Chapter 77 Section 1 The Origin of Venture Capital

The philosopher Hegel said: "All that is real is rational, and all that is rational is real." (All that is real is rational, and all that is rational is real.) "On Duhring" became the most progressive words.Everything has a reason for its occurrence, existence and development. Of course, if this reason is not established, it will eventually perish.The flourishing of venture capital in the United States (but not other countries in the world) after the 1960s (not before World War II) has its social foundation. After World War II, the United States replaced Britain to dominate the world's financial industry. For a long time after World War II, the United States was a net exporter of capital, and it had much more capital to invest than other countries.The traditional investment method is to invest capital in the stock market (Public Equity) or buy bonds (Bonds, such as treasury bonds).The average rate of return of the former over the past 100 years is about 7%, while that of the latter is even lower (the rate of return on U.S. Treasury bonds is about 5%).In order to obtain greater investment returns, the only way in the past is to invest in unlisted companies (Private Equity).Due to the losses from the Great Depression from 1929 to 1933, the U.S. government strictly restricted various hype behaviors of banks for a long time.Until the 1970s, spare capital could only be invested, and it was difficult to use it for financial speculation.Many of the purely financial games we see today, such as hedge funds (Hedge Funds), are all after the 1980s.

There are roughly two types of investment in private companies. One is to buy companies that are promising for long-term profits but encounter temporary difficulties. For example, investment master Buffett often does this. His very successful case is Geico (formerly known as Government Employee Insurance Company), when it was about to go bankrupt, it bought the company 100% at an ultra-low price and turned it into a profit, thus obtaining dozens of times the income; the other is to invest in a Among the new small technology companies, it will become bigger and listed or acquired by other companies.The latter is the object of venture capital.

Unlike mortgage loans, venture capital is unsecured, and if the investment fails, you will lose everything.Therefore, venture capitalists must have a way to confirm that the person receiving the investment is an honest industrialist who uses the money to start a business, not a liar who took the money and ran away (in fact, venture capital money is cheated from time to time. ).After World War II, through the efforts of Roosevelt and Truman, the United States established a complete social security system (Social Security System) and a credit system (Credit System), making the entire American society based on credit (Credit) on this basis.Every person (and every business) has a credit history, which can be traced through their social security number.American society initially assumes that a person is innocent and honest (Innocent and Honest), but as long as a person is found to have acted dishonestly, the person's credit is over-no bank will lend him money again, And his words can never be used as evidence in court.In other words, if a person has made a mistake in integrity, he is not a good person if he corrects it.With such a credit foundation in the United States, banks dare to lend money without collateral, and investors dare to hand over money to entrepreneurs who have nothing to start a business.Not only that, as long as the entrepreneur is a real talent, strictly implements the contract, and does his best, even if he fails, the venture capital firm will still be willing to invest in him in the future.Americans are not afraid of failure and tolerate losers.It is generally believed that failure is the mother of success, which is difficult to achieve in other countries in the world (of course, if an entrepreneur defrauds investment in the name of starting a business, his future path will be blocked).The United States has a long history of industrialization, well-developed commerce, sound business-related laws, and easy protection of venture capital.

Compared with other developed countries, the United States is a young immigrant country. Many Americans are first-generation immigrants who are adventurous and imaginative. They are willing to improve their social and economic status through entrepreneurship.The overall level of universities in the United States is ahead of the world, and the balance between theoretical research and applied research is relatively good, and it is easy to make inventions and creations that can be industrialized.The combination of these two items makes it easy for venture capitalists to discover good investment projects and talents.All the above-mentioned reasons put together form the environment for the emergence and development of venture capital.

High-return investment must be accompanied by high risk, but conversely, high risk often does not bring high return.Any kind of financial investment that can make a lot of money in the long run must be guaranteed by its inherent motivation.Stocks always tend to go up in the long run because the economies of the world are growing.The same is true for venture capital. Its internal driving force is the continuous development and progress of science and technology.Since new industries will continue to replace old industries in the world economy, venture capital investing in emerging industries and technologies will definitely have higher returns than the stock market in the long run.Therefore, venture capital seems to be risky, but it is not a gamble. It and private equity funds are the investment methods with the highest returns so far (the return rate is around 15% and 20% respectively).Because of its high returns, people and institutions (Institute) are willing to put more and more money into venture capital funds. For example, Stanford University puts a large part of its retirement fund in the venture capital company KPBC. invest.In the past 30 years, venture capital funds have grown bigger and bigger, from tens of thousands of dollars a year in the early days to 6 billion to 7 billion dollars per quarter in 2006.Since venture capital companies do not disclose financial reports, it is difficult to know the exact size of American venture capital, but it is generally estimated that the size of American venture capital funds in 2007 was about 200 to 30 billion US dollars.Now, the United States can no longer digest all the venture capital capital by itself. Therefore, in recent years, large American venture capital companies have also begun to invest overseas, a considerable part of which has been invested in China and India (European venture capital is still very small).

From a financial and tax perspective, venture capital is similar to traditional private equity funds (hereinafter referred to as private equity funds), but their investment objects and methods are completely different.Most of the private equity investment targets are traditional listed companies with a large amount of real estate and strong cash flow (Cash Flow). The market where these companies are located is promising, but these companies cannot make profits due to management problems.When private equity funds acquire these companies, they first take them off the market, and then use methods such as changing management, laying off a large number of employees, and selling real estate to turn them into profits within a few years.At this time, it may be re-listed, such as Goldman Sachs’ acquisition of Burger King (Burger King), or it may be sold, such as Hellman & Friedman Fund’s acquisition of double-click advertising company Double Click, and then sold to Google after reorganization.Running a private equity fund requires the ability to accurately value a company with many problems, superb negotiation skills and capital management skills, but the most important thing is to be able to settle labor issues, the most important of which are blue-collar workers and labor unions (because once a private equity fund acquires A company, the first thing is to sell bad assets and mass layoffs).From this perspective, private equity funds are dealing with the devil, but they are even more powerful devils.

Venture capital is the opposite, they are dealing with the smartest people in the world, and they are smarter people at the same time.The key to venture capital is to be able to accurately evaluate a technology and foresee the development trend of future technology.So some people say that venture capital is the best industry in the world. To understand VC, you must first understand how it is structured and how it works, and then understand the structure and decision-making process of VC.