Venture capital investment: what it is and where it goes

OK, we heard you and we just need to point out a consistent theme – high school students have a pervasive entrepreneurial spirit. You tackle innovation issues and often take steps to start your own school clubs, or even real entrepreneurial ventures, to put ideas into action. Vera H., a 14-year-old sophomore from Texas and grand prize winner of the 2022 Wharton Global Youth Comment & Win competition, puts it this way: “The opportunity to make discoveries, to create something of our own ; it’s what drives us to do our best.

Fuel for emerging businesses

While the passion that emanates from participants in our high school programs is a core business trait, it’s only part of the story of getting started, notes Dr. Luke Taylor, John B. Neff Wharton Professor of Finance and co-director of the Rodney L. White Center for Financial Research. “To start a business, it is not enough to have a good idea or a good product. You also need a lot of money,” says Taylor.

A key source of this initial funding is venture capital.

Venture capital funding is the fuel that propels start-ups and ambitious entrepreneurs around the world. Venture capital funds provide the capital – raised from high net worth individuals and institutions like investment banks, pension funds and endowments – to help start-up companies grow. VCs can also provide technical and managerial expertise to startups.

“It’s a very risky form of investing, because a large majority (about 95%) of startups fail,” says Sergei Netessin, Wharton Senior Associate Dean for Innovation and Global Initiatives and Professor of Operations, Information and Decisions. “However, those who do succeed can, in some cases, bring outsized returns to investors.”

Despite how simple these Shark Tank trades are on TV, investors rarely, if ever, see the returns overnight. “A venture capitalist gives money to a startup to help that company grow,” Taylor says. “The VC hopes to recoup that money – plus a return – several years later when the startup is bought by a larger company or goes public in an initial public offering.”

Trendy eyewear brand Warby Parker, founded in 2010 by two Wharton MBAs, is one example. The company secured its first venture capital funding in 2011 when it raised $1.5 million from investors in a Series A funding, or first round of venture capital funding. The company received six more VC injections (each indicating a new round of VC funding) via a $120 million Series G in 2020. In 2021, Warby Parker went public and began trading its shares on the New York Stock Exchange. The company was valued at $6.8 billion after its first day of trading on the stock exchange.

Warby Parker’s 2020 Series G was considered a mega-deal, Taylor notes, of which there have been many in recent years. Venture capital has long been a vital source of funding for high-growth startups, like Amazon, Facebook and Microsoft, and therefore a powerful contributor to the economy. For this reason and more, researchers and trade analysts closely monitor venture capital market activity and industry trends.

Netessine names DeepTech (technology based on new types of scientific and engineering advances and discoveries), FinTech (financial technology) and PharmTech (advances in healthcare products) as three innovation hotspots attracting capital funding -risk.

“Various Leadership and Thoughts”

An even broader and deeper trend in start-up funding seeks to improve the inclusiveness of the venture capital landscape, both from the perspective of investors and entrepreneurs. In recent years, the attention of the venture capital industry has focused on the funding gap faced by minority and female business founders. According to data from Crunchbase, for example, only about 1.3% of US venture capital went to black-founded companies in 2021.

Venture capitalist Josh Kopelman (W’92), managing partner of Philadelphia’s First Round Capital, spoke about the venture capital industry’s poor track record of funding entrepreneurs of color at the Tarnopol Speaker Series in Wharton Dean Erika James on the breed trade. “While the venture capital industry is seen as an industry whose superpower is seeing trends early and imagining alternative and better futures,” Kopelman said, “when it comes to racial equity, the venture capital industry has been a laggard, not a leader.”

Many companies are striving to incorporate diversity into the venture capital ecosystem. For example, fans of tennis great Serena Williams may have heard her talk about her venture capital firm Serena Ventures, a small company that invests in underrepresented entrepreneurs, including women, black founders and Latinos.

General partner Alison Rapaport Stillman, who majored in finance and operations at Wharton as an undergraduate, said people have finally realized that inequality exists in all aspects of life. “I want to emphasize that we are not investing in women and people of color to just tick a box,” Rapaport Stillman told the online publication. All increases. “We invest in diverse teams because we believe that diverse leadership and diverse thinking have the best returns, both financially and socially.”

What is Rapaport Stillman looking for in potential investors? A self-aware founder who can build a team of people with varying skills and strengths. For all those budding young entrepreneurs looking for funding, VCs care a lot about who they invest in. “The most important factor that VCs take into account is the team member’s experience, abilities, cohesion, etc.,” says Netessine. “Especially in the beginning, when little other data, like revenue or number of customers, is available.”

While getting venture capital investment is a standard way to grow a business, it’s not the only way, adds Netessine, who cites other sources of capital like angel investors, banks, accelerators and incubators (both of which support startups with resources until they are big enough to do it on their own). “Many companies prefer to start their growth with personal savings or the money of family and friends, rather than giving up significant equity. [company ownership] and power to the VCs.

Discover PS27 Ventures TikTok here.

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