The Discount and the Work

Back in the go-go days of the late 90s, whenever we were competing for a deal with another firm, I always used to ask the rest of the firm, “How much of a discount are we getting?”

It is my belief that most markets are efficient. Deals tend to get done at market prices. The way you extract a bigger return than your competition is with the “discount” and the “work”. And the two are related.

The discount is the amount below the market price that an entrepreneur is willing to take your money. According to this post on Martin Tobias’ blog, entrepreneurs are willing to take a 10-14% discount to lure top VCs into their deals. I agree with Martin that the name of the firm is only material to those who don’t know better. What really matters is the people in the firm, what they are like to work with, and if they’ll really work.

And that leads me to the second issue. I believe that the success of many deals, not all deals but many deals, is the way the investors and entrepreneurs work post-investment to make the Company succeed. That’s called “value add” by many in the business. I hate that term. It is so overused as to make it useless. The question that really matters is – Do the VCs roll up their sleeves and work for the Company? Not show up at Board meetings and pontificate about how great and how connected they are, but actually work. Work is never easy, always time consuming, and is likely to raise your golf score. But its the second component to producing above average returns.

And in the resulting feedback loop that is the venture capital market, those who really do the work end up getting the discount in the next deal they do.

That’s the way I see it.