Entrepreneurship is inseparable from venture capital institutions.

In the book "A History of Venture Capital," it is introduced that Silicon Valley provided a fertile ground for small and medium-sized companies and technical personnel to start businesses in the last century:

- It's okay to take bold attempts and fail;

- If you want to go back to work, there are also many companies to choose from.

However, for technical personnel, they often have technology and creativity.

But they lack money, personnel, sales, and may not even know how to lead a team.How do these technical personnel create their own careers from scratch?

This is inseparable from another large investment group: venture capital firms.

How do they make investments?

Investment style and life cycle

In fact, different styles are based on the life cycle of a particular industry or stock.We can observe from the figure below that the life cycle of an industry is divided into four stages.

▼First Stage: Deep Growth

At the initial stage of an industry's development, the industry needs to first validate its market demand and explore its business model and sources of revenue.

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In this stage, profits are usually not high, and it may even incur losses.

Take Amazon, for example, during the first ten years of its inception, it was mostly unprofitable for the majority of the time.Actually, during this period, Amazon's revenue has been growing rapidly.

However, the company reinvests most of its income back into production to acquire more customers and market share.

▼ Phase Two: Growth

In the second phase, revenue begins to grow rapidly, and profits also increase swiftly.

▼ Phase Three: Growth ValueEntering the third stage, the income may have reached a ceiling, with the growth rate slowing down, but profitability is still on the rise. Companies can increase profits by reducing expenses and improving efficiency. During this phase, the return on equity (ROE) of the company will gradually increase from low to high. For example, over the past five years, white liquor in the consumer goods industry has been a type of product in this category.

▼ Fourth stage: Deep Value

In the final stage, both revenue and profitability enter a state of relatively slow growth, which is known as deep value. Industries such as banking and finance, as well as optional consumer goods like household appliances, are in this stage.No variety can consistently grow at a rate that significantly exceeds the average growth rate of society.

Thus, after reaching maturity, it becomes a slow growth.

This is the four stages of the industry life cycle, corresponding to four different investment styles.

The role of venture capital firms

From the life cycle, it can be seen that for a startup company, it is a typical deep growth style, even in the early stages of the deep growth style.At this point, there is often only technology or an idea, lacking customers, revenue, and profits.

Venture capital firms are the ones that help such startups get on the right track.

• If money is needed, they assist entrepreneurs in raising funds.

• If personnel are needed, they use their connections to help contact suitable professional managers, or even top salespeople.

• When encountering difficulties, venture capital firms will help solve problems and offer strategies.

• They will even assist with family life needs.

The purpose is to exchange a portion of the equity from the entrepreneurs.

If such a startup company really grows, then this portion of the equity becomes very valuable.Characteristics of Venture Capital: Nine Deaths and One Life

However, venture capital, due to its early stage, also has a very high failure rate.

▼Value Style

For investment masters with a value style, typically investing in 10 listed companies, they might encounter 1-2 that they misjudge, while the others perform normally.

Like Buffett, who has made many investments, occasionally one or two might incur losses, but most of the companies he invests in make money.Venture Capital

For venture capital, it is possible to invest in 100 startup companies, with 98 of them incurring losses, while the remaining 1-2 may skyrocket in value by hundreds or thousands of times.

The companies like Apple, Google, and Facebook that we see being supported by venture capital are actually a very small number of survivors.

Before this, the vast majority of startups have failed.

Venture capital is a game of high risk and high reward, with a one in ten chance of success.

However, the few companies that do survive bring in substantial returns.

This is the source of venture capital's profits.Venture Capital Strategy: Investing in the 'Right People'

In a nutshell, the strategy of venture capital can be summarized as: investing in the 'right people.'

(1) In venture capital, the valuation factors commonly found in value styles are rarely used.

This is because for startups, it is too early in the game; there is no revenue, no assets, and no profits.

Naturally, there are no indicators such as price-to-earnings ratios or price-to-book ratios to refer to.Many startups, in fact, cannot be valued; it can only be seen whether the founders are formidable.

(2) The abilities of different founders can vary greatly.

In traditional fields, for example, the strength of one adult may be greater than that of another.

But it is impossible to differ by thousands of times.

However, in the field of tech startups, the abilities of different technologies and talents can indeed differ by tens of thousands of times.

Semiconductors, chips, artificial intelligence, and so on, all have similar characteristics.

There are even industries that are created from scratch by one or two top experts.Venture capital firms believe that for startups, the most important asset is the talent possessed by the founding team. This is also referred to as "intellectual book value."

It is the people who determine whether a startup can succeed.

For venture capital, the greatest risk is the possibility of missing out on the most outstanding individuals.

However, due to the high failure rate and difficulty associated with venture capital investments, the corresponding equity funds typically have an investment threshold of over one million.

Moreover, if the invested projects fail, there is even the potential for a total loss of investment.Not very suitable for ordinary investors as the main force.

At present, venture capital is still dominated by institutional investors, while ordinary investors mainly focus on securities investment.

This is also the case in private equity funds, where the two most important categories are: private equity funds (many of which engage in venture capital) and private securities investment funds.