The Role of Venture Capital

A questioner turned to the topic of funding for small and medium-sized enterprises (SMEs). “The equity and venture capital groups really do not seem interested in providing funding to small companies because they do not make enough money.” She asked whether VC companies were “getting back into the game.” Dr. Kota replied that smaller companies bring with them a higher level of technological risk, and to address their needs “you need to do more than SBIR bridge funding to mature the technology” until it is proven and ready VC firms. This, he said, is an opportunity for Federal and state entities to work together with companies.

The questioner asked if venture capital firms are too risk averse. Mr. Pogue said that “as a venture capitalist, it is not a question of being risk averse; we live with risk all the time, including the risks of very early-stage startup companies.” He went on to say that of about 700,000 new companies started every year, VC firms invest in only about 1,000 of them, or 1 in 700. They lose all of their investment in about 30 percent of companies they invest in, and earn just marginal gains in another 30 percent. “A major concern,” he said, is that most of the small companies seeking capital do not have business plans that are ambitious or believable enough to make the kinds of returns that the pension funds and endowments who supply capital to VCs require. We venture capitalists have to do better than the stock market over a period of time if we are to sustain funding and not be shut off from the pension funds. We find that in most cases, small firms looking for support are not really interested in high growth, in diluting ownership, or becoming public companies. They are interested in cheap capital.”

The questioner proposed further that one responsibility for venture capital companies is to help small firms create jobs. Mr. Griffith agreed with the urgent need for job creation, but that this had to be built on a strong business foundation. “The investments of VC firms aren’t aimed at creating jobs, they’re aimed at getting a return,” he continued. “It’s the same for Timken. We’re not about employing people, we’re about getting an economic return, and that’s the only way we get the right to employ people. Our objective is to build an economy, and if you build an economy, the jobs will come.”

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