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Venture capital and the meritocracy of Silicon Valley

Zafar Anjum | Nov. 4, 2014
In this interview, Somesh Dash, principal, Institutional Venture Partners (IVP), talks about his journey as a venture capital professional, and how Silicon Valley in inimitable.


The role of venture capitalist in the startup ecosystem

"Traditionally, if you want to make money from a crazy idea, you have two options," says Dash. "One, you go to your friends and family and ask them to give you a cheque and say if they want to make a donation, but you tell them that you don't know if the money will come back. And out of pity or out of love they can give you 50,000 to 100,000 dollars. The second thing is, traditionally, you ask for a loan and the way that Silicon Valley works, the only way to build a real company of scale is to invest heavily in the first couple of years in some amazing products, and that costs money. That costs money well before you generate profit or even in some cases, you haven't. So they'll loan you the money but the second you begin generating revenue, most of your profits is going to come back as a form of interest. Instead of reinvesting into a company for further growth, I take it out of my company and give it to a bank, right? And eventually, I go to a bank to pay the principle back."

"So, the role of equity is very powerful because essentially, there is a notion of the mutual trust between lender and borrower where it sort of like here you go, here's the equity, we understand that things can go really ugly, we cannot see a dollar, we're going to lose it all. But we understand that if things go really well, we're participating in the offset that you're going to see. So the reason venture capitalist is an important part of it is that it is the most risky form of financing  provided to entrepreneurs early in the process where they need it the most. And in the name of the scale of growth and it's beyond money -- the money itself is powerful in the sense that someone is willing to give you a cheque and not pressing for interest immediately but it's the help you get from a venture capitalist. So, what they typically do is that they'll go on your board, and make an introduction. For example, we see a 100 investment per year, and seriously evaluate about 20. We've done this for 33 years and at some point searching patterns emerge between what works or what doesn't work. So what you can do is, if you're looking at Dropbox, you can say hey this is what the Netflix guys did and this will work and what didn't work -- it's that perspective that's really really helpful, and that long term output where you're not saying here's my money -- you know $5 million, $10 million-today and give me my returns tomorrow. Venture capitalists need a long term outlook, and patience is key. It takes a really good quality venture capitalist to see good long term outlook. And it's the only form of finance that can grow that long, really." 



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