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On Wed, Dec 13, 2006 at 02:01:08PM +0000, Tom Potts wrote:
> On Tuesday 12 December 2006 19:36, paul sutton wrote:
> > http://www.conservatives.com/tile.do?def=news.show.article.page&obj_id=1303
>
> The boys with the money don't generally understand technology - and the ones
> that do know they are in trouble if it gets a hold - image starting a bank
> and making 0.5% on every transaction - even if you had to introduce ID cards
> to bring fraud down you'd still be making a killing. And then remember Laker
> Airways.
>
Sorry for the long post but I see so much nonsense in the newspapers
that I feel that I ought to put the other side. I also hope that the
information is relevant to someone on the list. (I have not been in the
Venture Cap business but I have friends who are / have been)
Some of the boys with money do understand technology, and increasingly
even understand opensource
eg
http://interviews.slashdot.org/article.pl?sid=06/10/13/1451242&from=rss
The big problem is that they will want to be convinced that they can
get a return on their money
Details of the return calculations for anyone interested:
Venture capitalists know that a percentage of their investments will
fail but they do not know which investment
If their required return is say 20% pa over all their investments and if
they are prepared to invest say £ 1,000 in 5 companies
Then over 5 years they are required to make 1000 * 1.2^5 ie £2,488. If
not they are sacked (they are also sacked if they do not make the
investments, so this is a catch-22 type world.)
If say 4 ex 5 of their companies does not make anything, then on a
average basis
- Average investment per company £1,000 / 5 = £200
- Total value required in 5 years = £2,488
- Value of successful company after 5 years = 2488 - (4*200) = £1,688
=> Target return for all companies on investment = 53% pa
If 4 of the companies go bust then the target rate of return is 65% pa
Now the problem is that:
- All of these companies either cannot or do not want to obtain
finance from banks in the form of loans (bank loans are much cheaper
but require interest paying regularly)
- If only one of your companies is going to make the required return,
then you will do everything in your power to make it succeed:
including changing the management if there is the chance that he or
she cannot make the company succeed
- If the company is doing so well, then competition is going to enter
the market really quickly
Therefore if someone wants this kind of money (and there is a LOT of it
about) then you need:
- A persuasive story for the product
- Capable managers (in the eyes of the venture capitalists)
- Capable employees - or a source of capable employees
- Potentially extremely high profits
- Manageable competition (you do not want a big company which already
knows about the product about to enter)
--
Henry
Thu Dec 14 08:49:51 GMT 2006
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