Venture capital is rising in popularity as a way to fund companies from a variety of business sectors. In 2018 alone, the National Venture Capital Association reported that $131 billion was financed by venture capital firms in nearly 9,000 deals. That number represented a 57 percent increase from the year before.
Despite this rapid increase in venture capital funding, one simple fact has remained steady: Most venture-backed businesses fail. Research conducted by Shikhar Ghosh, a senior lecturer at Harvard Business School, found that 75 percent of companies that are backed by venture companies never return a positive investment. As much as 40 percent of those companies are forced to liquidate their assets. In this case study, Scott Crockett, Everest Business Funding’s CEO, explains why.
VCs don’t need sustainable businesses
When business owners accept investments from venture capitalists, they do so with the hope that the money will help them grow. The definition of growth may be dramatically different for the business owner and the venture capital firm, though.
The business owner may want to grow quickly but at a sustainable pace. Venture capital firms are often not very patient. What they seek is rapid growth that builds value quickly.
Their ultimate goal is to have their investment result in a big-payoff event. This could be an Initial Public Offering (IPO) that takes the company public, or it could be the sale of the private company to a large public entity.
In either case, they don’t necessarily care about building a business that’s sustainable for the long term. They just desire to build a company that is attractive to other investors.
VCs know they’re going to fail
Venture capitalists are in the business of taking risks. They know this, and they prepare for this.
Venture capital firms are no stranger to failure. In fact, they expect they will fail more times than they will succeed.
Their success as a firm is determined by the overall return of all their investments, rather than on an investment-by-investment basis. For example, a VC firm may make four investments in one fund.
For them to succeed — or achieve a positive return — they may only need one of these investments to be successful. This makes complete sense to the VC firm from a business standpoint.
The problem for the individual business owners is it means the VC firm isn’t dedicated to just seeing them succeed. If the business isn’t proving as successful as the VC firm would like on their desired timeframe, they can just turn their attention to one of the other businesses in the fund.
This approach leaves the individual business owners on an island to figure it out on their own. In many cases, the business owners are being set up to fail right from the beginning.
While venture-capital funding may seem attractive based on the huge potential returns, Scott Crockett advises business owners to understand exactly what they’re getting themselves into before going down this path. There are often many other private investment and funding options business owners can take that can help them build sustainable, 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 finance industry. Mr. Crockett’s track record includes raising more than $250 million in capital and creating thousands of jobs. Scott has founded, built, and managed several finance companies in the consumer and commercial finance sectors.
Story by Jessica Brown