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"Something I'm curious about: what if VCs worked like Berkshire Hathaway, reinvesting the cash thrown off by portfolio businesses but never selling their shares

"Something I'm curious about: what if VCs worked like Berkshire Hathaway, reinvesting the cash thrown off by portfolio businesses but never selling their shares?" How does cash get thrown off? Are you suggesting a "dividends off of profits" type of thing for growth companies? Aren't growth companies supposed to be reinvesting profits in their own growth? The problem with dividends is that they are really only good one the initial investment is liquid. So if Berkshire invests in a value company that throws off 3% dividends per quarter, that's great. But it's only great because they can get their cash out at any time. If a VC invests in a startup (say $1mm), how exciting is the prospect of 50% chance of failure, but a possible 3% quarterly dividend IF the company succeeds? With no actual market to sell their initial investment of $1mm? I can't make these numbers look attractive in my head.

nostrademons 19y ago
"Are you suggesting a "dividends off of profits" type of thing for growth companies? Aren't growth companies supposed to be reinvesting profits in their own growth?" Yeah, dividends-off-profits. The growth-company thing is an issue for the initial ramp-up phase: it'd probably be 10 years or so before the fund would start having additional capital to invest. But in the steady-state, older non-growing businesses throw off cash that can be reinvested in small growth businesses. "So if Berkshire invests in a value company that throws off 3% dividends per quarter, that's great. But it's only great because they can get their cash out at any time." Berkshire can't cash out of their value companies at any time. Their typical modus operandi is to buy 80% of a successful privately-held business, leaving the other 20% to the founders. The companies remain privately held, and their stock is not sold on the open market. The only way Berkshire can cash out is if they find another buyer, like a private equity firm or large conglomerate, to take the whole business off their hands at once. Also, dividends thrown off by private companies are often a lot more than 3% (public companies have such lousy dividends largely because shareholders lack bargaining power). Take See's Candy, one of Berkshire's early acquisitions (http://valueinvestingresource.blogspot.com/2008/03/sees-candy-magic-formula-stock-from.html http://valueinvestingresource.blogspot.com/2008/03/sees-cand...). They bought it in 1972 for $25M on earnings of $5M. Since then, See's has required capital infusions of $32M and spun off dividends of $1.35B. That's a dividend-to-profit ratio of 98%, in comparison to the normal Wall Street averages of 30-50%. Of course, few startup entrepreneurs would be willing to sell 80% of the company from the outset. Berkshire functions in reverse to VC firms, providing liquidity and multi-million-$ payouts to firms that have already gotten successful. But what if you reversed the terms? 10-20% of the equity for the chance to be your own boss? With the investor's dividend payouts protected by a legal clause in the investment documents, guaranteeing that after certain profitability and cash reserve milestones are met and growth has fallen below a certain amount, X% of the profits are distributed as dividends? This is all idle speculation, since I don't have money to put where my mouth is. But if I had a billion dollars or so, I'd definitely want to try it. Because if these assumptions are true: 1.) Startups are the most productive part of the economy 2.) A small initial investment would let many more people quit their day jobs and found startups 3.) Getting bought destroys most of the efficiency advantages of being a startup Then a logical consequence is that a firm that buys-and-holds small profit-oriented startups should do better than one that invests in large public companies. Besides, it'd be a cool financial hack.

nostrademons 19y ago

"Are you suggesting a "dividends off of profits" type of thing for growth companies? Aren't growth companies supposed to be reinvesting profits in their own growth?" Yeah, dividends-off-profits. The growth-company thing is an issue for the initial ramp-up phase: it'd probably be 10 years or so before the fund would start having additional capital to invest. But in the steady-state, older non-growing businesses throw off cash that can be reinvested in small growth businesses. "So if Berkshire invests in a value company that throws off 3% dividends per quarter, that's great. But it's only great because they can get their cash out at any time." Berkshire can't cash out of their value companies at any time. Their typical modus operandi is to buy 80% of a successful privately-held business, leaving the other 20% to the founders. The companies remain privately held, and their stock is not sold on the open market. The only way Berkshire can cash out is if they find another buyer, like a private equity firm or large conglomerate, to take the whole business off their hands at once. Also, dividends thrown off by private companies are often a lot more than 3% (public companies have such lousy dividends largely because shareholders lack bargaining power). Take See's Candy, one of Berkshire's early acquisitions (http://valueinvestingresource.blogspot.com/2008/03/sees-candy-magic-formula-stock-from.html http://valueinvestingresource.blogspot.com/2008/03/sees-cand...). They bought it in 1972 for $25M on earnings of $5M. Since then, See's has required capital infusions of $32M and spun off dividends of $1.35B. That's a dividend-to-profit ratio of 98%, in comparison to the normal Wall Street averages of 30-50%. Of course, few startup entrepreneurs would be willing to sell 80% of the company from the outset. Berkshire functions in reverse to VC firms, providing liquidity and multi-million-$ payouts to firms that have already gotten successful. But what if you reversed the terms? 10-20% of the equity for the chance to be your own boss? With the investor's dividend payouts protected by a legal clause in the investment documents, guaranteeing that after certain profitability and cash reserve milestones are met and growth has fallen below a certain amount, X% of the profits are distributed as dividends? This is all idle speculation, since I don't have money to put where my mouth is. But if I had a billion dollars or so, I'd definitely want to try it. Because if these assumptions are true: 1.) Startups are the most productive part of the economy 2.) A small initial investment would let many more people quit their day jobs and found startups 3.) Getting bought destroys most of the efficiency advantages of being a startup Then a logical consequence is that a firm that buys-and-holds small profit-oriented startups should do better than one that invests in large public companies. Besides, it'd be a cool financial hack.