SUSTAINED GROWTH OR 'NEXT WAVE'? SOME KEY CRITERIA FOR BEST PRACTICE IN VENTURE CAPITAL

by Mark Paulsmeier, Chairman: Paulsmeier Inc. Group
3 August 2004

As we emerge from the downturn of venture capital’s bubble years, optimism is high. We are, it is said, in “the new cycle, “the new wave” – it is “springtime” for venture capital. Venture capital projects are said to have a “new integrity”.

While it is true that there is an upturn in mood, and that investment capital is now more readily available than it has been for some time, the question as to whether venture capital organizations globally can move beyond the mistakes of the “first wave” depends on their practices and, especially, their business models.

The pressures on traditional corporations to become more ethical and more accountable are now also being brought to bear in venture capital business. Increasingly, governments – especially those of developing and ex-communist countries – are seeking to attract investors who are serious about communities and environments.

Entrepreneurs, in turn, are increasingly seeking to create, or to become involved in, ventures and companies that are socially and environmentally conscious – where higher wages are paid, resources are devoted to development and, above all, the focus is less on maximizing income that on other goals.

This is not at all surprising. Capital does not trickle down. When not conducted properly, venture capital business forcibly sucks capital from the communities and environments that are meant to benefit from it. Best practice, on the other hand, is true to venture capital’s messianic legacy – as committed capital.

Some commentators are calling on venture capital organizations to become more socially involved through charity. Though this dramatizes the extent of social need, charity can hardly be relied upon when what is at issue is access to venture capital resources.

In venture capital, distributive justice is best ensured when projects optimally represent the interests of all parties involved and risk is successfully managed. Whether or not any venture capital organization can achieve distributive justice depends on the extent to which:

• Its business model stifles or unlocks the dynamic potential of venture capital by bringing together its three components – venture capital financing, viable projects, and corporate skill and resources.
• It is able to make any meaningful investments in venture capital resources.
• It is governed by a constitution and code of conduct and ethics.
• It is able to develop the skills and create the work opportunities needed to reduce poverty.
• It is able to successfully enter new markets sustainably.
• It is able to limit the risk of projects in developing markets to levels similar to developed countries.

The extent to which these criteria are implemented will determine whether we will see a “new wave” or sustained growth in venture capital.

© 2004 Paulsmeier Inc. Group. All rights reserved

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