DEFINITION of Drive-By Deal
A drive-by deal is a slang term referring to a deal in which a venture capitalist (VC) invests in a startup with the goal of a very quick exit strategy. The venture capitalist takes little to no active role in the management and monitoring of the startup, but instead seeks to increase the size of his investment by quickly finding a suitor to acquire the new venture, or else to speed it through to an initial public offering (IPO). A "drive-by VC" is thus a venture capitalist who engages in this type of deal.
Critics say a drive-by deal results in companies which are pushed towards an IPO even though they are not objectively ready - and all because the VC wants to get its money out, not necessarily caring if the busines itself (and its founders) ultimately succeeds or fails.
BREAKING DOWN Drive-By Deal
A drive-by venture capital deal involves investment in a start-up company where the VC seeks the shortest possible time to exit, ideally by way of an IPO on a stock exchange. Drive-by VC deals may be seen as advantageous for both the start-up company and the venture capital firm, since it allows a company to boost its growth at a very high rate early on in its life cycle and at the same time allows the investors to get back their capital quickly in order to re-invest in new projects without being tied up for years at a atime. However, critics argue that drive-by deals can ultimately lead to unsustainable growth, as the VC firm can pressure the start-up can go public before it is fully prepared. The VC also does not necessarily care about the viability or success of a company or its products & services after the exit has been achieved.
The term "drive-by" investing was first coined in the mid 1990s as venture capitalists poured money into technology startups, especially surrounding the dot-com craze. The term refers to the common practice at the time of angel investors and venture capitalists agreeing to fund early stage startup companies without doing any real due diligence to verify if the firm’s business plan and management team was a worthwhile and promising investment. During the technology boom, VCs were anxious to fund the next big company before their competitors. Drive-by investing occurred because they believed that they didn’t have enough time to do their due diligence. After the dot-com bubble burst in the early 2000s, this type of quick and dirty VC investing fell out of favor as many investors got burned when the sector collapsed. Still, we have seen a resurgance of this style of investing during the late 2010s as Bitcoin and blockchain-related startups have attracted the interest of VCs who don't want to miss out on the next big thing.