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The following is an article, titled ‘Venture capitalists need to hit home runs‘, that appeared at Financial Post.

eProf was asked: “What’s been your favourite JOLT session/workshop so far and why?”

So far, eProf’s favourite workshop is Randy Smerick’s take on venture capital. His point was VCs hit home runs. They have to if they want to give their limited partners a reasonable yield on their investment.

The venture capital industry in technology is extremely high risk, especially at the early stage. This means the vast majority of companies in a VC’s portfolio do not provide adequate returns. They fizzle out; they go bankrupt.

In this environment, the only way for VC funds to raise money, get a return and provide their LPs with an exit, is to swing for the fences. VCs are not interested in your company’s valuation growing at a GAGR of 20%. They need 10, 20 and 30 baggers (multiples of their investment). If the star companies in a VC’s portfolio returned 20%, the fund would face wholesale redemptions and dry up. In other words, venture capitalists need their investment in your company to make up for the underachievers in the fund.

This has big implications for entrepreneurs. VCs are not interested in your lifestyle business. They have two things on their minds: IPO, or initial public offering, and acquisition. It doesn’t make them vultures, it makes them clean-up hitters.

This is fine by us. As far as we are concerned, eProf’s interests are aligned with venture models. Go big or go home.

Well of course they need to ‘hit home runs’, but so does any fund manager and after all that in essence is all that venture capitalists are ‘fund managers’.  Yes, the investment asset class we invest into is nuanced, but which isn’t?

This is why we, Elcano Capital, have tried to move away from the phrase venture capital (Elcano uses the term Managed Early Stage Investment and venture capital only for general ease of common understanding), not because we have any issue with what that actually means but because its meaning is actually skewed to a single model of investment management, whereas we do not see the need or the benefit of being restricted to such a model.

We see our job as being ‘fund managers’ investing into ‘early stage’ equities for the purpose of maximising returns for our investors.  Everything else necessary to achieve this should not be assumed just from existing models.  It is our job to keep searching for the means to maximise investment return.

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