A year after the collapse of Lehman Brothers, venture capital investors continue to emphasize belt-tightening and investing only in companies that have the very best chances to succeed, says an article on the Venture Capital Dispatch in yesterday's Wall Street Journal.
The article is based on a panel discussion on "Keeping Portfolio Companies Alive and Thriving," at the Dow Jones Private Equity Analyst Conference in New York last week.
"If you're not getting escape velocity, that company should be sold or closed," said Kate Mitchell, a managing director with Scale Venture Partners. While there's still a willingness to invest in portfolio companies that are doing well, Mitchell said "there's a lot more dialogue about whether it's too early or too late" to try to accelerate a company's growth.
"The best CEOs are very cognizant of how hard it is to get new funds and [are] adjusting their spending accordingly," said David Lane, a general partner with ONSET Ventures.
Not all the talk on the panel was negative. All panelists saw opportunities for companies to succeed during the recession, but the concept is the need to be very selective.
It's anyone's guess as to how long this attitude will last among venture investors.
Showing posts with label venture capital. Show all posts
Showing posts with label venture capital. Show all posts
Tuesday, September 22, 2009
Wednesday, May 6, 2009
New Ideas to Revive Venture Capital Investing Presented at Industry Conference
A New York Times blog post earlier this week described the four-step plan put forward last week by the National Venture Capital Association to address the drought in acquisitions and IPOs of venture-backed companies. The plan was announced at the association's annual meeting in Boston.
The plan calls for "the return of small investment banks and accounting firms. These helped small tech companies go public until the dot-com bubble burst and then they disappeared. In order for start-ups to start going public again, the big banks and accounting firms must partner will smaller ones to reinvigorate them," the N.V.C.A. said.
Second, the plan deals with new forms of exits, such as SecondMarket and other exchanges where start-ups can sell shares on the private market.
Third, the plan seeks new tax benefits, such as a more competitive capital gains tax rate for IPO investors and tax incentives for-clean tech companies.
Finally, the plan calls for regulations such as Sarbanes-Oxley and financial statement requirements to be eased for very small companies that want to go public.
“It can’t be fixed with a stroke of the pen, but without fixing this problem, literally innovation will be at bay in this country, precisely at the time competition is increasing from abroad,” The Times quoted Paul Maeder, a general partner at Highland Capital Partners.
The blog post also cites Josh Lerner, a Harvard Business School professor of venture capital and entrepreneurship, who recommends that the VC industry focus on three key ideas.
(1) Changes in patent policy. Patent litigation costs so much and takes so long that it is burdening small tech companies, Lerner said. Instead, he suggests a patent policy similar to that in Europe, where inventors can challenge patents before they are approved. By contrast, in the U.S., Lerner said, most patents are granted quickly and protesters have to go to court to fight them.
(2) Lerner recommends using federal funds to support start-ups, rather than just supporting large, struggling companies.
“In our efforts to rescue failing giants, we are spending all this money keeping buggy whips afloat,” he said. “It seems a little crazy to say we’re going to invest all this money in sunset industries, not emerging companies.”
(3) Lerner said the U.S. to do a better job of keeping foreign-born scientists and entrepreneurs who have immigrated here to stay here. These are people we need to advance our business and economy. He predicted tremendous future pressure from China and India -- who will want to hold on to these talented people and provide incentives for them to remain at home rather than emigrat to the U.S.
The plan calls for "the return of small investment banks and accounting firms. These helped small tech companies go public until the dot-com bubble burst and then they disappeared. In order for start-ups to start going public again, the big banks and accounting firms must partner will smaller ones to reinvigorate them," the N.V.C.A. said.
Second, the plan deals with new forms of exits, such as SecondMarket and other exchanges where start-ups can sell shares on the private market.
Third, the plan seeks new tax benefits, such as a more competitive capital gains tax rate for IPO investors and tax incentives for-clean tech companies.
Finally, the plan calls for regulations such as Sarbanes-Oxley and financial statement requirements to be eased for very small companies that want to go public.
“It can’t be fixed with a stroke of the pen, but without fixing this problem, literally innovation will be at bay in this country, precisely at the time competition is increasing from abroad,” The Times quoted Paul Maeder, a general partner at Highland Capital Partners.
