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In a capitalist system, there are two ways to make money: labor and capital. Labor makes money from the production of some good or service resulting from the
by joshuaheard 13y ago
In a capitalist system, there are two ways to make money: labor and capital. Labor makes money from the production of some good or service resulting from the labor. In the case of a startup it is the founders' time, effort, and expertise in starting the company. Capital makes money off the use of the capital. In venture capital, the use of the capital (money) comes with a high risk, that the venture will not succeed. Therefore, there is a higher return. Nothing immoral about it.
- rayiner 13y agoNothing immoral about it, but it's not quite as rosy as you portray it to be. Most venture capitalists don't play with much of their own money, but rather play with the capital of their limited partners. As an industry, they provide pretty anemic returns to those limited partners. But almost all make a lot of money personally, because their standard arrangement with their limited partners is to charge a portion of the principal and a portion of the return as a fee. Why do limited partners keep taking those deals? Who knows? A combination of inertia, desperation, and bad judgment. Many big institutional pension funds are under tremendous pressure to yield very high returns and at the same time often aren't run by the best and brightest Wall Street has to offer. Also, as a startup founder, your investment of labor also comes with a high risk in the form of opportunity cost.
- joshuaheard 13y agoLimited partners keep putting money in because they understand that it is high risk, high reward. They can put a small amount in and be in on the next Twitter. Every investor should put a small portion of their investments into such an investment. Search "investment pyramid".