The Value of Private Venues, Part 2. VC's and Angels are Still Thinking Industrial Age

The world, VC's and Angels included, are still thinking Industrial Age. They are still thinking that ideas are 'a dime a dozen' and that investment capital is scarce. However, and this is beyond any doubt, 82% annual returns will bring far more money to the table than 30% returns.

Of equal importance are the much smaller equity requirements that allow many more people to sit at the table. If the ante is $1,000,000 very few people can sit there. If the ante is $10,000, there could easily be a hundred times more, perhaps a thousand times more people in the deal. Eventually a growing number of people will understand that this is not a few 'flash in the pan' private equity killings but rather a fundamental change in the financial relationships. If an aspiring entrepreneur lacks capital contribution or is not an experienced manager or the business plan has 'problems', rather than being a reason to throw the PPO in the trash, it will be viewed as a problem to be solved.

With 70%+ returns available, the cash will continue to flood to the private equity market. Now two things will happen. First, the competition for PPO's will drive up start-up share values. Second, because very large returns justify larger risks, the private equity market will become more risk tolerant in an effort to get their funds fully invested. What will ensue will be a kind of 'PPO bubble'. Whether it will become as extreme as the .com or real estate bubble is not yet clear. However, the real winners are clearly going to be those who get started before these two dynamics overcome the market.