NEW YORK – Due diligence doesn’t easily translate into the personal lives of venture capitalists. As a group, according to a survey of 317 venture capitalists by Money Union Inc., they are six times more likely to know the debt status of the companies they’ve invested in than their own debt load.
“Venture capitalists take actions that represent the lowest end of the average consumer – careful research on their investments, but they operate their own finances without any real attention. They’re somewhat giddy about the future performance of the economy, and they’re spending as if the money will continue to roll in,” said Allan Kahane, founder and chief executive of Money Union, a New York-based, privately-held financial solutions company.
Jericho Communications completed the survey on behalf of Money Union between March 30 and April 6 to underscore the need for rational financial planning, even among the economy’s most powerful players.
In the month following an initial public offering in which they’ve invested, credit card debt increased an average of 18% for venture capitalists. VCs taking home more than $800,000 per year had significantly more debt than those taking home only $400,000, and 61% of VCs said they paid the monthly minimum on their credit cards, while only 51% of lawyers and 43% of doctors surveyed did so.
Venture capitalists were three times more likely than chief executive officers surveyed to be late in paying credit card bills, and four times more likely than lawyers. Approximately 50% of VCs reported that their current debt is the highest of their lives, compared with 37% of CEOs surveyed, 17% of doctors and 13% of lawyers.
In fact, the recent volatility in the public markets has triggered even greater levels of short-term debt. While venture capitalists that invest primarily in the Nasdaq have higher debt than those that invest primarily in the NYSE. About 38% of VCs reported charging their biggest purchases while they were feeling depressed, versus only 8% of CEOs. VCs are also three times more likely than doctors to buy now, and worry about paying later.
“If VCs are behaving like this, how is the general population behaving?” Kahane said. “They’re like regular consumers – spending on elective items without planning. There’s a tendency toward impulse spending versus how careful they are with their investments.”
For its part, Money Union and its soon-to-be-launched Web portal for providing low-cost loans to those already in debt, MyBestInterest.com, was in the midst of closing its second round of institutional financing last month. While $7 million of the proposed $15 million round had been secured, the remainder was to be committed over the next few weeks, Kahane said.
The company was founded a year ago by Kahane and four current and former partners at Goldman, Sachs & Co. with the intention of allowing individuals to refinance their debt at a lower cost. A short time later, the founder of a software company and Web developer, which Kahane would not identify, joined Money Union to complete a $3 million round of financing.
The second round, led by a venture capital firm Kahane would not name, will be used to grow the business though strategic alliances with other Web-based companies, and building both a brand name and staff. The site was expected to launch in June.
Money Union provides online loans at a lower interest rate. The company pre-negotiates loans in bulk with other banks, thereby lowering origination and overhead costs for the banks, meaning lower interest rates for individuals.
By year-end, Kahane projects he will be able to refinance the obligations of 0.02% of those in debt. In three years, he predicts Money Union will have captured 0.8% of the total debtor’s market, translating into approximately $250 million in revenues.
A number of banks have already aligned themselves with Money Union, Kahane said, including Marshall & Ilsley Bank, the nation’s 25th largest, and a provider of back-office services for 900 other banks.