venture - Paul Hoff on Diigo

24 Oct 09

04 Jan 09

The Ultimate Bubble?: Politics & Power: vanityfair.com

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venture pe

those other kinds of funds, hedge funds—which make short-term investments in securities rather than, like private-equity funds, long-term investments in companies—are, everywhere, shutting their doors. Investors in those funds are, sensibly, demanding their money back—or what’s left of it.
This is an extraordinary demonstration of denial, or of a dreamworld, or of an alternative reality—or of my father’s dictum. Nobody knows if the world’s great P.E. firms are out of business—the guys who run these firms may not even know.
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- In a never-ending re-invention of relative masters of the universe, it was private-equity guys who came to sit on top: David Rubenstein, at the Carlyle Group; Blackstone’s Schwarzman; K.K.R.’s Henry Kravis; T.P.G.’s David Bonderman; Quadrangle Group’s Steven Rattner.
- Most of the powerhouse firms that, in the last five or six years, have come to dominate the corporate world were firms that found themselves with money in the bank when the market collapsed in 2001. In the private-equity formula, a $2 billion company which, at the bottom of the market, had lost half of its value—making it a $1 billion company—could be bought with $100 million in cash and $900 million in debt.
- For one thing, the modus operandi and reason for being of private equity is borrowed money, and there is none to be had— zilch. Gone
- while firms have raised vast pools of capital—the success of a firm is judged largely on the amount of money it has raised—this capital is not actually in the bank. It’s “on call”—and it’s entirely unclear what happens if, for instance, the Carlyle Group, with $40 billion theoretically available, calls on someone (wealthy individual, pension fund, well-endowed university, or, in that hall-of-mirrors locution, a fund of funds) who has lost the will or wherewithal to meet the call. (Permira, the big U.K. P.E. fund, has voluntarily let some investors take money back.)
- the very premise on which a P.E. fund buys an asset—that is, a reasonable ability to ascertain its current value—is gone. Nobody knows what anything is worth—therefore you’d be a fool to buy it.
  
  This last point is, unfortunately, germane not only to what you buy but also to what you own.
- To wit: private-equity firms now own all these businesses which not only have dramatically declined in value but are, practically speaking, worthless—their value doesn’t exceed their debt. What’s more, as consumer spending plunges, there isn’t enough business to support the debt.
- This general hubris and belief in business prowess come because, while P.E. firms have so often been Keystone Kop sorts of managers, the economy has over and over again proved their competence. Or, at any rate, the rising economy meant that all sorts of mistakes would be covered by a rich resale price. In a sense, with the market constantly rising, you could do nothing wrong—until now.
- Accordingly, the Maxim business went from making $28 million to making $8 million annually, which is not enough to pay the costs of the debt it incurred. Hence, Quadrangle Group, which recently admitted defeat and closed its hedge-fund arm (sometimes called, confusingly, the Quadrangle Fund, which, when I was in Monaco, meant that a rumor swept the Hôtel de Paris that Quadrangle itself had collapsed), is now trying to give Maxim back to its creditors.
- Apollo, Leon Black’s troubled firm, they’ve lost $365 million on Linens ‘n Things.
- Cerberus paid $7.4 billion for Chrysler.
- Blackstone, at the top of the market—indeed doing the last big deal of the bull market—paid $26 billion for Hilton Hotels.
- Blackstone become the biggest hotelier in the world, owning at various times mass-market chains such as La Quinta and Extended Stay America as well as Claridge’s, in London—reportedly Mr. Schwarzman’s favorite home away from home—but the Carlyle Group is named after the Carlyle Hotel in New York, David Rubenstein’s favorite hotel.
- Actually, Lehman Brothers, Bear Stearns, and a few other banks paid $26 billion for Hilton—they lent Blackstone the money. Or, in fact, because Lehman and Bear have collapsed and their debts have been bailed out by the U.S. government, you’ve paid for the Hilton hotels—with their dramatically devalued real estate on which their empty rooms sit.
- In order for the banks to get the business of private-equity firms, they gave deals they should never have given. Actually, loans to P.E.-backed companies are, in many instances, far worse and far more risky than subprime loans, which at least can be foreclosed on. The major P.E. firms in the riskiest of deals have gotten the most liberal terms possible—they almost can’t go belly-up. What’s more, it is important to remember that, if the private-equity game is played correctly, you don’t have that much money in any single deal. The lenders are on the hook. (The partners at Quadrangle can wash their hands of Maxim and still show up at work the next day.) You’re not. If it does well, you benefit disproportionately; if it goes south, you suffer minimally.
- unlike a hedge fund or a bank, which are only ever investors, a P.E. firm can suddenly become a manager (again ignoring the fact that these people know nothing about managing). They can slash, burn, reduce, maximize cash flow
- And yet, being comfortable with there being no there there is the talent. That’s the private-equity genius: We’ve figured out how to buy companies without putting up the money; we’ve figured out how to run them without knowing anything about them. The situation has just gotten more fluid—the banks don’t have money to give us, and God himself couldn’t turn a profit at most companies now. But somewhere, sometime soon, if we can just bluff it out, there is opportunity. Amazing opportunity.

