venturecapital

“Parking” : The Crucial Venture Capital Skill No One Wants to Talk About


john-doerr-tbi

John Doerr, Parking Attendant, Senior Partner at Kleiner Perkins Caufield Byers, and former Intel executive

What is parking?  It’s finding a good acquisition for a startup that didn’t do as well as you expected.

A local Okanagan company has recently been “parked,” with great fanfare as if it were a major success, but also to obfuscate the reality of the situation.  This reality needs to be openly discussed, but it is unlikely that it ever will be.  It is more important locally to loudly tout the company’s exit, primarily because there really has not been much else to celebrate here over the last few years.  Locally, there has also been naivete’ about multinational corporate investment in a local startup.. Nobody wants to talk much about that either, but the stark facts are there.

Canadian Business has just published an excellent story about Ryan Holmes and Hootsuite, BC’s most recent “gazelle” startup, and current wild speculation about a $1 Billion valuation for Hootsuite. More importantly, the CB article confronts the deeply imbedded challenges and problems with Canadian innovation, investment, and the hope that somehow Hootsuite might avoid the sorry long history of Canadian high tech companies.

Is HootSuite Canada’s Next Billion Dollar Tech Titan?

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Ryan Holmes, CEO of Hootsuite

Read more: http://www.canadianbusiness.com/technology-news/is-hootsuite-canadas-next-tech-titan/

Venture capital is described as a “hits business” and that’s true enough: a few exits produces the majority of the returns. 80% of VC profits comes from 2% of deals, a top European VC told the Business Insider.  Others have told me the same story.

But that’s only part of the story. A rule of thumb is that to be considered a good performer, a VC fund has to return three times its capital. But in many a VC fund, while 2X will come from the big hits, the third piece w ill come from smaller “long tail” exits, which individually might not make a big difference to the fund, but when added up can make or break it.  It is classic “marginal cost” thinking.   Said another way, better to come as close as possible to breaking even than to go bust. 

So “parking well” is a very important VC skill. And it comes down to the VC to park a company that hasn’t been performing as well as expected, because most often they’re the ones who have the industry relationships and the M&A experience, not the entrepreneurs. Cisco Systems has historically been the parking place for many unsuccessful startups. More recently, Google has enthusiastically joined the party, and their “parking” acquisitions have been labeled “acqui-hires.”  For Google, it has been a simple calculation.  Acquiring the target company, and tying up the key employees with a variety of incentives, versus the cost of an external hiring campaign, bonuses, relocation, and perhaps most importantly, excessive delays which negatively impact the acquirer’s competitive advantage.

VCs don’t like to talk about parking because they’d much rather talk about helping startups grow into huge blockbusters than mitigating losses on underperforming investments.

And Kleiner Perkins is known in the industry for being great at parking.

In a talk at Stanford, when talking about how VCs need to be good at finding exits for their companies, straight-talking VC Mark Suster phrased it thus: “Are you Kleiner? Can you get $400 million for ngmoco when it probably wasn’t worth it?,” adding jokingly: “Oh, maybe it was worth it.”

The point here isn’t to diss mobile gaming company ngmoco (your writer enjoyed many wasted hours on Rolando, one of their hit games), but it pivoted several times in search of a business model and when the acquisition happened, many eyebrows were raised at both the price and the acquirer, DeNA, a big Japanese gaming company that had done practically no US acquisitions to date.

In the case of Pelago, it probably works out for everyone. Groupon gets a great team who understands mobile, one of its big growth areas. The entrepreneurs get pre-IPO stock options into one of the hottest companies on Earth, and maybe even some cold hard cash if they weren’t too diluted and/or didn’t have too harsh liquidation preferences. Kleiner gets a small but valuable notch on its belt and helps talented entrepreneurs get a good save, who probably won’t forget that the next time they go raise money.

Parking is crucial for VCs, and Kleiner shows how it’s done.

Read more: http://www.businessinsider.com/whrrl-pelago-kleiner-perkins-2011-4#ixzz2HYMLaQUe

 

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  1. Don’t let ‘buyer’ steal the bacon | Entrepreneur | Financial Post « The Affluent Boomer™ - January 14, 2013

    [...] “Parking” : The Crucial Venture Capital Skill No One Wants to Talk About (mayo615.com) [...]

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