for forcing a decision.
· Business Response
Capital venturing also provides an organization with various sources of leveraging. This can be seen in the iFund case whereby decisions made by investors to promote the development of technologies relying on the venture firm business platforms to increase product demand. The venture fund was invested in several hardware and software makers whose products capitalized the power presented by the new intel chip. The success of these investments resulted in increased adoption of the chip within a short period. All these successes are attributed to applying corporate venturing to create a network of wireless players.
· Threat Management
Another motive that drives venture capital is threat management. The venture fund can be used by a firm as an approach to gathering intelligence, which in turn assists the organization to protect itself from emerging threats in the competitive market. Gaba & Bhattacharya (2012) mentions that during the 1980s, a silicon-chip expert formulated a venture program that focused on investing in a variety of technologies. This program aimed to gather strategic information at a much lower cost. The process program findings discovered that it was hard and expensive making chips using non-silicon products. This resulted in high valuation thus making the company capitalize on its competitive advantage. From this case, we realize that the decision to engage in capital venturing offered the firm a source of insurance. Also, the alternatives that the organization explored were viable as they were protected from the risk of being faced out of the market by its competitors.
Conclusion
In conclusion, the analysis of the various factors that influence venture capital and its importance in their business world is depicted from the resultant growth, development, as well as competitiveness in the market. From the paper, we realize that the factors that drive venture capital demonstrate entrepreneurial aspects that correlate with the positive effects on business corporations. Based on the deeper analysis of the strategic entrepreneurial aspects of venture capital investments, this article has clearly illustrated and affirmed that the technology plays a significant role in the competitiveness and sustainability of organizations and hence an attractive platform to venture in.
References
Gaba, V., & Bhattacharya, S. (2012). “Aspirations, innovation, and corporate venture capital; A behavioral perspective.” Strategic Entrepreneurship Journal.
Kwak, G. (2019). What drives venture capital fund performance?. Applied Economics Letters, 1-6.
Maula, M. V., Autio, E., & Murray, G. C. (2010). “Corporate venture capital and the balance of risks and rewards for portfolio companies.” Journal of Business Venturing, 24(3), pp. 274-286
Napp, J. J., & Minshall, T. (2011). “Corporate venture capital investment for enhancing innovation: Challenges and solutions.” Research-Technology Management, 54(2), 27-36.
Wallmeroth, J., Wirtz, P., & Groh, A. P. (2018). Venture capital, angel financing, and crowdfunding of entrepreneurial ventures: A literature review. Foundations and Trends® in Entrepreneurship, 14(1), 1-129.
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