Sunday, March 9, 2008

Venture Capital - Moving up the Ladder

In an article earlier this month, I examined an interesting trend in venture capital based on data provided by PWCMoneyTree. In short, the data appears to indicate that venture capital is moving away from investments in the "Start-up/Seed stage" and more towards later stage companies - those companies in "Expansion" or "Later Stage."

A recent article by Joseph Bartlett on VC Experts seems to find similar observations, using Jensen's "Eclipse of the Public Corporation" for support to his argument. Bartlett refers to Rebecca Buckman's October 2007 article in The Wall Street Journal - "Venture Capital Goes Big" that discusses venture capital's increasing activity in the buyout arena of private equity.

While the private equity industry seemed to nicely partition itself in recent years - venture funds here, LBO/MBO firms there - a funny thing happened - the walls between participants in the private equity industry seem to have disintegrated to some degree. I referred to this in an article last summer based on Mark Boslet's article in the San Jose Mercury News.

The net result? Greater demand for LBO/MBO deals, causing valuations to rise and profit margins on these deals to fall, and in turn possibly contributing to private equity's troubles as the 2007 credit crunch hit the financial markets. Bartlett also discussess the increasing price of LBO activity due to this increased demand, more plainly referring to the "winner's curse" that haunts firms that overpay for acquisitions.

If this trends continues, the entrepreneur in her garage with next big thing will find that traditional venture funding may be more difficult to attain than ever, and start-up capital will likely to be better accessed through the increasing angel capital networks emerging throughout the country.



Anonymous said...

Hm... I'll keep this post in mind because I'm looking to run a business soon. I'm ready for the challenge, but I can still use all the help and advice I can get. I've been thinking about buying a business lately instead of starting one from scratch. Maybe a franchise? I'm not sure. Any suggestions? Advice? Thanks.

Scott Sambucci said...
This comment has been removed by the author.
Scott Sambucci said...

Hi May - thanks for your comment.

Like everything, there are pros and cons to owning a franchise. Depending on the franchise, there can some very high initial capital outlays (i.e. McDonald's at $1 million or more). The upside is that you have the back end support from corporate, but you'll be far more restricted on the marketing, sales, and operational side of your business. This is frequently a big topic of discussion in the Entrepreneurship classes that I teach.

There sometimes can be quite a difference between a "small business owner" and an "entrepreneur." If you fall into the category of individuals that really just wants to operate your own business, instead of starting from scratch and develop an idea, than purchasing an existing business or running a franchise location might be the right way to go. Here's an article that's a nice overview of franchising. It's from 1996 but still has some very relevant information to consider.

FindArticles - Choosing a franchise - includes related articles - Franchising: Special Guide

Anonymous said...

Thanks for you help and advice, Scott. I really appreciate it. I'm still doing more research, and I managed to find a potential business to buy on some site called I still have to ask more about it, but I hope something develops. I'll have to take your advice into account. Thanks again!