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On a trip out to Charlotte visiting PE firms, I talked to a fellow student that was interested in starting his own search fund .  I had no idea what one was, so he gave me the 30-second description and then pointed me towards a couple websites to learn more about it.  The basic idea of a search fund is for an entrepreneur to raise funds to allow them to search for a target business to acquire, operate, and then exit.  In the initial stage, you identify investors that are interested in making private equity investments.  You pool together small investments from those investors ranging between $15 to $20k for a total of $150 to $400k.  This initial fund pays the entrepreneur's salary and expenses while they search for a target company to acquire.  In the next stage, the investors buy the company and hand over the company to the entrepreneur to lead as CEO or President.  The entrepreneur's goal is to grow the company for 4 to 6 years to the point where the company is ready for an

Just to add to the gloom-and-doom in the financial markets, Forbes came out with a very critical review of the venture capital industry ( "Venture Capital's Coming Collapse" ) and why the industry will likely undergo a major restructuring in the coming years as funding dries up.  Here's a good excerpt from the article: The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut , and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts . To get an idea of how lackluster the returns overall have been: Joshua Lerner, a professor at Harvard Business School, recently analyzed returns, net of fees, for 1,252 U.S. venture funds going back to 1976. The median return for top-quartile firms was 28%. That included the huge profits of the tech boom, whic

I just read an interview with Richard Foster on the McKinsey Quarterly.  In his book , Foster argues "that to endure, companies must embrace what economist Joseph Schumpeter called 'creative destruction' and change at the pace and scale of the capital markets, without losing control over current operations".  Foster talks in the interview about how the market in general outperforms individual companies because most companies can't evolve as fast while still being able to focus on their operations.  The cycle Foster talks about is one where entrepreneurs innovate outside the bounds of regulations (driving unusually high equity premiums), how those equity premiums draw additional people in to create a crash, and then how the government steps in after a crash to create new regulations and institutions.  And then the cycle happens again.  Entrepreneurs innovate outside those new regulations, etc. etc. Here's an excerpt about the equity premium cycle: The granddad

I came across this post on GreenVC.org from Rob Day an investment principal at @Ventures about what's wrong with cleantech venture capital right now.  The presentation is included below, but Day summarizes the trends he sees as follows: The shift to larger and larger funds. The related shift to later-stage investing. The related shift into capital-intensive subsectors and business models within cleantech. The mismatch of investment concentration with the geographic dispersion of cleantech innovations and innovators. The concentration of venture capital investments into just a few subsectors, while the lion’s share of subsectors receive much less attention (much less dollars) from investors. From flipping through the presentation itself, a few other things stuck out to me (in my own terms): VC's don't know what businesses will work and which don't work (i.e. provide a good return).  There just haven't been enough exits yet. Exit have been trending towards M&A&#

I just read an article in the WSJ titled " The Weekend that Wall Street Died " about the weekend of September 13 - 14, 2008 where Lehman was forced to file for bankruptcy and Merrill sold itself to Bank of America.  It's a pretty fascinating play-by-play of the weekend and how the heads of the top remaining banks (Richard Fuld at Lehman, Lloyd Blankfein at Goldman, John Mack at Morgan Stanley, and John Thain at Merrill Lynch) met with the Fed and SEC, met with each other, and met with representatives from Barclays and Bank of America, a series of interactions that resulted in changing the face of Wall Street forever.  It's amazing it all happened in a single weekend. The basic series of events was as follows: Leading up to Friday Sept 12 : Confidence in Lehman had plunged during the week.  Lehman's clearing bank, JP Morgan, was asking for additional collateral and if Lehman couldn't raise more capital they would be downgraded forcing them to put up even more c

Former IBM CEO Lou Gerstner was interviewed by the WSJ.  The interview included an excerpt about the auto industry.  I thought his comments on turnarounds was pretty interesting.  He mentioned that when you're trying to turnaround a company you have to move quickly.  You can't take a decade to slowly turn an organization around - you have to move with speed.  He also comments on how important it is to deal with the culture change necessary to make that turnaround strategy really work (which is probably the most difficult thing to change in a company).  The easy part is coming up with the strategy and knowing what to do.  Getting it done and changing behavior is the hard part.

