Analysis Of The Factors Of The Growth Of Venture Capital

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For the past few decades, venture capital has attained substantial growth, especially in developing economies where a considerable increase in economic activities has been observed of late. The main reason for this could be the search for different profitable markets that have gone through economic maturity, given that the developed markets have shown a slight decrease in profitability levels due to trade wars currently at play. Despite venture capital being widely disseminated worldwide, the activity is mostly concentrated in America.

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The venture capital market contains three elements management organization, capitalists, and invested corporations. In simplifying the dynamic market, capitalists invest their investments, which are controlled by management organizations (Maula, Autio & Murray, 2009). These three elements can only be effective and influential venture capital growth if all the parties involved and do their responsibilities in the right way.

Organization Innovativeness

Traditionally, the interest of organizations in creating venture funds has mainly been influenced by the venture capital climate. Most companies generally use the internal market research and development (R&D) system as the primary source of innovativeness. It is crucial with respect to innovation and subsequent product acceptance. If the management and operatives of a company assume that they know what customers want and make product designs behind closed doors, there is a likelihood that the end product will not receive acceptance. On the other hand, if management and operatives of a company go to the ground to ask existing and prospective customers questions, there is a likelihood that they will get the right product designs that will be accepted in the market. Innovation should be a mix of internal R&D and external R&D. Research has it that most monopolies lack efficiency, and so, the costs related to inefficiency are automatically borne by the end consumer.

Therefore, the organization structure must eliminate the dominance by the R&D. To accomplish this, the option for multiple technological initiatives founding on corporate venture capital is standard among the world’s leading corporations. By doing this, firms need to eliminate inefficiencies and use it as a tool of cost reduction.

Agency Problem

Agency theory focuses on inefficiencies that hinder contract association between firms. In this case, both players in a contract are risk-averse and opportunistic. Consequently, the opportunistic behavior of both parties may not be in agreement with the best interest of the organization. Moreover, any form of misalignment that exists between both parties implies loss for the business. A typical example where an agency problem exists is the case of the relationship between the organization’s R&D unit and the top management involved in technical advancement. So, if the R&D department initiates a project beyond its limits and take actions that cannot be accounted for or verified, may create conflicts. Besides, hold up challenges may emerge causing internal funded projects to halt in spite of significant corporate expenditure used. Therefore, creating a corporate venture capital initiative is the ideal solution to some of the problems related to agency problems. In regards to this, the corporate venture capital will provide the internal R&D unit with a significant challenge over their dominance on innovativeness.

Detachment

Research has also established that venture capital offers an inside perspective of new technological areas that can be exploited as an approach that allows businesses to respond swiftly to market changes. A positive aspect of venturing is that it provides the firm the ability to speed up its response to threats. In particular, it offers a quicker approach for the organizational management to detach from portfolios that appear doomed to fail. Since the relationship between the organization and the venture funds is generally at reachable, this is a significant advantage to market players. Because, as much as organizations may seem reluctant to abandon an unpromising project, the presence of other venture capitalists provides a platform for forcing a decision.

Business Response

Capital venturing also provides an organization with various sources of leveraging. This can be seen in the many technology and information cases, whereby decisions made by investors to promote the development of technologies relying on the venture firm business platforms to increase product demand. The venture fund was invested in several hardware and software makers whose products capitalized the power presented by the new intel chip. The success of these investments resulted in increased adoption of the chip within a short period. All this success is attributed to applying corporate venturing to create a network of wireless players.

Threat Management

Another motive that drives venture capital is threat management. The venture fund can be used by a firm to gather intelligence. Basu et al. (2011) mention that during the 1980s, a silicon-chip expert formulated a venture program that focused on investing in a variety of technologies. This program aimed to gather strategic information at a much lower cost. The process program findings discovered that it was hard and expensive, making chips using non-silicon products. This resulted in high valuation, thus making the company capitalize on its competitive advantage. From this case, we realize that the decision to engage in capital venturing offered the firm a source of insurance. Also, the alternatives that the organization explored were viable as they were protected from the risk identified by its competitors.

Conclusion

In conclusion, the analysis of the various factors that influence venture capital and its importance in the business world is proved from the resultant growth, development, as well as competitiveness in the market. One can realize that the factors that drive venture capital demonstrate entrepreneurial aspects that correlate with the positive effects on business corporations. Based on learning the strategic entrepreneurial aspects and factors of venture capital, one can understand the uniqueness of the competitiveness and sustainability of organizations need to attract venture capitalists and cooperate with entrepreneurs is an efficient way to help a business to enhance its ability in the market. 

16 August 2021

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