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Updated February 11, 2023A catastrophic cocktail of the coronavirus pandemic, its resultant recession, and the advent of war in Eastern Europe has sent shockwaves through the global economy in a three-year onslaught that has shaken the world into a state of economic insecurity surpassing that of the Great Depression of the 1920s. The crisis has shone an often uncomfortable yet incandescent light on the systemic inequities embedded in the global economy. Those most affected by these inequities have consistently belonged to the most vulnerable communities: lower-income and ethnic households, and those with lower levels of formal education. Disparities in access to support, inadequate health care provision, and undue strain placed on mothers and caretakers have become too-common penalties for those without access to the wealth, education, and employment required to shield them from the downturn.
Securely sheltered from this economic insecurity are those nestled among the world’s ever-growing list of billionaires. According to the Forbes billionaire list, seven of the world’s top ten billionaires in 2022 are the founders of venture-backed technology companies. Musk, Bezos, Gates, Ellison, Page, Zuckerberg, and Brin are household names. They epitomize the archetypal white male entrepreneur the world has come to associate with world-changing innovation and outstanding venture success. These entrepreneurs create tremendous wealth of their own, which they in turn invest in other venture-backable businesses: the Silicon Valley flywheel. A significant number of the US’s 735 billionaires have amassed their fortunes through entrepreneurship and the creation of venture-backed companies.
Most businesses begin with an entrepreneur who holds a grand vision, invention, or idea. These ideas are shared with co-founders, team members, investors, and eventually the world when the idea materializes into a product or service offered to consumers at a price. It often requires external finance to fuel that growth as a business grows. To realize this capital, businesses create revenues from sales, borrow money from friends and family, and take loans from banks. These more traditional forms of capital are most suited for companies that will grow rapidly yet steadily in a linear fashion. They can break even within one to three years and provide steady profit and growth.
Venture-backed businesses tend to have a few additional components. They tend to be high-growth, high-risk, high-reward, and, more often than not, tech-enabled businesses that can demonstrate potential for massive scalability. Of the millions of companies that are started each year, only a fraction is considered to have the ability to disrupt industries and achieve the exponential growth required to create returns to investors that are equal to or in excess of the entire fund—often more than £100M—from which they were invested. There are a great many books that delve into the detail of how to create a venture-backable company; each provides overarching principles that determine there must be a robust initial team, a problem faced by a large and preferably ever-expanding market, and a “sticky” product that can solve that problem at a price point consumers are willing to pay, also known as product-market fit. With these components in place, many entrepreneurs create startups they deem to have the potential to achieve the billion-dollar valuations that will propel them onto the Forbes billionaire list.
However, ideas are just ideas without the critical component of capital. A sizable investment, often into the seven figures, is required to fuel early growth and is frequently provided through external funding. Given that these companies are high risk, more traditional forms of capital are out of the question. Startup entrepreneurs increasingly rely upon angel investors or venture capital to provide the boost they need onto the trajectory for exponential scale. Funds flow directly into the company as an equity investment rather than an interest-bearing loan. This is central for early-stage companies with limited track records and little income, for whom interest-bearing loans could be unobtainable, onerous, or even crippling.