Do VCs want to build companies, or create returns?

by Bradley Miller on August 26, 2009

I was reading Bill Gurley’s blog – and went through his most recent entry “What is Really Happening to the Venture Capital Industry.”  He concludes that the VC industry should shrink because of economic pressures and LP requirements. I’m not so sure that’s going to happen – not only is VC an exciting PE class, but VCs are theoretically stimulating the economy and driving growth. Two goals that have become more important to investors over the past year.  It’s interesting, although it also caused me to reflect on the dual nature of VCs – getting money out of LPs, and investing that money in start-ups in their sector, and this led to some cognitive dissonance for me.

At the heart of the matter is money – the bottom line – which is ultimately what drives venture capitalists.  Without making a positive return on their investments, their LPs dry up and the VC industry would inevitably shrink.  More often than not, the funds raised by VCs have a limited investing and return period – 5 to 7 years at most.  Sounds like a long time, but in reality, it’s not. With such demands, in such a short turn-around period, it’s little wonder why they’re also known as vulture capitalists from time to time – pluck a company at just the right level of ripeness to maximize the investor’s return.  Which, as the case may be – certainly in this slow economic time – the companies are forced to mature before the period when the company has become a solid presence.

In today’s hypercompetitive market place, this model becomes strained and, to a certain vantage point, it looks dated.  Many folks have blogged about this, and I don’t necessarily have a definitive conclusion here, but it made me think about being an entrepreneur and my interactions with VCs and angels.  Understanding that VCs are out for money, and not necessarily to build great companies, is key when you’re building your company and also preparing your pitch presentation and approach to VCs.  Most start-up how-to sites and books teach entrepreneurs to play in to the VC game, rather than to build a solid company.  For new entrepreneurs this is something to be aware of – most of my friend in the tech and life science industries want to make a difference – and not just make boatloads of money.  At the end of the day, it’s important to understand this VC dichotomy and how that can affect your young business.

{ 4 comments… read them below or add one }

WRM September 4, 2009 at 11:36 am

It’s all about the benjamins, baby.

admin September 4, 2009 at 5:48 pm

Agreed. But, let’s say you can develop a company that’s going to be a cash cow, but will require 10-12 years to fully develop. However VCs, because of the type of institutional money they take need 5-7 year turn around – therefore they’ll force you out prematurely to get their money out and you as a founder ultimately lose out. Both founders and VCs are about the benjamins, but from slightly different perspectives. Interesting problem for founders.

WRM September 8, 2009 at 12:19 pm

You just made the same statement as I did. It’s all about quick profits and managing risk of their money. All about the benjamins, baby.

Cash Cow or not in 10 years, they see the return in 5-7 and will not risk the additional amount of time in that orginization; or there is more money that can be made with another group rather than waiting for the the remaining 5-7. They will pull their money because they don’t care what happens after that initial 5-7 years. They have made their money and will move on to invest in other opportunities with the greatest return.

WRM September 8, 2009 at 12:30 pm

Anyone that borrows money or assets releases control to the proprietor of the capital that is at risk.

How the founder can leverage or counteract the ‘control’ is the challenge.

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