Robustness In Sequential Investment Decisions

Long-range investment plans, for enlargement or decentralization particularly, often contain lots of different but interacting investments spaced over a number of years. Where there is appreciable uncertainty about external conditions in the future, it is possible that a “best” scheme based on the state of current knowledge will prove during the course of the intervening years to be less than good. One way of guarding from this risk is to ensure that the early (and for that reason irreversible) steps in the investment series keep open as many options of “good” schemes as possible. Concepts of robustness and balance are developed. Being a practical example of the use of the principles of a complete research study is shown, which handles the positioning of sites for new factories within an industrial extension program.

Seed firms differ from angels and VCs for the reason that they invest solely in the earliest phases-often when the business is still just a concept. Angels and even VC companies do this occasionally, however they also make investments at later levels. The problems will vary in the early stages. For example, in the first couple months a startup may completely redefine their idea. So seed investors usually care less about the idea than the people.

This is true of all venture funding but especially so in the seed stage. Like VCs, one of the advantages of seed companies is the advice they provide. But because seed companies operate within an earlier phase, they have to offer different kinds of advice. In the earliest phases, a whole great deal of the issues are technical, so seed firms should be able to help with technical as well as business problems.

Seed firms and angel investors generally want to invest in the initial phases of a startup, then hand them off to VC companies for the next round. Startups go from seed funding direct to acquisition Occasionally, however, and I expect this to be increasingly common. Google has been pursuing this route aggressively, and today Yahoo is too. Both compete directly with VCs now.

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And this is a good move. Why await further funding rounds to each port up a startup’s price? When a startup gets to the true point where VCs have sufficient information to invest in it, the acquirer must have enough information to buy it. More info, in fact; with their specialized depth, the acquirers should be better at picking winners than VCs. VC companies are like seed companies in that they’re actual companies, but they invest other’s money, and much larger amounts of it.

VC investments average several million dollars. So they have a tendency to come later in the life of the startup are harder to get, and include tougher terms. The word “venture capitalist” may also be used loosely for any venture buyer, but there is a sharpened difference between VCs and other investors: VC firms are arranged as money, much like hedge money or mutual money. The account managers, who are called “general partners,” get about 2% of the account annually as a management fee, plus about 20% of the fund’s benefits.

There is an extremely sharp dropoff in performance among VC companies, because in the VC business both failing and success are self-perpetuating. When an investment score spectacularly, as Google did for Kleiner and Sequoia, it generates a complete great deal of good promotion for the VCs. And several founders choose to take money from successful VC firms, because of the legitimacy it confers.