Capital And You (Part Two)
This is post is the second in a five part series on Capital, and You.
Previously, I defined capital as potential power.
This second post attempts to explains the relationship between Capital and the Venture Capitalist.
Capital and The Venture Capitalist
The Venture Capitalist has one primary optimization objective and a handful of secondary, often self-imposed, constraints.
The primary optimization objective of the Venture Capitalist to accumulate more capital. They may self-impose a constraint, like only accumulating capital in the financial services sector, or only by working with women entrepreneurs or by some other criteria. But their primary objective is accumulate more capital.
Venture Capitalists engage in a set of activities in the quest to accumulate more capital. If a person does not Venture to risk their capital, they are not a Venture Capitalist. Canadian society produces an awful lot of bored people who sure do like to take a lot of meetings and ask for a lot spreadsheets, but never venture anything. While they may self-identify as Venture Capitalists, they are, in all reality, meeting hobbyists with a passion for wasting founders time. A Venture Capitalist must engage in a set of activities that entails the taking of actual risk. If they do not risk their capital as part of a set of activities, they are not venture capitalists.
That set of activities includes the sourcing, evaluation, taking, and managing of risk.
First, a Venture Capitalist needs to accumulate a bundle of capital. This comes from two forms. First, they must garner a large enough network of people that know things and know people. They have to bundle social capital into some kind of financial instrument – typically labelled a Partnership. And second, they have to accumulate financial capital into a fund. The more capital they can accumulate at this first stage, the more variety of risk they get to manage.
Second, they need to procure a source of risk. They need a continuous flow of entrepreneurs, preferably naive ones, to talk with or talk at. Venture Capitalists need entrepreneurs to think of them and contact them. It’s a trope that Venture Capitalists absolutely hate all kinds of risk that are presented with. Some will make the mistake of expanding on these annoyances at conference panels, typically with a whole bunch of entrepreneurs in the room as they’re doing it. Yet, that is part of the activity they signed up for when they got into it.
Third, they have to evaluate risk. Each Venture Capitalist has their own set of heuristics for evaluating risk. A handful even claim to have algorithms. They use their social capital, typically their own experience in having accumulated a lot of capital themselves, to evaluate the degree of risk involved. The best Venture Capitalists act as super connectors in a community, connecting entrepreneurs and prospective customers. Such Super Connector Venture Capitalists are massive assets to the societies they choose.
Fourth, they have to take risk. They have to enter into a financial agreement with another entity in order to transact on the risk.
Fifth, they have to manage the risks they have taken. They have to watch how their capital is discharged into the market. They have to use their network to tilt the odds in their favour. Some many even attempt to mentor or coach people into better performance.
Risk is the essential vehicle for capital accumulation. If one risks nothing, the state punishes them by increasing the money supply, eroding their capital. Inflation truly is the most popular method of state power on monetary capital. If one takes great risk, and it pays off, one gets great reward.
The essential optimization objective of the Venture Capitalist is the accumulation of more capital. Anything else they say is secondary, and often disposable, constraint. If they wanted to directly impact the world in the way they want to see it, they’d have set up a tax sheltered vehicle and call it philanthropy.