Democratic vice-presidential nominee Gov. Tim Walz recently said "I don't even know what a venture capitalist does" at a recent campaign stop in Western Pennsylvania.
Many voters likely found Gov. Walz's statement eminently relatable.
That's understandable. The venture capital community hasn't done a very good job of telling everyday Americans what it does and why it's crucial for a vibrant, bottom-up economy.
But it's important for both politicians and voters to have a basic understanding of how VC works. That's because the industry supports a huge swath of cutting-edge businesses, spurring innovation, creating jobs, and bringing truly novel technologies to market.
Getting any new enterprise off the ground is a challenge. And it's during this time – a company's earliest days – that VC typically plays an outsized role.
By providing capital in exchange for an ownership stake, VCs help startups and small-but-growing businesses make the investments, purchases, and hires needed to grow. As those companies grow and gain value, so does the VC's investment, so the businesses' interests are closely aligned.
Some startups that receive VC support eventually go on to become household names, like Apple, Uber, or LinkedIn. But we rarely hear about the many startups that fail, or the ones that survive but take years or even decades to turn a profit. As many as 75% of VC-backed companies never return a dime to their investors, let alone a profit.
Venture investment is highly risky. But the model works because it sometimes offers impressive returns.
Indeed, VC-backed startups represent more than half of today's initial public offerings, as well as nearly 90% of all research and development expenditures at publicly traded companies. That makes them crucial for U.S. global competitiveness, and for driving the kind of creativity that changes the world.
Government policy has a big impact on how the process works. I've seen this first hand in my work with early-stage biotech firms thanks to legislative efforts to impose price caps on certain pharmaceuticals.
These proposals are all well-intentioned. Who wouldn't want cheaper medicines – or for other products to cost less, thanks to government intervention? But they misunderstood how early stage investment works – and why the handful of "big winners" make future, high-risk investments, and thus future life-changing discoveries, possible.
When VCs invest in a start-up developing a novel drug, they do so with the understanding that the odds are steep – and probably won't pay off. Countless novel chemical compounds created in the lab wash out before making it to the clinical stage. And among drug candidates that make it to clinical trials, about 92% fail.
This means that the rare, successful medicine needs a profit margin of more than 1,000% for life-science investors to simply to break even and pay for all the failures along the way. That sounds gratuitous to many of us, but that is simply the reality of the high-risk ventures that thousands of entrepreneurs undertake every year.
Venture capital is essential to American innovation and prosperity. Now that it's in the headlines, I hope that policymakers from both parties will begin to better understand the role it plays.
