In a tech-enabled yet social media oriented world that is highly volatile and full of false positive disruptive innovation symptoms, investors can no longer be afford to conduct all the investment due diligence processes by themselves. Instead, Venture Capital partners and Private Equity portfolio managers with enormous tech investment exposure, in-depth industrial expertise and broad cross-industry professional network are now seizing the opportunity to position themselves as the headhunters for multinational conglomerates and leading tech giants in identifying potential high value-added acquisition targets through early investment and various startup incubator programs.
Besides, they are also actively shaping a more competitive industry landscape that would eventually benefit the general public by providing necessary fundings and corporate strategy guidance to promising startups to innovate their products and scale their operations from the lower end of the market. According to the Disruptive Innovation theory introduced by Professor Clayton M. Christensen, disruptive innovations typically start when the new entrants with affordable products and different business models operate from the low end of the market (and being ignored by the incumbents due to their insignificant market share and profit margin). After gaining sufficient foothold, these companies start to invest more resources in fine-tuning their products, business strategies and operations and gradually move up the value chain. Finally, they reach a matured stage with scalable business models and profitable innovative products and replace the incumbents.
Nevertheless, the end goal of any businesses including angel investors is to be profitable in the end of the projected investment life cycle rather than to be merely charitable. Therefore, a concrete exit strategy is critical for the investors to stay grounded and sustainable in pursuing their long term corporate visions and missions.
In my opinion, the exit strategy of Venture Capital companies and Private Equity firms is no longer heavily relying on Public IPO following the shrinking pool of public companies traded on various stock exchanges in the recent years [1]. Conversely, they are providing intensive training on portfolio knowledge, business trends, technology ecosystems, engineering capability, operational efficiency, marketing, sales, fund raising and pitching techniques to the management teams of their portfolio companies.
They are betting on their portfolio companies to develop scalable technology ecosystems and differentiated product offerings in order to close more rounds of fundings and thereby boost the company valuation, or to be acquired by leading industry giants with skyrocketing price.
Indeed, many of the Venture Capital companies and Private Equity firms are the leading players in the consulting industry of their respective fields. VC firm partners and portfolio managers are actively offering consulting services to the potential buyers of the investment portfolio companies and often referring them to the business solutions rendered by their portfolio companies when the chances are right. This cross-selling approach might have increased the success rate of their exit strategy.
One should also note that in modern economics, the wealth of capitalists is not only preserved in the form of cash, government bonds, or equities in the stock market. Instead, capitalists also opt to store their wealth through the holding of promising tech startups and privately held large scale tech companies with high and stable valuation [2]. In this regard, Venture Capital companies and Private Equity firms have become the professional vehicles of capitalists to acquire and store wealth.
References
[1] Bloomberg: Where Have All the Public Companies Gone?
https://www.bloomberg.com/opinion/articles/2018-04-09/where-have-all-the-u-s-public-companies-gone
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| Diagram courtesy of Bloomberg Opinion |
http://podtail.com/podcast/the-james-altucher-show/ep-43-peter-thiel-what-the-future-looks-like/
For the concept of concentrating wealth on Venture Capitals and Startups that are far away from cash and credit, please refer to Peter Thiel's explanation in this podcast between minute 53:11 and minute 56:11.
[Transcript] Peter Thiel: The two big trends that I see in this decade are a war on cash and a war on credit.
The war on cash involves these negative interest rate, zero percent, nominal rates, negative real rates, the quantitative easing - all the central banks printing money.
The war on credit involves not allowing the banks to lend all this money out that's being printed, tighten regulation about bubble free stuff - Dodd–Frank (Act) in the US.
The war on cash and the war on credit at the first proximation cancel each other out.
So the government is printing a lot of money and is prohibiting the banks from lending it out.
But the nuanced thing is that I think you want to be far from cash and far from credit, because that is what war has declared on and I think the war will go on for a long time.
That's why I like venture capital. It's not the asset class for everybody. Personally I have probably 80 percent of my net worth is in venture capitals, startups, things of that sort.
Because it's very far from cash and it's very far from credit. It's not levered and it's not cash like. [/Transcript]
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