Diving into Venture Capital.

The Draper Wave.

Raising venture capital (VC) funds, or even putting up with a VC on your board, can feel like making love with a cactus. – Andrew Romans.

This is how Andrew Romans kicks off his book ‘The Entrepreneurial Bible to Venture Capital’ – strongly recommended to any entrepreneur, investor, or anyone working in the VC space.

One of the most interesting concepts that I found in his book was the Draper Wave.

When Romans interviewed Tim Draper – founder and managing director of Draper Fisher Juvetson (DFJ) – he explained that there has always been and will continue to be ‘a cycle between venture capital and private equity’ (Romans, 2013). The author provides an overview of the cycles that took place since 1965. From the roaring sixties until 1975, big corporations purchased smaller businesses, firing their previous employees in an aim to improve the business’ efficiency. Until the recession happened. Luckily, the computer industry started and venture capital took place, peaking in 1983 until banks stopped lending in 1991 given the consequences this had – causing the nineties’ recession.

Interestingly, just like with the previous economic slowdown, new companies started to emerge taking advantage of the still ongoing internet boom until the crash in the 2000s. Following the cycle, Private Equity (PE) and LBO (leveraged buyout) came in once more, making companies more efficient. However, this cycle ended with 2007’s ‘credit crunch’ (Romans, 2013). And what happened the next year? Yes, you guessed it right. The 2008 financial crisis and the emergence of new companies.

As seen, this article briefly illustrates a simple and obvious but often overlooked cycle followed by PE and VC investment. The book, ‘The Entrepreneurial Bible to Venture Capital’ illustrates a great visual of the so-called Draper Wave.

For more information on VC investment I strongly recommend reading the book mentioned above.