Over time, the venture-capital industry has advanced its operating processes and contracting practices making them well adapted to environments characterized by uncertainty and the different information irregularities between principals and agents. Great investments in venture capital have been seen in recent years since the phenomena have started to become identical to innovation and wealth creation for the investors.
Fast developing entrepreneurial businesses have taken over the markets and are providing the majority of employment opportunities. Venture firms have been a passage to capital markets for startups and new businesses for a lot of time and the market is getting saturated at an unlimited pace. Venture capital not necessarily has to be in monetary form; it can either be in the form of technical or managerial expertise and assistance. For new companies or startup ventures that have a limited operating history, venture capital funding is gradually becoming a popular capital nurturing source owing to the lack of the availability of funding through loans or other debt readily. Despite the investments being very risky, the potential for the enormous growth of these businesses and return on equity for the investors stand as the biggest motivation and attraction.
These investors are both, the ‘angel investors as well as the VC firms caring mainly about two things; expected returns and risks. Investors are giving the highest valuations to venture capital businesses because of low-interest rates and getting a decent return on the investment which is not possible elsewhere in today’s marketplace. The venture capital bubble has been formed owing to these historical ultra-low interest rates that have led to significantly lower returns on many investments have fueled a boom in venture capital investment. This VC bubble is expanding at an exponential rate. Huge investments have been made in the Silicon Valley startup to capture the growth opportunity of the tech industry. Some analysts claim that there is more money in the market than what the companies actually need which is one of the major potential causes for the bubble burst.
Numerous unicorn companies such as Xiaomi, Didi Chuxing and Airbnb are among the top private companies valued above $30b US Dollars. As stated earlier, these businesses are operating in a very risk environment and most valued business company today can become zero tomorrow; just like Theranos, an American health and medical technology company.
A once $9b US Dollars Unicorn Company is currently under criminal investigation by the federal prosecutors in America for allegedly possessing faulty technology and using competitor’s equipment for their operations. The female billionaire owner of the companies is devising different response strategies to address the issue but in vain. Young businesses and startups prefer to ignore the Initial Public Offering (IPO) and remain as private companies to keep themselves away from heavy taxation and legalities. According to Dow Jones VentureSource, there are less than 1% of young companies in the USA which is currently IPO registered.
More and more businesses are lacking IPO registration to avoid the reasoning and procedures if businesses fail or collapse. This is indeed a dilemma for investors in today’s world. The venture community has accepted the fact that ‘all that glitters is not gold’ for many unicorn tech companies. Sequoia Capital partner Alfred Lin puts the concept as the venture firms have realized the fact that valuation on the basis of which a number of companies are funded are not always that great fundamental business. The IPO registration catch has further intensified the two fears which are already there in the venture-capital community mindset: that these startups might be valued too high, and some of these businesses might have taken dirty standings to acquire the big-number valuation.
The advancement of new high-potential and prospective business ventures and venture capital is of great significance to the economic growth as a whole. Thorough and systematic policies can deeply influence such opportunities, but on the other hand, many public initiatives are mistaken. Innovation and advancement is important for the stimulation of economic growth while maximizing the role of entrepreneurial businesses as an engine of innovation.
The historical evidence and theoretical arguments suggest that governments and administrative authorities can play a key role in encouraging entrepreneurship. Yet, at the same time, many obstacles exist to the effective implementation of public programs with these goals and objectives. In general, the actual job of any investor is to help entrepreneurs build meaningful and fine companies and technologies. The major question which arises here is related to the future of venture capital phenomena. Is there a probability of improvement and change in the current VC model? Or would there be a completely different ground and system in the years to come?
