Venture Capitalism: Organized Ways of Gambling to Builds Unicorns

Startups come with risk, and finding a unicorn is mostly just sheer luck. But the analogy of the casino table doesn’t perfectly describe Venture Capital.
American - Capitalism & National Debt
American – Capitalism & National Debt

Venture Capitalism. What to know as a venture capitalist? Click Here!

The Casino Table

I’m about to take you to the casino table; a casino table full of people. This casino table only welcomes one game and it is the birthplace of most services and goods that you take for granted! But unlike other casinos, this one is different. Here, the gamblers bet on startups, who are willing to grow their money and after which, they just sit back and bid forevermore.

Welcome to the game of Venture Capital! It comes as no surprise that this very table has shaped our lives by betting on companies that we now heavily rely on. Even companies like Airbnb, Uber and not to mention Tick Tock were also bet on by these “gamblers”. Well, but why are they called gamblers? They are just funding startups, right? Absolutely! But the fact is that most startups fail, and ventures can only do so much to save their investment or gamble, as many people like to call it.

“About 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.” says (Visit their blog for the statistics).

The Deep Dive

Startups come with tremendous risk, and finding a unicorn is, for the most part, just sheer luck. But the analogy of the casino table doesn’t perfectly describe Venture Capital. There are hundreds of practices carried out by venture capitalists; they don’t just sit down and relax.

Of course, the entrepreneurs work day and night and strive for success, but ventures also have to rack their brains. Due diligence is a huge part of the process. This is exactly why there are venture capital funds, which have legal structures, investment advisors, lawyers, and analysts to significantly reduce the risk. 

However, even confident and wealthy individuals also sit down and try their luck. These “overconfident” individuals are known as angel investors, who need to have at least 1 USD million dollars in net worth (excluding their residential property). But let’s focus on the funds for the most part. These funds have a formal structure and they always provide more than just money.

Shark tank is a great example of this: When there are multiple sharks making the exact same offer, the entrepreneurs still have to think about which shark to choose because each shark provides more than just money. Maybe they have connections with manufacturers or companies that they could license their product to. The possibilities are endless! Head on over to our PE vs VC fund blog to know about the structure and grasp the details related to the topic. 

Why VCs are The Only Players of This Game

If you already know about the investment fund world, you may have heard of pools like Private Equity and Hedge funds. This begs the question: Why are VCs the only ones on this table? The answer is simple! As mentioned in our Private Equity vs Venture capital blog, Venture capitalists invest at the early stages of the company, whereas private equity funds either dive in when the company is already public or a few stages before the IPO.

This limits the risk for Private Equity funds, as the companies they invest in have already seen the outside world and are well established. Hedge funds are also a huge part of the investment community, but unlike both, they majorly focus on shorting public equity. Therefore, VCs are the only ones at the table.

The startups That are Bet on

Not every business can take to the skies. There are specific businesses that have the business model to scale at a monstrous level.

A simple gold mining or accounting firm can’t make billions and therefore doesn’t have the potential to scale. However, tech companies like Uber or Airbnb had the potential and the business model to do so. Therefore, they were considered by VCs and funded accordingly. 

How Venture Capitalists Make Up for Their Losses

More than 70% of venture-backed companies fail and barely 1% turn out to make up for their loss. Just like gambling, VCs lose most of the time. However, their losses are covered up by the few companies that turn out to be profitable over the years.

Even the most successful VC funds make their profits in the same way; there are just a handful of profitable companies that have filed for their IPOs and are covering up the losses and making profits at the same time. 

But again, it’s not that simple! Many of these top-level funds have more funds under them. These gigantic funds are known as funds of funds, which have multiple portfolios under each fund. This is exactly how risk is divided and organized to make profits. 

Here are A Few Funds That Funded The Startups We See Today

  • Andreessen Horowitz Fund III: This venture fund has funded Robinhood, Buzzfeed, and even Ripple! 
  • Sequoia ventures: This well-known fund has helped grow Zoom, SpaceX, Zapier, and many more!
  • Founders fund: By far, this fund has contributed the most, by funding startups that we all rely on today. Oculus, Asana, Spotify, and Airbnb are just some examples!

Read our previous article about the difference between private equity and venture capital fund HERE!

If you wish to know more about customer service, I recommend reading ‘The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs’.

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Writer: Neeraj Sawant
Editor: Evelyn Tobing

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