13 rebuts on Romney and jobs
Filed in: Venture Capital
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Why Romney is wrong on jobs
Filed in: Venture Capital
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Clueless San Francisco
Filed in: Commentary | Limited Partner
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Why documents don't protect LPs
Filed in: Commentary | Limited Partner
Even then. The actual deployment of risk can be and has been shoved under the rug of these generic and non-specific documents. These documents are not only lacking in the definition of risk, but severely lack controls to allow you as an LP to measure their compliance. And that is exactly why risk has deflated to uniformity and thus subprime Venture Capital.
Our reply above is a response to the representative’s reply (posted in full below) based on the aforementioned article:
“You should be able to be informed with:
1. Copies of the Limited Partnership tax returns.
2. Copies of Financial Statements with assets Marked-to-Market.
3. Copies of Minutes of General Partner meetings.
I am not an attorney, but usually General Partners have a fiduciary duty to provide at least these 3 items to Limited Partners. A review the Operating Agreement should provide information with the protocols for obtaining such info. Check how often you will receive these BEFORE making such an investment.”
The full article is available on the iCFO group on LinkedIn here
.Debt financing in startups
Filed in: Commentary | Limited Partner | Startup
And Gene Lee, Managing Director of Cove Point Holdings, a Family Office describes my views exactly in an interesting article published by Axial Market. Specifically he emphasizes how financial debt in a smaller middle market business can be very risky and limit the operating flexibility and growth prospects of a business.
We don’t believe that it makes sense to compound the operating risk of growing a smaller company and the risk from an ownership transition with the risk of a leveraged capital structure that could have bad consequences for a company if it misses a beat.
Primarily startups that work with subprime Venture Capitalists that have fragmented their investment risk and from the beginning do not have the ability to support the runway to upside completely are subject to the “blessings” of debt financing. The life-line of debt financing entering the startup world is an indicator of how subprime Venture Capital, downside investing, and the fragmentation and deflation of risk erodes the opportunity for groundbreaking innovation.
Now, If we could only design an economic system that translates the sanity from these kinds of Family Offices into a Venture Capital playbook. Perhaps that is why this Family Office is going direct.
Read the full article here
.ILPA measures
Filed in: Commentary | Limited Partner
) has done to structure the relationship between Limited Partners and General Partners. I have read their referendum and am not against the work of the ILPA, but feel the work of the ILPA so far offers little suggestions as to how to solve the systemic issues within the asset management realm (see “The musical chairs of asset management”). Yes, I do commend the ILPA for establishing "dining" etiquette, but it does not change the fact that the food being served is subprime. The way we construct financial systems (in violation of the free-market principles we boast about), by economic principle turns the discovery and arbitrage of the underlying asset subprime (sooner or later). Already in VC 10 levels of bottom-heavy diversification proliferate lies about the real risk deployed in Venture. And the results show it. VC fails to make a dent in the 80% greenfield of technology adoption, nor produce returns for LPs in line with that gap. So, while there are pragmatic things we can do with LPs to start to eradicate those economic lies (as described in my article), a much more fundamental change to the relationship and structure between GPs and LPs can turn their subprime alignment from subprime to prime. Transparency is just a (small) part of the economic framework, and even then the kind of transparency is paramount in establishing a different economic outcome of risk.
And below is the original comment from a Limited Partner (in hotel real estate) on LinkedIn
(members only) to which the above was my response:The Institutional Limited Partners Association has established a set of "best practices" that center around three guiding principles: 1) alignment of interests; 2) Governance; and 3) Transparency. Logically, if the GP has significant skin in the game by investing along side of the LP there is a higher likelihood they will be more selective in choosing where to deploy capital. The tenets of corporate governance can require a solution for many of the problems Georges discusses. These procedures can mitigate or eliminate conflicts of interest and related party transactions. And finally, if all the cards are on the table, readily seen by all parties, the dialogue becomes real and meaningful. The level of trust goes up and everyone benefits from an open, honest assessment. I am in the hotel real estate sector and we have adhered to similar principles for years. While not in total agreement with the ILPA, their efforts are to be commended as an attempt to bring some measure of standards to the industry.
Scaling is hard
Filed in: Commentary | Venture Capital
So, here is my response to the article to set Jeff straight:
Yawn, another article from a VC hoping to educate people to become entrepreneurs. Venture is just like American Idol, you find quality - you don't teach singing. People either have the talent or they do not. And Jeff's article(s) reminds me of the desperate Moms who keeps pushing their child to sing, even though when they open their mouth, we all recognize they can't. Not everybody can be an entrepreneur, but an entrepreneur can come from anywhere. The quest is to find prime, not teach subprime. But the real issue in Venture is that Venture Capitalists have not found a way to scale themselves in line with an 80% adoption greenfield and more quality entrepreneurial capacity than ever before. VCs are being beaten and disproven in their assessment of best practices by corporates more and more often. With negative returns on the whole for Limited Partners and perhaps a handful of VCs (out of the 790 post 911 dead weights) making any money monolithically and systemically for LPs, not the quality of entrepreneurial capacity is in question, but the arbitrage of that innovation deployed by VC.So, if Jeff was a wise man he would write an article that describes how Venture Capitalists can scale to detect and entice the entrepreneurial capacity they currently discard as false negatives. And explain why Venture Capitalists with many diversifications built in a period when corporate innovation proves their excuses wrong, really deserve to make any suggestions to budding entrepreneurs.
The original article with my comment can be found here
.As a limited partner I feel uninformed
Filed in: Limited Partner | Investing
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Regulating Private Equity
Filed in: Private Equity
China has made its first move to regulate Private Equity
, according to Coco Kee, Managing Partner of Kee Global Advisors LLC, a New York-based boutique advisory firm. Not a bad move at first glance, as we wrote about the need for regulation in an article that was covered by The Wallstreet Journal more than two years ago. The problem with most regulations is not that they are not needed, but they are implemented without a clear reference, rationale or script to the goal they aim to achieve. Put differently, many are bandaids to cover the cancer sores that may make the audience feel better, but in no way delivers a cure for the patient.
Private Equity and Venture Capital have been allowed to deploy a financial arbitrage that is in flagrant violation of free-market principles, and without an enforcement of anti-collusion, anti fragmentation of risk, marketplace transparency to all participants and other strict free-market principles, can never avoid the creation of investment bubbles that destroy the opportunity and faith in the underlying assets.
