Beware the Big Spenders

There is a reason they call them "Vulture Capitalists"

I was speaking to a man who has some incredible new technology that has the potential to disrupt and perhaps even revolutionize his industry. Some big VC names have taken meetings with him, and they were encouraging him to do two things that he found more than a little puzzling.

First, they wanted him to ask for considerably more investment than he believes he needs in order to accomplish his objectives. Second, they wanted him to completely change course from offering what is naturally a professional service to what would be a consumer product.

The reason, of course, is that these potential “investors” have absolutely no interest in his actual business, nor is it their intent to help him achieve his objectives. All they’re looking for is a vehicle with sufficient sizzle to attract media attention, pump up the public interest in the vehicle, then cash in by getting out before the potemkin business inevitably collapses.

When I explained this to him, it suddenly all made sense. He had been going into these meetings under the false perception that they were genuinely interested in making money by helping him achieve his goals. But they weren’t, and they never were, their interest in him was solely because he was in possession of something that might help them achieve their goals.

Electronics Arts is known in the industry as the graveyard of game studios.

The same is often true of corporations that grow through acquiring the business of other, smaller companies. Funded by debt, they simply purchase the sales of other companies, with little interest in maintaining the value of the intellectual property they purchased. As long as they can keep the sales up long enough to service the debt, it’s a win for them.

A friend of mine worked at a tech company that was bought by a bigger tech company. That company was bought, and then the third company was bought by a two-billion-dollar conglomerate. It wasn’t long before the conglomerate got caught on the wrong side of the debt curve, and my friend spent the next two years travelling around the world, closing down companies that would have been perfectly sound on their own, but had made the mistake of selling out to the acquiring company.

The moral of the story: never trust the big money.