Note to self.
October 6th, 2009 | Published in Uncategorized
When most people invest in something we expect to see a return on our investment – with a house (prior to the market implosion) 25% return on investment over time, maybe if you were really lucky 100%, double your money, in stocks you might see 18% growth and think “well that was good going” I’m out, or you may not and hang in there thinking the favors of good fortune might shine the light on you a little longer.
Welcome to the world of VC’s – who for some reason consider their money is worth 15 to 20 times more than yours or mine. Sure they have more of it, or they’re supposed to , but at the end of the day, who’s money it is, is open to interpretation. When a VC looks to invest in you, your company your concept they, firstly want to see that the company is making money, then if they see potential for it to make a lot more money they might invest with the proviso that they see a return of 20 times over their investment. The logic behind this is: the scatter-gun approach, shoot a bunch of buckshot and hope that something hits the rabbit. So if they make 10 investments they hope to see a return on 1 of them, which in theory covers the losses on the other 9. And this, apparently is “savvy” business. Doesn’t appear savvy to me, your company, gets raked over the coals sothe VC cover their asses on 9 bad bets. So if your business works, you pay back the debt on 9 other ideas that didn’t work. Wow cool. And they want 20 times over? Awesome. Let me get some of that VC money right now!
A fantastic article this morning in the New York times illustrates quite clearly the concept of leveraged buy-outs by private equity firms, how to take a good profitable company, create debt that wasn’t there by borrowing against company assets , pay yourself in fancy dividends and stock options, and walk away a couple of years later, leaving (in this case) a 100 year old company staggering under a mountain of debt it can’t service, leave the 1000’s of people that worked there high and dry and go find another sucker down the road. What’s in a name? Private equity – it’s not private if the money is someone elses, is it? Sounds fancy. Equity would suggest something of value, in this case they might be better thought of as “public-debt”.
The thinking behind this type of buy-out is hardly what I’d consider genius, a genius (as defined here) requires a bunch of criteria in order to be considered genius, not the least of which is an enormous amount of dedication, hard work, tenacity and an idea, a brain, and something that’s not ordinary. Extraordinary. Borrowing money to buy something , and then borrowing more money against the thing you’ve bought is about as genius as the people left with their ass’s hanging out after leveraging equity in their already over-valued houses and wondering why the fore-closure proceedings have started. Hardly Einsteinian
Sure the argument is “well they made money”, o.k, but no one is an island, for every action there is a reaction and actions like this serve to destroy things rather than create things. I remember a story of these burglars in Thailand that “gas”a house through the air conditioning, knocking the inhabitants out, afterwards set about robbing the joint. o.k. they made money – but do you really want to hang out with them?
Perhaps the time for being blind-sided by pugalistic “money-guys” is over. Start small, work hard, question everything, don’t assume these people know any more than you. It takes two to tango Sherlock and plenty of people out there have done it.
It’s like Lou Reed said, “don’t believe none of what you hear”
Oh and just to back up my thoughts read this article on VC’s at Inc magazine
