Venture Capitalism Provides the Raw Cash the Fuels Innovative New Business Models

The U.S. Small Business Administration reports that about 20% of all new business start-ups fail within one year. Extend that to five years and 50% go bust. Mind you, many of these companies had superior products that were popular and a lot of people were buying them – and yet, that was not enough to keep the doors open.

The No. 1 reason these new companies fail is a lack of sufficient capital. They didn’t have enough money on hand for things like buying more inventory, ramping up a distribution network and handling follow-up needs like service and troubleshooting.

That’s where venture capital can swoop in and make the difference between a company thriving or a company dying. A venture capitalist is a firm or an individual with a lot of money to invest. They are on the constant lookout for the next hot idea for an exciting new company to get behind.

Venture capitalists like to invest in new business models because it’s a way to make a huge return on what they invest. It’s far superior to parking a load of cash into a bank account, investing in the stock market or buying other complex financial instruments.

For example, Iranian-born American venture capitalist Shervin Pishevar was an early venture capitalist investor in a crazy idea for a ride-sharing company called Uber. He invested his own money and led the Series B for Uber investment that raised $26 million. That’s a lot of money, but today Uber is valued at about $90 billion. It’s an extremely lucrative return in exchange for drumming up $26 million.

Uber is a prime example of how venture capital works. Consider that Uber was a bold idea but also a sound idea. It was bound to catch on. However, without venture capital, Uber may have never gotten off the ground – or it may have failed in its first year like 20% of all new businesses.

It’s important to note that venture capital is often associated with funding start-ups, but the reality is that just 6% of all venture capital goes to brand new companies in any given year. More than 80% of venture capital is invested in the follow-on, or second-round funding efforts for companies already off to a promising start.