Unlocking your potential means turning your “shoulds” into your “musts.” This process helps you define what really matters in life.

Growing within high-growth segments is much easier than doing so in low, no or negative-growth market sectors. Consequently, VCs often avoid backing entrepreneurs whose companies operate in such markets. Nonprofits and venture capital firms can work together to unlock growth and productivity opportunities for SMEs. But careful assessment of benefits, costs and risks is vital.

What is Venture Capital?

Venture capital is high-risk financing for start-ups with potential for high growth. It provides a vital fill-in between sources of innovation funds (chiefly corporations, government bodies, and the entrepreneur’s friends and family) and lower-cost financing available to ongoing concerns (via the capital markets).

Venture investors fund new companies by purchasing equity in them, rather than lending them money. This gives them the right to vote on decisions and, in some cases, a say in company management. In exchange for the risk, venture capitalists expect higher than average returns on their investment.

The industry has grown rapidly over the past decade, but it is a relatively small part of the U.S. economy. Whether or not it will continue to expand in the same way is difficult to predict, because the public markets’ cyclical nature may check its growth. The industry also faces challenges from other funding options, including crowdsourcing and angel investors. And it has to overcome the myth that venture capitalists “pick winners.” The truth is that they invest in segments of the market where a few high-growth companies can support very high relative valuations, which in turn generate very large commissions for investment bankers.

What is the Role of Venture Capitalists?

Venture capitalists are investors who fund startup companies at an early stage in exchange for equity ownership and preferential decision-making rights. VC funds are structured to guarantee partners a minimum return of their initial investment before sharing in the upside. The majority of venture capital investments are made in technology-related fields, such as the internet, healthcare, computer hardware and services, mobile and telecommunications. However, non-technology startups have also benefited from venture capital funding, such as Staples (STL) and Starbucks (SBUX).

As with other types of private equity, VC compensation is composed of base salaries, year-end bonuses and carried interest, which is a share of the firm’s investment profits. Managing partners, or GPs, typically have successful track records as entrepreneurs and executives.

The single-minded pursuit of profit in the name of entrepreneurship can have negative societal consequences. This is why LPs often require that GPs invest some of their own money in the fund (known as “skin in the game”) and that they have a solid track record of investing in and helping to build startups.

What is the Role of Nonprofits?

Nonprofits are organizations that are not based on profit-making, and instead aim to improve quality of life for others at local, regional, national, or global levels. They are often religious or charitable in nature and provide services that the government does not directly deliver (such as food to families who run out of vouchers or debit cards).

Despite playing such an important role, most nonprofits struggle to grow due to limited public and private funding. Moreover, they tend to focus on operational and financial performance, rather than investing in organizational growth, leadership development, and strategic capacity.

However, it is possible to unlock the potential of nonprofits by enabling them to collaborate with private sector resources and venture capital firms. This will help them to increase their growth potential and ultimately create a stronger economy for everyone. In order to do this, it is necessary for nonprofits to engage in comprehensive market research and adopt a data-driven approach to their organizational management. This includes using both qualitative and quantitative methods to gather feedback from their target audience.

What is the Role of Governments?

Governments can stabilize markets, provide institutional frameworks for business and financial regulation, and enforce rules around contract law and property rights. Governments can also intervene when market failure threatens the economic system in a way that hurts shareholders and lenders. Governments can support industry through bailouts or impose subsidies, taxes, and tariffs to lift prices on foreign products in order to make domestic products more competitive.

Moreover, governments can affect markets through their monetary policy, which impacts the cost of money for businesses. Governments can raise or lower interest rates, which has a massive effect on markets and the economy. Governments can also affect markets by imposing transaction fees and taxes, which can deter investors.

There is a role for government in a market economy because governments provide certain kinds of goods and services, including promoting the common good, protecting the environment, defining and enforcing property rights, and redistributing income. But these benefits can be weighed against the potential for government to interfere in markets by purchasing and directly investing in companies. This intervention skews market decisions by directing investment in companies toward the nation’s interests rather than profit-maximizing return for investors.

What is the Role of Scale-Up Programs?

In the capital market, VCs invest in start-ups with proven technologies that are ready to scale up. They can do this either by investing directly or via a fund of funds, in which they act as limited partners. In the latter case, the LPs receive risk-adjusted returns as the assets of the VC fund grow over time.

In Europe, there are a number of programmes that support growth stage companies. Among them, InvestEU supports financial intermediaries by providing guarantees and facilitating the flow of private investment in the VC asset class. It also provides ESCALAR, a programme that allows LPs to participate in the equity of European scale-up companies with different terms than private investors and thus enhance their risk-adjusted returns.

The seminar participants highlighted the need for EU-level funding initiatives that cooperate with national governments to build a robust and efficient ecosystem for scale-up financing. They also agreed that successful scale-ups require not only funding but a sophisticated entrepreneurial ecosystem, which involves a range of actors besides VCs and start-ups and operates within a coherent regulatory framework.