Reasons Not To Take VC Money
siliconvalleywatcher.com
siliconvalleywatcher.com
Why hasn't the market produced a VC variant that's content with this, and willing to earn back its investment over the course of long term dividends? My guess is, the numbers just plain don't work out. If VC's are 10% successful, each successful startup has to pay for 9 failures. A VC might be 25% successful choosing successful dividends-bearing companies, but (a) those won't make up for the remaining 65% of failures and (b) the amount of dividends needed would dilute profits, so the founders wouldn't be any better off than if they didn't take the VC money in the first place.
That would make the VC investment an inferior asset class compared to common stock in your favorite publicly traded company -- which is also designed to pay back over the long term, have steady growth, and by the way does not charge you two and twenty for the privilege of owning it. (2% of investment principal per year plus 20% of investment returns, which is what the money men for VCs get socked with.)
If providing the capital in venture capital doesn't have the chance for return on investment far in excess of both the market and the fee structure, there is no reason to engage in it.
cough It probably doesn't on average. cough
But another problem with dividends is that they'd be so easy to spoof. It would be easy to claim that a business was making no money while finding ways to funnel it to oneself. That's what record labels have traditionally done to musicians: they give them a percentage of the net, then arrange that the net is near zero.
This could be managed through stipulations in share class or additional contract with the investment.
The reason record companies get to screw musicians is because the musicians don't get to negotiate the contract.
The most common investors in the venture capital asset class are pension funds and university endowments. They have the least need for liquidity of any investors in the economy. They should be indifferent between selling the stock at market price and holding the stock forever. And they should be able to fund new rounds of startups from the cash flow of their overall portfolio.
It would be easy to claim that a business was making no money while finding ways to funnel it to oneself.
If investors of any company cannot prevent management from looting then there is a major problem. But investors can fire the management. Musicians have no such leverage.