PIE Cycles and Venture Investment

Many stock market investors make investments on the basis of a single Planning, Investment and Execution (PIE) cycle. They plan their investment (i.e. study a stock, or financial instrument), then buy it, then sell it.

Venture investing is different. Information technology (IT) or biotech startups usually require multiple rounds of venture investment - usually designated in alphabetical order in reverse order of seniority of equity (i.e. Series A, Series B, Series C, and so on) - prior to a value realization event, such as a trade sale, or an IPO.

Only a very small percentage of companies exit on the basis of a single PIE cycle - even Silicon Valley darlings YouTube went through three PIE cycles (i.e. an angel round, followed by a Series A round, followed by a Series B round) before being bought by Google.

If you count all angel rounds as one, Google went through five PIE cycles - its last equity offering was Series D preferred stock before exiting. PayPal’s last round was also Series D, prior to its sale to eBay.

A single-PIE-cycle entrepreneurial “hit” is extremely rare. The most common scenario? Three to four PIE cycles, prior to exit. What is the maximum number of PIE cycles prior to value realization? US-based VOIP technology company Vonage made it through their Series E round prior to jumping onto NASDAQ (which makes six PIE cycles if you group their angel rounds into one, or seven PIE cycles if you count the funds raised through their IPO).

For first-time angel investors used to the stock market, sitting through multiple PIE cycles while waiting for an exit can be frustrating. However, most VC’s understand the “multiple PIE Cycle” paradigm, and structure deals to enable them to have preferential rights when future offerings are made.

Once an investment has been made, the firms usually keep capital in reserve to apply to these future rounds of funding - because in virtually all cases, the problem the entrepreneur set the company up to solve turns out to be much harder to solve than it first appeared (hint to first-time angel investors: virtually all technical problems turn out to be harder to solve than they first appear - structure in some warrants with your angel cash.)

The take-away lesson from this for first-in angel investors is: there are no overnight hits. Venture investment requires patience, and a tolerance of long incubation periods. The benefit is, when the entrepreneur finally solves that problem, the rewards can be great.