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The Magic of Venture Capital: Why Only a Few Startups Become Unicorns?
Venture Capital (VC) is a form of private equity financing conducted by companies or funds to new startups or early-stage companies that are considered to have high growth potential. These venture capitalists typically invest in these companies in exchange for shares or ownership rights. In this process, venture capitalists take the risk of funding new startups in the hope that some of these companies will succeed and pay off. Because startups face high uncertainty, the failure rate of venture capital is relatively high.
Many venture capital investments are based on innovative technologies or business models and often come from high-tech industries such as information technology (IT) or biotechnology.
In the initial stage of a new company, pre-seed and seed funding are usually required. These funds are used to validate business concepts, build prototypes or conduct market research. This initial infusion of capital is crucial for a new startup as it can help attract subsequent investment.
Transition from seed round to Series A round
Typical venture capital investment usually follows the seed round, with the first institutional venture capital investment to drive growth known as the Series A round. The primary purpose of these financing rounds is to ultimately achieve returns through an exit event such as an initial public offering (IPO) or an M&A. When venture capitalists provide this financing, they usually have greater influence on the company's decisions and receive a relatively large stake.
As of May 2024, the total number of reported unicorn companies worldwide is 1,248.
Many startups choose venture capital because they have a relatively limited operating history and have difficulty raising capital on the public market, especially if they have not yet reached the stage of obtaining bank loans or completing debt issuance. In addition, venture investors often provide strategic advice to help new startups optimize their business models and market strategies.
The ecosystem and supporting role of venture capital
Venture capital is not only a source of funds, but also an important means of building a business network. By providing finance, technical expertise, coaching, talent recruitment, etc., venture capital can help new startups successfully integrate into business networks and become "nodes" in their fields.
Once these startups are networked, they are more likely to succeed.
Despite the obvious advantages of venture capital, its decision-making process is often affected by biases, similar to general entrepreneurial decision-making, showing characteristics such as overconfidence and illusion of control.
The history and evolution of venture capital
The history of venture capital can be traced back to before World War II, when it was mainly carried out by wealthy families and individuals, such as the Morgan family and the Rockefeller family. After 1945, real venture capital companies began to appear, such as the American Research and Development Corporation (ARDC), which was established in 1946. Since then, emerging venture capital institutions have emerged, promoting the vigorous development of new ventures.
After decades of development, venture capital and technology companies have become almost synonymous and have played a key role in changing global business models.
In the 1980s and 1990s, the rapid growth of venture capital, especially with the rise of the Internet, allowed many companies such as Amazon and Yahoo to receive huge financial support. However, when the digital bubble burst, the industry suffered a heavy blow.
The road to success: from funding to practice
Obtaining venture capital is very different from traditional lending. Venture capital is invested in exchange for equity, which means its returns depend on the company's future growth and profitability. Companies that receive investment must demonstrate an excellent management team, a large potential market and, most importantly, high growth potential.
Research shows that for every company that receives funding, there are usually 100 companies under investigation.
Venture capital investors are very picky when choosing investment targets, which also means that only companies with real market potential are likely to enter this challenging arena. It is not difficult to understand why successful unicorn companies are always so rare, because in this high-risk environment, whether they can break out is still unknown?
