American venture capitalists are world leaders in the investment field. They have been transforming industries and boosting U.S. economic growth since the 1970s, investing largely in high- technology and biotechnology companies. Venture capital has created millions of jobs in America and helped generate trillions of dollars in U.S. corporate revenue.
Some people say the most successful venture capitalist was Queen Isabella of Spain who helped Christopher Columbus discover America. The queen's risky investment reaped a handsome return.
Venture capitalists today are willing to take risks that conventional banks and other financial lenders are not. Many venture capitalists were once themselves entrepreneurs, scientists or engineers. They often finance fellow innovators whose ideas produce generous profits for investors.
"The reason that venture capitalists have jobs is that often times entrepreneurs with wonderful ideas about how to transform industries don't have the capital to build these companies," says Jeffrey Andrews, a partner in Atlas Venture, a leading international venture capital firm headquartered in Boston, Massachusetts. "A technologist who has a brilliant idea for a new semi-conductor innovation or a new solar cell probably doesn't know much about how to set up a payroll system or how to set up a corporate structure. Venture capital investors, like myself, are in the business of not only finding and working with these early stage entrepreneurs to build companies, but also really working to build those companies with them."
Where to Invest?
"Venture capitalists invest in what we call early stage companies, which could be two people in a garage and a dog who have an idea," says Emily Mendell with the Washington-based National Venture Capital Association. "A third of the companies that venture capitalists invest in never succeed. But the payoff is great because those companies that do succeed contribute significantly to the U.S. economy. Starbucks, Microsoft, AOL, Federal Express, Home Depot, Staples, Outback Steakhouse, Cisco, Intel, Genentech -- these are all companies that started with venture capital."
Modern venture capital investment is mostly an American phenomenon, says Mendell. "It was invented here. It thrives here. There are other regions who want to emulate what we've done here in the U.S. Areas of interest are China, India, Korea, Vietnam and Eastern Europe. U.S. venture capitalists invested about a billion dollars in India and about one-and-a-half billion dollars in China in 2007, but about $30 billion here in the U.S."
Mendell says companies that receive venture capital account for about 10-point-three million jobs in the United States and about 18 percent of U.S. gross domestic product.
There are some 800 venture capital firms in the United States. Venture-backed companies often grow faster than their non-venture-backed counterparts. Most new companies change hands after four-to-five years of growth, or as soon as investors think they can make a significant profit on their sale. The process of finding a buyer is often left to investment banking firms that connect buyers and sellers, similar to how a real estate agent matches home buyers and home sellers.
Woodside Capital Partners, a leading international investment banking firm based in
Palo Alto, California, specializes in mergers and acquisitions of cutting edge technology start-ups. The company's Managing Partner, Rudy Burger, says his firm performs a vital function in the economy. "Companies, I think, quite rightly have realized that the most cash and time efficient way for them to innovate their businesses is through acquiring young companies. It used to be that the AT&Ts and IBMs and Xeroxs of the world would innovate primarily in-house through having world-leading research laboratories," says Burger. "The idea that a single company could innovate within four walls by hiring a team of people seems to me increasingly absurd, given that they are competing against the market itself and all the entrepreneurial energies and ideas in the world."
Nonetheless, some high-technology start-ups choose to remain self-funded by their founders for an extended period of time, such as LitePoint Corporation, based in Sunnyvale, California. Benny Madsen is co-founder and Chief Executive Officer of the company, which is a trailblazer in communications technology. "We wanted to be self-funded because we wanted to be in control of our own destiny. We had seen way too many companies start off with venture funding and crash because when you are venture funded, you have to execute the business plan that got funded,"
says Madsen. "You don't execute to maybe a changing environment or a deep analysis you get through the work [of finding new technology solutions]."
LitePoint recently did raise venture capital to broaden its global reach. Madsen says the company turned to Silicon Valley's Sequoia Capital. "We didn't have any financial investors on our side. So no one knew about us in the financial world. We needed a strong financial partner -- somebody that's well known in the industry that is sort of a class one-type of brand name in the financing world," says Madsen. "That's the stage when we decided to take an investment from Sequioa Capital, whom we consider a premier venture capital firm in the world."
Sequoia has backed some of Silicon Valley's biggest success stories, including Google, Yahoo, YouTube, Apple, Cisco Systems and Oracle. Atlas Venture's Jeffrey Andrews says companies that attract investors of Sequoia's or his firm's caliber are by definition "world-class". "They have to be very big ideas with brilliant people involved at every position on the team. It is an exciting business to be in because every company almost by definition is a world-changing idea with a world-class team. There's nothing more fun than being involved in that."
Most importantly, Andrews adds, these companies help create new industries, countless jobs and economic growth.
This story was first broadcast on the English news program, VOA News Now. For other Focus reports click here.