azeem.azhar

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% [?]

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% [?]