Role of Venture Capitalists and Angel Investors in Incubating New Ventures

Venture Capitalists as Incubators of New Start-ups

Venture capitalists or Angel investors are entities and individuals who fund startups and new businesses. There are many entrepreneurs with great business ideas but who are in need of funding for their ventures. It is not enough to have a great innovative idea when you cannot find funding to take it to fruition. This is where venture capitalists enter the picture as they provide the much needed seed capital to get the venture going. In other words, venture capitalists are those entities or individuals who when they find a business idea compelling and makes economic sense, they provide the ideators with funding so that their startups can be incubated. The term incubation is used to denote to the fact that the initial handholding of the startups must be done in a manner similar to how infants are incubated in their infancy. This means that the venture capitalists and angel investors not only provide initial funding but also guide the startups through their infancy so that they can be put on their feet and hit the ground running.

Venture Capitalists as Drivers of Economies

Venture capitalists drive innovation and profitability of new ventures. Any economy needs new ventures to succeed as part of the creative destruction process of capitalism. This means that for an economy to grow, it needs constant innovation and productivity leaps that new ventures often provide. As the new ventures need funding and support during the initial phases, venture capitalists are needed for these startups to hit the ground running. Moreover, new ventures have to be profitable as well as it has been estimated that nearly 50 percent of new ventures fail. This is where venture capitalists who evaluate the business ideas and separate them according to how profitable they would be play a critical and a crucial role in determining the success or otherwise of these ventures. As the examples of Silicon Valley in the United States and to some extent Shanghai in China show, venture capitalists with their deep pockets and keen economic and financial sense can indeed be an asset to the economies of the countries. This is the reason why the US is way ahead of other countries as far as innovation and innovativeness is concerned as it has a long history of venture capitalists and angel investors funding startups and bringing them to fruition.

Reasons why we need Venture Capitalists

It has often been said that venture capitalists fill the void that is created between the government and the private sector. However, many governments across the world actively fund new ventures, the bureaucracy, and the red tape that is involved in governmental decision making often stymies the funding of startups and the new venture incubation process. Further, it is not possible for the government or the banks and financial institutions to fund every good idea that comes their way. Moreover, the venture capitalists are usually staffed with industry veterans and experts who can evaluate a business idea in an expert manner and decide on the profitability or otherwise of the idea. Apart from this, venture capitalists are also needed for guiding the startups in their formative phase.

Venture capitalists are needed as they make the creative destruction process smoother and make the startups transform themselves from chaotic outfits to well-oiled organizations. This means that venture capitalists have a key role to play in shaping the economic destinies of countries. Finally, without venture capitalists, the private sector would be left with no one to guide them on the future directions of the economy and society.

Concluding Remarks

We have considered how venture capitalists contribute to the economies of nations. It must be noted that almost all great business ideas and innovations like Microsoft, Google, Apple, and Facebook have all come about because of active venture capitalist support and guidance. This is the reason why venture capitalists are so crucial to the eventual success of capitalism.


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Managerial Economics