Tweet

The new paradigm for V.C. Investing

Written by: Carl Moore

Article Overview: Venture Capitalists and Private Equity firms alike insist that they only way to garner return on investment is to exit. If you’re investing in businesses that have real revenues and are, or soon will be, profitable and cash flow positive, why don’t you hold the company in a portfolio and take returns in the form of annual dividends? Depending on an exit for a return on your investment seems the highest risk kind of investment of all.

The new paradigm for V.C. Investing

Venture Capitalists and Private Equity firms alike insist that they only way to garner return on investment is to exit. If you’re investing in businesses that have real revenues and are, or soon will be, profitable and cash flow positive, why don’t you hold the company in a portfolio and take returns in the form of annual dividends? Depending on an exit for a return on your investment seems the highest risk kind of investment of all.
The most likely lifecycle for start-ups in order of likelihood:
(1) bankruptcy (far and away the usual exit),
(2) merger with another loser which prolongs the agony for all,
(3) sale,
(4) IPO (rare), and
(5) staying private forever.
in the mid 1990s IPO became the overwhelming focus where M&A used to be a much more important and likely exit for venture capital. At the same time pre-money valuations soared to new stratospheres. Remember when the term “sweat equity” had meaning? Like “I have toiled in this business with low or no pay to bring to the point where it is worthy of investment.” Instead of simply “I came up with an idea?”
The model of the 1990s and since is clearly dead. There will be those who resist the change, as evidenced by the current exuberance of the renewable energy investors, but soon enough reality will set it.
Their seems to be confusion between the Seed/Startup stage and the VC Stage.
• Seed/Startup stage provides initial funding and a lot of hand-holding and oversight. Example - there are construction loans and there are home mortgages - both serve the same Industry but each is completely distinct.
• The Venture Capital stage provides additional money for growth, introductions for business development/partnerships and team building assistance. The VC stage does not nurture as much as perform triage and identify the winners.
Once a company has achieved a level of traction (revenue, customer base, number of visitors, validation partners, etc.) then a Venture Capitalist will step in and provide Venture Capital stage assistance. One of the other reasons the smaller deals got more difficult to do was that as mutual and other investment funds got bigger, the small companies became impossible to invest in for the larger funds.
Companies successful in the Seed/Startup stage can flow into the Venture Capital stage. What model will work going forward? Smaller funds, more reasonable GP comp, smaller investments, lower pre-money valuations, focus on profitbality, and M&A as the exit.
The idea of a non-revenue company finding VC interest in the future with no foreseeable form of revenues in their future might be a candidate for an early acquisition vs. finding a white knight.
It seems possible that we actually might see a return of some smaller companies going public, on the other end of this economic crisis.
• Financial assets are only worth the present value of future cash flows.
• The value of every financial asset to its equity owners is the present value of free cash flow.
The problem with money chasing deals is that companies become over capitalized and can never catch up to value expectations. Venture capital doesn’t have a good track record in early stage. This does not work economically and it does not work operationally. The large firm early stage venture capital model is broken irreparably. The good news is that entrepreneurs have figured this out and are being much more efficient in their use of cash and finding different ways to advance the ball. It’s the VC industry that hasn’t adjusted, because it’s an industry that now depends upon getting large amounts of money under management, rather than having a fund size that is appropriate for the new realities of early stage venture investing.
It wouldn’t be surprising to see a few new small banks spring up in response to the demise of so many of the larger firms, some smaller funds being started and high growth companies looking to the public markets for capital again.
The cost of going public must come down, industry expectations of exorbitant returns must be adjusted, and Managed Funds must downsize. Returning to the times of less money invested in smaller and more cash efficient start-ups — makes some sense.
The paradigm has changed for the venture business. We can no longer realistically expect the same kinds of absolute returns that were achieved in the past through a quick turnaround from start-up to liquidity through an I.P.O. Rather, most of the companies that venture capitalists are funding today will find an exit through merger or acquisition.

