After you have made money, there are numerous opportunities to invest your money – stocks, bonds, money market funds, real estate, private equity. The reason why you are interested in venture capital funds is the possibility of gaining multiple levels on your investment. You can pick up the stock for pennies and sell it for in the high 30’s and more. That is the good news, the bad news most of your investments will not even make money, but you only need one or two to make multi millions. If you want to put it in baseball analogy, singles are for dividend investing; doubles are for real estate; triples are for private equity and grand slam home runs are venture capital firms. There is an interesting book called The Power Law – Venture Capital and the Making of the New Future by Sebastin Mallaby published by Penguin Press, NY, 2022.

If someone says Silicon Valley, the images of the San Francisco, California will come to mind. Other cities will try to stay they are open to venture capital but what makes Silicon Valley the number one leader and likely to stay there which brings the issue why there?

If you were a government influencer, you would likely have said Boston before San Franciso. Boston has MIT and Havard or many people who could do the work. Boston has a long history of research and development including military contracts, however Boston largest companies were large, secretive, vertically integrated corporations. Hierarchical organizations are very good at coordinating people when the objectives are clear: think of an army. A cluster that is dominated by large, self-contained, secretive companies will be characterized by tight relationships among insiders at each firm, but few links between professionals at one firm and similar professionals at another firm. How do ideas spread?

In California, there were many small firms (think of the story of Apple founded in a garage), there is plenty of competition, but the business owners were capable of alliances and collaborations. When it comes to commercializing applied science, Silicon Valley’s culture of cooperation has proven more creative than the self-contained vertically integrated corporations. Shifting coalitions of small ones conduct myriad experiments until they find the best path forward.

It helps that California law prevents employers from tying up employees in non-compete agreements: talent is free to go where it pleases.

Another factor is colleges and universities as part of the ecosystem, the university at the center of Silicon Valley is Stanford University and it allows professors to take sabbaticals and work on startups, this fosters ties between academia and business. (for Stanford the benefit is when companies are very successful, the professors tend to donate money to Stanford). In contrast, MIT in Boston, professors risked tenure if they spent too much time on outside projects. MIT was more dependent on research and development government grants.

In personal relationships, how money is divided is a challenge and the more money at stake or potentially at stake, the bigger the challenge. Venture capital firms over the years had senior partners who could reasonably and fairly make decisions that both sides trust.

A venture capital fund not only offers money for a piece of equity but takes seats on the board of directors to help manage the company and finds a senior operations officer to bring a great disrupter idea or dream to reality. In the life of a company, it begins with an idea to make something better, then the company has to decide does it want to grow? if it does different skill sets are needed to move to next levels and possibility national or international in scale.

Linking to dividend paying stocks, potentially after you have accumulated wealth, you could use your wealth to be involved in venture capital. If you are correct, companies can generate grand slam home runs or 40 times plus what you invested. However, venture capital tends to need conditions to allow that to happen. Some of it is management, trust in the company to eventually go public and trade on the stock exchange, it is possible, but a lot of things need to go your way. Remember even at the best of firms, most of the investments do not make a good return on your investment. but it possible to have less than 10% success rate because that success is very good. If you stick to dividend paying stocks, the rate of return is lower and the total return – capital appreciation plus dividends you will rarely lose money and that is the number one rule of investing – try not to lose money.

There are more questions than answers, till the next time – to raising questions.