Private equity burning holes in pockets

February 22, 2007 —

I read a lot of VC blogs. Not because we’re interested in being on the receiving end of what a VC does, but because I think they’re smart people, and their blogs drip great advice.

Yesterday I noticed a post by Brad Feld regarding a ‘modest investment’ the Foundry Group made in a small web development firm. Brad (can I call you Brad?) mentioned that the company was cashflow positive but would benefit from a financial buffer to help them hire slightly ahead of demand.

It sounds like a great deal for both sides – congrats to each.

But it made me wonder how ep would look today if a ‘modest investment’ jumped in a DeLorean and drove back to see us 7 years ago. I think it would go a lot like the movie. Marty would inadvertently kiss his mom and the good things to come would fade out.

An investment early on would have distracted us. You don’t work the day + night + graveyard shifts if you’re happy with your place. And money has a way of making you happy with your place.

The case that spurred this writing also involves free advice from a group with skin in the game (hate that phrase) and an impressionable book of business, not to be confused with conflicts of interest. The non-financial components of this partnership will have the greater long-term effect.

But I roll back a bit even on this benefit as well.

We learned a huge amount by twisting / struggling a bit along the way. And I don’t think any amount of mentoring could replace that experience. I also think we built a stronger dedication to what we do based on having to walk uphill.

I won’t get into the financial implications of giving up vs keeping private equity because the question quickly becomes “what percentage of what would you be keeping?” But I will say this: each partner you involve along your path brings with them their own agendi (a word I can only assume is the plural version of agenda.) Your own agenda now has to take a number and wait in line. I wonder if Feed Rinse or Wellstream would have ever been had they been given a number.

If that impressionable book of business siphons off your own strategic efforts or leads you off your chosen path, the growth it brings is outward, not necessarily upward. In other words, it’s the difference between bigger and better. You can have both, but they’re different things.