The formulas, tricks and trade secrets of Private Equity

Private Equity Innovation

Sample Chapter

Vivek Wadhwa recently said private equity inovation (or specifically venture capital innovation) is a myth. He said this in a recent TechCrunch article on the uselessness of venture capital.

Vivek, if you’re reading, let me tell you, you’re officially a marked man by the industry. Not so much for insulting everything VCs believe they bring to innovation, but for doing it with more than just a modicum of truth. (However, I also think you went a bit far with “VCs at best have little to no impact on these companies and at worst have a negative impact.”)

First up, I agree with Vivek that it’s important to make the distinction between Vinod Khosla et al., who can draw upon their own operational experience, and the rest, who can only draw on their experience investing in and servicing operational companies.

The fact is, experience matters. We all know this, but many of us rationalise it away. Would you go with the guy who founded Sun Microsystems or the guy who negotiates tough liquidation preference terms? Enough said, at least in my book .

So, to focus the discussion of private equity innovation a little more, I suspect Vivek has issue with the latter group, the group that signs checks, loves to draft legal agreements, and doesn’t understand the difference between a bit and a byte. On this, Vivek says:

My VC friends complain over drinks about a new breed of VCs who are crowding out the really smart and experienced. These gold digger VCs bear MBAs and have no real operational experience but plenty of taste for IPOs. (Interestingly, if they don’t have an MBA, they have a law degree. Go figure.)

My point in bringing up Vivek’s article is that I see a similar trend in private equity innovation: lawyers, consultants, bankers, MBAs, etc., taking over the industry with financial engineering and very little operational or strategic value-add. They will quote years of experience servicing businesses, but to me, that’s like a bookmaker advising a horse trainer on strategy. Sure, they may have a few tidbits of good info, but I’d hardly call a bookmaker an experienced horse trainer.

So, back to my previous argument: experience matters. If you haven’t ever founded a startup, are you absolutely the best person to be advising a startup? Likewise with private equity, if you’ve never run a business, are you absolutely the best person to be advising a mature business?

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