For China the implementation of free-market principles are farther afloat from their economic foundation than it is to us in the U.S., but if we keep messing up our economic freedom China may just get there before we do.
Are small company IPOs just fine?
Filed in: Venture Capital
Dan Primack of Fortune
concludes in this morning’s e-mail that just because there are a few large IPOs, all must be fine in Venture land. An argument I have heard many times before and a dangerous conclusion that has had its precedent:I think you assessment that just because there are IPOs all is fine in Venture land is overly simplistic. It may demonstrate simply that the public is still easily swayed to buy into the magic of technology, even though many do not produce sustainable social economic value. And with the stock market violating free-market principles, I would not surmise that merely because you can raise another round (this time from the public) the returns will await its investors in the long run. We have seen many IPO's in the late 90s, and where are they now?
Many IPOs have been pushed through the funnel in the past that have produced miserable returns for the public. And each time we push a company through that funnel without the tangible social economic value to produce returns for the public, we erode the trust of the public to invest in the sector again. That is the reasons why IPO “windows” for technology do not open all the way anymore and permeate a distrust that is counter to our ability to produce social economic value in the future.
Lead or get the f*k out
Filed in: Venture Capital
” in which he laments in a self described Dave McClure way how a founding CEOs should know when it is time to stay or go. It is a topic that has been covered in much detail before. As an early stage investor you pick the right team in addition to the right technology (that has tangible social economic upside), and when you as investor have made a mistake in that assessment the equity and voting power can be used to induce a change of leadership. Yawn…The problem with the scenario described in the article is that the merit of the investor making the judgement of a change of leadership is often unquestioned. Hence we respond:
Sounds good to me. I wish however the 97% of VCs that don't make any money for LPs would do the same and get the f*k out too. If we all worked on the basis of a meritocracy our world would be a much better and healthier place.
For when we have more investors with transparent and verifiable merit, the likelihood of funding companies without the proper composition will make Mark’s blog moot. Entrepreneurs are held to high standards (as they should), yet investors are not. That is the real reason why Venture Capital as the arbitrage of innovation performs so poorly.
The meager role of Meeker
Filed in: Venture Capital
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Setting Menlo Ventures straight on Siri
Filed in: Venture Capital
Without using any proprietary information I had on this company, the overreaching description of the role of Venture Capital (VC) in this article is what percolates the Venture business and creates the fog around the real merit of Venture Capital in the process of producing returns for their investors. The integrity of the Venture Capital process matters, because only real VC merit can produce sustainable returns and therefor be the investment thesis that can instill new confidence with Limited Partners, especially with Venture’s deplorable ten year performance.
Specifically I take issue with the following statement:
...the decision to sell was a tough call and there was lot of hand-wringing at the Board level. Siri had just raised a new round from Horizons and had close to $20 million the bank.
The original document on PEHub appears here
, to which I add:Oh please. You are bending the truth quite a bit. Siri was great technology due to its inheritance from Calo developed at SRI but hardly a business success you seem to suggest that would prevent it from selling (everyone could see that from the App Store ranking). And $20M in the bank does not erase the fact that the business model as an independent iPhone app was flawed and underperforming. So, the value of Siri was primarily related to the value of the intrinsic IP, not the business execution or the role of Venture Capital in that process.I hate it when VC takes credit for what it didn’t achieve and doesn’t take blame for the things they (not entrepreneurs) did. Hence my need to set you straight. And the future of adoption of Siri in the real world remains to be seen (voice recognition is still fraught with many false positives and false negative that will feed Siri incorrect input, and lack of foreign language support that will minimize its global practicality), but if anyone can turn it into a business success in the long haul it will be Apple.Today it is a great marketing tool, a lot of water needs to go under the bridge before it can deliver incremental market access.You got lucky on this one, let’s leave it at that. Just don’t confuse luck with strategy.
Much of the success of Siri was derived from the ability of SRI to harvest the knowledge from a government project into a commercial project. I would recommend SRI to raise its own funds so it does not need to lose future equity in other projects to the external guidance that has proven to deliver only nominal value.
Against cutting out VC
Filed in: Venture Capital
”, because I want people to understand my views on Venture Capital are balanced and sincere. I have no axe to grind with Venture Capital but for a single reason: the economic incompatibility to detect and arbitrate groundbreaking innovation. So, it may surprise some of you that I am not in favor of removing VC as the middle-man in the Venture asset class. Here is my response:
It is the right concept to reduce the 10 levels of bottom-heavy diversification in the deployment of risk in Venture Capital that prevents it from producing viable returns moving forward. And with mostly subprime VCs populating the ecosystem today, the temporal opportunity to remove them may help certain LPs cross the time bridge of change. But Venture Capital arbitrage is needed to produce viable returns, as long as you don't populate it with subprime arbitrage. So, what pensions should focus on is an economic framework that deploys the proper (non-uniform) risk with people who have the merit to spot it. And then force the deployment of non-uniform risk that made Venture Capital so valuable in its inception. The concept of Venture Capital arbitrage is not broken, the execution is. And I wonder if a soccer game without a (highly merited) referee is actually better than one with a bad referee. Especially when we've been living with 20-years of bad VC referees.
The disease that plagues Venture Capital requires a doctor that prevents it from becoming terminal. The improper diagnosis will yield the same outcome as doing nothing, a further dumbing down of the massive opportunity that awaits innovation.
So, the diagnosis of the Ontario Municipal Employees Retirement System (OMERS) with $53 Billion in assets under management is a dangerous one, especially when they conclude that if their gutsy move does not work “we won’t be doing [VC] for very long”. Aspirin is not a cure for cancer.
How Steve Jobs proved Venture Capital wrong
Filed in: Venture Capital | Investing
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What is wrong with yet another $500M Venture Capital FoF?
Filed in: Venture Capital | Fund-of-funds
reported by Reuters PEHub, you say dear Debbie Downer?Nothing except for one crucial thing says Debbie; the deployment of risk in Venture Capital. If you have been living under a rock and have not been studying my 2010: The State of Venture Capital you will not realize that Venture Capital, the way it is constructed today can by economic principle never produce outlier returns. And thus Wisconsin’s very gutsy initiative will not yield more than the false positivity we have become so accustomed to.
