On the brink of chaos

19th November 2018  

by Marta Pradella, Legal & Portfolio Manager at U-Start

Probably the best way to start my first editorial is by quoting a Forbes’ article, which explains how the former CEO of a company, subsequently targeted by a large acquisition transaction, describes the differences between Private Equity and Venture Capital: “In Private Equity, you start with numbers and then you try to fit everything into the numbers. In Venture Capital, you start with people and then you try to figure out what numbers you can make.” And this is exactly the feeling, coming from the PE world, I had when I landed into the VC universe. VC is equally sophisticated, energic and stimulating but definitely a bit "messy". In my opinion, the causes of this disorder are intrinsic in Venture Capital (and in Venture Capitalists) DNA.

Firstly, one should consider that you deal with companies where rules and processes are still to be refined (and in some cases, even to be created). The company’s growth potential is still to be proved, and testing it is the final aim, which brings to life both the management of a start-up and those who believed in its project by investing. All the rest is important but secondary. There will be time to make sure everything is in order. What really counts is to develop a product or a service, which, in a world completely saturated of everything, is "disruptive".

I have also appreciated how, in the same article, the Venture Capital’s players are always described as "irrational actors", opposing to the ones of Private Equity which were named as "rational". Irrationality lies (on the management side) in throwing your own’s heart beyond the obstacle and in convincing others (the investors) to throw their heart too over the same obstacle, in a life phase of the business in which you are not still able to say how it will end. Surely you can make analyzes and projections, build models that allow you to have visibility on possible future cash flows, but you will never achieve certainty anyway. The role played by the start-up management team, the mix of soft and hard skills of its components and their ability to be irrational "just enough" (i.e. to be irrational but in an organized and "solid" way) is fundamental.

Sufficiently de-structured (which partly covers the "disordered" side and is more appropriate) are also due diligence processes and investment closings. A few documents and historical to see, hoping there were not lost in some meander of which there is no trace. Streamlined documentation and great savings in lawyers: no guarantee (not buying lever), no need to periodically verify the compliance by the target with financial covenants such as gearing, and no sense in demanding the release of endless pages of representations and warranties. a Few ceremonies and doodles.

In conclusion, the Venture Capital world seems to have an anarchic soul, made of chaos, flexibility and tendency to de-structuring, which is associated with the need to try to put some order. The kind of order that is indispensable when you have to think big. Is not on the brink of chaos that one finds the right equilibrium and, eventually, the creation?