Venture capital and innovation

In developed economies, where growth is weak, encouraging innovation has become a priority. New products or services, based on the development of new technologies or the implementation of new business models that meet unmet or unproven needs, are likely to generate the expected upswing in economic activity. Companies such as Apple, Cisco, Google or Amazon in the United States, Nicox, Soitec Parrot or even Criteo or Cellectis in France –, some of which did not exist in the 1990s – illustrate this new dynamic based on entrepreneurship and innovation. All these emblematic companies hold dominant positions in their respective markets, but what they also have in common is that they have benefited from venture capital financing. Stimulating innovation is not enough without the right ecosystem to help finance it. The key role played by venture capital in the emergence of new innovative industries is unanimously recognized. Public authorities in developed and some emerging countries are therefore trying to encourage this type of financing, which is particularly well-suited to innovation. Venture capital was born in the United States after the Second World War, and has gradually spread to a growing number of countries: Europe, Israel, Taiwan, China and Latin America. Outside the United States, however, venture capital is still a young industry.

Venture capital is a very specific financing technique, and its basic principles remain relatively unknown, even among entrepreneurs who are looking for the support of a venture capitalist to help their company grow, sometimes in vain. Not every young, innovative company has what it takes to be eligible for this type of financing.

Often considered an integral part of private equity, modern venture capital is in a class of its own, both because of the high-risk nature of this financing activity, and because of the highly specific techniques it employs to master the uncertain development process of any innovative start-up. Venture capitalists are true specialists in the creation of new businesses, thanks to their disciplined investment methods, the development of highly specialized skills, and the alignment of interests sought between investors and entrepreneurs. They also bring advice and a network of potential customers and partners to the financed start-up. Faced with the challenges of open innovation, large corporations are also involved in corporate venture capital, with more or less clearly defined objectives.

The aim of this article is to provide an overview of the venture capital industry, its players and the way they operate, as well as the different forms and applications of venture capital.