Former Blackstone analyst explains why venture capitalists exist

November 25
5:38 AM 2013

Andrew Schoen, a former analyst of the Structured Mergers & Acquisitions group of Blackstone Group said venture capitalists exist because no other investors are willing to take on such a high degree of risk with their money. In an interview with The Cornell Daily Sun, Schoen said venture capitalists believe that the high stakes game will give them better returns compared to typical investments.

Schoen, an incoming associate of venture capital firm New Enterprise Associates, one of the largest venture capital firms in the world, told the newspaper, "Typical debt investors aren't willing to take on that risk - it's not in their profile, and they don't have the expertise or knowledge to properly invest and realize those returns." He also added that despite the role played by venture capitalists in successful startups like Apple, Google and Microsoft, there are still a lot of people who don't understand the mechanics of the venture capital industry or the reason for its existence.

Schoen said venture capitalists take an active role in the operations of companies in their portfolio, acting as board members and helping them formulate strategies, among others. Passive venture capitals, on the other hand, don't do anything else beyond providing the funds needed by the young company.

He added, "Entrepreneurs seeking funding should decide if they want active or passive money and target venture capitalists accordingly. Active money isn't more expensive generally, but prestigious, brand name money from companies like Sequoia Capital, Accel Partners and New Enterprise Associates can be."

Although the venture capital industry is only made up of about 4,000 people, startups find it a challenge to get into the industry. Each year, domestic startups receive only an estimated USD 30 billion of venture-backed money. However, it is also the small size that makes it easy to establish connections and build one's reputation.

Schoen told The Cornell Daily Sun that venture capitalists like to support firms that are called "painkillers" or those companies that solve problems.

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