The problem with the support for innovation is clearly not the lack of capital, but the type of arbitrage and risk that is deployed through that capital. I say that having just come off a 2-hour phone conversation with a Fund-of-funds manager who deploys $700M in Venture Capital per year and empathically stated everything, no everything I warned him for in my blog has happened to him (including the script of my VC roast).
Deploying capital is the least of the problems we have, the Private Equity overhang is still aplenty. The problem is that many Fund-of-funds simply do not know how to deploy the proper arbitrage to make that investment produce viable returns. And now Wisconsin government thinks it can outperform the public sector in producing viable Venture returns? It is sad to see how ill-informed constituents can be sold on the easy promise of false economic positivity.
Spending money is easy, having it produce a return is a whole other ball game. I hope they have the guts to give me a call soon.
The Venture Confession
Filed in: Reference | Venture Capital
that he does not like the Venture profession much. To which purportedly Jim Breyer, partner at Accel responds:Total BS from this snake oil salesman. At 70+ years old with no friends left, he wants us to like him now. Oh puuuhhhlease! This guys is a jerk, dont take money from him, stay away as far as you can. Khosla is always about Khosla, super arrogant punk. He will destroy your company.
To which I need to respond:
Well Jim, as the former Chairman of the NVCA you should be ashamed of the “best practices” of Venture Capital as well. Negative 10 year IRRs, a handful of companies with any social economic value produced by VC as the arbitrage in an 80% greenfield and Venture Capital performing under the adoption rate of technology in the worst of economic circumstances, and a loss of trust by the public in that arbitrage is the despicable outcome of the mediocrity that holds our most precious asset (innovation) in a headlock.Perhaps what Vinod is eluding to is that Venture Capital is a mediocre asset class and arbitrage despite the enormous capacity and adoption greenfield to innovate. With less than 35 out of 790 (original) VCs making any(!) money and around ten doing so with Venture Capital as the monolithic thesis, Venture Capital has proven to be the improper economic construct to drive innovation.And I can fully understand why few smart people want to be associated with that performance or its “best practices”.
Venture Capital is a dumb economic construct to capture and arbitrate our capacity to innovate. For reasons why visit 2010: The State of Venture Capital.
Not so bad economy
Filed in: Macro | Venture Capital | Reference
Well, average returns of VC funds over the last 10+ years are still in line with the economy, both are negative. More money-in using the current flawed VC economics, in violation of free-markets, only subscribes to how clueless Limited Partners are or how large the size of the Private Equity overhang still is.
Read the online article with our response at All Things Digital
.About Venture Capital Trusts
Filed in: Venture Capital | Investing | Reference
No Charles, you are wrong. Venture Capital (no matter who feeds it) is the improper economic construct to support its underlying asset (innovation). Multiple facets are highlighted on my website, but the short of it is that you can’t expect to generate outlier returns from a uniform deployment of investment risk (I coined subprime VC).And the last thing government should do is meddle in the business of innovation. The role of government is to ensure markets operate and obey according to strict free-market principles. And we lack the most fundamental free-market principles that our forefathers instilled upon us. That is why we fail to detect the groundbreaking innovation that fantastic entrepreneurs in this country can create, and we instead have amassed the messy noise of false negatives that turns Limited Partners and the public off.The answer to improving the success of innovation is not to deploy the same deflated risk through new distributions, but to deploy the appropriate risk to the outlier entrepreneurs that deserve it.
Find the original article and my response to it online here
. Europe's PE & VC confidence, shaken not stirred
Filed in: Private Equity | Global | Investing
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Ignore the Dow
Filed in: Macro | Investing | Public markets
I agree with Brad’s announcement but for slightly different reasons:
Agreed Brad, but for slightly different reasons. No one should correlate the Dow with the state of the economy. Simply because the stock market is not a free-market system (see my blog) and therefor is not representative of the value of the underlying asset. So get on with life and build great innovation.
Get the article here
. We should instead be razor focused on diminishing our debt, or better jet improving income (rather than taxes). Interactive Venture Capital map
Filed in: Venture Capital
Following the lead of David B. Lerner at Columbia University, Scott Austin from The Wall Street Journal steps it up with an interactive map of Venture Capital deals sourced from Dow Jones VentureSource (for many reasons incomplete in capturing all Venture deals, but the margin of error may be the same across all geographies).
So, now you know where Venture Capitalists are spinning their wheels. Not to be confused with the health of the Venture ecosystem, since money-in does not equal money-out as we pointed out in yesterday’s posting on deals, deals, deals.
Check out the Venture Capital map online
.How not to refer a deal
Filed in: Venture Capital
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Deals, deals, deals
Filed in: Venture Capital
Jerry Neumann does an interesting exercise by applying some charts to Venture deals data. However, there are many reasons why you should not draw any conclusions from the majority of statistical reporting in Venture:
- Past behavior is no indication of future behavior (a rule of innovation).
- Deal staging says nothing about deal risk and therefore the number of deals says nothing about the viability of Venture taking more or less appropriate risk.
- The number of deals should have gone up dramatically because of the subprime nature of Venture Capital and thus smaller round sizes. Subprime VCs will need to offset deal size for deal volume to reach certain fund commitments. So, the rise in deals may well be offset by its quality.
- Money-in says nothing about money-out, and hence this chart at best how VCs are spinning their wheels. Just to remind you, ten year VC returns are negative 4.6% with only 35 of 790 VCs making any money for Limited Partners.
- Crunchbase (the source) is a very unreliable data source, not just because it cannot accurately capture all deals that are done.
- This data excludes the many angel deals that take place “under-the-table”.
Just keeping it real. Find the otherwise interesting blog of Jerrry Neumann here
.What New York needs and doesn't need
Filed in: Venture Capital
What NY needs (like SV) is less subprime VC. Because when subprime VC is gone and companies with substantial social economic value are produced, investors will care more about securing upside rather than downside, and the commodity squeeze in innovation will disappear. Along with many of the pain points you listed here.
Find our online comment on Chris’ blog here
.Goodbye Secondaries
Filed in: Public markets | Private Equity
Secondaries are a new way to sell an aging promise to dumb money, useful in delaying the pop of a growing Venture Capital bubble. They are a sign that Venture Capital has not recovered at all, and is still desperately licking its sore wounds. What other Venture Capital constructs can we invent, short of telling LPs that the incompatible economic construct and the improper application of risk of Venture Capital are responsible for the suffocation of innovation?
