What’s happening to all that money?
There have been many accounts recently about the implosion and explosion of the private equity, venture capital and hedge fund markets.
Given that there are few high-profile hedge funds and private equity funds that have imploded in a big way -including a few of those which were playing in mortgage backed securities. Many are viewing this as a necessary correction, and just desserts for funds that are not playing by the rules (wasn’t the whole idea behind hedge funds to be "hedged" in down markets?). But there are a large number of hedge funds that have not only survived the downturn of the market in the last quarter, but have generated positive returns.
By and large the amount of capital in the market is growing, but the distribution of the money is the big open question.
Venture capitalists raised 34.7 billion in funds in 2007, the highest amount raised since 2001 which was 38.8 billion according to Thomson financial and the National Venture Capital Association (NVCA).
So is all of that money going? As of last year, not a whole lot found its way into the pockets of entrepreneurs!
According to the Los Angeles Times, the VC investment into local companies fell to $689 million in the fourth quarter of 2007 compared to the $921 million during the same period in 2006. However the number of deals actually went up indicating that investors might be making smaller bets and waiting for the market to shakeout.
The New York Post (Private Equity Is Exploding) reports that the private equity boom in 2006 - 2007 is continuing through the early part of 2008. Despite a few spectacular flameouts, PE firms are continuing to raise tens of billions of dollars. Even with pension funds scaling back their investments, money has continued to flow in from foreign wealth funds.
For now much of the money in alternative investment funds seems to be sitting in the sidelines waiting out the crazy market dance.
As the gurus of Wall Street would say — "staying in cash is a perfectly acceptable market strategy". So the current wait-and-see-attitude where funds are not deploying all of their capital, might simply be a legitimate defensive position, and not the doom and gloom scenario that it is sometimes made out to be.
BIL - the un-conference : Answer to TED
Let me start out by saying that this un-conference thing is not for me. I didn’t like the couple of these things I have attended, I don’t like the idea of it, I don’t like how they are executed and I don’t like the outcome.
Here is BIL un-conference.
BIL is…
an open, self-organizing, emergent, and anarchic science and technology conference.
Nobody is in charge.
If you want to come, just show up.
If you have an idea to spread, start talking.
If someone is saying something interesting, stop and listen.
What do you need to bring to the un-conference?
Things to bring…
A camp chair. Who knows where you’ll end up having a session. Bring your own folding chair, like this one.
A laptop.
A cell phone.
A camcorder (if you have one).
A power strip.
Funny thing is that I might actually attend the Bil2009 conference. Why? because despite its inefficiency and despite its unfocused organization, it has potential and it offers a soapbox that is interesting. Moreover, I keep thinking that a couple of un-conferences that I attended did not have a “critical mass” of people, so Bil2009 might be a part of the continued experience of exploring the un-conference format.
I don’t like un-conferences very much but I dislike regular rigid conferences even more! So see you at BIL2009. TED and BIL are coordinated so BIL happens just after the TED.
Success factors of early stage venture investing
What are the factors that determine the success of Angel investing? In the most comprehensive study of Angel investors, Robert Wiltbank and Warren Boerker have looked at the portfolios and exits of 539 Angel led investments, in a three year study conducted through the Angel Capital Education Foundation and the Kaufman foundation (study is here Returns to Angel Investors in Groups). They gathered data from several prominent angel networks including the Tech Coast Angels in Southern California. Their analysis provides interesting insights into the factors that determine success in early-stage venture investing.
First, the numbers: the average ROI on investments of individual investors who are part of angel networks is 27% on average, with 2.6x return in 3.5 years. The returns are concentrated in a small number of investments with only 7% yielding more than 10x.
1. Due diligence: the amount of due diligence conducted on an investment is a direct predictor of success. It is clear from the study that a higher number of hours of due diligence relate to greater returns on the investment. This confirms that the large number of hours that angel networks spend in due diligence, per deal, is indeed time well spent.
2. Expertise: The experience of the angel investor in the industry that they invest in is also correlated with the success of the deal. The strength of large angel networks lies in the depth and breadth of the expertise of its members. This finding regarding the correlation of investor experience with returns indicates that in angel networks, investments are best led by (or actively supported by) members who have specific domain expertise in the area.
