Forget about the meek. It's the venture capitalists who are going to inherit the earth. Investments by VC firms more than doubled last year to US$48 billion-plus, and that's just the beginning. If the economy continues humming along like it has, the payout could be many multiples higher.
VC money has always been a fixture in the marketplace, but it's never risen to this level. And neither has VC influence. Instead of just loaning money and banking on the outcome, the new breed of VCs have the final word on management teams, business plans and determining when start-ups go public.
So who are these new VCs? There are several different models emerging.
Empire Builders. No matter how rich they get, some VCs are building mini financial empires. They're doing more than just plunking down money. They also are determining who partners with whom, creating a portfolio of companies that can benefit from one other's services.
In effect, what they're creating is a modern-day holding company, an idea that dates all the way back to 1911, when the U.S. government busted up Standard Oil. All of the resulting companies still did business with one other and influenced one other's decisions, but on paper they were independent.
VCs benefit from this strategy because their investment in individual companies is relatively small. That means if one company doesn't make it, it won't have a serious impact on the overall portfolio of companies.
Gamblers. VCs—above all else—are gamblers, risking their own money on an unproven business concept. And if it takes off, they'll get a big piece of the winnings.
Some temper the risk by sharing it, managing it the same way banks manage big loans. While that waters down their return on investment, the way the stock market has re acted to recent Linux IPOs more than compensates for a dilution.
Feudal Lords. Back in the Middle Ages, when men were men, they conducted business with a battle-ax. But that was only part of the business picture, and it was aimed at getting more land. The rest of it had to do with working the land, and the lords allowed serfs to farm their land in return for a piece—albeit a small piece—of the harvest.
What's changed is that there's a potential for a lot more people to make a lot more wealth, but the basic structure is the same. Would-be businesspeople are bartering away a piece of their future in expectation that their idea will succeed. And if it doesn't, then it's certainly no worse than a serf trying to make a living during a drought or on land that was drained of its nutrients by years of poor farming methods.
Next time you need more money, consider what you're dealing with. The capital is readily available, but what will it really cost you?