Venture Capitalists: Buying High, Selling Low
from the not-the-greatest-strategy dept
We were a bit confused following the last dot com boom when various venture capitalist went into hiding when it came to new investments. Suddenly they said that since the market was bad, they wouldn't make any more investments. That didn't make much sense. After all, VCs are supposed to be investing for the long-haul -- usually in the range of five to seven (plus) years. What the market is doing today is rather meaningless. In fact, investing heavily during a downturn is often a good strategy. There are fewer competitors investing, you can invest at lower valuations (buy low!) and your investment has more time to mature against less competition. Yet, it looks like many venture capitalists are taking that same strategy again, with many deciding that it's time to hold off on doing new investments until the wider market appears to improve. The worst stat in the bunch is that VCs are particularly shying away from seed stage deals -- which are the cheapest deals that need the most time to mature anyway. That's effectively a strategy that says says they'll wait until it's more expensive to buy again. Venture capital is called risk capital for a reason. If VCs don't want to take risks, they shouldn't be in the business. About the only reason I can see why it might make sense for VCs to hold off investing is if they really think their own investors will default on capital calls -- meaning they really don't have as much money to invest as they thought they had. But, if that's the case, VCs are in bigger trouble anyway.
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Filed Under: risk, venture capital
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Reality check time...
The final straw in venture was the first billion dollar fund, at which time the VC's began making their money off of mgmt fees (2% of the fund every year for 10 years) rather than the actual returns of the fund.
Nowadays, almost every fund in the US is deeply negative and have no propspect of positive returns on their existing investments, so in the next 3 years venture will be a total wasteland. Most firms will end up shutting down.
This is a necessary clean-up of the sector. No different than Wall St. there are major changes ahead.
Of course, as an entrepreneur -- you won't see me shedding any tears over the arrogant, over-paid VCs. They've needed to be humbled for some time. Good riddance!
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Re: Reality check time...
I also agree that, most of them don't have money to invest even though, they pretend they do - they heave their own problems convincing their own investors to top up their funds.
Thanks
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Re:
Yeah, it means one of the dumbest investment strategies for someone investing risk capital over a long-term horizon.
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That's Because....
Capitalism is a deck of cards built on fraud.
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good points, although risk of follow on financing has gone up
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VC's
In many cases, this would require moving the founders to non-controlling rolls, as the personal properties needed to take a dream to prototype stage are not necessarily the best ones for running a company and adapting the product for what the market wants.
No plan of business survives contact with the market. You need to listen to your customers and potential customers. You may have gone out with widget X, but found that service Y which you used to support widget X is what the customers really found valuable. So you push service Y and listen to the customers. A year or two later, you may be making money with service Z and providing some other widgets, say widget gamma and omega.
The initial dreamer is frequently a true believer in widget X, after all, that is what they started the company to build. Hence the very common shoot-the-founder (but the founder gets to keep his stock share) behavior of VC's.
Even given the migration of VC's to the commercialization phases, it is my understanding that many of them are having capitalization problems with backers refusing to write checks. Hence the virtual shutdown.
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LMAO
LOL . . . . funny stuff!
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