[Links: PEHub
]Trimming Venture
Filed in: Venture Capital
- CalPERS, the California $220B pension fund trims the selection of firms getting Venture money to a few. And with the Venture demi-cartel swirling further into its subprime maelstrom CalPERS judged deservedly so, with many other pension funds to follow. We hate to see Venture moneys decline, but not its subprime allocation. VC investors need to learn how to apply risk correctly before they are allowed again to invest the people’s money, and reduce the rampant false positives and false negatives their ill-fated arbitrage has produced. [Links: PEHub
]
Downstream thinking in Venture Capital
Filed in: Venture Capital | Investing
What follows is my comment to his article:
With all respect Mark, but this is a downstream analysis of Venture. Because certain events in VC occurred in a certain order, the next step in that order is relatively easy to predict and may indeed be correct.Yet, the real (upstream) question remains, if technology adoption worldwide is less than 80%, why is VC as the arbitrage not able to trace its massive greenfield. For the answer to that much more relevant question we need to look at the deflated deployment of risk in Venture, that has turned a high risk / high yield sector into the subprime class (with few exceptions) it is today.Best,Georges
[Links: PEHub
]LP entrapment
Filed in: Venture Capital | Investing
Prominent Venture Capital firm Kleiner-Perkins (KPCB) shows off its lack of entrepreneurial vision with its reported upcoming new fund in a string of previous LP entrapments. First green-tech, which we predicted a long time ago does not yield VC vintage returns. Then the iFund, for the creation of $1B companies from ASPs (average sales price) less than $10 (really?) to a social fund with Facebook, which companies at any point Facebook can choose to displace or disable (really!), to now a Cloud fund for technology utilities to appease the many technology laggers who have a hard time competing with Apple (desperately). Do none of the LPs realize that the risk of investing in technology is not technology?
But in the end Limited Partners won’t hold VC firms accountable to sticking to the Private Placement Memorandum (PPM) thesis, as long as the firm still creates some meaningful return from it. And when a VC firm manages this many concurrent funds, its large investment networks have enough deal diversification to make any investment that walks in their door fit one or more of the available PPMs. Lack of accountability to the original thesis in the PPM is the outcome of a Venture Capital demi-cartel, the opposite a free-market of investing with optimal entrepreneurial discovery would endure.
I continue to be amazed by the games VC firms play to stay in the game, that deflate not propel the opportunity for disruptive innovation. And that is why I dare challenge the intentions of the VC gods. [Links: PEHub
]P.S.: From Paris with love.
Few exits over $100M
Filed in: Venture Capital
Round sizes do not indicate risk, as you can see from my blog ("The economy is not the problem") where I use Vinod's quantification of the deflation of risk with the same money-in. And deflated risk equals deflated returns, hence the reason why subprime VC can only return subprime PE returns.The challenge for VCs is to not look at innovation like deals (or a commoditization of down-side risk), but treat them individually and each with their unique risk and funding requirements. But that assumes a GP who can assess upside risk (rather than money-in, downside) correctly and we are in short supply of GPs who can do that.The problem with innovation remains its arbitrage, not the lack of ideas that can produce great returns.Best,Georges
[Links: AVC
]Pump-and-dump IPOs
Filed in: Venture Capital | Public markets
- When startups cannot clearly describe their upside to the public prior to an IPO, many revert to inventing new accounting methods to describe their often financially challenged downside. Acsoi anyone? The real issue of course is that by pushing highly temporal value through the IPO process we play russian roulette with the trust of the public. And the social economic value of these “pump-and-dump” schemes is often hard to comprehend for those who are not specialists and thus hard for the general public to buy into. And when the public does not understand the value of the company (perhaps because a healthy balance sheet is not there yet), why not stay private and let the PE overhang take care of making the promise of upside become a reality first? Because we are going to need the public’s trust to recover from the deplorable performance in Venture. [Links: The New York Times Dealbook
]
IPO cracks; A $375 billion PE hangover
Filed in: Reference | Global | Public markets
- We wrote about The IPO bubble and described once again how our financial markets are not free and therefor disproportionately and artificially assign benefit to a few. Steven M. Davidoff, writing as The Deal Professor for The New York Times Dealbook site chimes in with his own version. [Links: The New York Times Dealbook
] - Private equity funds have $375 billion hangover, which they can easily throw overboard in the macro-economically defunct marketplace of Venture Capital. I wonder if bubbles grow bigger in a vacuum. [Links: Pensions & Investments]
The IPO bubble
Filed in: Reference | Private Equity | Public markets
But we can rebuild the trust in the IPO process (and thus innovation) with some simple, but groundbreaking financial reform.
Read the complete article...
Benevolent dictators
Filed in: Venture Capital | Private Equity
- We need more benevolent dictators in the startup world, as well as on the investment side - the opposite of the uniformity so prevalent in Silicon Valley today. An article I was going to write about that subject was preceded by an article by Michael Feuer, the CEO of OfficeMax who grew the company from nothing to $5 Billion. Get some excerpts from his book “The Benevolent Dictator: Empower Your Employees, Build Your Business, and Outwit the Competition” online here. [Links TechJournal South]
Subprime Venture Capital
Filed in: Investing | Private Equity | Venture Capital
We explain the meaning of the term “subprime VC” we first coined a couple of years back and explain how Limited Partners (and entrepreneurs) can avoid them.
Read the complete article...
A bubble in a bubble
Filed in: Private Equity | Reference
Here is a great way to learn how to blow your own bubbles:
The risks LPs ignore
Filed in: Venture Capital
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Venture LPs blowing in the wind, continued
Filed in: Online comment | Venture Capital
The real issue is that Venture Capital does not only produce poor index returns, it performs below the consumer adoption rate of technology in the same period, gets outperformed by corporate innovation and capital, has lost public trust because of bad past conversion from valuation to value and does not make a dent in the 80% greenfield of technology adoption. As an LP you should expect from your GPs an alignment with the index of the market opportunity of the underlying asset, not with the performance of those attempting to pursue it. It's a mistake many make in startups as well, where your target and sole focus is the greenfield not on those who failed to empty it. The iPhone strategy is a great example of that. But to step back, any laissez-faire financial system that violates free-market principles turns quickly (depending on market fluidity) subprime. And Venture Capital has turned subprime by virtue of how risk is deployed. Many LPs are unaware of the risk deployed in Venture, 10 levels of bottom-heavy diversification deployed by most LPs demonstrates that despite the belief in the PPM of an individual VC firm you still are unlikely to produce viable returns. So, Chris, the issue is the economic principles by which money is deployed to Venture. And once we fix that, there will be no more room for VC players that cannot perform in line with the massive market opportunity that lies ahead. Innovation scales, and Venture can too. Just not with the current financial model deployed by most LPs. And my fix resolves that.
