Breakthrough?
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The venture capital (VC) industry takes high risk for high returns. Now, Juxtapose, a new breed of VC fund, expects high returns like VCs but takes low risks like private equity (PE) funds. Is that possible?
Time of investment. VCs invest like aha. They are waiting for evidence of the potential of home ownership in terms of opportunity, strategy, or leadership. When they see potential in the opportunity or strategy but not in leadership, VCs replace the leader. Juxtapose expects to invest in the ideas phase. Definitely not less risk.
Unicorn ways. VCs invest in emerging industries or emerging trends. Almost every Einhorn Entrepreneur (UE) built their business 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.
Risk risk. Most investors and analysts think about risks based on the stage of the business. Early-stage companies, especially pre-Aha, have a higher risk of default than late-stage companies with established businesses and cash flow. Early stage VCs take high risks by investing earlier. PE funds take a low risk by investing in later companies with established businesses and cash flow patterns. You acquire these companies with multiples of cash flow and try to increase cash flow through improvements and acquisitions. Juxtapose assumes that startups take low risk by combining the roles of founding entrepreneur and VC fund. All entrepreneurs have confidence in their abilities – otherwise they would not start their ventures. Just because a VC fund has confidence in its own analysis of the industry and can build a unicorn doesn’t mean it has changed phase. Maybe the Juxtapose folks are more talented than the average VC. Or is that out of place confidence?
The chance. VCs fail at 80 out of 100 investments, despite investing after aha. Only one in 100 is a homemade unicorn that pays for the 80 failures. Will the founders of Juxtapose create multiple unicorns with just a few investments and disrupt the VC industry? That remains to be seen, but it’s worth noting that there are very few entrepreneurs who have built more than one unicorn. This is why unicorn entrepreneurs like Jobs and Musk are so unique. If Juxtapose is successful it would suggest a new way to build unicorns.
Real unicorn shops or unicorn companies. Is Juxtapose building unicorn companies or real unicorns? If the former, the foam of the market will have a huge impact on their success. As Warren Buffett suggested, let’s wait for the tide to recede.
Timeframe. Unicorn entrepreneurs often speed up their ventures early on to get a foothold with limited capital and grow with emerging industries. It usually takes 3 to 11 years for emerging industries to emerge. VCs like to invest after aha and then pour coal on a fire to accelerate growth, especially since VC limited partnerships typically have a 10 year lifespan. Can Juxtapose build a unicorn out of the idea of getting out within the timeframe of a regular VC fund?
Financial strategy of the fund for its ventures? The suggestion is that Juxtapose, on the one hand, does not seek profits for its ventures and, on the other hand, does not want to lose money. So does that mean companies are growing and breaking even at the speed of their cash flow? This has been the strategy of most of the financially savvy unicorn entrepreneurs I’ve interviewed or studied. To do this, the unicorn entrepreneurs had to combine the right business and financial skills to grow more with less. If the company is growing at the speed of its cash flow, why are the millions needed? Unicorn entrepreneurs grew at the rate they didn’t lose any money until Aha. According to Aha, they could attract more funding at a lower cost and with no VC control requirements. At this point, some unicorn entrepreneurs were accepting VC but staying in control. Most continued to grow without VC. It is unclear whether Juxtapose follows the unicorn entrepreneur strategy, the VC strategy or the PE strategy.
Direct competitors. One important fact is that unicorn entrepreneurs faced with VC-funded direct competitors have usually had great entrepreneurial executives combined with VC. Or they had great business models like Dell’s combined with great entrepreneurial leaders. It’s unclear whether Juxtapose’s strategy is to compete against VC-funded companies with unicorn entrepreneurs, against outdated companies, or in fragmented industries.
Revolutionary innovation or evolutionary innovation? Almost all of the VC funded unicorns were in emerging industries created by revolutionary innovations. This includes unicorns in emerging industries from personal computers to the Internet. These emerging industries enabled unicorn entrepreneurs to take advantage of these new business models. Juxtapose’s strategy of building a large company by acquiring dental offices sounds like the company is seeking competitive advantage in fragmented industries through consolidation, which seems like a PE strategy.
PE fund or a new type of VC fund? A mistake or two won’t kill a regular VC fund. In fact, VCs can be successful with 80% failure if they have a single home run. According to Juxtapose’s Patrick Chun, the fund takes risks like a VC fund and is hampered by one or two defaults. Why? If they got a home run that they seem to be shooting at with talk of building unicorns, wouldn’t they succeed with more mistakes? PE funds rarely have a home run with an annual return of 90-100%, so they can’t afford too many defaults. Juxtapose’s profile seems to be more of a VC fund than a PE fund. It seems to take the risk of a VC fund and expect the return of a VC fund. If it goes like a duck and croaks like a duck, maybe it is.
What’s new? VC funds and their companies, from Apple and Microsoft to Amazon to Airbnb, have been trying to do this for 50 years. This strategy is widely used.
What’s the record? The article asks whether there have been any major exits from the fund. Perhaps the real question is, were big companies built? If so, then this fund has done something unique and its strategy is worth mentioning. If it’s just a couple of exits, what happens when this current stock market craze ends?
Ultimately, the key question is whether this fund will compete:
- In an up-and-coming industry that was created through revolutionary innovations: If so, you need unicorn entrepreneurial skills and strategies. Can VC plus a rented gun defeat the skills, intelligence, and secrets of the world’s great entrepreneurs who have come down this path?
- In a mature industry, to compete against slow moving companies when they don’t move fast enough and then sell the company to a company. If so, many VCs have done so, but not where they are entrepreneurs and VCs. So is this a better model?
- Rolling up small businesses in a fragmented industry. Was there. Did that.
MY TAKE: Juxtapose seems to be an entrepreneur VC fund, not a VC private equity fund. It’s an interesting mix, but most financiers haven’t gotten started yet. Attracting a CEO who built a growth company is a smart move, but a rented weapon is still chosen. And if building multiple unicorns was that easy, why didn’t more VCs or unicorn entrepreneurs do it? And if it is so easy to be successful in the actual startup phase (no sale, just an idea), why do so many startups fail?
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