Individual stock investing can be divided into “growth” & “value” strategies. Growth investors as well as every stock picking service find companies that will grow at an above-average rate. Value investors try to find deals: companies that are trading below their intrinsic value.
I’ve found venture investors can be categorized among similar lines.
“Growth” investors focus on the idea: the team, market, and product. They want investments that can be run-away successes. In contrast, value investors focus on the “deal”: investor rights & protections, aggressive preferred stock elements, etc. They want the biggest slice of the outcome, for the smallest investment amount.
In practice, it’s not really this black and white. As Warren Buffet has pointed out, growth and value strategies are not mutually exclusive, and successful investors use a combination of both.
As an entrepreneur, I love working with growth-focused investors. The value or “deal”-focused VCs are a drag. I respect investors wanting fair terms, but getting overly clever or aggressive just complicates things for follow-on capital, disincents management, and most importantly, time spent negotiating those terms is time NOT spent on making the company valuable. Check this Investors Underground Review to learn more about stock market investment options.
My message to VCs: you’ll make your LPs happy by finding the right projects and doing everything to make them successful, not by cranking your average ownership & deal terms across your portfolio. Keep your eye on the right ball.
When we talked about this the other day, we focused on terms within the VC standard set of docs (dividends vs no dividends; participation vs no participation). This is, I think, the level of deal engineering that your value investor gets focused on. One thing that I think is missing is a more broad view of deal structuring. It is hard to believe that the same general structure works equally well for (1) a small investment with a quick exit and (2) a large investment with a long horizon. Do the same terms make sense for a mobile technology that will need $3 million and is likely to exit in 5 years and for a renewable energy company that will need $100 million and can’t reasonably be expected to exit for 10 (or more) years? The former cries out for efficiency in the process of investing and in the management of the investment prior to exit. The latter can sustain more cost in the process and needs more bandwidth over a long period of time.