Today’s Story on Venture Capital (It’ll Still Be True Tomorrow, Too)

My friend Tom Lawrence of The Equity Companies offered this answer to the question "Are investors fleeing traditional investments and looking for alternative places to stick their cash (like T-bills that pay nothing, but aren't going anywhere) and might they pour cash into VC funding? Or are they hoarding cash and not investing in any funds?":

Equity Capital Corp. provides growth capital to existing businesses. We call this Venture Capital. Some people believe Venture Capital is a description only of that capital used to start new enterprises.

Venture Capital is placed using a variety of instruments, common stock, warrants, debt, leases, supply chain financing, revenue financing, bonds, preferred stock, convertible bonds and stock, and a host of others too numerous and esoteric to mention.

Our firm has been providing this type of capital, regardless of the instrument or name, for nearly three decades. Markets have reacted to similar financial crises with some degree of consistency over this period.

There is always plenty of money for a really good deal in a capitalist society. There are just not as many good deals. The difference in many instances is the status of the economic climate.

There are exceptions. A car that runs on water would be great even though the economy is down. A car no one can afford that runs on water would not do well in such (or any) economy.

People invest to satisfy two primary psychological goals: (1) greed and
(2) fear. That is why markets work. For every trade these two elements take a side.

Most venture investors know that preservation of capital is more important than profits because it takes a lot of profits to pay back lost capital.  T-bills are the safest investment going. And, while they pay little, they don't lose your capital. Plus, even if all banks fail, the government won't because it can print money. T-bills are the safest preservation-of-capital play.

While this is true for most venture capitalists, there are notable exceptions and one is Warren Buffett's position in Goldman Sachs and GE. They had to sell equity positions cheap to get capital to satisfy regulators. The fear of being shut down by law was greater than the cost of diluting their stockholders' value.

Buffett is willing to take the risk that his investments will make money even though the economy is bad. He is buying an interest in the best companies in America. If he goes down, everyone goes down so in a sense he is betting on being profitable in any level of economy – or not being around. This business is not for the faint of heart.

So to answer your question about eschewing T-bills for something more risky to invest in, the answer is no we are not. We are investing money in businesses with a sound proposition that will make it in the economy of tomorrow as well as the one of today.

I think that's as good a description as you'll get about where the smart money is, and always will be. It's about risk management, not spreading the risk around. There's always money for a great idea that has real-world market value. Following a fulminating trend might get you a warehouse full of tulips.

That's my story, and I'm stickin' to it…

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