For entrepreneurs (and would-be entrepreneurs), such an analysis may prove especially beneficial. Although the collective imagination romanticizes the industry, separating the popular myths from the current realities is crucial to understanding how this important piece of the U.S. venture-capital industry is envied throughout the world as an engine of economic growth. Today’s venture capitalists look more like bankers, and the entrepreneurs they fund look more like M.B.A.’s. But as the venture capital business has evolved over the past 30 years, the image of a cowboy with his sidekick has become increasingly outdated. Their investing knowledge and operating experience were as valuable as their capital.
Arthur Rock, Tommy Davis, Tom Perkins, Eugene Kleiner, and other early venture capitalists are legendary for the parts they played in creating the modern computer industry. At his side stands the venture capitalist, a trail-wise sidekick ready to help the hero through all the tight spots-in exchange, of course, for a piece of the action.Īs with most myths, there’s some truth to this story. In these sagas, the entrepreneur is the modern-day cowboy, roaming new industrial frontiers much the same way that earlier Americans explored the West. The popular press is filled with against-all-odds success stories of Silicon Valley entrepreneurs. What’s more, they have a powerful grip on the nation’s collective imagination. In addition to analyzing the current venture-capital system, the author offers practical advice to entrepreneurs thinking about venture funding. Given a typical portfolio of ten companies and a 2,000-hour work year, a venture capital partner spends on average less than two hours per week on any given company. And they structure their deals in a way that minimizes their risk and maximizes their returns.Īlthough many entrepreneurs expect venture capitalists to provide them with sage guidance as well as capital, that expectation is unrealistic. In reality, they invest in good industries-that is, industries that are more competitively forgiving than the market as a whole. The myth is that they do so by investing in good ideas and good plans. Venture capitalists must earn a consistently superior return on investments in inherently risky businesses. They are the linchpins in an efficient system for meeting the needs of institutional investors looking for high returns, of entrepreneurs seeking funding, and of investment bankers looking for companies to sell. They have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. Today’s venture capitalists are more like conservative bankers than the risk takers of days past.
But today things are different, and separating the myths from the realities is crucial to understanding this important piece of the U.S. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk-taking and for their hands-on operating experience. venture-capital industry derives from a previous era. The popular mythology surrounding the U.S.
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