Finance Innovation And The Creation Of New Enterprises Essay

844 Words Sep 18th, 2016 4 Pages
As we continue to reel from the unthinkable (as in “what were we thinking?”) excesses of gorging on huge amounts of unsecured debt throughout our economy, we need to think clearly about the financial tools that will allow us to recover our footing, grow our economy and create well-paid sustainable jobs. While debt financing will undoubtedly make a comeback, albeit in a more prudent mode, real equity will have to be invested if we want to break the cycle that got us here in the first place. One of the proven methods of deploying equity to finance innovation and the creation of new enterprises is venture capital. Venture capital funds invest in new or unproven enterprises. These funds come in the form of equity that is invested in new companies. While this equity usually commands a preferred return to compensate for the risk of backing unproven companies, venture capital funds do not earn any return unless there is a financial “exit” for the organization as a whole in which all shareholders benefit. Until that exit (which can take many years), the venture capitalists (VCs) stand shoulder-to-shoulder with the founders and management of the companies they back, for better or worse. If the company fails, the VCs typically lose all. If the company is successful, the VCs make a return — but so do the other shareholders. Venture capitalists bring managerial and technical expertise to the companies they invest in. They bring experience and open their Rolodex. They find multiple ways…

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