ARE VENTURE CAPITALISTS GREEDY?
That is what they say, some even call them vulture capitalists! Well, I’m sure some are and
some aren’t like in any business. But in he case of VC’s is there good reason to be “greedy”?
I was in the venture capital business for four years and learned a lot about it. Like most things I have
tried, it’s not as simple as it looks!
In a nutshell, here are some of the things I learned:
- Much due diligence is done before making any investment; management and market
for the product for example are delved into very deeply with the fundamental question being “does the product solve a problem the
- Many funds are specialized investing only in businesses in which they have expertise on staff, not only in the field but people who have started
- Start-up venture funds may invest in, say, only 10 business before they are fully invested. The surprising part is that about three go broke, three struggle, two to three become viable but not highly profitable, and the fund makes most of its money and return to partners on only two or so investments. The gains must offset the money lost if they are to be successful in total.
- While some think VC’s are greedy in terms of what they get in exchange for their investments, others would argue that they had better position themselves to get some very high returns because of the failure rate they need to overcome.
- Most startups require additional investment to keep them going when they grow. Some seem to “eat” money!
- Most investments are preferred to people who have “been there and done that”.
- Most of the proposals VC’s see assume they only need money to be successful!
With those concepts in mind I ask, should the USgovernment be in the VC business? Obviously Solyndra is the big example these days. Bailouts could also be considered along with other government investments in business.
The questions become:
- Can we afford to be in this risky business?
- Does the fed price investments so that we make enough money from one or two investments to offset the losses we sustain by others? Taxpayers don’t want to see their money
wasted; even if it provides a few jobs. Do we have people who understand the nuances of the business, like pricing, due diligence and business acumen?
- Do politics skew investment decisions? I doubt if anyone could convince me they don’t.
- I saw a few “hurry up” investments during my tenure where corners were cut in due diligence and other research on the investment. (Solyndra) more often than not, what we put our money in wasn’t what we thought it would be.
- From what I know, the taxpayers did make some return on the bailouts, that is a
good thing. I do not know the net gain or loss from bailouts or stimulus investments. I understand the “greater good” concept, but also see the US going broke and need to reconcile those two ideas. Or buy into the idea of “what would have happened if we didn’t bail those business our?” Now I am getting way over my pay grade!
The bottom line to all this is that I hear a lot of criticism of the financial industry from many people relating to greed, high prices/rates, and holding back on loans and investments. The
question should always be asked: why don’t private investors provide the equity? Some may hate or envy the successful investors but if they are successful it comes from knowing what they are doing.
I don’t think many people really understand most business investments, the losses and the need to make profits to keep going. Sure, some may be greedy, but maybe some
healthy greed is needed.