In venture capital investing, founders and management of Gladstone capital, David Gladstone and Laura Gladstone provide our practical guide to the nitty-gritty aspects of venture capital investing. Targeted at venture capitalist looking at making the right investments, they mentioned that investors should start out any conversation with a thorough due diligence, defined as a process of researching, examining, questioning, analyzing and assessing any investment opportunity that may be presented to the fund. In particular, they mentioned that they should press entrepreneurs for their financial figures and analyze the numbers with care and a sense of detail. Plus, they should aim at getting a 25% return as many startups and up going bankrupt. Plus, they should target entrepreneurs with good management skills developing a unique market advantage while entertaining how to cash out as a process nears completion. They mentioned three potential exits: acquisition, initial public offering and selling the shares back to the company they invested in.
They also discussed with much care the qualities that they’re looking for an entrepreneur. Being economists, achievement oriented, determined, resourceful, entrepreneurs may also be good judges of risks. But above all, they must see their investors as partners, largely because venture capital is much more like partnering then a kind of sporadic short-term collaboration. The authors also press investors to analyze the company and its management, its marketing and production and operations. Looking at management involves getting the organizational chart and understanding who reports to whom and the roles and responsibilities of each individual throughout the organization. It also involves understanding compensation. Plus, investors must develop a sense of workforce morale in order to assess the company’s culture and its willingness to form a team in the years to come. Looking at marketing involves understanding distribution channels, sales strategies, pricing, and also understanding customer satisfaction and what the company does when they’re confronted with an unhappy customer. Finally, looking at operations and productions means understanding every function from purchasing through delivery. This involves understanding where the plants are, their capacity, their ability to incorporate state-of-the-art technologies. Assessing the quality of output is also critical.
Getting to a deal
The authors discuss getting to a deal with entrepreneurs. This involves studying financial statements and how these may affect capital returns in the future. Plus, as cash is king, getting an understanding of current cash flows and future cash flows also proves crucial. Finally, based on the risk profile, investors may put a price on their capital and suggest an investment. Once a deal is done, authors recommend that investors monitor performance on a regular basis, raise both operational and financial questions and also come with suggestions as to how to improve the company’s way forward. Finally, investors should consider that any company that they decide to fund is their company as much as anyone else’s. In this sense, as the authors stress, investing is like partnering.
In their book entitled venture capital investing, founders and managers of Gladstone capital, David and Laura Gladstone provide advice to investors. They suggest that would-be investors consider funding startups as “partnering” or “marriage” rather than just a one-shot collaboration. They suggest that to engage in thorough due diligence to understand the potential targets in detail. This involves looking at the management culture, marketing, as well as operations and production.
In the end, after having looked at cash flows and potential earnings, the authors explain how to go about signing a deal with entrepreneurs. They must assess the risk involved in funding a startup and price their capital based on the determined risk. Once the deal is done, they suggest that investors see their chosen company as their own or at least partly so. They suggest that investors monitor performance on a regular basis, ask questions and provide recommendations. As the process nears completion, investors may consider three exit strategies: selling their shares to an acquirer, going for an initial public offering, and selling their shares back to the company.
While the authors explain in detail how to perform a due diligence, they failed to explain how they measure risk and how they can supervise risk on a day-to-day basis other than monitoring performance. Plus, the authors seem to be performing due diligence based on Michael Porter’s analysis of the value chain. But contemporary startups operate according to a diversity of business models, some of which have little to do with Michael Porter’s value chain as platform startups illustrate. So determining risks based on a Michael Porter value chain analysis seems only right for those startups that are developing products and hardware and perhaps less relevant for platforms be startups.