I am confused, why can't 1st round VC write off their dud and just sell their top performer for more money? are you saying that because it sounds nicer to fund investor?
Unfortunately, optics do matter - as much as money, if not more. As mentioned, selling at a loss compared to complete write-off make not make much of a difference financially but gets the VC to show an 'exit'. Also, in all likelihood - it won't be at a substantial loss; more like between 0.7-1.2x of the VC's original investment. The IRR would be a drag hence exit even at a loss but ideally close to the inv. value.
For every subsequent fundraise, the VCs hit-rate assumes more importance; significant no. of total write-offs are viewed negatively - his decision-making comes into question as to why did he held onto his bet if it wasn't clearly working. Simplifying some issues here - it isn't easy for the VCs to pass on duds but they have better leverage esp. in a scenario where founders/minority investors want to continue operating the company... can always bargain to take some capital out via secondaries say during bridge rounds via a new incoming investor...
If I'm a buyer and I want to buy 2 out of 10 companies that you own, but you want me to buy all 10, that is an added expenditure for me. I will have to do paperwork for those 8 companies, meet the founders, pay lawyers, bring them into my monitoring pipeline, etc.
I will essentially be paying more so that you have better optics. So I'll pay less to cover the added cost of acquisition and maintenance. Not a whole lot, but a bit for sure..
Keep in mind that these aren't listed companies where a buyer can just buy some stock and quietly let it sit in their portfolio. More companies = more work.
In a world of startups, how do we measure success? Perhaps it’s more about the exit strategy than the initial investment.
I am confused, why can't 1st round VC write off their dud and just sell their top performer for more money? are you saying that because it sounds nicer to fund investor?
Unfortunately, optics do matter - as much as money, if not more. As mentioned, selling at a loss compared to complete write-off make not make much of a difference financially but gets the VC to show an 'exit'. Also, in all likelihood - it won't be at a substantial loss; more like between 0.7-1.2x of the VC's original investment. The IRR would be a drag hence exit even at a loss but ideally close to the inv. value.
For every subsequent fundraise, the VCs hit-rate assumes more importance; significant no. of total write-offs are viewed negatively - his decision-making comes into question as to why did he held onto his bet if it wasn't clearly working. Simplifying some issues here - it isn't easy for the VCs to pass on duds but they have better leverage esp. in a scenario where founders/minority investors want to continue operating the company... can always bargain to take some capital out via secondaries say during bridge rounds via a new incoming investor...
Touché
Exactly, it seems odd they'll prefer better optics over more money
Will appreciate if you could add some reasoning on why the bundled offer will be on a discount!
If I'm a buyer and I want to buy 2 out of 10 companies that you own, but you want me to buy all 10, that is an added expenditure for me. I will have to do paperwork for those 8 companies, meet the founders, pay lawyers, bring them into my monitoring pipeline, etc.
I will essentially be paying more so that you have better optics. So I'll pay less to cover the added cost of acquisition and maintenance. Not a whole lot, but a bit for sure..
Keep in mind that these aren't listed companies where a buyer can just buy some stock and quietly let it sit in their portfolio. More companies = more work.
How can regular people go into investing in companies like this ?