What is venture capital, and is library automation getting any?

I’ve seen the phrase “venture capital” bandied about in reference to Vista Equity Partners’ recent acquisition of SirsiDynix (pdf), and the earlier acquisition of Ex Libris/Endeavor by Francisco Partners. Venture capital is a somewhat nebulous term, meaning different things to different people. Since the rise and fall of the dot-com era, however, it’s most often applied to capital offered to start-ups, anticipating large returns for the relatively high risk of investment. It provides an infusion of cash to a new or small company, enabling innovation. Sometimes “venture capital” is also applied to an investment in a beleaguered company in order to turn it around, which can be similarly high risk/high reward.

Though I can appreciate the hopes of library automation customers that the recent acquisitions may signal an infusion of cash that will fuel innovation, that’s not exactly what’s going on here. These are buyouts by private equity firms of large, established companies. Although we sometimes talk about the state of library automation software in terms that might be described as “beleaguered”, I’m not really sure that describes these companies’ financial situations.

It may indeed be the case that Vista Equity Partners and Francisco Partners intend to invest resources into these companies to make them better and more profitable, and if so, I think that’s great. (I, for one, welcome our new private equity firm overlords.) On the other hand, these acquisitions could be an example of what’s known as leveraged buyout, a strategy by which private equity firms acquire companies by borrowing against the assets they acquire. Often this involves paying themselves a big cash dividend, and then doing just enough to keep the company afloat under the sometimes excessive debt burdens they have inflicted during the acquisition, and attempting to sell it off again in a year or two.

I’m not saying I know which will happen, or even which is more likely. I didn’t do much research about Vista and Francisco’s previous acquisitions and what’s happened to them. I just wanted to make the point that we ought not look at acquisition of large companies like these the same way we look at VCs financing a startup. In these sorts of deals, there’s often a lot of fancy accounting going on that obscures the motives.

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