Drive-by Deal (Venture Capital) - Explained
What is a Drive-By Deal?
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Table of ContentsWhat is a Drive-By Deal?How does a Drive By Deal Work?Academic Research on Drive-By Deal
What is a Drive-By Deal?
It is a slang term used in venture capital situations referring to a deal in which a venture capitalist invests in a startup with a plan of getting out as soon as possible. In such scenarios, the venture capitalists have a quick exit plan while investing in a startup.
How does a Drive By Deal Work?
The venture capitalist with such a deal doesn't get involved in the operation or management of the startup. They attempt to increase the size of their investment by finding a buyer immediately or by initial public offering. If a startup is in a need of collecting capital within a specific time and its initial public offering round is due in future, a venture capitalist firm or a venture capitalist may invest the capital in the startup with an idea of making a profit as soon as the startup has its initial public offering. It is called the drive-by-deal. While drive-by-deal takes place, the startups are often obligated to hold the initial public offering ahead of the scheduled time. A venture capitalist who engages in such deals is known as drive-by VC. Initially, a drive-by deal can be advantageous for both the venture capitalist and the startup, as the startup gets the required fund at an early stage and the venture capitalist gets to invest his or her money with a quick return. But experts are of the opinion that a drive-by deal is bad for the startups as they are often forced to hold the initial public offering when not prepared for it. The venture capitalists do not care much about the growth and viability of the startup, they enter such deals just for increasing the size of their investment quickly. The term drive-by deal was coined during the 1990s when the technology startups attracted a pool of venture capitals particularly surrounding the dotcom craze. During that time, it became a common practice for the venture capitalists and angel investors to invest in a technology startup without examining the viability of it. In order to beat their competitors, they started investing in an early stage technology startup without doing the due diligence. The practice proved to be a massive failure after the dot-com bubble burst in the 2000s. Many investors lost a lot of investment as the sector collapsed. The same practice became popular again in the 2010s during the rise of Bitcoin and blockchain related startups. The VCs were again too anxious to miss out on the next big thing and started investing blindly completely ignoring the due diligence process.
Academic Research on Drive-By Deal
- Venture capitaland private equity: A course overview, Lerner, J. (1997). This article describes the course, "Venture Capital and Private Equity," that was introduced by the author while teaching at Harvard Business School in the 1993-1994 academic year. The course seeks to deepen the understanding of corporate finance while introducing key features of the private equity industry and the importance of the valuation process in this industry. The course is organized into four modules with case studies and expert analysis as the primary vehicles for the material.
- Entrepreneurship, adaptation and legitimation: a macro-behavioral perspective, Etzioni, A. (1987). Journal of Economic Behavior & Organization,8(2), 175-189. This article offers an overview of how entrepreneurs embrace the inevitable force of societal change. The author treats entrepreneurship as a societal function, rather than an individual attribute, allowing for a broad analysis of the change that is ushered in and responded to by entrepreneurs.
- Vertical integration strategies of the national oil companies, ALMONEEF, M. A. (1998). Vertical integration strategies of the national oil companies.The Developing Economies,36(2), 203-222. This article offers a broad overview of the petroleum industry with specific attention to how vertical integration played a role in oil companies from various countries.
- Chinese investment strategies and migration: does diaspora matter?, Pieke, F. N., & Speelman, T. (2013). This article seeks to examine Chinese national investment policy and its possible relation to changes in Chinese emigration over the years. The last 30+ years of Chinese migration patterns are analyzed, with a focus on more recent migrations to Europe and Africa. Chinese state administration and policy towards emigration is discussed, and ramifications for China as a global presence and a domestic entity are also examined.
- Globalization, entrepreneurship, and public policy: a systems view, Carlsson, B., & Mudambi, R. (2003). Industry and Innovation,10(1), 103-116. This article takes a look at our increasingly global marketplace and uses a systems approach to analyze the inter-related nature of public policy, regional resource capacities, and entrepreneurship. In order to examine the capacity for sustained growth, regional economic clustering and technological spillover are considered against a backdrop of global economic motion.
- The loyalty effect-the relationship between loyalty and profits, Reichheld, F. F., Markey Jr, R. G., & Hopton, C. (2000). European Business Journal,12(3), 134. In the early 1990s loyalty was seen to be a driving factor behind corporate profitability, and this article seeks to examine how loyalty operates as a factor with the advent of e-commerce. This article is the first in a two-part series where the authors review the loyalty effect.
- BIT by BIT: The growth of bilateral investment treaties and their impact on foreign investment in developing countries, Salacuse, J. W. (2017). InGlobalization and International Investment(pp. 25-45). Routledge. This chapter is excerpted from a textbook and examines the Bilateral Investment Treaty (BIT) phenomenon. The authors look at the process that created the BIT, the rules it has created, and the effect it has had on foreign investment transactions, and shortcomings in global legislation regarding BITs. How BITs figure into the future of global trade and investment are also predicted.
- Exports: A necessary ingredient in the growth of small business firms, Edmunds, S. E., & Khoury, S. J. (1986).Journal of Small Business Management,24, 54. This article recommends that exporting become a part of the strategic plan for small and very small U.S. businesses. By examined the state of the U.S. trade market and its makeup of industrial sectors, the authors propose that increasing small business exports not only benefit the individual businesses, but it would increase the overall health of the U.S. economy and create a more generally robust environment for all domestic firms.
- Risk-Reduction Strategy for Investing in Restaurant Stocks: A Portfolio Approach, Barber, N., Barth, S., & Blum, S. (2011). Journal of foodservice business research,14(1), 33-46. This article provides a diversification strategy that can be used when considering an investment in restaurant stocks. By utilizing the modern portfolio theory and considering a discounted cash flow and the weighted average cost of capital, the authors propose a method that offered a 5.6% rate of return and 75% accurate prediction rate for a sample restaurant group.
- Competitive strategy revisited: contested concepts and dynamic capabilities, Green, S. D., Larsen, G. D., & Kao, C. C. (2008). Construction management and economics,26(1), 63-78. By using the case study of a regional contractor, the concept of strategy and its relationship to endogenous factors versus internal adaptability are discussed. The findings show that strategy is affected by a loosely organized group of individuals engaged in a collective endeavor. The forces at work in shaping strategy, both internally and externally are thoroughly examined.