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Venture capitalists have been a major driving force behind Silicon Valley, helping to transform startup ideas and innovation into successful businesses and job creation. Without them, we wouldn’t have Apple, Google, Intel, Genentech or Oracle. But the industry is at a crossroads, putting corporate innovation and job creation at risk.
VCs historically are among the most efficient creators of technology innovation and job growth. But today, entrepreneurs can increasingly take advantage of technology (such as the cloud and the smartphone) to develop and deliver products to customers at much lower costs than before. This is reducing their need to raise venture capital. Additionally, alternative funding sources are encroaching upon the VC’s traditional turf.
What can VCs do to evolve and adapt, and continue to boost wealth and job creation? A new Accenture study into challenges and opportunities before the industry offers five suggestions: VCs must venture beyond the Bay area; adapt to the new funding reality; step up efforts to diversify investment; create new exit strategies; and recommit to venturing. The study also offers five ways the government can assist venture capitalists to reaffirm their commitment to innovation and startup businesses.
Read all insights from Accenture’s research study: “Silicon Valley’s Lessons for CIOs and Innovators”
Over the last 40 years, venture-backed companies in the US produced $3 trillion in annual revenues, 21 percent of US GDP and 11 percent of private sector jobs. For each new high-tech employee, four to five non-tech jobs are created, creating an economic ecosystem that has a multiplier effect on the local, and even national, economy.
To understand the changing dynamics of the VC industry and its implications, the Accenture Institute for High Performance Research conducted a deep dive into the industry’s challenges and opportunities. Apart from a technology culture survey of more than 600 full-time IT professionals that probed Silicon Valley’s unique characteristics, the study comprised roundtable discussions among venture capitalists, subject matter expert interviews and an entrepreneur roundtable discussion on technological innovation, entrepreneurship and the supporting ecosystem.
Five challenges stand out: disappointing VC performance in the market; declining technology cost combined with the availability of more funding and advisory alternatives; the plateauing of the number of innovative startups—at about 1500 to 2000 per year; declining IPOs, from 140 per year in the nineties to 38 in 2012; and fewer actively investing VCs, concentrated in a small number of startups. All this implies slower new company formation and job creation in the future, already manifest in non-IT sectors such as health care and energy.
Here are five ways VCs must evolve to boost the innovation, wealth and job creation engine.
Venture beyond the Bay area. VC insularity and consensus thinking has led to a concentration of investment in four areas: consumer tech, corporate IT, clean tech and bioscience. More diverse backgrounds, geography and investment strategies will help introduce more countercyclical investors and accelerate technological innovation in new areas.
Adapt to the new funding reality. Rather than view angels and other alternative funding mechanisms as competitive threats, VCs should embrace new ways to create value using their strengths—for example, by stepping in when scaling ideas into businesses ready for IPO.
Step up efforts to diversify investment. The VC community must redouble their efforts to seek out promising business ideas outside the valley and in other industries and geographies.
Create new exit strategies. “Manufacturing liquidity”, i.e., institutionalizing alternative exit strategies for new businesses is another challenge. With 70 percent of funds now exceeding 13 years in duration, harvesting of investment and reinvestment are delayed. The industry needs to figure out how to manufacture alternative liquidity paths at scale.
Recommit to venturing. More VCs are evolving to become a full-service source of capital, talent, sponsorship and strategic advice, but they need to go back to the basics and help startups create credibility.
The high-stakes business of investing in technology startups requires business and tech expertise, great instincts, deep pockets, big risk appetite, and a willingness to invest early. But to pull together and chart a new course, one that produces stronger returns and greater economic growth, the VC industry needs to be diverse, with a more diverse investment focus.
Public-sector attention to increasing the pipeline of quality startup ideas will greatly help the VC industry. The government needs to reward risk taking in education, science and business. From elementary education to university level, educators must retool their learning objectives to embrace the Silicon Valley-based cultural concept that failure is a critical element of the innovation process, and nurture creative problem solving, idea creation, resilience and entrepreneurial skills.
Additionally, government must find innovative ways to broaden and accelerate the process of transforming government-sponsored research into viable commercial practice by becoming first customers of a startup business. It can also make it easier for innovative ideas and entrepreneurs to succeed, by relaxing taxation and immigration policies.
Christopher DiGiorgio and Jeanne G. Harris
August 20, 2013
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