Read the full commentary here:
Venture LPs blowing in the wind
Filed in: Online comment | Venture Capital
Yet according to Cesar Milan we should blame the owner for the dogs behavior, and thus we should certainly assign blame to LPs for the underperformance of GPs. Not in the least because the economic model under which Venture is deployed is economically flawed.
In his announcement email as the co-chair of the 22nd Annual Venture Capital Investing Conference, June 7-9, 2011 at the Sofitel Hotel in Redwood City Chris writes to await for a new crop of VCs to emerge and refers to winds of change in Venture and conveniently referring to miserable last 10 years in Venture as a down-cycle. Of course the proverbial down cycles are a great way to diffuse any argument against underperformance. Just wait until your child comes home with miserable grades from Harvard and simply referring to them as a 10-year down cycle.
But the most benighted part of Chris e-mail is how he defers all performance issues in Venture to GPs, blissfully forgetting that LPs hire the GPs that don't perform. And thus expecting change in Venture without a seminal event to induce that change is foolish.
A broken system rarely gets fixed by those who created and still benefit from it (by skimming management fees), and Chris' suggestion of synthesizing the old with the new may be wishful and self serving thinking, but hardly realistic. Chris' words demonstrate he certainly has been drinking the NVCA kool-aid. Venture Capital needs to be remodeled from the top down, economically.
But the good news is that Chris' wishes can come true if he is more critical of the role of LPs in the sub-priming of Venture Capital over the last twenty years. Only a rigorous financial reform can resurrect Venture.
[Links: Venture Capital Investment Conference
]P.S.: Greetings from Bretagne, France.
Free VC
Filed in: Venture Capital
- If the SEC would focus on turning Venture Capital into a free-market system, it would not need to divert to crowd-funding with fraud concerns in order to free it. [Links: VentureBeat
]
Another startup flea market is born
Filed in: Venture Capital
This time it is spray-and-pray Dave McClure with his startup demo days
trying to win the fastest gunner medal, err "super angel" medal. Let's all just stick our heads in the sand and forget that subprime risk can only deliver subprime returns. And pick up some Startup America money while you are at it, so we can all glow in the dark side of VC positivity.The subprime Venture maelstrom is spinning and spinning, like it never has before. Get ready for a very rough landing.
VC escapism in search of dumb money
Filed in: Venture Capital
Now VC are drifting away from bio-tech based on the reportedly deplorable state of "the market for bio-tech IPOs". Wait, aren't we "the market"?
VCs are simply drifting
in whatever way allows them to raise their next fund, and trap any Limited Partner not smart enough to see through their nonsense. Here is how VCs have jumped aimlessly around over the last twenty years, chronologically (yet not meant to be complete in granularity):- Enterprise
- Client/server
- Health-tech
- Consumer
- Music
- Biotech
- China
- Security
- Consumer
- Open Source
- Capital Efficiency
- Green-tech
- Agriculture
- Health-tech
- China
- Micro
- Gaming
- Cloud
- Social Networking
- China
All of which herding contributed to negative 4.6% 10-year IRRs. One should have noticed notice that not the identification of popularity produces Venture returns, but the acute value to the public remains the only constant that drives returns.
With Limited Partners in the U.S. slowly taking note of the systemic failure of Venture to scale to the size of the underlying opportunity and turning up the screws, VCs seek the path of least resistance and travel the world
in search for dumb money that keeps them and their cushy management fees afloat.Many foreign countries will fall for it as they have fallen for the fallacies of the free-market that Venture is not, yet it's underlying assets so desperately require to produce disruptive value. Let alone a culture of innovation that takes 20-30 years to build.
So unchanged, I predict the continued failure of Venture globally. But it may take 10 years for you to figure that out, while the fat cats continue to gorge themselves on those lucrative promises.
The fiduciary responsibility of Limited Partners
Filed in: Private Equity | Public markets
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How Facebook prolongs subprime VC
Filed in: Venture Capital
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No Venture beats subprime
Filed in: Private Equity | Investing
- Israeli Venture Funds raised $0 dollars in 2010. Smart. Not investing in Venture is better than turning Venture subprime, because when you invest in Venture subprime, you'll hurt the economy twice (you'll just find out how ten years later). Have a chat with American Limited Partners who have not made a positive return since 1998. The economic model under which Venture operates and deploys risk needs to change first. [Links: PEHub]
Stock Mapping, Despite VC
Filed in: Reference | Private Equity
- For those who are fooled by the belief that the stock market is a free-market and therefor accurately represents the health of companies or its authentic attraction The Wall Street Journal site Smart Money gives an interesting top-level overview of the performance of those assets across sectors. [Links: SmartMoney]
- IPO's are up to $1B in the first quarter compared to same period last year, those who know Silicon Valley well realize that is a sign of how the smarts of great entrepreneurs escape Venture Capital arbitrage, not because they benefit from it. Just give them the money and get out of the way of success is the only model that is sustainable today (Facebook & Twitter anyone?). [Links: PEHub
]
ILPA etiquette
Filed in: Private Equity | Public markets
- I too was asked to comment (about 1 year ago) on the Institutional Limited Partners Association guidelines, a document in which Limited Partners attempt to standardize on their interactions with GPs. I categorized the plan as "dining room etiquette", who actually pays attention to it anymore, even though arguably many should. The real issue between LPs and GPs is that the relationship allows for 10 levels of bottom heavy diversification to which no etiquette can produce sustainable returns. What the ILPA members need is a plan that stops laissez-faire investing from turning the underlying assets systemically subprime. [Links: ILPA]
Icahn gives back, Half a Ponzi
Filed in: Private Equity
- Carl Icahn is giving investors all their money back, and his integrity will pay off big time in the long run. I wish VCs would do the same, invest only their own money instead of just cherry pick secondaries with their cushy management fees. Keep dreaming. [Links: PEHub]
- Half of Bernie Madoff's $20B Ponzi scheme has been recovered. I wonder who will go to jail for the Ponzi scheme that is Venture Capital. [Links: CNBC]
When Angels collude and collide
Filed in: Venture Capital
The biggest problems I have with AngelList is that it further commoditizes the investment thesis (responsible for negative 10-year returns in Venture to begin with) and creates a socialistic investment society, quite the opposite to the anarchy that is needed to deploy unique risk that can produce meaningful returns. The answer to deplorable performance of a subprime VC industry is not to deploy more subprime risk but to do the opposite, deploy prime risk. But the skills to deploy prime risk responsibly are not as plentiful as dumb money.
