There is a small corner of the world where multi billion-dollar IPOs are launching, valuations are going through the roof, enormous sums are being paid for takeovers, and incredible scalability and return on investment are generating tremendous excitement. Young entrepreneurs and programmers are flocking to Silicon Valley in the hopes of joining this modern-day Gold Rush. Venture capitalists are using their expertise in technology and far-reaching network to add extra value to the companies in which they invest.
However, when Venture Capital becomes the model for all other kinds of entrepreneurship and funding strategies, dangers lurk. One of these is the sky-high failure rate of tech start-ups. Only one in 300 companies make it in the Valley; the rest live on hope and borrowed money. Of the ten Venture Capital investments that finally get made, seven will never make any money, two might break even, and only one will yield an outsized return. When you invest, you are on the lookout for the kinds of companies that can yield at least a tenfold return on investment. This usually requires an immense amount of scaling.
Capital always has a risk/return ratio: if the risk is high, then the return must be also high. If the risk is low, the return can be lower. Venture capital is a high-risk, high-return investment. Venture capital asks for high returns, which puts pressure on the person receiving the funding. There is constant pressure to show results as quickly as possible, often in the form of a quick IPO. The fear of start-ups is that they will lose out if they spend an extra month or week on the project. They want to cash in on the concept before it has had the chance to be fully tested and developed. Technical and online innovation is time-critical.
The high-risk model of investment is similar to newly hatched baby turtles running for the ocean. Only one out of 1000 eventually makes it; predators will eat the others. It’s an incredible wasteful process because of the number of baby turtles lost. To offset this loss, turtles lay a lot of eggs. Whales, on the other hand, have few predators and give birth to one calf every other year, making them extremely protective and dedicated to the infant’s survival.