The strategy of a venture capital company

At the peak of the dot-com boom, there was a much publicised national competition being run in the UK by a major venture capital company. The winners – who would be judged as having the best e-business proposition - would be financed with up to two million pounds (about 3 million dollars) of capital, with the venture capital company taking only twenty-five percent of the equity in return.

It sounded like the venture capital company was being altruistic and supportive of entrepreneurs – benefactors, who were helping young hopefuls to get a start. But, after working with financiers and investors in the City of London, my reaction to this competition were perhaps somewhat more cynical: I presumed they were running this competition to make a profit.

As venture capital companies make their money from capital gains rather than income, it is reasonable to assume that their primary interest is in what is going to look appealing in the documents for an IPO (Initial Public Offering) when they take the company to market. In this respect, convention holds that you need an experienced management team and a detailed business plan before offering equity to investors. Investors will expect this. This is what they will want to base their investment decisions upon.

It was only to be expected therefore that the judges were said to be looking for "strong management teams and realistic financial projections as well as products that have sustainable growth possibilities and the chance of competing in the global market place". The big question though was whether or not these requirements actually had any relevance to the eventual success of the company that would be financed. Strong management with business plans seemed to me to be a handicap rather than an asset in the volatile e-business environment and the idea of "realistic financial projections" totally ludicrous.

The competition reminded me of an experience I'd had a couple of years previous, when I'd received a telephone call from a venture capital company. They'd been told, by one of their associate companies, that I might be someone who could have some good e-business ideas - this was on the strength of two books I'd written on computer programming and intelligent systems.

I was invited to the venture capital company's offices for a discussion. When I arrived, I was somewhat surprised when the first thing the interviewer did was to have me sit through a computer presentation showing me how great their company was.

When it was finished, I started to explain my idea of a strategy to create an e-business but the interviewer wasn't interested. He wanted to know what fully developed products I had (none), what patents I had (none), what management structure I had (none), what my business plan was (vague). At that point, a secretary came over (probably at a pre arranged signal) and told the interviewer his next appointment was waiting for him.

However, during the interview, I'd managed to get in a few questions myself and discovered that the interviewer, who was a principle of the firm, had originally been a pop record producer. I'd asked how much he used the Internet and he'd told me he didn't have time to use it himself. Then I clicked. He wasn't interested in my ideas, he was only interested to know if I had anything that would look good in a prospectus for a flotation on the Stock Market.

The whole thing rung a bell with me. I'd had a similar experience when I'd applied for a patent on a method for mixing different types of secure information on a CD-ROM. Soon after the application had been applied for, I'd had a phone call from a company claiming they could market my patent for me.

Full of hope and excitement I went to their smart offices in central London and was surprised to find that they had no interest in the details or potential of my product whatsoever. All I got was a computer generated description of how good their company was and a hard sell to get me to part with seven hundred and fifty pounds for them to act as agents for me. It didn't take much figuring out that they weren't interested in selling my product at all: only in the fee that they could get out of me.

As a postscript to the interview I had with the venture capital company, it was only a year later that I read in the press that the company had grouped together a promising looking selection of start ups and gone to market with a valuation of three billion dollars. Out of curiosity, a year later I looked at the price of their shares after the dot com bubble had burst - they'd fallen to less than a tenth of their initial offer price.