My finance professor handed out a fantastic article called " The End " written by Michael Lewis, the writer of Liar's Poker , about the mortgage melt-down and some reasons for what fueled the bubble on Wall Street.  The main take-away from the entire article for me is that incentives on Wall Street are totally mis-aligned - as I'll talk about shortly. In the article, Lewis tells the story of Steve Eisman.  Eisman started his career as a corporate attorny, then turned to become an equity research analyst at Oppenheimer, and finally moved on to a hedge fund (Front Point Partners).  At Front Point, Eisman built up short positions across the entire subprime mortgage lifecycle - mortgage originators, homebuilders, mortgage bonds, CDO's, etc.  The article describes in colorful detail Eisman's journey in uncovering the roots of the industry and at every turn how shocked Eisman himself is. Eisman repeatedly questions how it was even possible (or legal for that matter)

I read in VentureBeat that a start-up called Better Place is going to partner with California to build a $1B electric car infrastructure for the Bay Area.  It sounds like a pretty ambitious plan.  It will be interesting to see how this plays out.

This presentation from Sequoia was mentioned several times in the media, so I finally got around to Google'ing it and found it off of VentureBeat.  Good times.  Oh, I mean RIP good times.  It's actually a really nice macro-economic summary (albeit incredibly depressing).  I love the "let's get drinks" slide at the end. Sequoia Capital on startups and the economic downturn View SlideShare presentation or Upload your own. (tags: depression recession )

I came across a research article in Knowledge@Wharton titled " Show Me the Money: Aura of Top M&A Banks Often Obscures Low Returns for Clients " about how the league tables ranking investment banks don't necessarily correspond to post-M&A performance of the banks' clients.  In fact, the study finds that there's actually a negative correlation between the league tables and post-M&A performance.  That's obviously counter-intuitive.  One possible reason is as follows: Banks are simply responding sensibly to industry practices. "Since clients ignore the very measures that do predict future performance [i.e. past performance] and instead focus on market share, it is entirely logical for banks to maximize their league table position -- in particular, by accepting even value-destructive mandates," he and Bao write. "Not only will the mandate boost fee income today, but it will also increase market share and the ability to generate income

I read an article about 4 months back in the WSJ (" Study Refutes Niche Theory Spawned by Web ") regarding a debate between traditional marketing theory where businesses focus on producing and distributing blockbuster products (that have significant marketshare) vs. a new paradigm where businesses shift production and distribution to a vast array of products tailored specifically to the individual tastes and needs of consumers.   The latter theory is generally referred to as the "Long Tail", but a recent study by a Harvard Business School professor seems to refute that theory.  Adding to the discussion, I just watched a fascinating interview with Eric Schmidt , the CEO of Google, in The McKinsey Quarterly where he talks about why businesses should not focus their strategy on the long tail. First, what is the "long tail"? We can summarize the long tail as follows (here we draw on a few sources including HBR - The Long Tail Theory in Short , WSJ - see link a

Someone recommended I read the NY Times Magazine article from a few weeks ago called " Capitalism to the Rescue " about how venture capital money is fueling the so-called green-tech economy.  The article almost entirely focuses on Kleiner Perkins.  The article includes quotes from John Doerr and Aileen Kim (one of the Green VC Stars ) among others.  The article talks at length about how KPCB finally made its foray into green-tech in the last few years and why they did so.  Surprisingly it was Bill Joy that led the way with a "map of grand challenges" in the energy space: Then, in late 2006, at one of Kleiner’s corporate retreats, Bill Joy, a founder of Sun Microsystems and a new partner at the firm, displayed what later became known within Kleiner as “the map of grand challenges.” This was a matrix of colored squares that itemized the firm’s progress in locating potential investments in about 40 different categories: water, transportation, energy efficiency, electri

I watched this 7 min video from the McKinsey Quarterly and thought it was pretty good. It focuses on the urbanization that China will undergo over the next decade as hundreds of millions of people flock to urban centers. It also deals with how China should build those urban centers - lots of mega-cities of 10 million+ vs. some mega-cities surrounded by mid-size cities in a hub-and-spoke model vs. proliferation of small townships. Here's the video: The accompanying article on the topic covers the same material in a little more analytic detail.  Beyond the exact format the urbanization will take, what I think is more interesting is the implications that any mass urbanization will have on the economy there.  Here are some areas of concern: Land - with urbanization and development comes urban sprawl and the loss of arable land - which means heightened concerns over food security Energy - the demand for energy and energy resources will more than double (from 60 quadrillion Brit

I saw this on BigThink. Soros talks about how consumer spending has been America's engine of growth over the past decade. The current financial crisis has basically shut that engine off. So, what's the next engine that's going to take us out of the recession/depression we're heading into? Soros thinks it's energy - alternative energy and energy savings technology. video platform video management video solutions free video player