29 Oct 08

Information Arbitrage: Climate Update: Early Stage Investing

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venture vc crash

larger funds ($100 million+) I know and work with are pulling in their horns
doesn't appear to be much of an appetite to do new early stage deals.
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- IPO market is closed and times to exit could be extended from 3-5 years to 8-10 years and beyond.
- Smaller funds,
- plenty of dry powder (both financially and managerially) to both support existing companies and to deploy in new deals and are seeing more deal flow than ever. So while they are clearly raising the bar for investment and competition for VC capital is intensifying, many view the current malaise as a chance to invest in great businesses at attractive prices
- All VCs, whether large or small, are saying that current cash should be husbanded, with the goal that it should be sufficient to support the business until cash flow breakeven
- "In the end you will succeed because of what you DO spend your money on."
  Surely time is right.
- LIQUIDITY CREATES OPTIONALITY. That means having the chance to accelerate growth in the face of weakened competitors, to step up advertising and promotion when others can't afford such expenditures and to hire key talent at better prices to shorten release cycles or to sell more aggressively.
- angels who "dabble," e.g., aren't professional angels or "super angels" as I've referred to them in the past, are generally shell-shocked and backing away.
- this means for the entrepreneur is that it will surely be harder to put together those "friends and family" rounds, as the dad next door who was willing to toss in $50k in April is licking his wounds from his equity portfolio dropping by 30%. But while the competitive environment for capital has intensified the money is there, it just happens to be in fewer, more concentrated hands
- Be in the jet stream; don't be at the edge. Get in the middle of "directional optimism."
  What David was saying is to avoid being a feature, an add-on. Be right in the middle, be relevant. Be something that squarely addresses a client problem. Don't be afraid to go for it. Because if you don't, you will not succeed.
- Get your product into customers hands ASAP - NO SCIENCE PROJECTS - and with total transparency.
  In essence, don't be afraid to look stupid, don't be afraid if it breaks. Be honest with a client as to where you are and what you are trying to accomplish. Take their feedback seriously. Rapidly iterate on the product. And get it back out in front of them. Use rapid iteration to FIND THAT CUSTOMER.
- Overcommunicate with your team in times of turmoil.
- Those that did share a lot often found that team members came up with solutions better than the CEO, and were "pre-socialized," helping to allay a CEOs fear of having to fire people, cut salaries, etc.
- Listen to customers and data. They are the two keys.
  While David acknowledged the value of his Board and other smart people in his orbit, at the end of the day the ultimate guideposts of progress are customer feedback and data around usage. Little else matters.
- Be and "AND" culture
  In short, always be raising money until you never have to raise it again, and build product at the same time. Those who say raising money is a distraction to building product just don't get it. You have to do both AND do them well. It's all about the AND.

16 Jun 08

Why Venture Funds Don't Want Your Cash - New York Times

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Venture investing

the average venture fund raised from 1992 to 1994 earned its limited partners more than 20 percent a year. Those fortunate enough to be in funds raised from 1995 to 1997 earned, on average, more than 50 percent a year.
The optimal fund size, Professor Kedrosky and others say, is a $250 million fund managed by four partners. ''There's 25 years of data that shows that funds roughly this size give the best returns, but it's like everyone went temporarily nuts for a while,'' he said.
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- The differences in performance between funds in the top quartile and funds in the bottom are profound,''
- IF there are 5 winners in a market sector and 10 losers, the winners still make up for the losers,'' said Steven Dow, a Sevin Rosen partner. ''But what we saw happening during the boom is that 30, 40, 50 companies would be funded in the same market. Five winners don't make up for 20 or 30 or 40 losers.''
- ension fund managers who did not discover venture capital until the late 1990's. Typically, those running a fund of funds invest their own money alongside their clients', and are thus motivated to choose only those funds that pass muster. Pension fund managers, by contrast, are investing other people's money, typically according to a formula set by a board.

