Originally published July 3, 2006.
One of the most attractive aspects (to me) of venture capital is the chance to partner with some dramatically transformational people and businesses to shape and improve the world around us. A handy little write-up from a recent Wharton conference titled Innovation and Organic Growth: Balancing Risk and Reward gives a better perspective of the venture capital world at large, and the risk management strategies employed by venture capitalists.
The VC financing industry typically funds less than 1% of applicants; in several discerning firms, funding is provided to as few as a quarter of a percent (1 in 400) of applicantes. This gatekeeper strategy is a primary filter to build a portfolio of big winners, not big wipeouts. Further VC industry insights from the Wharton conference point out why the early-stage investment risk places large corporations can be at a disadvantage for investing (waiting for big payoff may cut too sharply into earnings) and small venture capital firms are more appropriately structured to take on the high risk of early-stage investing (effectively, the rewards of success are largely concentrated at the partner level in a venture capital firm). For this reason, venture capital firms maintain strategically small numbers of partners; with too many, rewards are spread too thin to justify the risk.
For the complete article, including audio direct from the conference, visit Knowledge@Wharton: Managing Risk in Venture Capital Investing
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