Related Articles
  A Mental Model For VC Investments
  Observations of Changing Paradigms In The Workforce From Your Strategic Thinking Business Coach
  Business Networking - Old vs New Paradigm
  Education Based Marketing the New Sales Paradigm for Relationship Selling
  Forget the Recovery - It's a Transition

Article Tags: cash flow, new paradigm, private equity firms, return on investment, venture capitalists



Related Forum Posts
Re: Balancing Your Man & Business - This is SOOOO real. . Keeping first things first has kept the balance. First God, then everything else. When I start the day with prayer and meditation, I prioritize better. There are certain things I must do each day in business but I remember to schedule quality time with my mate AND I'm attentive too. I noticed when I don't put God first, I struggle to keep a balance and wonder how we'll add kids to the paradigm. When I do it right EVERYTHING falls into place. Besides that, we BOTH really ENJOY business. We're both self-employed. I like this thread. This has been BIG discussion with us of late. We've both gotten MUCH better. It's no small thing either.
Re: Invest in Real Estate or Stocks? - I want to reiterate what Barb said, be prepared for the long run. Investing in stocks and real estate myself, I highly recommend learning as much as you can about both. Find a great mentor in both areas as well if you can. But always, always, remember that you buy both and WAIT. There's no flipping around or you can lose alot! Jude
Re: HOW DO I STAND OUT FROM THE REST? - [quote="kellyandandrew":i8cu0zo4]With so many diferent onilne businesses to invest in, how do i stand out from the rest to attract people. I know there are some fantastic business minds out there and would appreciate a bit of advice![/quote:i8cu0zo4] Investing in any business is not an easy task in today's competitive market. I suggest before investing in any online business you should consider a lot of things in your mind. The things you should consider are like competitor's sale, online sale of your firm, how much visitors to site daily, what are profit rates and many more.
Book: Secrets of Six Figure Women - Secrets of Six Figure Women: Surprising Strategies to up your earning and change your life Barbara Stanny, 2002 Jacket: Maybe you've noticed - a subtle trend is gathering steam. Quietly and steadily, the number of women making six figures or more is increasing, and it continues to rise at a rate faster than for men. From entrepreneurs to corporate executives, from white collar executives to free lancers and part timers, women are forging careers with considerable financial success. Through extensive research and hundreds of interviews, including dialogs with more than 150 high earners whose annual incomes range from $100,000 to 7 million, Stanny discovered that ...they all had certain traits in common: 1) a profit motive 2) Audacity 3) REslience 4) Encouragement 5) Self-awareness 6) Non-attachment 7) Financial knowhow She amplifies on these in the book itself. Table of Contents Intro: Welcome to the era of the six-figure woman 1. The Queen in the Countinghouse 2. The Lowdown on low earners 3. Raising the bar 4. Strategy 1: The Declaration of Intention 5. Strategy 2: Letting go of the ledge 6. Strategy 3: Get in the Game 7. Strategy 4: Speak Up 8. Strategy 5: The Stretch 9. Strategy 6: Seek Support 10. Strategy 7: Obey the rules of money 11. Claiming our power Appendces: Resources and websites Tips for getting out of dent Investing Basics: Wealthbuilding 101
How Do I Start Franchise? - How do I start a franchise? Before one can start a franchise it is important that you do your homework and research your market thoroughly so that you know what you are getting into. To start a franchise, it is vital that you: First, investigate all the franchise opportunities available to you by visiting franchise trade shows or by contacting a franchise agent. Also talk to family, friends or relatives who have set up a franchise, or who know some one who has set up a franchise. It is good to get as much information as possible from fellow franchisees, as not all franchises are good investments Second, talk to franchise owners that are in a franchise similar in to the one you would like to invest in. Ask them if they are pleased they are with their decision, and how well their business is doing. Is it meeting their expectations? Also ask questions about the franchiser and how responsive it is. It is important to determine the integrity of the franchiser you are interested in doing business with. Third, consult any and all advisers. Have an accountant review the audited financial statements the franchiser presents you with, and bring in a lawyer to help review all the legal documents before you sing them. Fourth, thoroughly read the Uniform Franchise Offering Circular, which is a disclosure document in which the franchiser must release certain information such as, any and all administrative, criminal or civil litigation currently pending or completed against the franchiser involving allegations of fraud or misrepresentation. It is a recommendation of the FTC that all franchisers supply a UFOC to prospective franchisees. Also make sure to verify and confirm the UFOC facts. Do a background check on the history and experience of the franchise and its employees. Fifth, compare other franchises. Look for franchises similar to the one you are interested in investing in, and see how well they are managed and financed. Sixth, know and be fully aware of all the terms and conditions of the purchasing contract you are about to sign. Seventh, research as much as you can. Buying a franchise is a complex process and should be approached with caution. The more information you know, the better it is for you. Remember, only you can determine if owning a particular franchise is right for you. When starting a franchise it is key that you evaluate yourself and see if a franchise is the right business investment for you. Investing in a franchise should not be taken lightly as it can be a risky business. It is important that you consider all the facts before you make a decision to invest in a franchise.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Pure FUN of Learning & Using NLP

What Type of Business Should I Start?

Reverse Mentoring

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.