Venture backed firms key to industry success and tech diffusion

[Josh, Ramana, 2020, “Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn,” Journal of Economic PerspectivesJstor, p.237, vol.34, No.3, acc. 7-18-24, GDI-LI]

On the demand side, there has been a plethora of attractive investment opportunities. Many venture-backed firms have focused on developing novel ways to apply information technology and the widespread diffusion of mobile communications. One manifestation has been platforms that connect and employ widely dispersed sellers of services and goods (frequently dubbed the “sharing economy,” and manifested by companies such as Airbnb and Uber). A second has been firms that substantially improve the efficiency of existing services at much lower price points: for example, the ways in which Salesforce.com and other companies provide “Soft- ware as a Service” to businesses, the rise of “fintech,” and the plethora of “Mobile Apps” available for consumers. Third, several companies replicated business models successful in the United States in other national markets, with the Chinese companies Alibaba and Tencent being the most dramatic exemplars. An important consequence was the dramatic increase in venture capital investment in Asia over this period (a topic worthy of much closer study).

Another demand driver has been the substantially lower cost of starting a new business in the software and services sectors. As documented by Ewens, Nanda, and Rhodes-Kropf (2018), the much lower initial capital needed for new ventures in these sectors made it much cheaper to learn about their potential. This change led early-stage investors to be more willing to fund less proven (but potentially high- return) ideas and entrepreneurial teams in these sectors. One manifestation was an increase in a “spray and pray” investment approach, where financiers provide a small amount of funding and limited governance to a larger number of startups. As seen in Figure 1, the number of startups receiving a first round of venture capital financing rose substantially over this period.