Why Venture Capitalists Invest in Others' Companies Instead of Their Own Ideas

The primary goal of any investor is to make a profit, and venture capitalists (VCs) and angel investors are no exception. Their role is to fund innovative startups and projects, with the aim of seeing substantial returns on their investment. Yet, you might wonder, with all the resources and expertise, why would these investors choose to fund others' ideas rather than pursue their own?

The Role of VCs and Angel Investors

Venture capitalists and angel investors are professional investors who specialize in providing funding to startups and innovative companies. Their primary goal is not to generate returns from their own ideas, but to identify projects with high growth potential and fund them early on. This strategy allows them to achieve significant returns, typically in the range of 10 to 50 times their initial investment within a few years. By focusing on others' ideas, they can spread their risk and ensure portfolio diversity.

The Case of Rocket Internet

One notable exception to this rule is Rocket Internet, a German company known for funding copycat ideas. Unlike traditional VCs, Rocket Internet does not solely rely on its own ideas. Instead, it capitalizes on the success of existing startups and uses its expertise to replicate and scale these models. This approach allows Rocket Internet to leverage the market's success stories and avoid the ambiguity and uncertainty associated with investing in untested ideas.

However, Rocket Internet does not truly embody the traditional VC model. Most VCs, especially those without a direct exit history as a founder, do not have their own ideas to invest in. Instead, they serve as intermediaries, evaluating and funding promising projects identified by themselves or through various channels. Such an intermediary role is crucial for identifying undervalued companies with significant potential for growth.

The Role of Analysts

Much of the work done by VCs and angel investors involves detailed analysis and evaluation of market trends, industry developments, and startup potential. They are more akin to analysts than innovators or craftsmen. Their expertise lies in identifying market gaps, understanding customer needs, and assessing the competitive landscape. By leveraging their analytical skills, VCs can predict which startups are likely to succeed and provide the necessary capital to help them grow.

For VCs who have a background as founders, their experience can provide additional value. These individuals possess a deep understanding of the startup ecosystem and can offer invaluable insights during the investment process. However, even these individuals recognize the benefits of diversifying their portfolio by investing in others' ideas. It not only helps manage risk but also allows them to stay ahead of new trends and disruptions in the market.

The Importance of Diversification

Diversification is a crucial aspect of investment strategy. By investing in multiple projects and ideas, VCs can mitigate the risk of putting all their eggs in one basket. If one investment fails, the losses can be offset by gains from other successful startups. This diversification also enables VCs to tap into a wider range of industries and sectors, increasing the likelihood of finding high-growth opportunities.

Conclusion

In conclusion, venture capitalists and angel investors focus on funding others' ideas rather than their own because their primary objective is to maximize returns. By leveraging their analysis skills and understanding of the market, VCs can identify and fund the most promising startups, achieving significant growth and returns. This approach not only ensures portfolio diversification but also allows them to stay up-to-date with emerging trends and innovations in various industries.

While Rocket Internet stands as a unique example of a company investing in copycat ideas, it does not negate the broader trend of VCs and angel investors investing in others' projects. This strategy aligns with their core mission of driving innovation and generating substantial returns for their investors.