What is a Drive-By Deal?

It is a slang term used in venture capital situations referring to a deal in which a venture capitalist invests in a startup with a plan of getting out as soon as possible. In such scenarios, the venture capitalists have a quick exit plan while investing in a startup.

How does a Drive By Deal Work?

The venture capitalist with such a deal doesn't get involved in the operation or management of the startup. They attempt to increase the size of their investment by finding a buyer immediately or by initial public offering. If a startup is in a need of collecting capital within a specific time and its initial public offering round is due in future, a venture capitalist firm or a venture capitalist may invest the capital in the startup with an idea of making a profit as soon as the startup has its initial public offering. It is called the drive-by-deal. 

While drive-by-deal takes place, the startups are often obligated to hold the initial public offering ahead of the scheduled time. A venture capitalist who engages in such deals is known as drive-by VC. Initially, a drive-by deal can be advantageous for both the venture capitalist and the startup, as the startup gets the required fund at an early stage and the venture capitalist gets to invest his or her money with a quick return. But experts are of the opinion that a drive-by deal is bad for the startups as they are often forced to hold the initial public offering when not prepared for it. The venture capitalists do not care much about the growth and viability of the startup, they enter such deals just for increasing the size of their investment quickly. T

he term drive-by deal was coined during the 1990s when the technology startups attracted a pool of venture capitals particularly surrounding the dotcom craze. During that time, it became a common practice for the venture capitalists and angel investors to invest in a technology startup without examining the viability of it. In order to beat their competitors, they started investing in an early stage technology startup without doing the due diligence. 

The practice proved to be a massive failure after the dot-com bubble burst in the 2000s. Many investors lost a lot of investment as the sector collapsed. The same practice became popular again in the 2010s during the rise of Bitcoin and blockchain related startups. The VCs were again too anxious to miss out on the next big thing and started investing blindly completely ignoring the due diligence process.