Jul 02 2009
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My Cyborg Name
W.I.E.S.E.N.: Wireless Individual Engineered for Sabotage and Efficient Nullification
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“ Renting usually is cheaper than owning. In really expensive cities, such as New York and San Francisco, renting is so much cheaper that it’s tough to make the case for becoming a homeowner. Buying in these markets often means settling for a much worse property or an awful commute, compared with what you can afford if you continue to rent. You’re not really throwing money away when you send a check to your landlord, anyway. You’re exchanging it for a place to live. You’re also getting flexibility and freedom — things you sacrifice when you buy a home. When you’re a renter, it’s the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide or you get or lose a job, you can up and move, often with just a few weeks’ notice.
Jul 01 2009
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“ When Facebook launched its off-site advertising initiative called Beacon, users were seeing things like the purchase of a surprise engagement ring on Overstock.com exposed to a would-be wife on Facebook because people didn’t understand how to deal with the new integration of 3rd party sites.
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The Day Facebook Changed - Messages to Become Public by Default - NYTimes.com
This isn’t the point, but … overstock.com? Really?
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“ Delinquency rates on the least-risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure. Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.
Jun 30 2009
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“ It’s not smart money. It’s wise money. Wise investors see long-term potential. Entrepreneurs often choose VCs based on how well the VC knows the company’s industry or has a specific skillset (like good at business development or understands the technology.) The entrepreneurs think that this is what “smart money” means. But really, the job of a VC is not to figure out your industry better than you or to fill a gap in your team. Their job is corporate governance — financing issues, recruiting, firing a CEO (or possibly you!), or mergers and acquisitions. These issues require wisdom - understanding the long term consequences of your actions. As such, what you’re really looking for is wise money.
Jun 29 2009
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via dilbert.com
Jun 25 2009
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A Dark Summer
[caption id=”attachment_44” align=”alignleft” width=”60” caption=”Stuart Ellman”][/caption]
We’ve been hearing it from readers and friends about not blogging more over the past month. And it’s a fair critique. Sometimes we just have nothing to say.
It is feeling pretty dark in venture capital right now and as we head into summer it doesn’t seem likely that most of these things I’m about to say will change.
Venture capital is basically a funnel. Money goes in, companies are built, value is added (or not, depending on your point of view), exits are achieved, either via M&A or public offerings. Let’s look at each part of the funnel.
At the top of the funnel we see a few things:
• Many LPs are questioning the venture model or don’t have the funds to participate in the venture asset class.
• Pension funds are scared to be seen allocating to Private Equity and Venture Capital.
• New funds aren’t being raised – firms are finding that their returns aren’t sufficient to entice LPs to dance another song with them.
• Those new funds that are being raised are smaller and further apart.
• Those who have capital are scared to put it to work, either because they worry that the companies won’t be able to succeed in such a slow environment, or because they feel they must conserve capital for their existing portfolio.
As move into the middle of the funnel, a few observations:
• Social media deals are having trouble, as the sector was overinvested and many of these investments assumed a business model could be figured out in a more capital-rich environment down the road.
• Online advertising is struggling badly, and an entire ecosystem of consumer internet and ad tech companies that depended on ad support are having to re-think their businesses.
• Deals in clean technology or hardware sectors that require significant CapEx are struggling, as the public market required to properly provide these companies with growth capital simply hasn’t come back in a timely fashion.
And finally, the bottom of the funnel:
• Despite a few promising IPOs, the exit markets are still a mess. The pipeline of companies that “should” be able to go public is lengthy and it will take a while to process this queue. Trade sales are down as the multiples afforded by the acquiring companies have decreased due to a depressed stock market.
• Over the last decade, venture returns have not been exciting, and it looks like this will continue while the market and the broader economy works on recovering from its leverage hangover. This wasn’t the fault of venture capital or our companies, but we are collateral damage.
• Even for those companies who may be able to go public, there is little mezzanine equity available, certainly none from hedge funds.
So, what does one do? I still believe in the venture model. Motivated, entrepreneurial people will start and build great companies. Great venture capitalists are wanted, not because of the color of their money but because of the quality of their advice and help. These two always find a way to meet up. Exit markets always come around; new companies will grow quickly and people will want to invest in the next Apple or Google. Some fund cycles have poor returns. Others have excellent returns. An LP cannot pick the right fund cycle, as the commitments are 10 years. So in order to play, you need to invest in all the cycles. New funds not being raised means that those with capital will have lower prices and better returns. VC’s will carefully put money to work but the asset class will get smaller; it is Darwinism with the VC community. Pension funds will end up reallocating capital as soon as they start to see returns. The lack of mezzanine capital means that prices will stay reasonable, even for quickly growing companies.
At RRE, I have many reasons to be happy. The unallocated capital in our most recent fund is larger than most new funds. We have some really terrific companies in our portfolio. I have huge confidence in the team we have put together. However, in tough times, I am focused on being very tough with new money going out the door. A follow-on investment has to really deserve the money in order to get it. The days of keeping a struggling company alive and hoping for a better time is behind us. New deals will get (and are getting) funded. In fact, we are closing one this week. But the bar is very high.
Management teams need to be great, the markets need to be moving, and the price needs to be attractive. Money will be made over the long term if the right tough decisions are made now. This is one of the many things we learned as a firm out of the last cycle and we are applying it now.
Jun 24 2009
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“ Transformers: Revenge of the Fallen” is a grotesque exercise in hyperinflation. At 149 minutes, it’s longer than “2001,” “Close Encounters of the Third Kind” or “Star Wars.” In fact, this may be the emptiest epic ever made.
Jun 19 2009
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“ On Tuesday, Bloomberg noted that housing starts were “soaring,” in May, up 17.2 percent from April. That’s up three straight months, the Journal chimed in. But housing is an extremely seasonal business. The CEO of a large bank once told me that his bank’s mortgage business all but disappeared in the fall because men in the Northeast wouldn’t look at houses on Sundays during the football season. So noting that housing starts or sales rose sequentially in the spring months is a little like saying traffic at the train station next to Yankee Stadium was up hugely in April, when 20 games were played, from March, when no games were played. What really matters is the comparison with the previous year. And the news is horrid on that front. “Year over year, housing starts were 45.2 percent lower than the pace of construction in May 2008,” the Journal noted.
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“ Prices? While they’re likely to keep falling a while longer under the weight of foreclosures, the market is definitely closer to the bottom than the top. “We expect prices to drop for another year and then stabilize before starting to rise with incomes,” says Standard & Poor’s (MHP) Chief Economist David Wyss. Moody’s Economy.com (MCO) predicts the S&P/Case-Shiller U.S. National Home Price Index, maintained by data specialist Fiserv, will fall about 16% this year before regaining ground. Based on the National Association of Realtors national median home price of $180,000 for the fourth quarter of 2008, that would mean a median of $152,000 at the end of 2009 and then a rebound to $179,000 by the end of 2012.
