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In 2007 there were 3,914 venture capital transactions, and of these, about 1,300 were new deals. There were probably more, but this is the number that was reported by the venture outfits that participate in the PricewaterhouseCoopers/ National Venture Capital Association MoneyTree survey, so it’s a good proxy for national activity.
Here’s what’s amazing about this number. How many times have you talked to a venture capitalist, or for that matter an investment banker or private equity investor, who said, “We’ll see about 2,000 deals this year and invest in perhaps five,”
“This suggests that last year’s nearly 1,300 first time financings required investors to look at nearly 3 million business plans.”
Now that’s picky.
But here’s what I don’t quite understand. How can professional investors look at nearly 3 million plans, and find so few successes? Just 130, if you use the common VC metric of one bona fide success for every 10 investments.
And while I don’t quite understand this phenomenon, I have a theory. The truth is, most professional investors know too much. And this knowledge is what keeps them from finding and investing in some incredible companies.
It’s more than just raw knowledge, and it’s more than just domain expertise that I’m referring to. Really, it’s an investor’s role in the domain. That is, if you are the go-to guy or gal for say, medical devices, you go to all the right conferences, every consulting and accounting firm with a medical device practice knows you, and all the board members and chief executives of medical device companies know you. And because of this the go-to guys get fed deals with all the same biases, and get input from all the same experts.
This doesn’t limit their success per se. It does however have them saying no to transactions that they should perhaps really be saying yes to.
And in a nutshell, this is how we approach private equity. Yes, we know quite a bit about banking and structured finance. But there’s a world of opportunity out there in a wide range of disciplines. We don’t feel we need to know everything there is to know about them. What we need to do is spot the entrepreneurs who can operate effectively in them, and have the guts and tenacity to see their vision through.
It’s a formula that works because it creates a partnership where two parties aren’t trying to run the same business. And it’s worth keeping in mind when the go to investors turn your business plan down flat.
Recently, I heard something that I had not heard in a long time: “It’s different this time.”
The person who said this was a guest commentator on CNBC. She was suggesting that she was seeing things in the sell-off that were never seen before.
An understatement perhaps.
Nonetheless I can’t but help think about the last time the phrase was in common parlance. Anyone? It was during the upside of the dot com bubble. As the market ran to meteoric heights (Nasdaq 5,000, can you imagine?) there were inevitable questions: ‘Isn’t this just a bubble that is bound to burst?’
“No,” the answer invariably came, “It’s different this time.” That’s because at the time, even some of the most intelligent investors and business people believed that the so-called New Economy was going to eat the shorts of the so-called Old Economy.
Well, it turned out not to be so different at all. In fact if there was anything different it was that boring old infrastructure and commodity companies – drillers, miners, steel manufacturers industrial equipment makers – went on a tear, and were the companies to be invested in after dot com bubble.
And so it’s different this time?
Not really. Most people will still pay their mortgages. They will put food on the table and gas in their car. They will grit their teeth and send their children off to college. Policemen will walk their beats and firemen will respond to calls. People will still buy homes and insurance policies and go shopping at Home Depot to buy some or all the things they need for the garage, basement and backyard. Businessmen and women will still go on business trips and walk through airports and stay at hotels and get rides in cabs. Our trading partners overseas will still buy our goods, and Americans will still buy products coming in from abroad.
There’s a good deal of evidence to suggest that all of this economic activity will occur at a much slower pace. However, there is absolutely no evidence to suggest that it will come to a screeching halt and stop altogether.
What might be different this time is that the markets around the world are behaving as if it will. And because so much of investor wealth is under some form of institutional management – mutual funds, pensions, managed accounts, hedge funds, funds of funds to name just a few – the market turmoil does provoke some question about just how bright the best and the brightest really are.
Though at a tremendous cost, the turmoil does one other thing too. It finally confirms the old adage: Those who do not learn from history are destined to repeat it.
