What is a drive-by offer?
A drive-by deal is a slang term that refers to a venture capitalist (VC) investing in a startup with the goal of executing a very fast exit strategy, ideally through an initial public offering (IPO) in a stock exchange.
- A drive-by deal is a jargon term that refers to a venture capitalist (VC) investing in a startup with a quick exit strategy in mind.
- Critics say indirect deals result in venture capitalists pushing companies toward an initial public offering, even though they are not fully prepared.
- The term “drive-by” investing was first coined in the days of the dot-com craze, when venture capitalists blindly invested money in tech startups.
- Drive-by deals became less fashionable after the dot-com bubble burst in the 2000s.
- Venture capitalists often hang out with young entrepreneurs with startups.
Understanding a self-service offering
Venture capitalists often invest in companies for the long term. Typically it takes approximately five to eight years for a promising early stage company to cement its path and be bought or listed on a stock exchange. During this complicated process, venture capitalists will function as partners, caring for startups through their growing pains.
Having an exit strategy is key. In many cases, venture capitalists are only paid when the startup they invested in is sold, either through an initial public offering (IPO) or being acquired by another company.
When possible, some venture capitalists will actively seek to get to this point earlier than others. Occasionally, a startup may have concrete plans to go public, but first it needs quick access to capital. If the IPO’s ambitions hold up, venture capitalists might be expected to swoop in, as it allows them to make a quick buck without having to go through all the strenuous activity they are normally required to perform.
When opportunities of this nature present themselves, the VC has little or no active role in managing and monitoring the start-up. Instead, the goal is to increase the size of the investment by quickly listing the company or finding a suitor.
Advantages and disadvantages of a drive-by offer
VC drive-by arrangements can be considered advantageous for both the start-up and the VC as it allows a company to drive growth at a very high rate early in its life cycle, while allowing customers to investors quickly recover their capital. to reinvest in new projects without being tied down for years.
Although they are sometimes fruitful for all parties, self-service offerings are often viewed with skepticism. Critics say these types of transactions result in companies being pushed into an IPO, despite being objectively unprepared for such a large event.
Venture capitalists are dedicated to making money for their investors and, when all goes according to plan, also for the promising companies into which they inject capital. However, if it is a short-lived affair and quickly extracting a profit from the startup quickly becomes the only goal, it could be argued that its nurturing aspect is lost out the window.
Suddenly, venture capital has little reason to worry about the long-term well-being of the company. Getting to the promised land of IPOs as quickly as possible becomes the primary mission, regardless of whether the company and its founders succeed or fail immediately afterward.
Venture capitalists often earn money for their investors and for themselves when their investment in a start-up is sold or acquired.
Drive-by offer history
The term “drive-by” investing was first coined in the mid-1990s when venture capitalists invested money in tech startups, especially around the dot-com craze. The term refers to the common practice at the time when angel investors and venture capitalists agreed to fund early stage start-ups without conducting any actual due diligence to check whether the business plan and management team of the company were a promising and worthwhile investment.
During the tech boom, venture capitalists were eager to fund the next big company before their competitors. The automatic reversal occurred because they believed they did not have enough time to do their homework.
Many investors burned out after the dot-com bubble burst in the early 2000s, causing this quick and dirty venture capital investment to fall out of favor. That largely remained the case until the late 2010s, when digital currency Bitcoin and blockchain-related startups started to build a lot of buzz. The excitement surrounding this emerging technology asset class led some venture capitalists to act recklessly. Again, this was motivated by the fear that not investing promptly would lead to them missing out on the next big thing.