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Just read a good article in BusinessWeek titled " Super Angels Shake Up Venture Capital " about how new, smaller venture capital funds are filling the gap in early-stage venture funding.  The article focuses on Josh Kopelman's First Round Capital .  The "super-angels" are basically just early-stage venture funds that are near or under $100 million.  Kopelman argues that the economics of large venture funds ($1 billion+) aren't sustainable, particularly in this economy.  Most of these funds need to return 3x in three years (for a 20% annual return).  With a $1 billion fund, that means you need your investments to have exits in excess of $15 billion (assuming you're invested at 20%).  Given there are no IPO's these days, it's tough to have those kinds of exits.  Makes sense I suppose for investments that don't need much capital to get going (IT, web, etc.).  But it seems the mega-funds still have their place.  To get an alternative energy start...

Read an article in the WSJ titled " High-Tech Start-Ups Put Down Roots in New Soil " about how many high-tech start-ups are considering moving their operations to lower cost locations in America.  States such as Ohio and Michigan are offering significant incentives for these companies to move, including grants and tax breaks.  The downside for these companies is that the funding infrastructure may not be fully in place in those new locations.  For example, venture banking, venture capital, and other sources of finance don't have a significant presence or interest in places like central Ohio.  Says one start-up CEO: "When it comes to raising larger amounts as the company grows," he says, "it remains to be seen if the financing infrastructure [in Ohio] is up to par with the operational side. I think it would be a mistake if we ceased connection to the West Coast."

Read a post in VentureBeat about how VC's are upset about the fees that major i-banks like Goldman Sachs charge small companies for IPO'ing.  They feel that the larger banks have traditionally demanded large fees (e.g. $7M in a $100M IPO), while smaller banks in the syndicate that do most of the work get a much smaller piece of the fees.  Reminds me of the research I saw last fall about how IPO's from the large investment banks (based on the league tables) actually perform worse than those from smaller investment banks.

The WSJ put out a three part video series on the source and events of the financial crisis.  It's about 25 minutes in length.  Good follow-ups to my previous posts - The Weekend that Wall Street Died and The End of Wall Street and Misaligned Incentives . Chapter 1: What Happened Chapter 2: Why it Happened Chapter 3: What Happens Next

I saw this post titled "How to Spot Subprime VC" from Georges van Hoegaerden on PEHUB and thought it was interesting.  Here are the highlights: Seems more interested in how it is built rather than what the disruptive business proposition is. Seems more worried about cost of development than cost of greenfield customer acquisition. Talks about valuations before you’ve explained the value of becoming the market leader. Seems more occupied with categorizing the investment than understanding its unique business value. Talks about capital efficiency without probing market inefficiency. Doesn’t question market entry risk, but focuses on cost . Doesn’t ask about the runway to profitability, but the initial round to get in. Asks you which other investors you’ve spoken to. Asks you to talk with his associates first. Asks you more about your education than your work experience.

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...

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)...

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 ...