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Private Funding’s Continuing Evolution

Around the Iron Edge VC offices, team members are often asked to explain what it is that we do.  The most common, and most accurate, response is that we are a “pre-IPO company”. You’ve heard us use that phrase many times in these weekly emails. On some occasions, we’ve been described as a Private Equity firm and as a Venture Capital fund. We even have “VC”, or “Venture Capital”, right there in our name. While both depictions are fundamentally correct, neither fits our business model as they are defined in the most widely held perceptions of the terms. We occupy a very small niche within the larger universe of investment management (more on that later), so our function hasn’t yet been assigned its own catchy two-word summary. For now, we’re content to use either of these alternatives to describe our vocation.

To clarify the differences, let’s dive into some pop culture references.

In the movie Wall Street, Gordon Gekko (played by Michael Douglas) is a “corporate raider”. When Bud Fox (Charlie Sheen) draws Gekko’s attention to Bluestar Airlines, a small aviation company that employs Fox’s father (Martin Sheen), Gekko sees an opportunity to seize control of the outfit, break it into pieces, and cash in on its assets including the pension plans. Gekko is clearly the film’s villain, and (SPOILER ALERT) he is wearing handcuffs by the end of the story. His nefarious intentions notwithstanding, Gekko’s gig is basically that of a private equity guy. Remember that this is a work of fiction, and in no way would we suggest that Private Equity is by nature a criminal enterprise, but the core concept on display here is otherwise a suitable example. A Private Equity firm seeks to acquire a privately held company, or even buy up enough shares of a publicly traded one to gain controlling interest, and then to varying degrees change, expand, or even sell off that company.

By contrast, a Venture Capital firm supplies the funding to boost the growth of startups. In several storylines of the HBO program Silicon Valley, the characters are seen attempting to convince wealthy investors to put money into Richard Hendricks (Thomas Middleditch)’s data compression company Pied Piper, or Jian-Yang (Jimmy O. Yang)’s octopus recipe app. The well-dressed, and often befuddled men and women at the other side of the table are Venture Capital investors. They spend their time listening to the pitches of underfunded entrepreneurs, and they determine which ones will prove to be worthy investments. They exchange working capital for equity ownership, and the high-risk investments occasionally result in staggering returns when the startup blossoms into the next Pinterest or Twitter. Just as Private Equity professionals are rarely heartless thugs like Gordon Gekko, Venture Capital people are almost never as funny as they are depicted on television.

A pre-IPO fund like Iron Edge VC may draw comparisons to Private Equity and to Venture Capital in that we, too, conduct all of our business within the realm of privately held companies and their funding. Unlike a PE firm, though, our aim is not to buy and control any business in its entirety. Unlike a traditional VC firm, we don’t fork over piles of cash to early-stage startups. Our focus is on individual investors. We favor the term “democratization”, in the sense that we provide financial opportunities to affluent individuals who aren’t quite at the same level as the cardigan-wearing folks on Silicon Valley. We offer our clients the newly availed freedom to invest alongside the big dogs.

Historically, a growing company would typically conduct an Initial Public Offering (IPO) five to seven years after its founding, granting ordinary investors ownership of shares with the potential to deliver tremendous returns. Under today’s market conditions, this scenario occurs with much less frequency. These companies have not disappeared, but their journey from conception to public availability has evolved and elongated, for better or for worse. Now, a much greater portion of a new business’s growth takes place while it’s still privately held, leaving a lot less opportunity for significant gains within the primary equities markets. What’s different today is that the VCs have become much savvier, and they hold onto their shares tightly until growth and value have reached a crescendo. Now, an IPO is most often conducted well after a company’s tenth birthday, and after most of the juice has been squeezed out. This delay in the public offering of shares has created issues for the investing public: people want access to leading-edge and innovative enterprises, but they can’t get their hands on any shares until they’ve been passed around to the point of exhaustion. These circumstances have given birth to a relatively new market for private equity, and Iron Edge VC is at the forefront of that market. Ownership interest in private companies has always furnished a privileged few with the potential for large returns in an asset class that has almost no correlation to the overall public markets.  Iron Edge’s mission, and one that we have accomplished countless times, is to level the playing field.

Last Tuesday, in an article for Forbes, Boxwood Partners Managing Partner Patrick Galleher wrote, “The 2010s were an incredible journey in the world of private equity. The amazing amount of capital flooding into the industry combined with the rise of secondary markets created an ecosystem uniquely situated for investment and growth. As more investors recognize the value and importance of the middle market, it’s difficult to see things going anywhere but up from here.” Granted, this refers to middle market businesses, or ones that have been around long enough to establish street cred but have not yet matured to the point of fitting the profile of the deals we arrange for our clients. Still, these middle market companies are often destined to become “unicorns” (meaning their valuation has surpassed $1 billion), and therefore the phenomenon Galleher describes is instructive to our purposes. The “investors” to whom he refers are deep-pocketed VC outfits, not you, and those investors don’t intend to let you get your taste of the good ones until the headwinds die down. We are here to change that.

We at Iron Edge VC are proud to have access to the shares of today’s most exciting private companies that have proven track records of impressive growth, but still have tremendous potential and are not yet available on the public markets. These opportunities include, but certainly aren’t limited to, the likes of Palantir, SoFi, 23andMe, Topgolf, AirBnB, Impossible Foods, and SpaceX. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.

As always, our inventory is available on a first come, first served basis.

5f6e0d464e388c4975685025 Paul Min

Paul Maguire

Founder And Managing Partner