Why VC Investing Is Key Right Now
By Hal Callais
Venture capital investing is a critical part of the economy as it can support job creation, wealth creation, and increase a founder’s chances of succeeding. The amount of capital invested by venture funds pales in comparison to the amount invested by private equity (growth and buyout funds), however, venture capital has a disproportionate impact on the global economy. Ultimately, venture capital investing is key during a crisis, as it provides risk capital for startups benefiting from long-term trends; in turn, supporting entrepreneurship and the creation of jobs and wealth.
Revival of US Entrepreneurship.
From the domestic heath challenges arising from COVID-19, economic issues are feeding the social unrest. Despite their best efforts, the stopgap provided by the Federal Government is temporary and is quickly dissipating. Even through the intentions of this aid was to provide interim support to businesses and people, it seems increasingly likely that we are just beginning to scratch the surface of what is coming.
In the startup community, founders are faced with a looming issue of where to find their next round of funding. This is part of why there was a rush to raise capital in March and April. Many startups have had to layoff employees, have lost revenues and even closed their doors. While these things are all challenging to live through and deal with, it is the perfect breeding ground for innovation and entrepreneurship.
According to the Center for American Entrepreneurship (“CAE”), a revival of American entrepreneurship is key to it achieving its national objectives. The CAE provides further detail into the reasoning, but I’ll simplify it: 1. Productivity, 2. Innovation, 3. Jobs.
- Productivity. Entrepreneurship brings improvement in productivity. Robert Solow demonstrated in 1957 that most economic growth cannot be attributed to increases in capital and labor, but only to gains in productivity. Innovation and productivity go hand and hand.
- Innovation. To economic growth, we need to create. But its not just innovation for innovation’s sake, it’s value is predicated on its ability to be commercialized. Business formation often accompanies innovation to achieve commercialization. Successful commercialization is often a factor of value, timing, luck, and the team.
- Jobs. Successful commercialization creates wealth and jobs. Often startups will award equity to employees to attract the right talent to help ensure a successful progression from idea to market acceptance. When a startup successfully commercializes its innovation, the economic benefit will often be shared by employees, executives, and investors, and customers. This wealth creation for all stakeholders is unique for startups and venture-backed companies which very often leads to these stakeholders reinvesting and recreating wealth through the next generation of innovative startups.
Our National Objective?
As a democracy, the US’s objectives will be riddled with volatility every election cycle. However, what is constant across election cycles and political parties is the United States’ contractual obligation to repay its debt. As a result, the most important national objective is economic growth. It is especially important that we focus on long-term growth today.
To clarify, it is not simply that the US needs to exceed 0% year-over-year GDP growth, it needs to grow at a speed which allows tax revenues to support the upcoming maturing debts in a given year, plus interest, plus any budget deficits. To put this in perspective, despite the amount of debt the US carries, it is still the world’s most stable reserve currency and its bonds are considered “risk-free.”
For the US to ever overcome its debt, it needs to grow. Without innovation, productivity will stagnate, and commercialization won’t happen. This will in turn not increase national wealth and create jobs.
Accessing capital, quickly.
Being a startup founder is hard. It is not enough to innovate, form a business, and commercialize; you need to do it as quickly and effectively as possible. Even the best technologies won’t successfully commercialize if they don’t have the right mix of product/service demand, with an optimized cost structure, the sheer force of will to make it all happen, and access to capital.
While venture capital is sought by many startups, it is not appropriate for everyone. Further, different venture groups are more appropriate for specific companies, than others. Each venture group is specialized for different outcomes and companies. Despite the varying flavors of venture groups, they all provide access to capital.
In times of crisis, most forms of capital will freeze. This can present challenges to many businesses trying to survive. Venture capital is a key source of capital for the companies which historically provide long-term wealth and job creation.
Ultimately, venture capital investing is key today, as it enables the efficient commercialization of inventions and increases the chance that these businesses succeed. The successful outcomes of innovative business formation is necessary to the US achieving its national objectives.
A Call to Action.
It is the responsibility of Americans, newer generations in particular, to so their part to meet the US national objective for growth. There is no more important mission for American’s to undertake. Marc Andreessen said it best, “Our nation and our civilization were built on production, on building….There is only one way to honor their legacy and to create the future we want for our own children and grandchildren, and that’s to build.”
We need the innovators and builders to do what they do best. By innovating, building, creating, they can have a massive impact on the next chapter of our country. As noted by Litan and Schramm (6), “…entrepreneurs throughout modern economic history…have been disproportionately responsible for truly radical innovations – the airplane, the railroad, the automobile, electric service, the telegraph and telephone, the computer, air conditioning, and so on – that not only fundamentally transformed consumers’ lives, but also became platforms for many other industries that, in combination, have fundamentally changed entire economies.”
At Callais Capital, we want to be a catalyst for founders who innovate, commercialize, and impact our communities. This call to action is addressed to anyone in the startup ecosystem who can make a difference by contributing to the long-term vibrancy of our communities. By supporting founders who build real businesses, we can all play a role in ensuring the quality of life for future generations.
References:
(1) “The Economic Impact of Venture Capital: Evidence from Public Companies,” by Will Gornall and Ilya Strebulaev, Standford Business, November 1, 2015, retrieved from: https://www.gsb.stanford.edu/faculty-research/working-papers/economic-impact-venture-capital-evidence-public-companies.
(2) https://startupsusa.org/why-is-entrepreneurship-important/
(3) https://www.econlib.org/library/Enc/bios/Solow.html
(5) https://a16z.com/2020/04/18/its-time-to-build/
(6) “Better Capitalism,” by Robert Litan and Carl Schramm, Yale University Press, 2012