The venture capital (VC) industry takes high risks for high returns. Now, a new type of VC fund, Juxtapose, expects to earn high returns like VCs but take low risks like private-equity (PE) funds. Is this possible?
Timing of the investment. VCs invest after Aha. They wait for evidence of home-run potential in the opportunity, the strategy, or the leadership. If they see potential in the opportunity or strategy but not in the leadership, VCs replace the leader. Juxtapose expects to invest at the idea stage. Definitely not lower risk.
Unicorn opportunities. VCs invest in emerging industries or emerging trends. Nearly every one of the unicorn-entrepreneurs (UE) built their ventures in emerging or fragmented industries by developing dominant companies – examples include Fastenal and Waste Management. Juxtapose seems to be following the same strategy as UEs.
Venture risk. Most investors and analysts think of risk based on the stage of the venture. Early-stage ventures, especially before Aha, are considered to have higher risk of failure than later-stage companies with established businesses and cash flow. Early-stage VCs take high risks by investing at the earlier stage. PE funds take low risks by investing in later-stage companies with established businesses and cash flow patterns. They acquire these companies at a multiple of cash flow and try to grow the cash flow through improvements and acquisitions. Juxtapose expects to take low risks in startups by combining the roles of the founding entrepreneur and the VC fund. All entrepreneurs have confidence in their abilities – otherwise they would not start their ventures. But just because a VC fund has confidence in its own analysis of the industry and ability to build a unicorn does not mean that it has changed the stage. Maybe the Juxtapose people are more talented than the average VC. Or is this misplaced self-confidence?
The odds. VCs fail on 80 out of 100 investments even though they invest after Aha. Only one out of 100 is a home-run unicorn that pays for the 80 failures. Will Juxtapose’s founders create multiple unicorns with a few investments and disrupt the VC industry? That remains to be seen, but it is worth noting that there are very few entrepreneurs who have built more than one unicorn. That’s why unicorn-entrepreneurs like Jobs and Musk are so unique. If Juxtapose succeeds, it would suggest a new way to build unicorns.
Real unicorn businesses or unicorn-valued ventures. Is Juxtapose building unicorn-valued ventures or real unicorns? If the former, the frothiness of the market will have a huge impact on their success. As Warren Buffett suggested, let’s wait for the tide to recede.
Time frame. Unicorn-entrepreneurs often pace their ventures at the start to gain traction with limited capital, and to grow with emerging industries. Normally emerging industries take 3 to 11 years to emerge. VCs like to invest after Aha and then pour coal on a fire to hasten the growth, especially since VC limited partnerships usually have a lifespan of 10 years. Can Juxtapose build a unicorn from idea to exit within the time frames of a regular VC fund?
Fund’s financial strategy for its ventures? The suggestion is that, on the one hand Juxtapose is not seeking profits for its ventures, and on the other, that it does not want to lose money. So does that mean that the ventures are growing at the rate of their cash flow and breaking even? This was the strategy of most of the finance-smart unicorn entrepreneurs I interviewed or studied. But to achieve that, the unicorn-entrepreneurs needed to combine the right business and finance skills to grow more with less. Also, if the venture is growing at the rate of their cash flow, why are the millions needed? Unicorn-entrepreneurs grew at the rate where they did not lose money until Aha. After Aha, they could attract more financing at lower cost and without demands for VC control. That’s when a few unicorn-entrepreneurs accepted VC but stayed in control. Most continued to grow without VC. It is unclear if Juxtapose is following the Unicorn-Entrepreneur strategy, the VC strategy, or the PE strategy.
Direct competitors. An important fact to note is that unicorn-entrepreneurs who faced VC-funded direct competitors usually had great entrepreneurial leaders combined with VC. Or they had great business models, such as Dell’s, combined with great entrepreneurial leaders. It is unclear whether Juxtapose’s strategy is to compete against VC-funded ventures with unicorn-entrepreneurs, or against obsolete corporations, or in fragmented industries.
Revolutionary innovation or evolutionary innovation? Nearly all the VC-funded unicorns have been in emerging industries created by revolutionary innovations. This includes unicorns in emerging industries from personal computers to the Internet. These emerging industries allowed unicorn-entrepreneurs to use these new business models. Juxtapose’s strategy of building a large company by acquiring dental practices sounds like the venture is seeking a competitive edge in fragmented industries through consolidation, which seems like a PE strategy.
PE fund or a new type of VC fund? One or two failures will not kill a regular VC fund. In fact, VCs can succeed with 80% failures if they have a single home run. According to Patrick Chun of Juxtapose, the fund is taking risks like a VC fund and will be handicapped with one or two failures. Why? If they get a home run, which is what they seem to be shooting for with talk about building unicorns, wouldn’t they succeed with more failures? PE funds seldom have a home run with annual returns of 90-100% so they cannot afford too many failures. Juxtapose’s profile seems more like a VC fund and not a PE fund. It seems to be taking the risks of a VC fund and expecting the returns of a VC fund. If it walks like a duck and quacks like a duck, perhaps it is one.
So what’s new? VC funds and their ventures, from Apple and Microsoft to Amazon and Airbnb, have been trying to do the same for the last 50 years. This strategy is quite common.
What is the record? The article asks if there have been any great exits from the fund. Perhaps the real question is if any great companies have been built? If yes, then this fund has done something unique and its strategy is worth noting. If it is just a few exits, what happens when this current stock market craziness ends?
At the end of the day, the key question is whether this fund is competing:
- In an emerging industry created by revolutionary innovations: If so, will it need unicorn-entrepreneurial skills and strategies. Can VC plus a hired gun beat the skills, smarts and secrets of the world’s great entrepreneurs who have gone down this path.
- In a mature industry to compete against slow-moving corporations when they don’t move fast enough, and then sell the company to a corporation. If so, many VCs have done this but not where they are the entrepreneur and the VC rolled into one. So is this a better model?
- In a fragmented industry to roll up small businesses. Been there. Done that.
MY TAKE: Juxtapose seems to be an Entrepreneur-VC fund, not a VC-private-equity fund. It is an interesting mixture, but most financiers have not started ventures. Attracting a CEO who has built a growth venture is a smart move, but it is still picking a hired gun. And if it were that simple to build multiple unicorns, why have more VCs or unicorn-entrepreneurs not done it? And if it’s that simple to succeed at the true startup stage (no sales, only idea), why do so many startups fail?