I worked a bit with Branson in the Seventies, and was very interested in his business methods then. I assume they have changed ;-)
He functioned very much as a Venture Capitalist - but with a difference. Many people came to him with different ideas, mostly connected with Virgin Records, but some were from different areas addressing his same audience.
For him then , it was about a solid business plan. He would put up most of the dough on the basis of the plan, which had to yield 12% return on invested capital. He ralso equired a commitment from the owners, so they took part of the risk. He had gathered around him a bunch of accountants and legal advisors to help him assess these plans, and they often guided the start-up at the beginning. But he was very intuitive in selecting which start-ups to go with.
As long as he got his 12% - no more, no less - every year, he didn't care how much the co-owners made. Some made millions, a lot got ploughed back. For the start-up owners, it was highly motivatiing. But if any plan failed (in providing the 12% return) the business was terminated quite fast.
This 12% was, of course, a very good rate of return. Only vintage stratocasters could offer similar growth and you'd have to sell them to get the cash;-).
There was another element to the Branson MO - still evident today. His father was a High Court judge and Richard was fairly savvy about the law and lawyers. He used these weapons quite regularly, but rarely against people he was in business with, since it would be a reflection on his poor judgement. Like David and Goliath, he was never afraid to take on the big boys. And I think he has triumphed rather more often than he has failed. You can't be me, I'm taken
Most of the VC's do not limit their rate of return goal. I haven't looked at the numbers recently, but most want to be in the upper quartile of VC's in terms of IRR, and I believe that requires in most "vintage years" of funds returns that are more like 45%, IRR's that is.
For him, business was fun, or it had to be. He did, and I had quite a few conversations with him about it, want to change the world. Yet it wasn't in the goody goody, sense of change, but in just making life more fun. I was staying at his place just before the launch of Virgin Airways, and all he wanted to talk about was the logo on the planes - nothing about the business or even the service concept. It was the logo and how it would appeal to the potential audience. But that IS the fun side.
I am biased of course, but his business success is, for me, inspirational. Not at all in the sense that I could do the same - because I don't have the chutzpah or brains - but he showed that there was an alternative, and that original thinking could be rewarded. You can't be me, I'm taken
And I am sure their kids will be wondering what is so special about virtual reality, or millions of people gathering together virtually to change corporate decision-making. You can't be me, I'm taken
Your comments are right on,,, that the buy-out segment is growing dramatically, and leverage is an important element, with all the risks that leverage brings. And you are also correct on the Internal Rate of Return focus of private equity, and that goal of course means that more money returned, and returned faster, are the key elements by which they are measured by their limited partners. Those goals are not necessarily in line with goals for the overall health of the business--not necessarily contradictory, but one would like to see more synergy in the board room. I'm a big proponent of other elements of the business model, the business model for the individual company, not the VC's. And these elements would include things such as high level of commitment to quality; close working with the customers understand evolving needs and thus achieve new innovative products; very fair pay for all levels of employees, including stock options for all if it's appropriate; and basically having business strategies, objectives, and ethics that win the hearts and minds of the employees, etc, etc. Most VC's would not be as excited about some of these goals as a high quality senior management team for the business would be (I guess that comment is overly kind to most private equity people).
I'm unfamiliar with the public-private partnership concept in venture, but that would be an interesting model and discussion.
Do you have a rough idea of the total amount and public/private ratio?
As I understand, shareholder value is the king indicator of company's success. Morevoer, corporations are (kind of) legally oblidged to maximize shareholder's value, are they not? How is can be legally determined whether the board does its best? Can long-term success be easily lost in a collective drive for fast profit margins?
It sounds to me that gaining maximal profit for investors can put a lot of pressure on workers. Is there good evidence that this pressure is increasing? How long were Ford and General Motors were giving "generous" salaries to their workers?
Shareholder value is important in both settings. you point out that the private equity guys may be very short term because they want to make their money as quickly as possible, improve the company and sell it. Yet further up thread someone comments on the pressure on public companies to make quarterly projections, and points out the temptation to eschew the long term to improve the short.
you find good people and good leaders in both settings, imho, and the opposite as well. personally, I don't find a conflict between investor and employee goals. well motivated and well paid employees build unbelievable companies. and leadership, ceo's, should easily be able to make that point to investors,,,and drive for great results. there is not conflict with customers either--innovate, give them quality and service, and they will flock to you. this can be done by private companies and public companies. but it takes strong leadership with intellectual depth, good ethics and values--qualities not always easy to find, + a ton of other qualities.
The goals of investors, employees and customers might be similar, but basic impulses differ quite much.
One other naive question: when people speculatively buy shares in the market while the company is not issuing them, are they really "investing" in a technical sense? No new money comes to company's pocket, it is just appreciation of (presumably) growing value of the company, right?
