Even as you read this article, dozens of would-be inventors and entrepreneurs around the globe are experiencing ‘eureka’ moments: a split second in which they first discover a premise or idea that can alleviate a pain point in the world or inspire joy.
However, these creative individuals often lack the financial backing or business know-how to turn these seedlings of ideas into functioning startups and eventually market-ready products. That’s where venture capitalists come in.
A venture capitalist is an individual or a firm that specializes in investments. Specifically, investments in companies that are in the early stages of startup and have high-growth potential. Unlike angel investors, venture capitalists funding comes from multiple and diverse sources, such as banks, superannuation funds, and wealthy businesspeople.
Now that we’ve defined what venture capitalist is, we can explore the vital role that they play in the ever-evolving investment landscape.
1) Supporting Innovation
Source: entrepreneur.com
An important function of venture capitalists, like this one, is to support innovation. By providing vital funding to budding startups, especially in the technology sector, venture capitalists (or VCs) allow inventors to play with new ideas and push the boundaries without the stress and constraints of a limited budget.
Many well-known and highly successful companies dominating the market today were supported in their early development by VCs. For example, back in 2015, when the prolific ride-sharing app UBER was still in its infancy, it received over $250 million dollars worth of funding from venture capital firms, including Jeff Bezos and Google Ventures. UBER’s competitor, Lyft, also relied heavily on investors to kickstart its US takeover.
Venture capitalists disrupt the market’s status quo by providing funding to revolutionary ventures. This disruption pushes other companies to follow suit and embrace technological advancements, which can in turn transform the economic landscape and create solutions to some of the world’s greatest social and environmental issues.
2) Driving the Economic Multiplier Effect
The Economic (or Expenditure) Multiplier Effect refers to the proportional amount of change that occurs in the economy from the injection or withdrawal of capital. Venture capitalists often drive positive expenditures through their investments in startups. This initial cash injection creates a significant trickle-down effect, where the startup not only uses the cash for its own growth but also invests the capital into products and services from other businesses. These businesses then experience their own growth, which can lead to job creation, increased consumer confidence, and stronger local economies.
3) Creating Jobs
Source: esd.ny.gov
As touched on above, VCs often have a positive impact on the labor market. The high-growth startups they invest in have the potential to quickly become formidable employment opportunities. For example, well-known startup Airbnb grew from humble beginnings in 2008 to record a figure of more than 5000 employees by mid-2022.
Not only do venture capitalists provide the funding to get small businesses off the ground, but they also play a significant role in scaling up the business. As the startup evolves, dedicated VCs assess which resources are required to grow the venture and then provide the businesses with the industry connections needed. This growth creates a ripple effect in which new employment opportunities can be generated. For example, when a VC connects a growing startup to a manufacturing business, the startup’s scale will determine how many employees are needed by the manufacturer to fulfill the request. As the startup transforms into a larger, more reputable business, the manufacturer and the rest of the supply chain may need to hire additional staff to meet production demands, leading to indirect job creation.
4) Developing Industries
Source: forbes.com
Venture capitalists also play a crucial role in developing industries, with a strong focus on the energy and technology sectors. VCs do this not only by injecting capital into disruptive ventures that promote industry innovation but also through market validation.
As venture capitalists are known for their expertise in evaluating risk and opportunity in the marketplace, their investment in a specific sector, industry, or technology signals to other stakeholders that there is economic potential. This increased confidence can inspire smaller investors to take a chance on new businesses or give a young entrepreneur the final push to launch his or her new startup.
Additionally, through their in-depth research, monitoring, and participation in key conferences, most successful venture capitalists become trusted thought leaders within their chosen fields. With this knowledge, they come together to share insights with other industry titans to inform trends, start conversations and shape industry practices. This process can identify gaps in the market and lead to further growth and innovation in the field.
5) Sustaining the Entrepreneurship Ecosystem
Source: entrepreneur.com
At their core, venture capitalists are financial professionals that are responsible for producing significant returns on their client’s investments. This imperative to produce a robust return on investments drives VCs to develop strong exit strategies. Through initial public offerings and acquisitions, VCs know when to finalize their investment in one startup and recycle their capital into the next big thing. This recycling process creates an ecosystem of entrepreneurship that is completely self-sustaining, offering constant new opportunities for inventors to enter the market.
6) Promoting Economic Risk-Taking
In uncertain economic times, there is a tendency for businesses and individuals to shy away from financial risks. However, this economic conservatism does little to create jobs, inspire innovation or bolster the already unsteady economy. Venture capitalists can combat this market stagnation. Unlike angel investors, for instance, VCs are typically prepared to take on high-risk projects even in this climate, which can help startups with limited financial records bridge the investment gap between conception creation and product/service realization.
By supporting these high-risk ventures, VCs are effectively demonstrating the power of calculated risk-taking. In turn, this inspires other stakeholders to spend and invest in disruptive ideas, leading to a more resilient and dynamic economy.
From the above, we can identify the tremendously positive impact that venture capitalists have on the economic landscape, from supporting job creation to championing innovation across multiple industries.
