In Changing the Game, Cringely explains how VCs are putting their trillion dollars to use:
The old model was for top firms (those run by intelligent people) to look at 800 deals per year and invest in two to six, pumping them with enough money to assure success while also killing off the founders and pushing for an early IPO and VC cash-out. The other VC firms just watched what the top firms were doing, then bought in on B or C rounds where the risks and returns were proportionally lower.The new model is venture capital masquerading as a combination of hedge funds and investment bankers. Seed rounds are the only rounds and they are limited to angels, friends, and family. Very few companies go public and those that do are unique in their niches. Acquisition has always been the other exit strategy, but if the VCs don’t have a piece of the company being acquired, they can’t enjoy the benefits of a sale, so what’s to do? The VCs start acquiring companies, that’s what, in a classic hedge fund maneuver called a “roll-up.”
A roll-up means buying many companies in the same market niche, say convenience stores. A private equity group buys, for example, four to five chains of convenience stores totaling 2000 locations. They consolidate the chains saving fixed costs, obtain some economies of scale through bigger purchase orders, but mainly they sell off poor-performing stores for their real estate value, and eventually take the new company public or sell it for a profit to an even larger competitor.
Today’s high-tech version of VC-managed roll-up means buying a bunch of similar high-tech companies, consolidating their products and services, then selling the whole or taking it public, simple as that.