I wrote this on Nov 25, 2021 here
I respect traditional Venture Capital (VC) firms but I hate their business models. How can you find a great startup, fund it and because you are required to return money to your limited partners (“the VC’s investors”), in years, you exit even before the company begins life?
Yes, you got in when the startup was worth $200m and it went public for $2 billion. You rejoice because within a 7-10 year span, you have made say 10x returns. But wait for just 10 more years, the same startup which IPO’d at $2 billion is now worth $30 billion. But you had since gone!
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What would have been bad if the VC had held its positions without any constraint of time? That way, instead of capturing value within $2 billion within a decade, it opens itself for value capture within $30 billion in the window of decades. And you allow LPs which desire to exit to go.
That is why I did not design Tekedia Capital as a typical VC firm. I did the math and discovered that more than 90% of VCs are leaving money on the table because of artificial constraints of time they created. They become operators at the center of the smiling curve instead of at the edges. For all the backers of Facebook or Tesla, the greatest winners are the investors who got in early when they went public. The VCs who exited within the first 10 years of this company life left value on the table.
(Some funds are structured to have expiration dates, typically 7-10 years which the fund must close and return money to limited partners.)
By removing time, Tekedia Capital investors will capture not just the initial opportunities but also latter day opportunities in our companies. In a cambrian moment, restricting boundless opportunities by time does not seem right. Tekedia Capital will play at both the center and the edges of smiling curves. And we want to ring the bell in a public market, unrestricted by time.
This is my destination: in the future, and because we have no constraints of time, as our startups mature, we can stay the course and capture compounding value by taking Tekedia Capital public. That seems like a great business model even for a business that focuses on analyzing business models from startups.
Read this piece from Fortune Datasheet:
As the Wall Street Journal reported on Thursday, a growing number of VC firms—including Accel, Lightspeed Venture Partners, Sequoia Capital, and Andreessen Horowitz—are buying shares of publicly traded companies.
For Accel and Lightspeed, it’s about re-investing in their portfolio companies. From a logic standpoint, it makes sense: Accel and Lightspeed have history with public companies like UiPath and GrubHub — they invested in these companies back when they were privately-held startups, and they have valuable insight into their businesses and operations. Buying their public stock is like curling up with a childhood stuffed animal when the hurricane hits.
Conclusion: VCs are evolving to capture more value at the edges of the smiling curve.
There are great Venture Capital firms in the world. But for many of them, their business model does not make sense (I wrote in Nov 2021). Yes, you got in when the startup was worth $200m, and it went public for $2 billion. You rejoice because within a 7-10 year span, you have made say 10x returns. But wait for just 10 more years, the same startup which IPO’d at $2 billion is now worth $30 billion. But you have since gone! What stops you holding your positions post-IPOs, while creating paths for limited partners for exit?
Today, it seems VCs have the memo: “As the Wall Street Journal reported on Thursday, a growing number of VC firms—including Accel, Lightspeed Venture Partners, Sequoia Capital, and Andreessen Horowitz—are buying shares of publicly traded companies. For Accel and Lightspeed, it’s about re-investing in their portfolio companies.”
At Tekedia Capital, we are structured in a way that we do not have to go and re-buy our publicly exited companies (when that happens) because of limited partners. We will prefer to hold the positions instead of what Accel is doing: sell today and later, go back and re-buy. The business model of VCs must evolve.
By removing time, Tekedia Capital investors will capture not just the initial opportunities but also latter day opportunities in our companies. In a cambrian moment, restricting boundless opportunities by time does not seem right. Tekedia Capital will play at both the center and the edges of smiling curves. And we want to ring the bell in a public market, unrestricted by time.
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There are many ways of understanding this reality, it is not a binary anyway. On the one hand, staying put and enjoying the compounding effect sounds great and capitalistic, but it can also limit spread of wealth and fortunes. The new companies at growth phase also need funds to grow bigger, and if VCs tie up funds while enjoying compounding effects, prosperity may never reach some countries and villages.
On the other hand, those ‘forced’ exits also entail that funds must be invested elsewhere, because limited partners won’t just withdraw their largesse and save in bank vaults, they have to be sent on another errands, but this time to new missionaries.
Sometimes how we view opportunities and dividends creates intractable inequalities, which we would end up spending decades accusing and defending who contributed more miseries and discontent; it is not every reward or profit we believe to be our own is actually ours. We must ensure that the good vibes and windfalls get to more people.
In all, balance is key, so that we don’t become too greedy and then forget that there are millions of players warming up to enter the pitch, they are waiting on that precious limited capital to start banging in their own goals!
I think Prof. Wasn’t actually disputing or prejudicing the position of early exit, or at best capturing of those growth values for LPs at the end of such early 7-years period. What I think he’s saying is that, why not sell off, liquidate part of your partnership (shareholding) of this now grown companies and have your LPs have some liquid cash to reinvest in other venture activities as you said. And then stay the course (maintaining your basic holding/equity) on the long haul to the stand the chance of capturing even more value post IPOs when such companies have become market behemoth of some sort. Play the short-term ‘exit’ (more like value liquidation) game, while also “strategically” positioning and staying for the bigger pies at the long run.
Thanks – that is my position: “Play the short-term ‘exit’ (more like value liquidation) game, while also “strategically” positioning and staying for the bigger pies at the long run.”