![]() ![]() They are keen to push for speedy market introduction and an aggressive innovation and growth strategy.įor these reasons, VC backed firms are typically more innovative and more profitable, grow larger and create more jobs than comparable other firms. By investing a large share of equity, they share in the firms’ upside potential. They create value by speeding up the professionalisation of firms and preventing avoidable failure. ![]() On top of securing access to finance, VCs provide oversight and control, and offer strategic advice to compensate for the lack of entrepreneurial experience of the newcomers. They typically offer co-financing only when a VC is invested in the venture and is monitoring and advising the firm.īy screening business proposals and creating access to financing, VCs play an important role in steering capital to the most profitable uses and thereby contribute to productivity growth. Banks, in contrast, must limit their risk exposure to safeguard the depositors’ money and could not extend credit if firms lack risk bearing equity capital. They supply risk capital by acquiring big chunks of equity shares. Given high risk, they must intensively screen business plans and may select only up to five out of a hundred proposals. VCs are specialised in financing the riskiest but most innovative start-ups with the largest growth potential but little own resources. Venture capitalists (VCs) can help to overcome these problems. Many of the most promising ventures might not exploit their growth potential or not even get started. Start-ups could not yet accumulate collateral that would allow banks to give credit. Since new ideas are not yet tested by the market, business risk is extremely high. Being new in the game, they tend to lack entrepreneurial experience and are prone to management mistakes. Several stumbling blocks – or ‘market failures’ – are lurking on the way. The most successful start-ups rapidly scale up to become the next generation of business giants. Incentives might be better in small teams. They are less prone to think along existing business lines and more eager to pursue radically new solutions. However, per Euro invested, young firms seem to be more successful. Large corporations invest the lion’s share of private R&D. Venture capitalists, private equity and banks are the pilots in steering capital to new uses. Less productive firms must exit and release resources for better use in new ventures. Creative destruction can raise productivity only if capital and labour are reallocated. New products and services replace old ones. Professor of Economics Christian Keuschnigg discusses how venture capitalists and banks facilitate the process of creative destruction and steer capital towards a more productive use ![]()
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