How venture capital works

Until I saw the “preferences” that VCs give themselves or the anti-dilution contracts they give their hand-picked executives, it never occured to me that people would invest in a company mainly with the idea of taking it over.  I was naive: I thought people invested to earn a good return on their money.  And, maybe, to promote innovation.

Here in Forbes this weekend is another article about an innovator who lost everything while his investors prospered.  The Wizard of Water, September 7, 2009 excerpt:

Hauge, 53, never finished college and has been self-employed his whole life, working in construction and as an inventor.  He eventually got his saltwater pressure exchanger to work.  But it was a Pyrrhic victory.  He consumed so much capital in the quest to perfect the device that he lost control of Energy Recovery, Inc., the company he had founded to make the exchangers.  The San Leandro, Calif. firm earned $8.7 million on $52 million in sales last year, but Hauge owns none of it and is consulting on water and renewable energy projects in Virginia.  Maybe he should have quit?  “I don’t know why I didn’t,” he says.  “I guess it’s my nature.  I persevere.”

Desalination is one of the great problems and opportunities on the planet today.  Too bad this innovator was cut out of the fruits of his labor. 

We have seen the best minds of a generation pursue “finance” rather than develop useful tools and products, screw the economy, and be rescued because they were too big to fail.  Leif Hauge shows how these “financiers” work on a personal scale.

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Published in: on August 23, 2009 at 7:57 pm  Comments (1)  

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One CommentLeave a comment

  1. I’m remembering your Princeton geophysics student who was ready to graduate and go into investment banking. Sigh. Another “great mind” lost.


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