The one thing certain angels had going for them is their ability to spot unique risk, and now with those participating in AngelList that risk will be ironed out. So, off goes the financial industry again, sliding further into subprime Venture Capital desperation. And with average performance of Angels worse than VC, expect more of its self induce demise soon as we won't have to wait for fund vintages to mature to see the outcome of this futile exercise.
You have to wonder why financial merit is not held to the same rigor as productional merit, for the sake of our competitiveness as a nation.
[Links: AngelList
, subprime VC, TechCrunch: Angels collude]Spinning VC, fundraisings down
Filed in: Venture Capital
Law firm Fenwick & West released its 4th quarter 2010 Venture Capital Survey
, with 67% up-rounds, 21% down-rounds, and 12% of rounds flat. Price of rounds increased by 61%, most probable because of the slipstream of secondaries in deals like Facebook, Groupon, Twitter. Mergers and acquisitions paid $33.9 billion in 445 transactions, a 63% increase in dollar terms from 2009. For all of 2010, VentureSource reported 46 venture-backed IPOs raising $3.4 billion, a close to six-fold increase in the number of deals from the eight venture-backed IPOs raising $0.9 billion in 2009 (over half of the 32 IPOs in 4Q10 were China-based companies with U.S. venture investment). Despite the spinning of wheels by loaded VC funds producing minus 4.6% 10-year returns, confidence of LPs in Venture Capital continues to slide: fundraising by U.S. venture capital funds fell to $11.6 billion in 119 funds in 2010, a 14% drop from the $13.5 billion raised by 133 funds in 2009.It will be interesting to see whether the participation of new secondaries and growth funds from JP Morgan, Bain Capital etc. will slant the numbers this year and drag more lemmings into their wake. Nevertheless, Venture Capital returns will center on the viability of fewer companies - opposite to the spray-and-pray funding strategies of many VCs. Many parameters at play here but I expect to see the run for secondaries to improve statistical spin in VC a bit, to then dry up quickly and produce an even harsher reality of the deployment of subprime risk for most money in the asset class. Another financial bubble is imminent, not to be confused with a bubble in technology.
The future of innovation remains in the crude hands of a dysfunctional financial system, and uncontrolled will continue to demonstrate how it cannot scale to the massive greenfield in technology adoption that lies in wait to be picked up.
UK Venture down
Filed in: Private Equity | Investing
- The UK is looking into raising its Venture deals after a steady decline, with a Venture czar responsible for luring new deals in. Good luck considering that the economic model in Venture is flawed and by economic principle can only produce subprime returns, no matter how much money you throw at it.
Get a grip Wallstreet, VC just as broken as education
Filed in: Reference | Private Equity
- Wall Street is punishing a 40-year old company, HP, for missing its quarterly revenues while growing earnings. Oh please, as if quarterly revenues say anything about the viability of a long standing company. Much more worried should HP be about its largest partner Microsoft, unable to keep pace with OS innovation, phone and tablet computers that erode the growth of PC sales in a systemic fashion. If only the stock market would be a real free-market.
- Venture Capital is just as broken as our education system. Similar characteristics: money out of line with performance, experienced arbitrage lacking, failure rewarded, little accountability, hard to fire. Time to change the package, the solution is not as hard as most people think, but it will be disruptive and radical reform.
378 Stale VCs? VC should give back too
Filed in: Venture Capital
- According to The Funded, 378 Venture Capital investment firms have not made any recent investments. That would mean roughly 1/3rd of all VC firms since the beginning of 2000 have seized to invest, possibly because they have not raised a new fund. And that means the collective investment from these firms into startups has received improper innovation arbitrage, as it has not produced cumulative returns to build the commitment for a new fund. As an entrepreneur please verify your prospective investor is not on this list, to avoid being tagged as a false negative (by a negative). Expect this list to grow some more, so bookmark the source page.
- Oaktree Capital Management hands $3B of its distressed fund back to its Limited Partners, asking them to re-up for a renewed strategy to better match new economies. We applaud their integrity. Venture Capital investors should do the same, given minus 4.6% average returns and give all the unallocated moneys back to LPs. With fewer than 35 VCs making any consistent money for LPs, I bet fewer than 5% of current VCs will be able to raise a new fund with a new, modern investment strategy. Because they just don't know.
VC falls further to 10-year minus 4.64% returns
Filed in: Venture Capital
managed to fall from a miserable -4.2% to a downright horrid -4.64% over the relevant period. Even worse is the vintage-year data provided by Cambridge Associates, which tracks VC fund performance based on the year in which the fund was raised. Who are these Idiot Limited Partners and Idiot Entrepreneurs that keep going back to the same VCs and listen to their compass, like victims suffering from the Stockholm syndrome
, and with our government in desperation greasing the skids to an economic model that does not work. The grand opportunity in Venture is to fix its economic model and reinvent Venture from the top to provide new access to an 80% greenfield of technology innovation that still lies ahead. My new year’s prediction has again come true, in little over one month this time. Sadly.
CalPERS changes and VC allocation
Filed in: Private Equity | Public markets
of CalPERS’ (California Public Employees' Retirement System) $229B assets under management (AUM). While Dan may not be as impressed with CalPERS’ transparency and its past, having had a couple of brief conversations with their “new” CIO Joe Dear and a CalPERS board member it appears their new leader is cleaning house as fast as its bureaucratic system allows him to. I too have found out those boats (pension funds) turn very slowly, and demanding it to move faster is a waste of precious energy. Yet CalPERS is a large and important investor in Venture Capital with 8% or $2.5B in commitments of a total of $31.4B in Alternative investments dedicated to the sector.
