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Venture capitalists had to take risks before reaping the benefits of huge returns.


Tech start-ups have ambitious ideas but lack capital

Tech start-ups have ambitious ideas but lack capital

At the beginning of the 21st Century, hundreds of tech startups assembled at an indifferent location in California what is now known as Silicon Valley. From MIT graduates to Highschool dropouts, each starry-eyed visionary had an idea that they hoped would transform the world. 

A lot has been written about the success of industry leaders such as Steve Jobs and Sergey Brin. But no mention is ever made of the thousands whose ideas were never absorbed and who were forced to take regular jobs with successful companies. 

I am particularly not discussing the history of success and failure in Silicon Valley. I will focus on the journey of investors referred to as venture capitalists. These are individuals and businesses who descended on these eager inventors with bags full of cash. 

The idea was to invite entrepreneurs seeking funding, who would then pitch their idea to the investors. An idea that appeared sound, revolutionary, or worth risking would receive funding in return for a percentage of the equity of their idea. For meager sums of cash, investment firms, individuals and other equity firms acquired control of 1/3 to 1/2 of the eventual value of the tech. If in the future the idea proved successful and was commercialized, this had the potential of turning a 1 million dollar investment into a Billion dollar worth in equity stake. 

Such a valuation was normally made during the Initial Public Offering, that is when the general public was allowed to purchase stocks in the newly minted tech company. At this juncture, the venture capitalists were at liberty to sell their stake in the company they helped fund and move on to seek another startup looking to get funded. 

The IPO of the technology company, Dropbox.

The IPO of the technology company, Dropbox.

At an initial price of 10 dollars a share, some investors sold their sticks for more than 50, 100, or even 200 dollars! The number of billionaires on paper created during these famous IPOs was astonishing. It spurred further interest in investing in startups. 

In this case too, as it occurred for innovators seeking investment, millions of dollars were lost in investments on ideas that failed to attain universal appeal and thus lost their lucrative appeal in the commercial sense. Out of about 100 successful silicon valley startups, at least a thousand withered and died before generating any income.

Thinking about these two classes, inventors and investors, whose losses in terms of human capital and lost investment was probably in the trillions of dollars, one should dare to ask if it was all worth it.  

No progress is possible without acquiescing to a position of vulnerability. Stepping into the unknown is risky and intimidating. But if everyone marked time and remained static for the fear of loss, the world would certainly never have progressed to the level it is in today. 

For this reason, with a retrospective eye on pioneers who invented the steamboat, airplanes, railways electricity, and thousands of other modern amenities, I have always been prepared to take risks.

many venture capitalists lost their money while a few became billionaires.

Many venture capitalists lost their money while a few became billionaires.

I however have one motto I abide by before stepping into the unknown. I learn all I can about the venture, business, or company that I intend to invest in. I also ensure I gain insights into the likely future evolution of that industry. This helps me know whether my stake might be a victim of time and become worthless, or again if, after considerable time, the value of my investment would have grown considerably. With this information, thoroughly grasped, I always take risks in stable corporations with long-term strategic potential.

After many years, I can confidently assert that I understand what it means when they say that nothing is to be feared, only understood.


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