Why Venture Capital Is Broken
The amount of Venture Capital invested in 2016 was only a quarter of what was invested in 2015 in South Korea. Talking to accelerators and incubators here in Seoul, the most common expectation is that VC investment will remain cool for the next few years.
Large American VC Firms invest large amounts of capital in a fairly small number of startups every year, with hopes that at least one startup will provide returns to cover all other investments. This creates a unicorn chasing culture where only startups with the potential to IPO at multi-billion-dollar-valuations are considered.
I believe that for VC investments outside of the Silicon Valley, especially in smaller markets such as South Korea should be completely different. Instead of chasing unicorns, VCs could focus on consistent growth, sustainability and monopoly (Patents).
VC Firms could learn a great deal from Warren Buffett. There is nothing wrong investing in revenue driven startups that can return 30%YOY for the next decades, yet most VCs would laugh at such prospects. This go-big-or-go-home attitude leaves a great deal of potentially rewarding investments from being made.
A large number of investments outside of Apps and Internet are also being missed out. One of our Venture Partners is in the health food supplement industry. This boring two-year old tangible company generates tens of millions of dollars with a profit margin that would beat most tech startups with the same age. It could generate hundreds of millions of dollars a year if launched globally, however most VCs would not even consider it.
There is a big shift in consumer habits and trends for the future. Automation, Artificial Intelligence and Robotics may deeply affect the fabric of society. Industries that are built on human needs won’t be affected as much as superfluous industries. Consumers may cut back on in-game spending but are less likely to cut back on shoes, food or energy.
I also believe that Venture Capitalists have a duty to invest in technologies that can change the World. Technologies that make people’s lives better in a considerable way — Such as cheaper energy, drought resistant crops, hole-proof socks, etc. Enabling new technologies will pave way forward for a better world, new industries and consistent growth.
There is a very large number of new technologies being neglected by VCs. My focus at Outroll is to help commercializing research and translating new ideas into successful products and services.
VC investments take at least 7 years to mature, and many popular funds today may not achieve profitability by 2022. If funds stop chasing unicorns, perhaps they can help to drive the new economy and provide a great impact to mankind.
In the words of Dr. Seuss: “Unless”.