Venture Capital is a Mortgage

http://blog.yumbunny.com/2009/02/venture-capital-is-mortgage.html

by thorax • 17 years ago

5 7 17 years ago

blog.yumbunny.com

pg2• 17 years ago

Not quite. VC is equity funding, so they get a portion of the upside, whereas debt just gets the capital back plus interest. This means the VCs' interests are much more closely aligned with the founders'. They both get rich in the same way: from shares in the company becoming more valuable.

The empirical evidence suggests it's a net win for founders. How many tech companies IPO without taking VC? Zero, as far as I can tell.

jacquesm3• 17 years ago

I don't think IPO is the required hurdle to take before declaring a huge success and while there are some companies that have made it that far on their own it certainly isn't the norm.

One likely reason is that the IPO process itself costs a very large amount of money and is usually underwritten in part by large institutions.

Didn't cisco make it all the way to IPO without any outside investments ?

Edit: cisco took 2.5 M in capital from sequoia

pg2• 17 years ago

Cisco was funded by Sequoia.

thorax• 17 years ago

Well, it's not saying it's literally a mortgage-- more that it's yet another area that is often associated with people spending beyond their means.

Ideally, I think founders should skip the VC if they can grow/sustain things themselves or at least think hard about taking the loss of equity. Not every business model can make that work, though.

And, of course, not all companies want to go IPO, though I can understand that desire for a lot of people.

jacquesm3• 17 years ago

It very much depends on the competitors out there. VC capital can work like an arms race, if your competitor takes an infusion of capital and you do not then two things can happen:

- they manage to buy themselves the top spot leaving you in the dust

- they lose focus and think that because of the capital infusion that they sky is the limit and start doing stupid stuff.

In the second case you clearly are the winner, otherwise you have a real problem.

releasedatez• 17 years ago

Good analogy but I think one aspect of VC is missed in this piece and it's the VC's connection to the rest of the world. When a company gets funded by VC, it's growth potential increases because of the VC's network and connection. When you get a mortgage, the bank doesn't introduce you to a high bidding buyer.

Venture Capital is a Mortgage

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