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Showing posts from December, 2008

Search Funds

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

Venture Capital's Coming Collapse?

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

Creative Destruction and the Financial Crisis

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

What's Wrong with Cleantech VC

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&#

The Weekend that Wall Street Died

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

Lou Gerstner on the U.S. Auto Industry

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.