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This wont change VC/PE at all. It fits right into the playbook. 1. Take on as much debt as possible. 2. Extract as much of that cash in the form of management

This wont change VC/PE at all. It fits right into the playbook. 1. Take on as much debt as possible. 2. Extract as much of that cash in the form of management fees as possible. 3. Flip to next phase within 3-5 years. If there is meat left on the bone, give it to another VC/PE. If not, try to IPO and leave the public and pensioners holding the bag. If its so garbage you can’t IPO then declare bankruptcy and move on to the next victim… erhm company. Yes I know PE and VC are different. However, they both follow this basic playbook with some nuances.

jasode 3y ago
>Yes I know PE and VC are different. However, they both follow this basic playbook No, they don't follow the same basic playbook and I think you misunderstand how different they actually are. VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue. PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens. VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".
- TrackerFF 3y ago
  But it should be mentioned that lot more (VC-funded) startups are being purchased by PE firms, compared to 10-20 years ago. Which makes one wonder - how "organic" are these companies? In the sense that they can stand on their own feet, without being funded by debt throughout their whole lives.
  - fakedang 3y ago
    Because the traditional PE model of debt-fuelled dividends is not feasible anymore. Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. After '08, my old firm (mega PE) went on a spree away from the PE play book, simply because they had the dry powder but not enough opportunities. Commercial and residential real estate, biotech, tech, etc.
    - JumpinJack_Cash 3y ago
      > > Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. But it should be the opposite no? PE firms acquires company, installs a new CEO and instructs them to knock on each and every bank lender for business loans taking advantage of the low interest rate environment. Or even mortgages if the company needs to expand its physical footprint. PE retains the equity and bank finances the business growth as per the intention of the Fed monetary policy 2008-2021...and maybe 2024-????
      - fakedang 3y ago
        After 08, the industry was flush with cash and acquisition valuations were lower, so they didn't really need to obtain cash from loans for the acquisitions (which is the LBO model, where you put less upfront cash from your AUM). The low interest rate environment could have been utilized by PEs like you mentioned, but there were other industries where the same play book could be used for much higher returns - like real estate, tech acquisitions, etc. Why bother with a leveraged buyout of a family owned business for 10% returns when a debt-fuelled real estate purchase will give you 25-30%?
- dehrmann 3y ago
  > VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners". They also attract similar types of investors and are similarly affected by interest rates.
jacquesm 3y ago
That's not how it works at all on average, though there are bad VC and bad PE funds. The most comparable item is that the VCs take on the risk that growth won't happen and the PE funds take on the risk that the future uncertainty is larger than their investment. But that's where the similarities stop, VCs are on a timetable, usually invest in far earlier stage companies and need to have a large portfolio to have a shot at breaking even or making money. PE is far lower risk, typically anything that returns more than real estate is already a candidate for acquisition and by the time a PE fund is interested the business has maxed out on most of its expected growth and as a result the amount of uncertainty in the deals is minimized. VCs can engage in 'buy and build' strategies, where they roll up multiple players in a market by doing one big investment in a company that they think has the best chance to become market leader and then to make that happy by funding this company to take over the competition. This doesn't always pan out either but when it does the pay-off is usually well worth the investment. PE and VC are sufficiently different that the LPs of those funds see them as different risk baskets with PE getting the lions share of the allocation because it is considered to be reasonably safe and VC looked at as lottery tickets.

jasode 3y ago

>Yes I know PE and VC are different. However, they both follow this basic playbook No, they don't follow the same basic playbook and I think you misunderstand how different they actually are. VCs do not have their portfolio companies take on debt to pay dividends back to VCs. That's because the typical startup companies that they invest in don't have positive cashflow to service any debt payments to a bank. The banks won't lend to startups because they don't have the cashflow to pay back the debt. The startups at the early stage of VC money don't have cashflow because they don't have meaningful revenue. PE's invest in mature companies instead of startups. PE's target established companies with real revenue and cashflow. That's where the debt playbook and financial manipulation happens. VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners".

TrackerFF 3y ago
But it should be mentioned that lot more (VC-funded) startups are being purchased by PE firms, compared to 10-20 years ago. Which makes one wonder - how "organic" are these companies? In the sense that they can stand on their own feet, without being funded by debt throughout their whole lives.
- fakedang 3y ago
  Because the traditional PE model of debt-fuelled dividends is not feasible anymore. Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. After '08, my old firm (mega PE) went on a spree away from the PE play book, simply because they had the dry powder but not enough opportunities. Commercial and residential real estate, biotech, tech, etc.
  - JumpinJack_Cash 3y ago
    > > Back in the day it was really feasible to issue debt on the cheap, since you'd find takers, but with equity outpacing debt in returns, that model became infeasible. But it should be the opposite no? PE firms acquires company, installs a new CEO and instructs them to knock on each and every bank lender for business loans taking advantage of the low interest rate environment. Or even mortgages if the company needs to expand its physical footprint. PE retains the equity and bank finances the business growth as per the intention of the Fed monetary policy 2008-2021...and maybe 2024-????
    - fakedang 3y ago
      After 08, the industry was flush with cash and acquisition valuations were lower, so they didn't really need to obtain cash from loans for the acquisitions (which is the LBO model, where you put less upfront cash from your AUM). The low interest rate environment could have been utilized by PEs like you mentioned, but there were other industries where the same play book could be used for much higher returns - like real estate, tech acquisitions, etc. Why bother with a leveraged buyout of a family owned business for 10% returns when a debt-fuelled real estate purchase will give you 25-30%?
dehrmann 3y ago
> VCs and PEs are the "same" in the sense that they both structured as funds with "limited partners". They also attract similar types of investors and are similarly affected by interest rates.

jacquesm 3y ago

That's not how it works at all on average, though there are bad VC and bad PE funds. The most comparable item is that the VCs take on the risk that growth won't happen and the PE funds take on the risk that the future uncertainty is larger than their investment. But that's where the similarities stop, VCs are on a timetable, usually invest in far earlier stage companies and need to have a large portfolio to have a shot at breaking even or making money. PE is far lower risk, typically anything that returns more than real estate is already a candidate for acquisition and by the time a PE fund is interested the business has maxed out on most of its expected growth and as a result the amount of uncertainty in the deals is minimized. VCs can engage in 'buy and build' strategies, where they roll up multiple players in a market by doing one big investment in a company that they think has the best chance to become market leader and then to make that happy by funding this company to take over the competition. This doesn't always pan out either but when it does the pay-off is usually well worth the investment. PE and VC are sufficiently different that the LPs of those funds see them as different risk baskets with PE getting the lions share of the allocation because it is considered to be reasonably safe and VC looked at as lottery tickets.