Venture Capital Investment, in general, destroys the value of a company.
The VC model, more or less, goes like this:
- Identify a company with explosive growth potential
- Buy in on the ground floor to gain a big slice of equity at a low price
- The company uses that investment money to improve their market position
- The company is sold to a huge company for the cost of the VC investment plus a whole lot, which gives the VC company excellent returns
In reality, VC needs to achieve returns that are better than other, comparable investments. While there are inconsistencies in the market, a simple indexed fund can make about 10% year on year with (relatively) low risk and (relatively) low cost.
So it follows that VC needs an investment to make better than 10% year on year. Few companies can make anything like this as sustained growth. Moreover, the longer the investment continues before a sale the more money the VC requires to meet their target.
There are really only a few big companies who have the kind of funds to splash around on new technology acquisitions. If you can't catch the attention of Google, Microsoft, GM or the like, then a high value sale is very unlikely.
With a bit of thought, we can see that the business model of a company that has received a large VC investment is totally different to another company in the field. VC company isn't focused on good service, steady growth or customer satisfaction; they need the company to grow quickly and be very attractive for a buyout. Their product is actually the company itself, and the market is potential investors, not whatever widgets or services they sell to the public.
The reality is that VC adds a huge expense to any potential company sale. VC puts enormous pressure on the company to sell out in two or five years. There is huge, cutthroat competition to sell to the tech giants or industry leaders.
Profitable startups that have received VC investment and then gone on to sale and success, more or less, originate with YCombinator and nowhere else. Even then, almost all YCombinator alumni have been zombie companies. That is, companies that subsist on VC investment but do not have a successful business model.
If it interests you, I can discuss why VC almost universally makes shitty investments.
Examples of YCombinator Zombie Companies include Reddit and Twitch. In fact, almost everything on the top 50 list of YCombinator companies is a Zombie company. Perhaps AirBnB is profitable now? They were having huge issues with insurance, but that might be solved.
I'm happy to discuss this more if anyone cares. I spent literally a year of my life learning about VC investment and how to chase it before deciding it was mostly shit.
tldr: Venture Capital Investment is a shitty business model. Bankers and accountants, who know nothing about the technical risks of a venture, invest vast amounts of money chasing one-in-a-million long-shot because Facebook did it once. Almost all VC money is invested badly and written off as a loss.
Venture Capital Investment, in general, destroys the value of a company.
The VC model, more or less, goes like this:
- Identify a company with explosive growth potential
- Buy in on the ground floor to gain a big slice of equity at a low price
- The company uses that investment money to improve their market position
- The company is sold to a huge company for the cost of the VC investment plus a whole lot, which gives the VC company excellent returns
In reality, VC needs to achieve returns that are better than other, comparable investments. While there are inconsistencies in the market, a simple indexed fund can make about 10% year on year with (relatively) low risk and (relatively) low cost.
So it follows that VC needs an investment to make better than 10% year on year. Few companies can make anything like this as sustained growth. Moreover, the longer the investment continues before a sale the more money the VC requires to meet their target.
There are really only a few big companies who have the kind of funds to splash around on new technology acquisitions. If you can't catch the attention of Google, Microsoft, GM or the like, then a high value sale is very unlikely.
With a bit of thought, we can see that the business model of a company that has received a large VC investment is totally different to another company in the field. VC company isn't focused on good service, steady growth or customer satisfaction; they need the company to grow quickly and be very attractive for a buyout. Their product is actually the company itself, and the market is potential investors, not whatever widgets or services they sell to the public.
The reality is that VC adds a huge expense to any potential company sale. VC puts enormous pressure on the company to sell out in two or five years. There is huge, cutthroat competition to sell to the tech giants or industry leaders.
Profitable startups that have received VC investment and then gone on to sale and success, more or less, originate with YCombinator and nowhere else. Even then, almost all YCombinator alumni have been zombie companies. That is, companies that subsist on VC investment but do not have a successful business model.
If it interests you, I can discuss why VC almost universally makes shitty investments.
Examples of YCombinator Zombie Companies include Reddit and Twitch. In fact, almost everything on the top 50 list of YCombinator companies is a Zombie company. Perhaps AirBnB is profitable now? They were having huge issues with insurance, but that might be solved.
I'm happy to discuss this more if anyone cares. I spent literally a year of my life learning about VC investment and how to chase it before deciding it was mostly shit.
tldr: Venture Capital Investment is a shitty business model. Bankers and accountants, who no nothing about the technical risks of a venture invest vast amounts of money chasing one-in-a-million long-shot because Facebook did it once. Almost all VC money is invested badly and written off as a loss.