Venture Capital investing – it is all binary . Either you hit the jackpot or bite the dust ! Thats what it has been ingrained! So the power law is in action !
Well , it need not run the above narrative. Early capital is provided to disrupt the space . And get traction on the new space . And you learn on the job . And then apply it in realtime & then look for growth .
And then comes the growth capital , wherein the bigger VC & PE firms enter and provide capital & also where early investors exit . This exit is provided by these late stage entrants typically at a discount to the price at which they entered.
Now what will you say to an entrepreneur who refuses to grow . Did all the tick marks – frugal , managing capital , eye on efficiency, optimum resource allocation, the works . Also managed Covid crisis effectively .
And post covid , simply refuses to grow. No new initiative , happy with the present state of affairs …
Pre- covid behaviour and approach towards business and post – covid approach is like a 360 degree uturn .
Calculated risk vs zero / negative risk taking .
And as a VC you invest for growth & profitability. And not for running a steady state business . This type of business you could have raised debt and carried on … But here there is a cost of capital and also cash outflow …
When you have equity , there is no cash outflow and is free capital ( ????)
The entity has profitability, but the revenue is stagnant post covid! ( flat 4 years ) …
Peers and new entrants are growing , allocating capital and also raising capital ….
And this does not give any discomfort to the entrepreneur .
And to a VC – capital stuck !
Growth in this case is warranted !!!
Author,
Brijesh Damodaran
