Talking with Ramana Nanda about Venture Capital Investing

# **Are Venture Capitalists the Key to Unlocking Innovation? | Private Capital Symposium 2022**

During the Private Capital Symposium 2022, Ramana Nanda, Professor of Entrepreneurial Finance and Academic Lead for the Institute of Deep Tech Entrepreneurship at Imperial Business School, and Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship, dive into the role of venture capital in driving innovation and overcoming barriers to commercializing deep tech. They explore the strengths and advantages of the venture capital model, the persistence and performance across funds, the best use case for venture capital, and the challenges associated with it.

## **Strengths and Advantages of Venture Capital**

Venture capital has been instrumental in driving innovation across various industries. In the United States, less than one percent of companies receive venture capital financing annually, yet over half of the companies going public have received venture capital[^1^]. This disproportionate association with high growth, high impact, job-creating companies raises the question of whether venture capitalists simply excel at picking successful ventures or if they actively contribute to their success through value-added work[^1^].

Academic studies have identified two key ways in which venture capitalists provide support. Firstly, they ensure that the best interests of the company and its founders are prioritized through governance. This is crucial for both publicly traded and private companies, where diverging interests may arise[^1^]. Secondly, venture capitalists possess a vast network associated with their portfolio of companies. They leverage this network to connect businesses with talent, potential customers, and suppliers. Additionally, their reputation attracts top employees who appreciate the vetting process conducted by venture capital-backed firms and the potential for sustained funding[^1^].

## **Persistence and Performance in Venture Capital**

The persistence and performance observed across funds in venture capital distinguish it from public equity markets. While mean reversion is generally observed in venture capital, it occurs over a longer period of time. This can be attributed to the nature of venture capital deals, which are bilaterally negotiated. Hence, value-added investors, who have developed a reputation for enhancing company growth, can secure more favorable deals compared to competitors offering better prices but lacking the same value-add[^2^].

Research suggests that access to deal flow plays a fundamental role in the persistence of venture capital performance. Successful venture capitalists, who have been helpful to companies and achieved impressive returns, attract higher-quality deal opportunities. This ability to consistently obtain promising deals across multiple funds contributes to their sustained performance[^2^].

## **The Best Use Case for Venture Capital and Associated Challenges**

Venture capital is particularly effective in situations where companies can quickly and inexpensively de-risk their ventures, and market risk is the primary concern. Over the past few decades, venture capitalists have excelled in helping businesses navigate early experimentation and address challenges related to customer demand and unit economics. As companies progress from experimentation to growth stages, venture capitalists provide capital to scale these viable enterprises[^3^].

However, venture capital has traditionally been less proficient in taking on significant technical risk. This is often because venture capital firms lack the necessary in-house technical due diligence capabilities. The biotech industry is a notable exception, as it deals with substantial technical risk, albeit with more well-defined milestones dictated by the FDA[^3^].

Regarding deep tech industries such as renewable energy generation, carbon capture and sequestration, and new sustainable materials, both technical and market risks are closely intertwined. The success of a particular technology and its ability to solve technical challenges directly impact market potential. Consequently, venture capital plays a crucial role in mitigating these risks and catalyzing innovative solutions in deep tech sectors[^3^].

To watch the full discussion on venture capital’s role in driving innovation and the barriers to commercializing deep tech, check out the [Private Capital Symposium 2022 video](source_link).

## **Keywords/Tags:**
Private equity, venture capital, private capital symposium, investing, deeptech, research

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Are venture capitalists just good at picking companies that will ultimately be successful? Or do they actually help them become successful through their value-added work. During the Private Capital Symposium 2022, Ramana Nanda, Professor of Entrepreneurial Finance and Academic Lead for the Institute of Deep Tech Entrepreneurship at Imperial Business School and Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship discuss about how venture capital is being instrumental to driving innovation in companies and how to unlock the barriers to commercialising deep tech.

0:24 What are some of the strength or advantages of the venture capital model?
3:24 Where does the persistence and performance across funds come from in VC?
5:40 What’s the best use case for venture capital and what are some of the challenges that we can see associated with the venture capital model?
10:00 How to unlock the challenges of driving innovation and the barriers to commercialisation of deep tech