Importance of Venture Capital to Growth-Oriented Entrepreneurial Ventures ('GOEVs')

This article builds on econometric data in article #2E2.2022 and segments the population of small & medium-size business enterprises in G7 countries into 3 categories: high-growth entrepreneurial ventures (‘HGEVs’), start-up entrepreneurial ventures (‘SUEVs’), and owner-managed small businesses (‘OMSBs’).

Only the first two are of any interest to venture capitalists ('VCs'). VCs select prospective investments based on expectations for significant enterprise growth (growth-oriented entrepreneurial ventures, or 'GOEVs'). Expected revenue growth of an enterprise is the fundamental driver of its future profits and valuation increases sufficient to multiply VCs' invested capital. And, VCs judge that only the possibility achieving such investment multiples warrants the extraordinary uncertainty & risks associated with making such investments.

However, achieving significant growth typically requires significant capital - particularly human, entrepreneurial, and financial capital. GOEVs have five needs for significant financing: lengthy technology/product development cycles, operating cash shortages during start-up, capital investments in critical PP&E and IP, initial market development costs, and 'fuel' for expansion during the rapid growth stage.

Professionally-qualified financial managers are frequently adept at raising cash from many sources. But, conventional debt financing is typically not available to GOEVs and the most appropriate type of financing matched to the nature of its five needs is equity - i.e. risk capital. While there are several sources of equity capital available in a typical 'pecking order', not all of these are available to GOEVs - at least in the amounts required throughout their stages-of-development, or at all (e.g. public markets). But, venture capital fills a gap in the supply of equity for GOEVs in many cases. In 2020, the value of VC investments globally breached $300B (about 1.5% of this was in Canada). Through their investment decision-making, VCs effectively determine which enterprises get funded and which do not, based on their industry and stage-of-development preferences. Thus, at a macro level, venture capital has a strong influence on sectoral growth in most Western and some Asian nations.

At a micro or enterprise level, VC firms' (which are financial intermediaries) value-added extends beyond the obvious financial capital: they efficiently bring investors and entrepreneurs together, make better decisions than their limited partners (original source of funds) would alone, and provide advisory services (e.g. strategic guidance, leadership coaching, team-building support, and leveraging their networks) that enhance enterprise survival and success. Over approximately 70 years, VCs have developed a variety of strategies (e.g. due diligence, deal structures, staged/contingent investments, compensation & ownership arrangements, governance & oversight) to mitigate the high uncertainty & risk inherent in new venture investments. Also, many VCs believe that interpersonal relations and 'fit' are important for effective working relations - both within their enterprise management teams and between enterprise leadership and the VCs. Similar to the "5 Cs of Credit", I suggest there may be '4 Cs of Venture Capital': Capabilities, Connections, Capital, and Coaching.

Venture capital is often described as 'patient money' as VCs understand the time from initial investment to a successful exit ('cashing out') can be many years. Thus, venture capital is particular well-suited to funding growth-oriented entrepreneurial ventures and, in so doing, supporting the growth of national economies.