Venture capital is growing in popularity as a means of financing companies in various industries. In 2018 alone, the National Venture Capital Association reported that $ 131 billion was funded by venture capital firms in nearly 9,000 deals. This number represented a 57% increase over the previous year.
Despite this rapid increase in venture capital funding, one simple fact has remained constant: Most venture capital funded businesses fail. Research by Shikhar Ghosh, senior lecturer at Harvard Business School, found that 75% of businesses that are backed by risky companies never return a positive investment. Up to 40 percent of these companies are forced to liquidate their assets. In this case study, Scott Crockett, CEO of Everest Business Funding, explains why.
VCs don’t need sustainable businesses
When business owners accept investments from venture capital firms, they do so in the hope that the money will help them grow. However, the definition of growth can be drastically different for the business owner and the venture capitalist.
The business owner may want to grow quickly but at a sustainable rate. Venture capital firms are often not very patient. What they are looking for is rapid growth that creates value quickly.
Their ultimate goal is to make their investment result in a very profitable event. It can be an initial public offering (IPO) that makes the company public, or it can be the sale of the private company to a large public entity.
Either way, they don’t necessarily care about building a long-term sustainable business. They just want to create a business that is attractive to other investors.
VCs know they will fail
The mission of venture capitalists is to take risks. They know it and they are preparing for it.
Venture capitalists are no strangers to failure. In fact, they expect them to fail more times than they succeed.
Their success as a business is determined by the overall return on all of their investments, rather than on an investment-by-investment basis. For example, a venture capital firm can make four investments in a single fund.
In order for them to be successful – or get a positive return – they may only need one of these investments to be successful. This makes perfect sense for the VC firm from a business perspective.
The problem for individual business owners is that it means the venture capitalist isn’t just about seeing them succeed. If the company does not achieve the success the venture capital firm wants in the desired time frame, it can simply turn to one of the other companies in the fund.
This approach lets individual business owners on an island find out for themselves. In many cases, business owners are set up to fail early on.
While venture capital financing may seem appealing due to the huge potential returns, Scott Crockett advises business owners to understand exactly what they are getting themselves into before embarking on this path. There are often many other private investment and financing options that business owners can take to help them build sustainable and successful businesses.
About Scott Crockett
Scott Crockett is the Founder and CEO of Everest Business Funding. He is a seasoned professional with 20 years of experience in the financial industry. Mr. Crockett’s track record includes raising over $ 250 million in capital and creating thousands of jobs. Scott has founded, built and managed several finance companies in the consumer and commercial credit industries.
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