The blog post also cites Josh Lerner, a Harvard Business School professor of venture capital and entrepreneurship, who recommends that the VC industry focus on three key ideas.
(1) Changes in patent policy. Patent litigation costs so much and takes so long that it is burdening small tech companies, Lerner said. Instead, he suggests a patent policy similar to that in Europe, where inventors can challenge patents before they are approved. By contrast, in the U.S., Lerner said, most patents are granted quickly and protesters have to go to court to fight them.
(2) Lerner recommends using federal funds to support start-ups, rather than just supporting large, struggling companies.
“In our efforts to rescue failing giants, we are spending all this money keeping buggy whips afloat,” he said. “It seems a little crazy to say we’re going to invest all this money in sunset industries, not emerging companies.”
(3) Lerner said the U.S. to do a better job of keeping foreign-born scientists and entrepreneurs who have immigrated here to stay here. These are people we need to advance our business and economy. He predicted tremendous future pressure from China and India -- who will want to hold on to these talented people and provide incentives for them to remain at home rather than emigrat to the U.S.
Tuesday, March 17, 2009
Search Funds are Growing In Popularity As a Way to Raise the Odds of Building a Successful Business
"While most people have never heard of them, search funds are attracting increasing attention as a way for small businesses to beat the usual odds of success, even in the midst of a deepening recession," according to an article in The New York Times ("Paying Entrepreneurs to Find the Right Business," March 12, 2009), from which this posting is abstracted.
"This is the way a search fund typically works: One or two ambitious graduates of a top-tier business school, who want to run their own business but recognize they lack practical experience, offer themselves as fledgling entrepreneurs who can make some tough-minded investors a lot of money.
"These investors put up about half a million dollars for the pair to spend up to two years scouring the marketplace for a promising business with $10 million to $30 million in revenue. If satisfied with the choice, the investors help finance the acquisition of the business, join its board and give their young partners a crash course in hands-on management. If all works out, the venture grows and makes everybody richer.
"H. Irving Grousbeck, co-founder of Continental Cablevision (later Media One) and now a consulting professor of business at Stanford University, helped originate the business model a quarter of a century ago and has been studying it ever since.
"Grousbeck says studies by the Center for Entrepreneurial Studies at Stanford, which he co-directs, show average annual returns by search funds to their original investors of well over 30 percent.
"The results are skewed by the big winners, which constitute about a fourth of the total. Another fourth fold without making a purchase, a fourth lose money for their investors and a fourth provide a middling return, according to Mr. Southern, the Boston investor. Still, taken as a whole, search funds can be a winning proposition.
"The funds do have drawbacks, of course. The same recession that has attracted search fund buyers has scared off sellers, for example, Mr. Grousbeck said.
Moreover, major successes are rare. However, one major success is Asurion, which was built from a $6 million roadside assistance company with 45 employees into the nation’s largest provider of insurance products to cellphone companies.
"Asurion provides a case study of the power of the search fund model in the right circumstances.
The founders, who had studied under Mr. Grousbeck at Stanford, said they liked Roadside Rescue (the predecessor company) because it was not a towing company. Instead, it sold roadside assistance insurance through local wireless carriers to their users. The venture grew by 50 to 100 percent a year in its first four years.
"Then the two men had an epiphany: they were not in the roadside-assistance business; they were in the cellphone services business. In 1999 they expanded into insurance for loss or damage to cellphones. After making three major acquisitions in recent years, Asurion, based in San Mateo, Calif., has grown into a $2.5 billion company with 10,000 employees, more than 70 million wireless customers and a growing presence in Asia.
Jim Southern, a Boston investor, said his search funds had generated 14 times the capital he placed in 20 companies over an average holding period of eight years
He says that "more business school graduates are being drawn to search funds, in part because of Asurion’s success and in part because the recession has diminished prospects on Wall Street and in corporate America. Nearly 25 would-be search fund entrepreneurs have approached him since November alone, he said, compared with fewer than 10 in a full year in the past. He plans to back nine funds this year, the same as in 2008 and 2007 but significantly more than the one or two a year he helped finance before that.
