Why should venture capital matter?
Audrey Richards, Contributor
Venture Capital to many persons is a strange, esoteric asset class which is 'needed' by small businesses but which should be good for someone else's portfolio.
However, venture capital (VC), which is financial capital invested in high-potential businesses through professionally managed venture funds or by high net worth individuals (angel investors), has become more mainstream and accessible, as more and more professional managers establish funds and raise capital from a wider network of investors. These investments may not be suited to all portfolios, but with a clear understanding of risk management and portfolio-diversification strategies, more investors are becoming involved.
VC is considered to be a subset of the private equity asset class. As its name suggests, private equity is equity capital invested in privately held businesses. Many VC funds eventually divest the businesses in which they have invested, to the public equity markets - stock markets, through initial public offers (IPOs). The sale of a company's shares through IPOs and eventual listing on a stock market tend to attract the attention of the wider investment market, and it is at that stage that many investors will consider investing in a company's shares, and as recent history has shown, oversubscribe many IPOs. The venture capitalist, on the other hand, at that time, reaps the reward for taking the risk in the private company.
But, why should private equity matter? Private equity and venture capital investors are not just investing cash in a company's business. They bring what is commonly called 'smart' capital, as the expertise they bring to the business may assist the growth of the business through restructuring, better management and technical skills, access to markets and improved corporate governance. Unlike debt capital, VC is 'patient' capital, as the investors align their interests with the company's interests and obtain their returns, not through monthly debt payments, but through growth in the value of their equity, once the company grows.
Research by a number of international agencies on VC-backed companies in the United States, Europe, Germany and China has found that venture capital has a positive impact on the success, survival and growth of start-ups as well as existing businesses.
One study indicates that venture capital-backed companies have significantly higher growth rates than private firms and, in many instances, eight times the impact on employment.
As Jamaica seeks to get on a positive growth trajectory, the possible impact on high-potential businesses is something that should matter to public and private sector policymakers, entrepreneurs, investors, academics, advisers and the general public.
We should be cognisant of the effect of a number of factors on venture capital activity. The IESE Business School has created the Venture Capital and Private Equity Attractiveness Index, while the Latin American Venture Capital Association has created the LAVCA Scorecard. Both these benchmarks have identified similar factors, within a country's environment, which impact VC markets.
These include the level of economic activity, which impact the 'deal flow' of businesses available for investment; the human and social environment, including the educational levels, tertiary graduates, research, crime, corruption and the justice systems; innovation capacity, patents, ease of doing business, bureaucracy; the depth of the capital markets, the impact of taxation, investor protection and corporate governance; intellectual property rights laws and enforcement of these laws, shareholder protection; entrepreneurial culture.
It is clear that the factors which affect venture capital activity, in reality, impact competitiveness and the ability of Jamaica to attract investors of all types.
The venture capital agenda is therefore not in its own unique space, but is fully aligned with Jamaica's growth agenda. VC can be a game-changer for growth, and that's why it matters.
Audrey Richards is project coordinator of the Jamaica Venture Capital Programme.