Why Venture Funds Don't Want Your Cash - New York Times

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venture investing

The optimal fund size, Professor Kedrosky and others say, is a $250 million fund managed by four partners. ''There's 25 years of data that shows that funds roughly this size give the best returns, but it's like everyone went temporarily nuts for a while,'' he said.

15 Jun 08

Rules Of Thumbs - Venture

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rot rulesofthumb venture

28 Jan 08

The Equity Equation

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startup venture

An investor wants to give you money for a certain percentage of
your startup. Should you take it? You're about to hire your first
employee. How much stock should you give him?

07 Nov 07

VentureBeat » Raising money in good times

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venture vesting

remains a strong market for entrepreneurs to raise venture capital. The survey finds that valuations have continued to increase, while some tough terms negotiated by venture capitalists such as multiple liquidation preference and “ratchet” anti-dilution remain comparatively rare.
We are increasingly hearing requests for odd-ball terms such as very short vesting schedules (2 years?!) and founders’ protective provisions that recall the heady days of the Bubble.
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- With respect to founders’ vesting, the people who build the company are the most likely to be the ones who lose out with “creative” vesting schedules. Most founders think about how to protect themselves from being ejected by VCs, however, the vast majority of the time, it’s the founders who get rid of one another when someone is behaving badly or not pulling his or her weight. With aggressive vesting, this can result in an ex-founder owning a huge chunk of stock, while the remaining founders work like dogs to make it valuable.
- It may seem counterintuitve not to push for the “best” terms, but in my experience the marginal value of improved terms is not worth the investment in time and effort required to incur such gains.

Noam Wasserman's "Founder Frustrations" blog: Golden Handcuffs and Vesting: Early Analyses

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vc venture

Anything less than three years of vesting in front of anyone on the team on an early stage deal starts to get very risky. I've never done a 1 year vest thus far.
In the case where an individual is brought in as CEO 3-4 years into a company's existence, we are often stuck with giving him/her full vesting on the unvested shares on a double trigger. Reason being that a strong CEO, who has been through the fire before, knows the game and will make this a centerpiece of negotiation.

Ask The VC - Equity Compensation Terms

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venture vesting

The standard vesting terms for a venture-backed company are typically a four-year vest with a one year cliff.

Feld Thoughts - Term Sheet - Vesting

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venture vesting

Industry standard vesting for early stage companies is a one year cliff and monthly thereafter for a total of 4 years.
nvested stock typically "disappears into the ether" when someone leaves the company. The equity doesn't get reallocated - rather it gets "reabsorbed" - and everyone (VCs, stock, and option holders) all benefit ratably from the increase in ownership (or - more literally - the reverse dilution.") In the case of founders stock, the unvested stuff just vanishes. In the case of unvested employee options, it usually goes back into the option pool to be reissued to future employees.

06 Nov 07

What should the vesting terms of founder stock be before a venture financing? | Startup Company Lawyer

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venture vesting

A typical vesting schedule is four year vesting with a one year cliff. This means that 25% of the shares will vest one year from the vesting commencement date, with 1/48 of the total shares vesting every month thereafter, until the shares are completely vested after four years
the amount of acceleration should be similar to the amount of severance that a person may receive in the same situation. If six to 12 months of severance might be justified if a person is terminated without cause, then six to 12 months vesting acceleration seems reasonable. Of course, the typical norm in technology companies is that there is no severance in any situation.
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- Single trigger change of control vesting means that the shares accelerate upon a change of control. This isn’t in the best interest of investors because the fully vested founders have little incentive to continue to work for an acquiror after a change of control. In order to incentivize these people, additional options may need to be granted, which increases the cost of the acquisition to the acquiror, potentially to the detriment of the investors
- Double trigger change of control vesting means that the shares accelerate upon a change of control AND the founder is terminated without cause or a constructive termination occurs within 12 months of the change of control.
- double trigger 100% acceleration for founders or certain executives is fairly accepted among investors. However, extending that protection to rank and file employees is not common.
- , VCs are likely to impose their own vesting terms and acceleration upon a Series A financing, so it may not matter what terms are implemented when the initial founders shares are issued. However, reasonable vesting and acceleration terms may survive the Series A financing, especially if it would be difficult to renegotiate with a critical founder in a team with multiple founders.

