How private equity and venture capital firms spark the economic engine

The American Experiment is a beautiful thing. It has led to the invention of the automobile, electricity for the masses, air travel, personal computers and really important things like rock ’n’ roll.

Time and time again, residents of the United States have pushed the envelope by developing incredible inventions and nearly perfecting the ability to sell the citizens of the world on their need for so many products.

Amid this innovative spirit is a uniquely American economic engine. I’m not speaking of banks or the public market, nor am I insinuating that other nations haven’t gotten on board. What I’m suggesting is that there’s something special about private equity and venture capital firms.

The role of private equity:

Let’s imagine a business owner who has spent the past decade growing a company from the ground up. In fact, let’s give that entrepreneur the benefit of having a profitable $50-million business with a 25% EBITDA. The sole proprietor may want to grow that business to the next level but faces the challenge of getting a bank to provide the needed capital to acquire a competitor. Banks can certainly make great business partners, but they typically don’t have the appetite for helping execute an acquisition strategy.

Herein lies the perfect scenario for a private equity firm to come to the table with an invaluable proposition. A private equity group provides the needed funding to close an acquisition and helps run due diligence, optimize inefficiencies, provide operating assistance and enable the founder to monetize the value of the company through a liquidity event.

The value of venture capital:

Let’s shift over to the ever-interesting world of venture capital. Pre-revenue, pre-profit businesses often need more money to allow a longer incubation period than the average founder or traditional bank line will afford.

Envision a 50-employee business that is three years in but doesn’t yet have a product in the marketplace. Apart from federal grants, these businesses in large part wouldn’t exist. Venture capital firms, however, have brought investors’ cash into a “probability of success” distribution model. In other words, venture capital helps spark the economic engine by taking chances on the next greatest thing.

From biotechnology to pharmaceuticals to software to consumer electronics, venture capital has funded some of the most helpful and intriguing out-of-the-box products that people have come to appreciate over time. At their best, venture capital firms “prime the pump” and help keep the United States globally competitive.

The takeaway:

These two important pieces of the economic puzzle have done much to drive capital into needed segments, remove operating inefficiencies and get new ventures off the ground to supply the global market. May the American Experiment continue to produce new and innovative ways to benefit people globally and create prosperity for those up to the challenge.