I asked David Teed with Diogenes Capital and the Temecula Group to comment on the fact that so much venture capital is flowing into the industry now. I noted that a number of companies that had received VC money had been purchased by either equity funds or major firms like BMW and Volkswagen. His response is in italics, with my input.
Venture capital flowing into the parking, transit and wayfinding tech space has been accelerating in recent years. Parking had been slower than other sectors to tech adoption and predictive technologies but is now catching up fast – encouraged by the obvious connections between the data generated (or potentially generated) by parking capacity and availability, smart city initiatives and ultimately the seeming utopia of autonomous vehicles.
The dynamic you refer to is the natural eco system for start-ups in the US.
- Entrepreneur founds a business based on a good idea. Usually starts with their own money, or funds through friends and family.
- Entrepreneur needs capital to fund the startup and early growth phase – attracts seed capital and early VC funds – for which he/she gives up equity in the company. VC companies are not in this for their health. They negotiate a percentage of ownership in exchange for the money. The Entrepreneur now becomes a partner, and not always a majority partner.
- Additional growth funding is then provided by later VC funds – more equity ownership is given up (by entrepreneur) The Entrepreneur is now a minority ownership but exercises operational control of the business by virtue of founder status and business leadership (for so long as he/she has the confidence of the investors). Founders are often sidelined in their own companies when the VC investors conclude that the start-up needs a business savvy leader rather than a technologist at the helm. After the third round of funding they inevitably a minority partner, meaning they no longer control the future of the company.
- As the business becomes more self-sustaining / profitable it is now attractive to private equity which can be used to fund next growth phase and/or acquisitions – more equity ownership is given up by entrepreneur. By now, the entrepreneur/founder finds that they have very little equity left percentage wise, but as you see below, they own a very small piece of a much larger pie.
- Several things have now happened – early investors would like to take their profits and private equity is looking for its own exit (given most PE funds have a 3 to 5 year hold period) VC money wants a quick turn around. They are used to getting in and getting out with a large profit.
- Also entrepreneur now owns a much smaller piece of the larger business (often by now a relatively small piece) and is questioning whether he should take his money out of this deal and start his own company (again). If the company was originally worth $1 million and the entrepreneur held 100% and is now worth $50million but the founder has only 10%, the value he would receive on a sale would be $5 million. Certainly more than the original $1million, even though he only held 10%.
- The most obvious take-out for each of these investors / entrepreneur, is the industry buyer who can pay more (for synergies) and drive scale of business to the next level – some entrepreneurs stay on for this next level while others take the money.
What has happened by the third step is that the entrepreneur, formerly the CEO, and fully in charge is now an employee answering to a board most likely appointed by the VC or PE fund. They may hang on in order to grow the company as much as possible, so their small percentage will be worth more.
Their ego may not allow them to work under these conditions, so they leave and use the money to start another company. Others may find that the additional funding puts them in a position to do as they will, perhaps run the R and D operation and let the company continue to grow and prosper as they do what they did when the company started, create, invent, and add to the overall welfare of the organization.
Does either of these sound like anyone you know?
JVH
