Squander capital. Why would a businessman do this?
Posted by admin on 20 Nov 2009 5:59 am. Filed under Other - Business & Finance.
Sandman
A curiosity question.
Man acquires about $5mil in capital from a venture capitalist.
Man buys a group of radio stations.
Man does nothing to promote his radio stations or improve them. Runs odd formats i.e. playing music nobody has ever heard of. Firing staff willy-nilly, managing from 900 miles away. Believing he will just become #1 by his mere existence.
Now the stations are about to go “dark.”
He truly squandered his opportunity.
He is regarded as crazy.
Is it like the old saying, “Don’t try to understand crazy” ?
Or was this guy crazy as a fox?
Is this something done regularly by businessmen in order to gain something? Like a tax write-off for instance?
Just wondering if anyone else has encountered such a thing and to what ends it was done.
A curiosity question.
Man acquires about $5mil in capital from a venture capitalist.
Man buys a group of radio stations.
Man does nothing to promote his radio stations or improve them. Runs odd formats i.e. playing music nobody has ever heard of. Firing staff willy-nilly, managing from 900 miles away. Believing he will just become #1 by his mere existence.
Now the stations are about to go “dark.”
He truly squandered his opportunity.
He is regarded as crazy.
Is it like the old saying, “Don’t try to understand crazy” ?
Or was this guy crazy as a fox?
Is this something done regularly by businessmen in order to gain something? Like a tax write-off for instance?
Just wondering if anyone else has encountered such a thing and to what ends it was done.
One Comment to “Squander capital. Why would a businessman do this?”
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On November 20th, 2009 at 7:50 pm
Most VC firms will include covenants within their capital to ensure this doesn’t happen. Essentially, if you take the money and manage it poorly over a specified period of time, either their shares (likely convertible preferred shares) are convertible at a lower rate. That means they convert for $0.35 per share instead of $0.50 a share (i.e. they get more control of the company).
I think that it would be tough to **** away $5M from any VC firm unless the VC felt that you were still holding $5M in assets. Likely in this case, the covenants on the debt or preferred shares would activate and the VC would takeover and liquidate the company.
I don’t think the situation you outlined could happen because any rational VC would only pay $5M if they had reasonable protection (i.e. covenants or controlled the board) and they would orchestrate a takeover if it happened.
More likely is the opposite of what you mentioned, the VC captures the boards, runs the company into the ground for a year, activates their convertible preferred shares (at a discount because the company’s REVs declined) and then takes over the company. Once they have most or all the company after the fist year, they turn it around and actually try, inflate the value of the company and go public.
And since they ran the company into the ground in year 1, they got it for a discount. Of the case you outlined and the case I outlined, unfortunately the latter is liekly, and does happen, far more often.