"Mr. Grousbeck, the Stanford professor who nurtured the first fund in 1984 when he was teaching at Harvard, says the business model has spread to Europe, Latin America, Asia and even South Africa, if only by a trickle.
"Still, search funds occupy a tiny niche of the investment world. Mr. Southern estimates that only 160 or so have been created, all looking for companies with less than $50 million in revenue. He estimated that about 60 search fund companies were active today.
"Even so, Mr. Grousbeck said, investors who back a portfolio of search funds stand a good chance of beating the returns in other markets. “I can’t tell you how many investors have asked me, ‘Why should I pay somebody to hunt for a company when entrepreneurs are knocking on my door all the time to invest in theirs?’ ” he said. “I tell them, ‘You’d be taking a very small risk for the chance to ride the coattails of some very bright and talented people.’ ”
"This is the way a search fund typically works: One or two ambitious graduates of a top-tier business school, who want to run their own business but recognize they lack practical experience, offer themselves as fledgling entrepreneurs who can make some tough-minded investors a lot of money.
"These investors put up about half a million dollars for the pair to spend up to two years scouring the marketplace for a promising business with $10 million to $30 million in revenue. If satisfied with the choice, the investors help finance the acquisition of the business, join its board and give their young partners a crash course in hands-on management. If all works out, the venture grows and makes everybody richer.
"H. Irving Grousbeck, co-founder of Continental Cablevision (later Media One) and now a consulting professor of business at Stanford University, helped originate the business model a quarter of a century ago and has been studying it ever since.
"Grousbeck says studies by the Center for Entrepreneurial Studies at Stanford, which he co-directs, show average annual returns by search funds to their original investors of well over 30 percent.
"The results are skewed by the big winners, which constitute about a fourth of the total. Another fourth fold without making a purchase, a fourth lose money for their investors and a fourth provide a middling return, according to Mr. Southern, the Boston investor. Still, taken as a whole, search funds can be a winning proposition.
"The funds do have drawbacks, of course. The same recession that has attracted search fund buyers has scared off sellers, for example, Mr. Grousbeck said.
Moreover, major successes are rare. However, one major success is Asurion, which was built from a $6 million roadside assistance company with 45 employees into the nation’s largest provider of insurance products to cellphone companies.
"Asurion provides a case study of the power of the search fund model in the right circumstances.
The founders, who had studied under Mr. Grousbeck at Stanford, said they liked Roadside Rescue (the predecessor company) because it was not a towing company. Instead, it sold roadside assistance insurance through local wireless carriers to their users. The venture grew by 50 to 100 percent a year in its first four years.
"Then the two men had an epiphany: they were not in the roadside-assistance business; they were in the cellphone services business. In 1999 they expanded into insurance for loss or damage to cellphones. After making three major acquisitions in recent years, Asurion, based in San Mateo, Calif., has grown into a $2.5 billion company with 10,000 employees, more than 70 million wireless customers and a growing presence in Asia.
Jim Southern, a Boston investor, said his search funds had generated 14 times the capital he placed in 20 companies over an average holding period of eight years
He says that "more business school graduates are being drawn to search funds, in part because of Asurion’s success and in part because the recession has diminished prospects on Wall Street and in corporate America. Nearly 25 would-be search fund entrepreneurs have approached him since November alone, he said, compared with fewer than 10 in a full year in the past. He plans to back nine funds this year, the same as in 2008 and 2007 but significantly more than the one or two a year he helped finance before that.
"Mr. Grousbeck, the Stanford professor who nurtured the first fund in 1984 when he was teaching at Harvard, says the business model has spread to Europe, Latin America, Asia and even South Africa, if only by a trickle.
"Still, search funds occupy a tiny niche of the investment world. Mr. Southern estimates that only 160 or so have been created, all looking for companies with less than $50 million in revenue. He estimated that about 60 search fund companies were active today.
"Even so, Mr. Grousbeck said, investors who back a portfolio of search funds stand a good chance of beating the returns in other markets. “I can’t tell you how many investors have asked me, ‘Why should I pay somebody to hunt for a company when entrepreneurs are knocking on my door all the time to invest in theirs?’ ” he said. “I tell them, ‘You’d be taking a very small risk for the chance to ride the coattails of some very bright and talented people.’ ”
Subscribe to:
Posts (Atom)