A trip through the exotic land of venture capital 

No other facet of the financial sector is more mysterious, risky, rewarding, romantic and creative than venture capital (VC). Stories of entrepreneurs, with a bright idea, backed by venture capitalists and going on to create sensational products or services like a Google or Apple, fill us with awe and wonder. It is probably the only facet of the vast financial sector from where some public good can emerge—in the form of a path-breaking new product or service.

The problem is, of the many ideas that get funded, we  get to know only what eventually succeeds. The most celebrated examples of venture capital success these days are in the field of computing, software and the field that combines these two with essential human behaviour and psychology, viz. social media. Massive global successes of VC-funded social media, such as Facebook, Twitter, LinkedIn, Pinterest and so on, have become part of our lives. Ventures that fail are never highlighted; they are hidden from the public view, keeping the aura of VC business intact.

What is the VC business really like? Louis Gerken, a venture capitalist himself, offers an insider’s view. He explains how VCs work tracing the fascinating history of the activity to its present. The VC business has its roots in early 20th century to Carnegie Steel Company which was sold to the United States Steel Corporation in 1901 for $480 million, of which about half went to the founder Andrew Carnegie. The second-largest shareholder was Carnegie’s partner, Henry Phipps. “In 1907, Phipps formed Bessemer Trust as a private family office to manage his fortune. Four years later, he transferred $4 million in stocks and bonds to each of his five children and Bessemer Venture Partners was launched—the nation’s first venture capital firm of the US. The firm has prospered, managing more than $4 billion of venture capital, invested in over 130 companies around the world.” They are present in India too, though their investment has been in some dubious companies.

Gerken also offers background information on  VC investors and their investment strategies. There are discussions on VCs’ performance and the sectors that VCs find attractive. Venture capital business has its own cycles. The book explains the current investment climate, sharing data on the growth of new start-ups and the challenges they face. There is a list of private and listed venture capital investment options available.

Gerken explains that VCs don’t, typically, use a lot of their own money. It is ‘angel investors’ who do that and, typically, invest $1 million or less in an enterprise. An angel-funded company may grow and become attractive to venture capitalists. VCs form a firm and start a fund which is often designated for a specific industry sector. In the US, the fund will attract money from pension funds, endowments, foundations and high-net-worth individuals and family offices interested either in investing in that particular sector or just looking for the higher than normal returns.

The fund then backs an entrepreneur for an equity position, opens the doors for the management team and, if the idea blossoms, exits the investment through an initial public offering (IPO) on the stock market or a sale to another firm. The profits of several such ventures are shared by the venture capitalist with the investors who had contributed to the venture fund.

According to statistics of the National Venture Capital Association (NVCA), 40% of all ventures fail, while another 40% may break even. About 20% dream of funding the ‘next big thing’.

A large part of the book is devoted to advocating the good side of VC—the multiplier social impact that a successful VC-funded enterprise can create. It is not intended to be a guide on how to get VC funding; nor is it a guide on how to become the next Facebook. It is written more for investors—the wealthy ones who can pony up big money to get a slice of the VC action. But will someone wanting to invest millions in a VC fund read a book on it? Or tap into his network?