Venture Capitalists Should Avoid Buyouts

from the what-to-do-with-all-that-cash? dept

Venture capitalists sitting on way too much cash is an issue that keeps cropping up around here. It seems that some of the VCs have decided they can make use of that cash by trying to become buyout specialists as well – buying up distressed companies and turning them around. However, according to this article, they might want to think twice about that strategy. Buyouts and venture investing require two very different mindsets – and many people think it’s difficult to be good at both. Venture capitalists have to grow companies, and work well with people (even if many entrepreneurs think they’re being stabbed in the back). Buyout/turnaround firms need to come in, clean house, and get the most useful parts of the business back on track. It’s more of a hatchet job than a nurturing job. What I still don’t fully understand is why VCs don’t go back to the way they used to think: venture investing is a longer term investment. It used to take an average company seven years to go public, and venture funds run for 10 years, usually. So, it would make sense, with all that cash, to start investing on a five-to-seven year horizon. Unfortunately, too many VCs are still focused on the late 90s model of a two year horizon for an exit strategy.

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Comments on “Venture Capitalists Should Avoid Buyouts”

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Clouser says:

Venture Capital vs. Buyouts

I agree w/ Techdirt here, there are two completely different skillsets. One is more about identifying innovation and new technologies, and leading small teams into big companies. The other is about restructuring, cutting out non-core activities. Recently I met with a couple of VC’s semi-socially for I am swirling an idea around. Interestingly, both of them said they are not interested in startups now. I was very surprised and pressed them for as to why, citing the fact that historically it takes five to seven years to build a good company. After digging deep enough, they admitted to the fact that their shareholders, or, LP’s, would not be happy with the fact that they were investining in startups (more risk) vs. later staged buyouts (supposedly, better valuations and lower risk). Essentially, what it means is that these vc’s were not educating their shareholders/limited partners well enough, and were too scared to do elsewise. Following the heard is easier. That’s what most VC’s do. It does open the door for progressive funds to emerge, though.

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