Sex And The Single Zillionaire

Posted on March 23, 2006
Filed Under Uncategorized |

When I read the title of this post I thought maybe I might want to read it in outside of my office, then into the first paragraph I realized that it was a play on Tom Perkin's new book and I realized that maybe Mr. Perkins was in fact gunning for his ex-wife on the literary charts. Only after I read the entire post did I realize that neither were true, what Sramana was writing about was the fundamental shift in venture capital that we are well underway with now.

I wrote a post a while back about angels investors and the changing economics of that slice of private equity as a second order effect of cheap infrastructure. In retrospect I realized that it's not so much that private equity is changing but rather the gulf that is often referred to as the "tweener stage" is widening and that is compressing the ends of the spectrum. Like in geology, when you compress something you increase the heat as a byproduct, and quite often you come out with something very different than what you started with.

This notion of build-to-flip has always been an anachronism to me, primarily because it's so irrational. If you architect something with the goal of it being acquired by a single company, or small group of companies, and that doesn't happen or in parallel several other ventures have the same plan and they execute better than you, well then you are kind of screwed. If you build a business where the outcome is a successful and self-sustaining business, then at least your destiny is in your own hands. However, it is clear that there are some very successful ventures that have been build with the sole purpose of being acquired at a young age, thereby enriching the founders and the limited number of investors to a degree that is disproportionate with later stage ventures where the common shareholders have been diluted through successive venture rounds.

I mentioned the "tweener stage" phenomena among startups. What this represents is the stage of a company's life where the easy fast growth is done but before the stage where a truly defensible business exists. In enterprise software that has been the point past $30m a year in revenue but less than, for the sake of the argument, $70 million. It's never easy to grow any startup, but the hard fact is that getting from $0-15m a year is a lot easier than going from $15-30, and after $30m it is a tough slog because you have to build out the infrastructure that much larger companies already have in place and is the ante for the game.

Acquirers quite often aren't interested in the tweener stage companies for reasons I don't fully understand, or accept, but exist nonetheless. What acquirers see in this stage of company is a business that is facing slowing growth rates, higher burn rates, and the potential for increased turbulence. Both the anecdotal and statistical evidence would suggest that acquirers like 'em very small or very big, and as an outgrowth of that companies in this stage look for merger partners in their quest to get through that tweener stage as quickly as possible.

In an effort to tie together these disjointed thoughts, where I am going with this is that private equity hasn't really changed all that much, but what has happened is that the "risk capital" investors that angel investors and "swing for the fence" venture investors represent have moved farther to one end of the spectrum, while the growth capital investors have moved farther to the other end. As a result of this movement, if I were a CEO of a startup I would be strategizing my fundraising through several rounds much more carefully than in years past, at least to the degree that entrepreneurs even can direct the financing side of their businesses.

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