ELIAN D. ALVAREZ

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Value Investment Strategy in Venture Capital

Sep
08

Why succeed in every investment (or the majority of them) is more important than depending on the statistical model of “Spray and Pray”.

Starting a business is not easy. One has to invest a lot of effort, time, and brain in order to introduce an idea that can stand out and is of value to others. Every individual is naturally inclined toward investing in a startup with better prospects than a start-up that would not generate any value and likely to fail in the future. Every investor would want to see his investment a complete success, whether it be an investment in a single stock or a bucket full of stocks. Same is the case with Venture Capitalists; they wish every investment to be successful, and for the same reason, prefer to use value investment strategy over the statistical model of spray and pray.

Although, spray and pray has got a lot of media attention in the past few years, and the face behind it is none other than Dave McClure, the founder of 500 startups, yet, you cannot deny the fact that it is important to reasonably manage your risk.

Nurturing the Idea is as Important as Making Money Out of it

Nurturing the idea is as important as making money out of it and this is exactly what value investors believe in, because you won’t be able to make money out of it if it doesn’t grow well. Manu Kumar, the founder of K9 Ventures, said that most companies do not turn out to be a failure because of their investors, but despite their investors. This is why he doesn’t want the startups, he has invested in, to fail, and wants a reasonable success rate in his investments. He keeps an average of four or five companies in his portfolio and he wants each one of them to be a success. This is why he is very selective and prefer to go for the one with good prospects. He keeps his investment between $100k and $200k and screen companies down while expecting a much higher rate of success. He looks for appropriately priced deals and doesn’t touch anything that is five or higher.

Value Investing Strategy – Bridging the Gap between Investors’ Mindset and Founders’ Perception

Another famous name among the Venture Capitalists, Thomas Korte, said that they do everything in a scaled way, because the majority of the founders tend to take the funds they are offered in the seed stage. There are very few in the market who believe that their investors would take them through Series B and Series C, and their apprehensions are true to a certain extent. At one point, McClure said, “it is not that their portfolio has a high death rate, it’s just that there is a higher death rate out there.” Instead of aligning himself with the founder and an acquirer, he prefers to align with an investor and acquirer. So, if a company has a scalable impact, he makes a deal as soon as possible. It is not easy to bridge the gap between investors’ mindset and this commonly held belief of startups. However, Value investing strategy can contribute towards changing this mindset and bringing harmonization to achieve common goals.

Benefits of Value Investing

Potential to Make High Profits – As opposed to spray and pray strategy, value investing has a potential to make high profits, because value investors tend to invest in companies that are being offered at a discount price and sell them well above their intrinsic value by bringing their true value to light through solid research on a value stock, its peers, and the sector.

Avoid Exposure to High Risk – Investing in a few companies with good future prospects will not only enable the investor to focus on materializing the potential value, but also keep the overall cost to a minimum. The investor will not be dependent to succeed on that only company that make the revenue beside all the others have already failed.

 

Yes, there might be a lot of effort and hard work involved the value investment strategy to be implemented while choosing the startups for investments, but it is important to note that short term price fluctuations are not always a true depiction of the true value of an asset.

As Benjamin Graham, the founder of value investing and mentor of Warren Buffet, once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”