3. Follow-up: Hands-on investors had a higher success rate than those who were less involved with their portfolio companies. This finding certainly makes sense, as companies that are closely mentored and receive the benefits of the investor’s experience, are more likely to succeed.
The study covers investors in major angel networks. Individual Angels are not included in the study. It is not clear how the performance of individual Angels would compare with the results of this study. One can only guess that single investors would not invest the tens to hundreds of hours of due diligence typically conducted on investments in angel networks. On the other hand, angel investors with very strong know-how in a particular domain might perform very well if they invest within their own area of expertise. Individual Angels tend to invest in companies and people that they are familiar with, so they might have more insight into the strengths and expertise of the entrepreneur.
The issue of an investor keeping in close touch with the companies that they invest in, is a big one. The standard recommendation is that an angel investor build up a portfolio 20 to 25 investments, so that they are properly diversified. For an individual investor (or even one within a network) the job of tracking that many companies can be very time consuming indeed.
And then there is the issue of what is "suitable diversification" in a venture portfolio. If we use the results of this study - that only 7% of investments are in the category of "make-the-fund" transactions that return more than 10x, it implies that in a portfolio containing the recommended 25 investments, 1.75 on average, will generate high returns. With an error of 0.75 on the average number of investments needed, there is a 67% (1 sigma) probability that the investor get between one to two big hits under their belt.
The last piece of analysis assumes a normal curve for venture investments. But but of course we know that there is nothing "normal" about venture investing, and that the highly interesting phenomena really lie in tails of the distribution!
Robert Scoble and the secret Microsoft killer product
We know that Microsoft is going to unveil a revolutionary product. We think it is coming out March 3rd. We don’t know what it is. We know a lot about what it isn’t.
The hoopla started when Scobleizer Robert Scoble broke the story that he was shown a Microsoft product which was so moving that it made him cry.
Microsoft researchers make me cry
It’s not often that I see software that really changes my world. It’s even rarer that I see software that I know will change the world my sons live in. I can count those times pretty easily. The first time I saw an Apple II in 1977. When Richard Cameron showed me Apple’s Hypercard. And something called Photoshop, all in his West Valley Community College classroom. Later when I saw Marc Andreessen’s Netscape running the WWW.
I think we have all been there. Seen an invention that you knew was going to change the world.
So it was when I saw the first web browser. It was Mosaic (the mother of all browsers), beautiful, even in its first version. I tried to tell others what I had beheld. "It had graphics, hot links that you click on to go to yet another page, you book mark things you like….". But it was like speaking a language no one understood. If all you had encountered were Bitnet, Decnet and ATDT (remember?) there is no way you would have the vocabulary to understand how revolutionary the first graphic web browser experience is.
So I understand Robert Scoble, and his need to write about what he had seen, even if he cannot divulge the details yet.
Techcrunch has spent some time speculating about what this is. Scoble has replied on his blog with what the new product isn’t - ie everything that Techcrunch is speculating about. According to Robert it is not operating systems, productivity apps, data centers or databases, video game consoles. And no, it is not the touch table top pc either. What is seems to be is a clever, small application that two (presumably very smart) people built.
So then Valleywag gets into the fray. They scold Scoble for starting hype about a product before he is released from an embargo regarding divulging information!
From Valleywag: Unsolicited advice, Robby: If you have an embargoed piece of information, don’t talk about it until you can talk about it. You’re not building buzz, you’re killing it in advance by sending people’s imaginations soaring in the wrong directions
Excuse me! There is no great product that has needed buzz before it was released, to be successful (think Facebook, Google, Ebay). Nor has any product been killed simply by hype.
For those who are pointing to the Segue as a prime example of high expectations generated due to too much buzz, lets just be honest. The product did not get killed because of buzz. It faded away because it looked dorky! Steve Jobs thought so, and a focus group of a few teenagers would have come to the same conclusion if the designers had let anyone have a peek at the product while it was being built!
Meanwhile - yay for Microsoft! We are all ready for them to totally wow us with their next app!
Loading ...