The performance of Venture Capital comprised of a mere 1.1% of Total Assets Under Management is not really something to write home about, good or bad. Unless you recently discovered - like I did - that the deplorable (minus 4% average ten-year IRR) performance of Venture Capital comes from how we build the economic systems in finance and thus is much more symptomatic across other asset classes.
Simply put: any financial system using a laissez-faire economic system will inevitably turn subprime. And thus the asset allocation, while increasing in value because of the sheer size of the financial gamble it creates, will at the same time be hollowed out by the deflation of quality of its underlying (subprime) asset.
So unless pension funds really understand the money trail that feeds the underlying assets they will just be as successful as I was in finding a wife (i.e. substance, predictability, sustainability - a future) when I was 18 years old.
VC cooperation, 2H2010 23 IPOs
Filed in: Private Equity | Reference
- I respect Bill Draper the 3rd who came to Silicon Valley in 1959 to join the West Coast’s first venture capital firm. But preaching about more cooperation in Silicon Valley is promoting investment socialism, where we need the opposite: deployment of investment risk driven by anarchy, so it matches groundbreaking innovation. Out with subprime risk, in with investment merit.
- The second half of 2010 scored 23 IPOs according to VentureDeal. $2.5B in Capital, 9 deals priced at above $100M. Get the report here
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Pensions are back, VC is easy
Filed in: Private Equity | Public markets
- Pensions Top 1,000 are back in positive territory. Assets of the Top 1,000 grew by $484.6 billion in the 12-month period, to $6.56 trillion, according to Pensions & Investments' annual survey of the largest U.S. retirement plan sponsors. Hopefully they will spend some of their gains with a little more discipline to Venture this time around.
- Venture Capitalists will want you to believe the “magic” of innovation is a very complex problem with interplays and overlays, not in the least because it prolongs their cushy existence in the sector. I waste no time debunking that one with Paul Flamenbaum at Paul Capital Partners. Venture Capital is easy if you focus on how and where you deploy risk, rather than money.
US innovation favored
Filed in: Venture Capital
- Innovation comes from a culture, and innovative cultures are not bred in a day. Hence the money dished out to US innovation will continue to topple any other country. If money flow is ever truly based on merit, that should continue for 20-30 years, but given our past performance in Venture we know it won’t be long before money starts scattering, desperately looking for new targets.
Venture Capital's problems will continue
Filed in: Private Equity | Investing
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Cottonwood
Filed in: Venture Capital
- David Blivin from Cottonwood Technology Ventures did an interesting talk recorded on video (60 mins) at the University of New Mexico last October for new entrepreneurs. He, unlike many in the Venture business seems to understand the notion of upside investing we defined in our blog way back. My suggestion to him is to tell the story, not to “slide it”.
Most what VCs?
Filed in: Venture Capital | Economy
- Mark Fidelman came up with a list of most respected Venture Capitalists based on sentiment analysis technology. Kind of like a photo sharing site where those who rate an image have demonstrated to be in no correlation to those who buy the photograph. Transactional transparency is the only merit that counts Mark, and faking economic principles is the kiss of death to its underlying asset. In an industry where VCs produce minus 4% IRRs and thus subprime Venture returns, the assessment of those who arbitrage innovation rated by those who chase it is economically irrelevant. Even though I would have put one or two of those people on my list.
Money does not equal risk
Filed in: Venture Capital
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VC transparency
Filed in: Venture Capital
- Henny van der Pluijm in The Netherlands is trying to make Venture Capital a little more transparent with his “Venture Capital Gids”. Not quite the transactional transparency needed to create a meritocracy for all participants, but a good start nonetheless. David B. Lerner has created a map on global Venture activity on his website, not sure about his crowd-sourced data quality control, and thus some of that transparency may be selective and elective. Venture at your own risk.
Endowments on a rise, VC wasteland
Filed in: Public markets | Private Equity
- U.S. educational endowment portfolios grew 19.1% in the fiscal year ended June 30 to $346.5 billion, Harvard leading the pack. Curious to see the contribution of-and-to Venture.
- Quote of the day from PEHub, “Venture Capital is a wasteland”. Any financial system with ten levels of bottom-heavy diversification is.
VC delusions of positivity
Filed in: Venture Capital
- I am convinced the NVCA rallies its VC members to write stories about Venture Capital is “back to normal” and its “returns are going up”, after minus 4% IRR 10-year returns in Venture washed away all of its protectionist arguments, while corporate innovation blew VC performance away in the same period. Is the big news item here that going up means VC performance doesn’t get worse than minus 4%, I would hope so too. VC performance is a disgrace to American innovation. Yet maybe, just maybe (watch the video) what it means is that the best practices of the NVCA in deploying innovation arbitrage over all these years are just not good enough. As a Limited Partner I would not be betting on, but rather against those best practices as statistically and empirically that would yield better returns. Time to face reality boys!
Against small funds
Filed in: Venture Capital
An argument against smaller venture funds <$250mm. I guess @usv @firstround and @iaventures should just pack upTo which my answer is: exactly. Just because there are people, funds and firms making some money does not mean that is good for the innovation ecosystem.
Case in point: many VC firms made money in the bubble only to leave a lasting mistrust with public markets in technology companies since. So, the perpetuation of technology utilities they manage to sell to corporates with even less of a strategic approach to innovation is not a sign of value creation, and the dependency on those M&A transactions signals a further slide into subprime Venture.
The authentic value creation in Venture is when money of the public (Institutional or otherwise) is put to work to create real value for the public.
Or as Bill Draper recently stated
: “The best venture capitalists try to make great companies instead of making a quick buck. Those are the classy venture capitalists. If entrepreneurs have a choice, go to those guys.”HealthTrain to nowhere
Filed in: Venture Capital
- I know and like Bob Bozeman as a person, who has just launched HealthTrain Ventures with $250M aiming to launch 100 companies in Atlanta. But this fund is crazy for two reasons, Healthcare companies are rarely Venture compatible businesses and extreme investment fragmentation will do to Healthcare what it did to the technology sector, turn innovation subprime.
