Inside the office of one of London’s top venture capital firms sits a framed quotation: “Show me the money”. In the current recession, these words have particular resonance with the way venture capital firms are operating.
I spent my summer at one of these venture capital (VC) firms. Like flies in search of sugar, companies of approach venture capital firms like the one I interned at. The companies seeking investment have dreams of stardom, but the VCs guarding the honey pot quash these dreams with ease, often rejecting tens of companies in a single day.
The Power Point presentations, PDF executive summaries and Word document business plans of prospective companies are picked over by the venture capitalists. Only a few merit discussion at round table meetings between the partners of the firm. Even fewer are eventually funded.
The variety of propositions that can come to a firm are astounding: a company in the Orient with a shady mafia feel seeks investment to roll out kiosks across China; another is the latest in a long line of firms seeking funding for yet another type of solar panel technology.
Most propositions are rejected outright because they're too early for a venture capital firm to get involved: there will be little market traction or the product may still be just a prototype. Whatever the reason for their rejection, few – if any – of these companies successfully answer the venture capitalists’ plea to “show me the money”.
Nevertheless, some companies are successful in winning investment: those that already have significant revenue and significant growth prospects. Technically, these type of investments many not be categorized as venture capital: they're often deemed “lower-mid-market private equity” or “growth equity”. However, with venture capitalists seeking lower risk exposure in the recessionary climate, they are gaining favor –at least at some European venture capital houses.
These are the companies that best answer the venture capitalists’ plea to “show me the money”. Sectors such as online gaming and online advertising feature heavily. For example, as the number of users on a games portal increase, the revenue generated from charging users for each game play also increases, but the costs for serving these extra users is almost insignificant; a successful games portal is like printing money.
But in seeking companies such as online games portals – companies that clearly show the money –venture capitalists face a different dynamic to that which they are used to. These companies do not necessarily need the investment from a venture capitalist as they are making healthy profits already. Why would they want to give away their business to someone else?
Calling up the CEO of one of these profitable super-growth companies and telling him that you’re a venture capitalist does not have the same sway that it does elsewhere. When a company is interested in raising investment, competition is fierce between various venture capital firms. Suddenly, these super-growth companies become the honey pot and the VCs become the flies seeking out the sugar.
Dinesh Ganesarajah is a Class of 2011 MBA Candidate at the Kellogg School of Management. Having slaved away in previous lives for software houses, online media giants and venture capitalists, he is now starting his own venture out of business school. He is British-Sri Lankan.