The reason most dental practices were owned by dentists and their families rather than by investors before the passage of the affordable care act is probably that the business is complicated enough that there is no practical way for the investors to tell whether the dentists running the practice are cheating them (e.g., by hiring his cousin to work at twice the rate at which the cousin’s labor is really worth).
In contrast, VCs (and the investors into VC funds) can trust the startups they invest in because they pick only companies that have a plan to grow very rapidly (more rapidly than is possible if revenue scales linearly with such a constrained resource as dentist labor or oral-surgeon labor). When the proceeds of an IPO or sale of the company are several orders of magnitude larger than the amount invested, any “self-dealing” on the part of the execs of the company being IPOed or sold become irrelevant—or at least easier for the investors to detect and to deal with.
Although private-equity funds gets paid mostly by IPO or sale-to-a-larger-company just like VC does, because they don’t limit themselves to investments that have the chance of growing by orders of magnitude, they have a more difficult time raising money. They must rely more on loans (as opposed to sale of stock) to raise money, and what sale of stock they do do is to a larger extent to high-net-worth individuals with an expertise in the business being invested in or at least an expertise in the purchase, sale and management of mature companies where “mature” means “no longer has a realistic chance of growing very much larger”.
During the dotcom boom, there was a startup out of LA whose plan involved search-engine optimization, but the young men running the startup decided to spend some of the money they raised to make a movie. When the investors found out about the movie, they hired private security contractors who teamed up with LA police to raid the startup and claw back as much of their investment as they could (causing the startup to dissolve). I offer this as an example that self-dealing is possible in a startup, but it is easier to deal with: when a private-equity fund gets together 100 million dollars to buy Kleenex Corp or whatever, then finds out that the execs at Kleenex are spending a significant amount of the corp’s money to make a movie (which they didn’t tell the investors about) they can’t just walk away from their investment: they have to fire the execs and hire new ones or step in and run the corp themselves, both of which will result in an interval of time during which the company is being run by exec still learning about the company.
The reason most dental practices were owned by dentists and their families rather than by investors before the passage of the affordable care act is probably that the business is complicated enough that there is no practical way for the investors to tell whether the dentists running the practice are cheating them (e.g., by hiring his cousin to work at twice the rate at which the cousin’s labor is really worth).
In contrast, VCs (and the investors into VC funds) can trust the startups they invest in because they pick only companies that have a plan to grow very rapidly (more rapidly than is possible if revenue scales linearly with such a constrained resource as dentist labor or oral-surgeon labor). When the proceeds of an IPO or sale of the company are several orders of magnitude larger than the amount invested, any “self-dealing” on the part of the execs of the company being IPOed or sold become irrelevant—or at least easier for the investors to detect and to deal with.
Although private-equity funds gets paid mostly by IPO or sale-to-a-larger-company just like VC does, because they don’t limit themselves to investments that have the chance of growing by orders of magnitude, they have a more difficult time raising money. They must rely more on loans (as opposed to sale of stock) to raise money, and what sale of stock they do do is to a larger extent to high-net-worth individuals with an expertise in the business being invested in or at least an expertise in the purchase, sale and management of mature companies where “mature” means “no longer has a realistic chance of growing very much larger”.
During the dotcom boom, there was a startup out of LA whose plan involved search-engine optimization, but the young men running the startup decided to spend some of the money they raised to make a movie. When the investors found out about the movie, they hired private security contractors who teamed up with LA police to raid the startup and claw back as much of their investment as they could (causing the startup to dissolve). I offer this as an example that self-dealing is possible in a startup, but it is easier to deal with: when a private-equity fund gets together 100 million dollars to buy Kleenex Corp or whatever, then finds out that the execs at Kleenex are spending a significant amount of the corp’s money to make a movie (which they didn’t tell the investors about) they can’t just walk away from their investment: they have to fire the execs and hire new ones or step in and run the corp themselves, both of which will result in an interval of time during which the company is being run by exec still learning about the company.