
The Underbelly of Venture Capital - sgt
https://www.linkedin.com/pulse/underbelly-venture-capital-thomas-brennan/
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jasode
_> because from an investment perspective, of course you want to be able to
buy the next big thing, but you shouldn't turn your nose up great earnings per
share and return on capital. However, that's not the case with venture capital
firms. Why is this?_

Because that's not the VC's specialization. That type of investing is what
Warren Buffet does. (E.g. the Graham-Dodd school of "value investing".)

\- Warren Buffet : cares about Earnings-Per-Share, free cash flow, dividends,
etc. This naturally points to mature and _healthy_ companies with quality
management like Coca-Cola and Geico. He doesn't flip companies. He's not a
turnaround specialist.

\- private equity funds like Blackstone / Carlisle Group : cares about things
like EBITDA to know if the company's financials can service a loan (because
they buy companies with loans.) Like Warren Buffet, they look at mature
companies instead of startups. However, unlike Warren Buffet, they are open to
investing in _distressed_ companies that need a management turnaround or some
capital investment. They will also look at companies with degraded bond
ratings and buy them at a discount and use it if necessary to take control of
a company. They will flip companies (hopefully for a higher price) after some
years of ownership.

\- hedge funds : they have all sorts of ways to invest in companies including
buying stock, playing with options like puts, calls, derivatives, etc. They
typically ignore startups. They can also ignore all companies and only play
around with commodities, currency exchanges, or real estate speculation.

\- Venture Capital : look at startups (even if they don't initially have
revenue or earnings-per-share) in hopes of a unicorn breakout. VCs don't do
management turnarounds, don't buy distressed debt, don't play with
puts/calls/derivatives. They specialize in "new ventures" i.e. startups.

It's all about specialization and investor's skill set. Warren Buffet admits
he doesn't know how to evaluate startups. Likewise, VCs are not in the "value
investing" game like Warren Buffet. A big pension fund like California CalPERS
will be an Limited Partner in all 4 of the above type of investment funds to
diversify.

The VCs are doing what the LPs that gave them money expect them to do: _invest
in startups_.

If the VCs were to look at EPS, they would no longer be VCs. The LPs don't
need VCs to do non-VC type of investing because the LPs can simply go to one
of the _other_ investment vehicles that _already specialize_ in analyzing EPS.
(E.g. the LPs can buy some of Warren Buffet's Berkshire Hathaway stock.)

~~~
tixocloud
This. VCs are just doing what they are expected to do.