It's been a few months since I've posted anything up here (chalk it up to b-school). But I figure I should try to keep in the habit of posting things I come across. With the election only 8 days away, I thought this one was appropriate. I read a post in Mankiw's blog called " My Personal Work Incentives ". He takes a look at each of the candidates tax plans, specifically the high-end of where their tax plans would place people and companies, and then considers where an additional dollar earned today would be 35 years from now. Basically, if he earned an additional dollar today and saved it for 35 years with interest at 10%, what could he expect to hand over to his kids in 35 years (taking into account personal income taxes, capital gains taxes, corporate taxes, and estate taxes)? So, it turns out that $1 would yield $28 to his kids without taxes, $4.81 with McCain's tax plan, and $1.85 with Obama's tax plan. I thought this was a funny closing line: The bot

"Across the United States, if someone is injured in an auto accident, the chances are about one in seven that the at-fault driver is uninsured" - so says a 2006 article in the Insurance Journal. Why should you care? Because you could be involved in one of those accidents. I learned that the hard way today. I got hit by someone yesterday in a parking lot. At the scene they claimed to have auto-insurance and I jotted down their insurance and license info, but when I called their insurance company today to file a claim I discovered there policy had lapsed. Lucky for me the damage was minor. As it turns out, though, I shouldn't have been surprised that the driver was uninsured. In California, the rate of uninsured motorists is even more outrageous - one in four ! That's the second worst uninsured rate in the United States. That's sad. (And the lesson here - always always always call the police to file a report!) So how could the problem be this bad? I suppose this

I read an article in the WSJ about some really fascinating scientific research about the brain. It turns out that people make the best decisions when they trust their instincts and just go with their gut. It's pretty amazing. Apparently, the human mind actually makes a decision 10 seconds before the conscious mind is aware of it. The mind apparently has a decision making process that is deeply embedded in our cells and it takes time for our conscious minds to really grasp it. Here's an excerpt that describes it: In experiments with laboratory animals reported this spring, Caltech neuroscientist Richard Anderson and his colleagues explored how the effort to plan a movement forces cells throughout the brain to work together, organizing a choice below the threshold of awareness . Tuning in on the electrical dialogue between working neurons, they pinpointed the cells of what they called a "free choice" brain circuit that in milliseconds synchronized scattered synaps

I read an article in the WSJ (Merger, Indian Style: Buy a Brand, Leave it Alone) a while back about how Tata Motors was going to buy Jaguar and Land Rover from Ford. The main focus of the story was how Tata was looking to learn from the US companies: Rather than seeking to wring profits out of two luxury automotive brands that frequently have lost money, Tata is looking to learn from them to help launch its own global expansion in autos, using the brands' own management team and a full roster of employees. I thought that was an interesting trend. I later came across an opinion piece by Matthew Slaughter, an associate dean and professor at Tuck, about what the Tata deal tells us about the benefits of foreign direct investment. He pointed out how these multinationals undertake their "insourcing" deals: It is well known that new FDI can come via "greenfield" investments that build new businesses from scratch. Think photo opportunities of business executives and

There's a lot of VC money going into "green tech" projects these days - $2.2 billion in 2007! I read an article in Forbes about the next generation of VC's leading the charge. The bios of these folks is truly ridiculous. Here's an excerpt: This trio could get hired anywhere. Aileen Lee was president of her section at Harvard Business School. Trae Vassallo learned to program when she was 7 and at 28 cofounded a wireless e-mail company that Motorola bought for $550 million. Samir Kaul led the effort to sequence the genome of the arabidopsis plant and then built three life sciences companies from scratch. He's only 33. These three are among venture capital's new guard. That's kind of humbling.

I was skimming through Mankiw's blog and came across a post on McCain and Obama's positions on carbon auctions . I mentioned the importance of the carbon auctions in my previous post as a lesson that the US is learning from the mistakes in the EU - i.e. giving away carbon credits in many cases actually serves as a subsidy. Mankiw's point is that you have to go with a full auction system because it most closely resembles a Pigovian Tax, which apparently is the optimal policy response to externalities. A Pigovian Tax is basically just a tax levied to counter negative externalities in a market. If you give away carbon credits for free, there's no price and no incentive to improve. Instead, you have to put a price on the externality and make people pay for it. And then theoretically the revenue that's generated from the tax could be used on research or projects to mitigate the impact of the externalities. I also read an article recently about what's called a

I read a few articles about the proposed cap-and-trade system in the U.S. and thought it'd be a good opportunity to read up on the Kyoto Protocol. According to a press release from the United Nations Environment Programme (from Wikipedia): The Kyoto Protocol is an agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this limitation represents a 29% cut). The goal is to lower overall emissions of six greenhouse gases - carbon dioxide , methane , nitrous oxide , sulfur hexafluoride , hydrofluorocarbons , and perfluorocarbons - averaged over the period of 2008-2012. National limitations range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland. An additional summary from Wikipedia o

