Built to sell(out) ?

I was at an event this month where a prominent, experienced investor was talking to the audience about small being beautiful. He was talking about fund size and investment size. His fund is smaller than $100MM. For this post, I’ll just call him “Joe”.

Joe went on to say that while starting companies has become more efficient, venture funds have been getting bigger. If companies need less money then why do VCs raise more money?

That’s a fair point except for a big thing in my experience. The cost to start a company in the “early days” is now inexpensive. But then the growth phase requires significant capital (infrastructure & staff). Look at todays great companies – facebook, twitter, yelp, gilt groupe, etc. They required modest capital to start and launch the product. Then they raised big big dollars to scale.

That’s a great model and works for investors and entrepreneurs alike. Venture isn’t dead – rather it’s being staged differently. The challenges for a small fund is to avoid significant dilution over time. The challenge for a big fund is the challenging IPO and M&A market. A firm needs big returns to make big funds work properly. Both fund sizes need to be aligned with the company and founder needs. I think everyone would agree on that.

But the big problem I had with Joe’s speech was when he said that because of the tough IPO market, they invest assuming the vast majority of his investments will be sold for $50-$200M.

I waited for the clarifier but it never came.

I think our job (entrepreneurs and investors) is to build & fund companies that can become important, viable and standalone companies. That’s why I don’t consider the question “who will buy this company” when I think about making an investment.

I want to believe that these companies can innovate, grow and choose to remain independent on their own.

And more standalone companies grows the entire market.