Venture Capitalist: Market Structure and Investment Profitability

This essay explores the optimal market structure for venture capitalists seeking high returns on their investments in start-up businesses. It analyzes various market structures, including monopoly, oligopoly, and monopolistic competition, to determine which offers the most favorable conditions for profitability. The analysis concludes that monopolistic competition, with its low entry barriers and opportunities for differentiation, presents the best prospects for new businesses to achieve significant profits in the short run. The essay references established works in microeconomics and corporate finance to support its arguments, emphasizing the importance of market structure in influencing the risk and potential profitability of venture capital investments. Desklib provides a platform to access this and similar solved assignments.

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Venture Capitalist and Market Structure
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Venture capitalists tend to provide capital to various start-up businesses. This is
usually done with the expectation of high profits which is not unreasonable considering the
fact that the risk associated with start-up companies is comparatively higher. However, the
profit realisation on the part of the venture capitalists would be contingent on a host of factors
which ought to be considered. While, there are other factors at play also, two crucial aspects
are the underlying structure and the competition that is prevalent in the industry. These two
factors are essential as the underlying risk and profitability of the business would be
dependent on these considerations (Damodaran, 2015).
For instance if the underlying market is one with high entry barriers such as
oligopoly, monopoly, then in such cases there would be high degree of competition from the
established players owing to which it becomes difficult for a new business to thrive in the
space as the established firms would not allow losing market share to a new business. Entry
would be comparatively more easier in markets with lower entry barriers such as
monopolistic competition and perfect competition. In case of markets resembling perfect
competition, it is very dififcult to earn profits in the long term and hence a venture capitalist
would not be interested in investing in such businesses. On the other hand, for businesses
which can differentiate from the competitors, the value proposition to the customers would be
clear and thereby a higher profitability can be expected in these markets (Nicholson &
Snyder, 2015).
In the above backdrop, it is imperative to analyse the various markets and determine
the market structure in which it is expected that highest returns are possible for a new
company. The first market structure to be considered is monopoly. Monopoly is a market
which is characterised by presence of very high entry barrier owing to which initially any
new business would face immense issues with entering the segment and hence would not
make any significant profits for a long time owing to the market power of the monopolist

firm. Clearly, such a market is not preferable for a new business and also the underlying
investors (Mankiw, Mankiw & Taylor, 2015). The next potential market could be oligopoly.
Here the entry barriers are lower than monopoly but still considerable. This market structure
has few players with sizable market share owing to which these firms would tend to lower
their prices and create other barriers making it difficult for a new company to enter and
thrive. As a result, in this market structure, the competition would be quite high and therefore
not preferred if the objective is high profits in a short time frame (Nicholson & Snyder,
2015).
The viable alternative would be monopolistic competition. This market structure tends
to offer low entry barriers making it easier for the firm to make an entry. Additionally, non-
price based competition is quite common amongst the players in this market structure. As a
result, a new business which can innovate and differentiate from the peer group can immense
significant amount of profits in the short run making this the preferable market structure
(Mankiw, Mankiw & Taylor, 2015).

References
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Mankiw, G.N., Mankiw, G.N. & Taylor, P. (2015) Microeconomics 5th ed. Sydney:Cengage
Learning.
Nicholson, W. & Snyder, C. (2015) Fundamentals of Microeconomics.11th ed. New York:
Cengage Learning.