As an alternative to the outright acquisition of innovation through acquiring other firms, organizations may choose to invest in firms or businesses (that either may or may not be in the firm’s own portfolio of businesses) with high growth potential.
Venture capital is being used to earn high rates of return by supporting the acquisition of innovations, and some firms establish their own venture capital divisions to provide such support.
The amount of venture capital invested in new ventures reached a high of $46.1 billion in 1999. Research has shown that venture capitalists may earn large returns or experience significant losses. For example, one study found that 34 percent of the Venture capitalists experienced a loss, while 23 percent gained a rate of return on their investments of 50 percent or greater.
Venture capitalists place weight on the competence of the entrepreneur or the human capital in the firm. However, they also place weight on the expected scope of competitive rivalry the firm is likely to experience and the degree of instability in the market addressed.
Increasingly, venture capital is being used to support the acquisition of innovations. To provide such support, some firms establish their own venture-capital divisions.
Some relatively new ventures are able to obtain capital through initial public offerings (IPOs). Firms that offer new stock in this way must have high potential in order to sell their stock and obtain adequate capital to finance the growth and development of the firm.
When investing venture capital, the strategic benefits to a corporation include:
- the ability to invest early and observe what happens to the new venture
- movement toward subsequent acquisitions, technology licensing, product marketing rights, and possibly the development of international opportunities
- gaining a “window” on future technological development
Potential returns may be limited by the risk-reduction effects of venture funds’ syndication and the participation of other firms.
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