azeem.azhar

Techcrunch’s piece on venture returns seemed a little optimistic to me when I read it. And @cdixon agreed–pointing to the Calpers data which I have used before.

What is good about Calpers CEV program is that it is a massive program of investment into VC funds. While it misses many of the locked-up super-stellar West Coast VCs (like Sequoia), it is a fair bet that Calpers is a choice LP for many VC funds.

As a caveat to my analysis: I am not a trained financial analyst, so this is best efforts. Since I don’t have the dates of either draw downs and disbursements, I can’t calculate precise IRRs. Someone with more time could build a probabilistic model of this, if  you need.

Headline numbers: Calpers put $3bn into CEV from 1999 to mid-2009. By that point, the net value (in terms of cash paid out and the book value of investments held) was $2.86bn, representing an overall loss of 6.4%. J-curve affects aside, this suggests that venture has returned less than zero over the past decade.

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Popularity: 87% [?]

Michael Liebreich, the hyper-focussed, high energy founder of New Energy Finance, has scored an impressive deal: being acquired by Bloomberg. Over the past six years, with incredible creativity and discipline, he has build a fantastic business–the number one player–in covering the new energy, cleantech and green energy markets.

Michael was kind enough to let me get involved in New Energy Finance as a small investor. And from the sidelines I was able to watch incredibly disciplined execution, a relentless focus on building a superb team and the best investor communications I have ever seen. And all this with a comparative modicum of external funding (compared to, say, Spinvox) and no VC involvement.

Well done NEF!

Popularity: 39% [?]

VC’s are bizarrely private about the returns of their funds, eschewing the calls of other asset managers for transparency–so hoi polloi (you and me) need to rely on whatever sources we can have.

Fortunately, our friends at CalPERS do believe in disclosure and twice a year publish the performance of funds in their alternative asset class. This includes the California Emerging Ventures Program. This is one of the few public sources of the performance of a wide basket of VC funds and as of August 6th, it’s data was updated to reflect performance to 31/12/2008.

I think it’s valuable for entrepreneurs and angels to get a flavour for how VC performs as an asset class over time; and the variety of performance tracks a given fund can take. These will reflect on the GPs you are dealing with and might explain their behaviour during a negotiation or board activity.

What does the CEV programme tell us?

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Popularity: 78% [?]

The Baltic Dry is as some people know is a vital index which tracks the prices being paid for dry-bulk cargo. It is a great indicator for the health of world trade.

However, trading BDI contracts was the realm of professional investors. For us mere mortal retailers, we found proxies, the most popularof which was Dryships (DRYS). Last year, as the BDI enjoyed a hideous rollercoaster as shipping rates hit upwards of $120k per day only to collapse in autumn to as low as, well nothing. DRYS has a strong historical relationship to the BDI and the stock bounced around like a yoyo, hitting as high as $114 and a low of $4 or so.

What has happened this year is that the historical relationship between DRYS and $BDI has broken down.

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Popularity: 21% [?]

It’s worth understanding how LPs pay VCs in other to understand what kind of risks VCs are paid to take.

LPs (or VC investors) are typically pension funds, endowments and occasionally family offices who are investing over a long-time horizon in a variety of asset classes. Because of their time horizon (that is they are looking to build wealth over generations) they can get into longer term investments such as timber, farmland or VC.

These LPs can get stock market returns and bond returns through equity and bond holdings. So they turn to alternatives for two main things:

1. Diversification: don’t put all your eggs in one basket. VC is an interesting asset class in that it diversifies over time (relative to equity markets)

2. Juice: VC, smart guys with money investing in smart geeks, should surely create markets, disrupt industries, yadda, yadda, yadda. Read the rest of this entry »

Popularity: 7% [?]

The very kind folk at Thomson Reuters have provided me with some of the data that Fred Wilson was asking about in his two blog posts on the VC maths problem (I, II).

Starting with US data from 1994 to 2008:

A total of $69.5 bn was raised via 998 IPOs of VC backed firms (of all flavours) in the US. The total post offer value was $396 bn.

There were 3000 M&A transactions from 1994 to 2009 YTD of VC backed firms in the US. Of these, 1460 were disclosed. The sum of  these deal values was $219bn, the average was $ 150m. On average each VC-backed firm had received $32m in financing and in-toto they had received $31m in venture backing.

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Popularity: 18% [?]

The hedge fund annus horribilis rolls on. Those who weren’t dishonest were, in many cases, incompetent. The latest data for March 09 from CSFB/Tremont shows some amusing reading.

So let’s get this right. The equity market/neutral group has lost 43.6% in the 12 months to Mar 09. The S&P only lost 39% at this time. Equity market neutral is meant to be, er, market neutral. Or is it just the easiest hedge fund strategy to come up with, raise money against and earn management fees from?

Popularity: 2% [?]

I was two parts astonished and one part unsurprised to discover that Google was going to get into corporate venturing.

The traditional case for corporate venturing–which is often based on solid academe (e.g. Block, Chesborough, Birkenshaw, Dushnitsky) goes like this:

• Not all the smart people live inside our company. There are tons of smarts outside our company and venturing or minority-investing will help us access this
• We can leverage our balance sheet without hurting earnings by taking small stakes in emerging companies
• As an quoted, operating company we can’t take the risks or afford the uncertainty that new ventures targeting new customer segments or using new technology create.
• Venturing is a cheap way for us to get a good sense of the dealflow in the market
• It won’t cost anything—even if we fail over several years, we’ll only have a writedown of a few hundred million dollars which in the scale of our company is nothing. And who knows, we might pick the next Facebook, er, Google, and then we’ll look really smart
• We need a full armory of innovation tools to ensure we continue to innovate. That armory includes innovation programmes, brain storms, partnerships, McKinsey, BCG, etc, etc and—of course—a venture program.
• The academic studies do support corporate venturing as a driver of value-add (as measured by Tobin’s Q)

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Popularity: 18% [?]