On the brink of chaos

19th November 2018  

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

The best way to start my first editorial on Venture Capital is probably 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 from the numbers and then you try to fit the whole story into the numbers. In Venture Capital, you start from the people and then you try to figure out what numbers you can make.” And this is exactly the feeling I had when, coming from the PE world, I landed into the VC universe. VC is equally sophisticated, energic and stimulating, but it definitely has a "chaotic” element to it. In my opinion, the origins of this chaos are intrinsic to Venture Capital’s (and written on Venture Capitalists’) DNA.

Firstly, one should consider that in VC you deal with companies in which rules and processes are still to be refined (and in some cases, even to be created). More often than not, the companies’ growth potential is still to be demonstrated, and it is exactly the immense effort and vision needed to realize this potential that brings to life both the management of a start-up and those who believe in it by investing. Everything else may be important, but it remains secondary. There will be time to make sure everything is in order. What really counts is to develop a "disruptive" product or service in a world completely saturated with everything.

I have also appreciated how, in the same article, the Venture Capital’s players are always described as "irrational actors", in opposition to Private Equity ones who are labelled "rational". Irrationality lies (on the management side) in throwing your own’s heart beyond the obstacle and in convincing others (the investors) to follow you in this ambitious endeavor, in a phase of the business in which you cannot already see how it will end. Sure, you can make analyses and projections or build financial models that allow you to have visibility on possible future cash flows, but you will never achieve certainty. 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.

Partially de-structured are also the due diligence processes and investment closings. A few documents and historical data to see, usually hoping that they were not lost in a forgotten drawer of a forgotten desk of which there is no trace. Streamlined documentation and large savings on lawyers’ fees: no guarantees (nor 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, constituted by flexibility and tendency to de-structuring, which is associated with the need to try to enforce some order. The kind of order that is indispensable when you have to think big. But, in the end, where else can you find genial creation if not on the brinck of chaos?