Why Venture firms below $250M cannot succeed
Filed in: Venture Capital | Investing
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LinkedIn IPO
Filed in: Private Equity | Reference
- I like LinkedIn, and its IPO will soon be on the docket. They better hurry up the filing process before the public finds out that Facebook is just around the corner, ready to empty LinkedIn out. Adding Michael Moritz of Sequoia to the board may - for now - have investment bankers buy into its projected public valuation to put the company on the market. I feel sorry for the public that does not have the foresight I do, and will undoubtedly fall for LinkedIn’s highly temporal value, with subsequent prospects in our industry punished for it later on. The reason why private and transparency in the Venture business should not be mutually exclusive.
VC blog merit
Filed in: Venture Capital
- VC blogs are popular, awkward since most VCs don’t make any money for Limited Partners and their compass by virtue of their performance can simply not be trusted. I suggest the only thing VC blog about is the transparency of dealmaking, so we can see who truly earns the merit to tell a story. We need more reliable money-out than money-in stories.
Vinnie Paz and Venture
Filed in: Private Equity | Public markets
- The Venture business is being hypnotized by Venture Capitalists where the chasm between what they say is going on and what is really going on is enormous. A method to establish social control, so says Vinnie Paz’s in his song “End of Days”. Entrepreneurs should play this song on their way back from yet another frustrating false-negative pitch to 95% of VCs who’s arbitrage is defunct anyway. Excusez les mots.
Avoid investor noise
Filed in: Venture Capital
- I agree with Adeo Ressi at The Funded that entrepreneurialism generally cannot be taught (after say six years old), but to raise money you need to learn how to find the right investor. The key in Venture is to avoid dancing with 95% of VCs who never make any money for their Limited Partners and tagging your innovation as a false negative, or put differently, it takes serious skills as to how to avoid the noise in the VC arena. And those skills can be taught.
Resurrect Venture Capital, VC recommendation
Filed in: Venture Capital
- We better not mess up the opportunity to innovate with a financial system that economically can never detect the outliers of innovation. Our new sidebar on our blog explains that better than before: “We owe it to our unwavering entrepreneurial capacity to build a progressive financial system in Venture that can yield rewarding returns from tapping into an 80% greenfield in technology innovation. So, the lies and empty promises in Venture Capital stop right here, where a new more prosperous beginning can take off.” So, don’t be mistaking my criticism of Venture as negativity. Quite the opposite. Only a new more modern economic model in Venture can resurrect Venture Capital.
- I get asked all the time by entrepreneurs what VC firm I would recommend. Without thought my answer is: very few, but if you must just keep your selection down to any of the 35 out of 790 VC firms that make any money for Limited Partners, the others will just perpetuate false negativity in the Silicon Valley maelstrom. So, without performance numbers to look back to, Andreessen-Horowitz stands out for me (on paper). The firm demonstrates to have relevant technical experience (Andreessen), married with relevant economic experience (Horowitz). It is a small firm, where not consensus amongst a large group of General Partner defaults to the socialistic mediocrity that plagues other firms. The firm is able to make small investments quickly and ready to make large investments (without syndicates) to support true upside investing. That means it understands that the deployment of risk is not equal to the deployment of money, just the way we would like to see it. I never had the pleasure of meeting either one of the General Partners, even though I have seen Marc around many times in Palo Alto, so I will leave it up to your own sanity to feel them out.
Venture plummets, Capital efficiency retracted
Filed in: Private Equity | Public markets
- Venture fundraising plummets, are Limited Partners finally waking up? Now let’s do a reset.
- Bill Davidow from Mohr Davidow Ventures now says companies require more money to grow up...what happened to the capital efficiency VCs have been preaching for the last ten years? Yup, it was nonsense to begin with. No longer are the winds so strong that all turkeys can fly. Thanks for not leaving a better Venture ecosystem behind.
VC spin doctors
Filed in: Venture Capital
, because they are false and misleading. Not just to entrepreneurs but to Limited Partners as well. Now Venture Capital pretends to care about entrepreneurs and innovation (rather than about their fortuitous role in it, and they may), while none of its actions prove it is self critical. Despite negative 10-year IRRs.I am not sure who comes up with these promising descriptions, but my suspicion would be the chair conference (Dixon Doll and cohorts). Here is IBF’s mission statement (in grey boxes) for their upcoming event on June 7-9th in San Francisco.
I cringe and need to break them down.
Raising The Bar in an Era of Innovation! We all know venture capital is rooted in the spirit of investing in opportunity. The U.S. has always been a dominant force in fostering world innovation and Silicon Valley’s position of being the heartbeat of entrepreneurship remains true. Very true, entrepreneurial capacity of the U.S. is undeniable (however more than 74% of IPOs are now outside Silicon Valley proper).
However, in recent years, technology disruption and globalization have challenged venture capital’s greatest skill: transforming ideas into marketable and lucrative products. Utter nonsense. Venture Capital by way of collusion and excessive syndication has eroded itself to subprime with equally subprime returns. The best practices of Venture Capital have failed to produce returns, as corporate innovation thrives during the same period.
Further, America has been acutely conscious of a changing world, as economic crashes and educational concerns linger. Global standards are rising and with America’s growing anxiety, pressure has increased for the VC community to continue superior performance and maintain competitive edge. Nonsense. Since when are the actions of Venture Capitalists that do nothing but distribute money from others (Limited Partners) a corollary or a trendsetter to the United States as whole. The pride of this country is production, not finance. Venture Capital arbitrage by way of its artificial stronghold on innovation, has because of its negative ten year performance demonstrated it is not what the United States stands for, does not scale to our capacity to innovate, nor embodies the free-market principles that lie at the foundation of our economy.
Now, more than ever, the spotlight is on innovation – front and center, loud and clear. This is an unprecedented time for the VC community, and together as a whole, the industry must address venture investments and methods to ensure a continued growth trajectory for promising young companies.The spotlight has always been on innovation, and now that the numbers are out, the undeniable failure of Venture Capital to tap into that innovation has surfaced. Venture Capitalists need to look inwards, at their self induced dysfunction instead of look up and hope for “the weather” to get better.
I have asked to present on stage at IBF last year, and so far they declined. So much for injecting some polarity in the old-boys network. So much for really wanting to improve our capacity to innovate.