I read a few articles lately about energy created by wind turbines placed in offshore, deep water locations. One article was in Forbes called Deepwater Wind . The other article was in the WSJ called Winds Shift in Energy Debate . It doesn't seem like you can get much cleaner in terms of energy production than wind. But due to problems with the energy grid and transmission capacity, one of the problems with wind turbines is that they need to be close to the markets that will actually consume the energy. For a major city, one of the solutions that has been proposed is to place wind turbines just offshore. The conditions offshore offer consistent, steady wind. But the problem is that the wind turbines obstruct the ocean view. An excerpt about this from the WSJ: Because of favorable wind conditions and the relative ease of siting, much of the U.S. construction to date has been in areas far from big population centers. In many cases, transmission systems lack the capacity to move

The weekend edition of the WSJ had a fun article titled A Stinky, Pricey Delicacy highlighting the recently increasing price of the durian fruit in Asia. One durian can set you back upwards of $200. Until today, I had not had the pleasure of tasting durian. But the article prompted me to see what all the fuss was about. Here's a quick excerpt from the article describing its unique qualities: Adored by Southeast Asians and Chinese, the durian sends most foreigners fleeing, thanks to its unmistakable odor. "Gasoline" and "blue cheese" are two tame metaphors people often use to describe it; "garbage," "stinky socks" and "manure" also are frequently invoked. Even here in Thailand, durians are banned in hotel elevators, subways and airplanes. Well. We bought one tonight from the Asian market, cracked it open, and dug in. I have to say all the above descriptions were wrong. It was more like a custard version of french onion soup.

Ok. I think I've beaten the corporate tax horse to death lately, but I like Greg Mankiw so I wanted to post this one. He wrote an opinion piece in the NY Times a few weeks ago about reducing corporate taxes. A couple good excerpts: A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers. Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax. He continues further to discuss why to focus on corporate

I read The Reluctant Fundamentalist by Mohsin Hamid while on vacation in Italy and thought it was really good. The book basically tells the story of a Pakistani man who comes to the US, attends a good university, gets a dream job in financial services in New York, falls in love with an American girl, and then abandons it all to return to his home country after 9/11. Although the story is a little contrived - the parallel between the man's failing romance with the girl and his failing romance with America is a little too obvious - it's really wonderfully written and a real page-turner. Given my ethnic background, how I went to a good school, moved to New York to do consulting, and was there on 9/11, much of the story felt familiar. At its core, for me, it was really a story about identity in the U.S. Particularly about changing your identity here - the ability to transform from an immigrant or an outsider to one of the elite and how America post-9/11 developed an isolationi

I read an interview with Robert Mundell in the opinion section of the WSJ this morning. Robert Mundell is regarded as the father of supply-side economics and the euro. He won a Nobel Prize for Economics in 1999 (the same year the euro was introduced). In the interview, Mundell offers some interesting commentary on the current state of the economy, including issues like the current marginal tax rate, the corporate tax rate, and the weak dollar. I figured it would also be an opportunity to explore supply-side economics a little further. An aside - why focus on the " marginal " tax rate? The marginal tax rate is looking at the rate at which the next dollar that someone earns gets taxed. So basically, to what extent does someone have an incentive to make that next dollar? The distinction becomes important when you have a graduated or progressive tax system like you do in the U.S. (and many other countries for that matter). Here's a quick view of the progressivity o

While I was over in Italy there was quite a bit of coverage of the EU referendum in Ireland. On the flight back I read an interesting article in the Financial Times. Ireland had not yet voted on the measure at the time of the article and they subsequently voted No. There was a tremendous amount of campaigning and advertising around both the Yes and No sides. But what I found particularly interesting about the situation is that it was actually the left-wing (unions, etc.) that were pushing for the No vote. And one of the primary reasons they were pushing the No vote was because they claimed that Ireland must lose control of their ability to continue to have low corporate taxes. Unions pushing for lower corporate taxes! Amazing, right? Ireland has corporate taxes hovering around 12.5% and their economy has benefited significantly as a result. Here's a quick excerpt from the article: Ireland's corporate tax take was €6.4bn last year, representing a little less than half t

I've watched the show SuperNanny quite a few times and think it's a great show. I read an article in the latest US News & World Report called Good Parents, Bad Results . The article highlighted eight things that parents do wrong when disciplining their kids (based on findings of researchers from places like the Yale Parenting Center and Child Conduct Clinic). Here's the rundown of the eight and some excerpts: 1. Parents Fail at Setting Limits If parents don't set limits, children will then try to push the limits because they feel unsafe. They are looking for their parents to respond so that they can get an understanding of what's safe and what's not safe. These kids have problems later in life. But, paradoxically, not having limits has been proven to make children more defiant and rebellious, because they feel unsafe and push to see if parents will respond. Research since the 1960s on parenting styles has found that a child whose mom and dad are permiss