11 Sep 07

VentureBeat » What motivates an investor to say “yes”

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funding pitch venture

Venture investments by their very nature require a leap of faith (none more than ours) that only comes when an investor becomes aspirational – when he or she wants the investment to make sense (even though statistically deals never do make sense).
three things come together for the investor
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- they have a sense (and it’s often just a gut feeling) that the idea could be very big
- They personally believe in the entrepreneur
- have a personal interest or background in the industry that gives them a leg up the diligence curve.
- So my advice, if you’re an entrepreneur trying to raise money, is focus on these three levers. If you’re not the evangelist, ‘people person’ type, find someone who is and make them your front person.
- convincingly convey a sense that yours is a big idea then go looking for investors who love the stuff you do.
- Avoid the trap of pitching anyone who will listen. It’s exhausting and demoralizing.
- carefully from among those with an expressed affinity for your sector – they’ll be the ones with a tendency towards the aspirational.

05 Sep 07

Developments in German venture capital

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rate of return venture

a quarter of providers of funds to early stage venture capital firms set an explicit target rate of return and the average rate is 28.5 percent.

business finance - venture capital finance adviser alternative investment market

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rate of return venture

initial rate of return most VCs would expect is 25 per cent

24 Jul 07

Venture Hacks — Thoughts on ‘The Equity Equation’

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equity value venture

hen you evaluate a candidate, ask yourself whether she is likely to increase the next round’s share price (include the dilution of her market rate options). If the answer is yes, she is a possible hire. If no, she is a no hire.
financially at least, taking money from a top VC firm can be a really good deal.
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- It would improve the average startup’s prospects by more than 43% just to be able to say they were funded by Sequoia, even if they never actually got the money
- things that increase your share price the most
- hire an investor to serve on your board if he didn’t bring money with him? If the answer is no, his value add is literally worthless
- top firms pick the best companies, they don’t make the best companies. They say so themselves

22 Jul 07

Venture Hacks — Should you raise debt or equity?

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funding return valuation venture

5% per month or every two months

Venture Planning Associates - Investor Returns

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return venture

the earlier the stage,
the more difficulty will be encountered in raising the initial capital.
Start ups, 10-12 times return in 5-7
years.
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- compounded Venture Capital Return
  Rate over many years is approximately 17.8%
- Venture Fund
  to be profitable, it must assume at least 50% of its investments will
  at best make only a small profit

14 Jun 07

fastsoft

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7ip ip nicta research venture

FastSoft creates "full throttle" connections for sending any file of any size, making it an ideal tool to improve productivity and profitability in a wide range of industries.

15 May 07

Charles River Ventures’ Angel Experiment: First Nine Investments

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early stage funding vc venture

When Charles River Ventures announced its Quick Start program last year to provide a few hundred thousand dollars to startups on an expedited basis, it caused minor ripples in the Angel funding market.
CRV is doing very well overall. They say their 2000 fund will return 2-3x to limited partners, an excellent return by any measure, particularly given the 4 year nuclear investment winter from 2000-2004.

Paul Hoff's Library tagged venture → View Popular

blog.jedchristiansen.com

The Ultimate Bubble?: Politics & Power: vanityfair.com

Information Arbitrage: Climate Update: Early Stage Investing

Why Venture Funds Don't Want Your Cash - New York Times

Why Venture Funds Don't Want Your Cash - New York Times

Rules Of Thumbs - Venture

The Equity Equation

VentureBeat » Raising money in good times

Noam Wasserman's "Founder Frustrations" blog: Golden Handcuffs and Vesting: Early Analyses

Ask The VC - Equity Compensation Terms

Feld Thoughts - Term Sheet - Vesting

What should the vesting terms of founder stock be before a venture financing? | Startup Company Lawyer

VentureBeat » What motivates an investor to say “yes”

Developments in German venture capital

business finance - venture capital finance adviser alternative investment market

Venture Hacks — Thoughts on ‘The Equity Equation’

Venture Hacks — Should you raise debt or equity?

Venture Planning Associates - Investor Returns

fastsoft

Charles River Ventures’ Angel Experiment: First Nine Investments

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