http://www.orlandosentinel.com/business/os-florida-rises-in-venture-survey-20120224,0,4884331.story
By Richard Burnett, Orlando Sentinel
In a boost to Florida's national ranking, companies here attracted nearly $300 million in venture capital last year, an indication that investment firms are taking notice of the Sunshine State during the nation's slow economic recovery, according to a new survey.
Florida companies received $299.8 million in 2011, or nearly 58 percent more than the state's 2010 total, according to the MoneyTree Report published by PricewaterhouseCoopers and National Venture Capital Association. They received $55 million in the fourth quarter alone — a fivefold increase from the same period a year earlier.
PricewaterhouseCoopers Florida's 2011 growth rate topped the national pace and moved the state up two spots to No. 13 on last year's venture-capital rankings. Nationwide, firms and wealthy individuals invested $28.4 billion in VC deals, a 30 percent increase from 2010.
Central Florida generated deals worth a combined $45.2 million last year, a 10-fold increase from 2010. With a fourth-quarter total of $9.35 million, the region has now posted five straight quarters of VC deals after being shut out in 2009 and landing only one deal in 2010 until late in the year.
Three local companies received venture financing during 2011's fourth quarter: software developer Pentaho Corp. ($5 million) and surgical-equipment maker LensAR Inc. ($4 million), both of Orlando; and XOS Digital Inc., a sports-data technology developer in Lake Mary ($350,000).
Pentaho's millions were the latest in a series of deals. The company, which produces business-intelligence software, has received more than $20 million from venture-capital firms based in Silicon Valley and London since its founding in 2004. It now has 58 local employees, a sales office in San Francisco, and a global clientele that includes browser-developer Mozilla.
"We have a group of strong investors that believe in the company and are willing to invest into the future," said Doug Johnson, its chief operating officer. "We sell all over the world and are ramping up to expand in several regions nationwide, including the Orlando area."
More venture capitalists are extending their radar to include Florida, said John Cambier, managing partner of IDEA Fund Partners, a Durham, N.C.-based venture firm that opened an Orlando office last year.
He cited, among other things, the state's new biotech initiatives, such as Orlando's Medical City at Lake Nona, which could eventually generate "a flurry of startups and venture-backable companies."
"We think there are good ideas, good people and good opportunities to invest in Florida," Cambier said. "We just need to work together to convince the rest of the venture-capital community to spend some time there so they can see it, too."
The nation's perennial venture-capital leaders continued to lead in 2011, starting with California ($14.7 billion), Massachusetts ($3 billion), New York ($2.3 billion) and Texas ($1.5 billion), according to the MoneyTree survey, which is based on Thomson Reuters data.
Local experts welcomed the latest figures but cautiously evaluated their significance.
"There's some economic recovery in those numbers, though ever so slight," said Michael Okaty, an Orlando corporate-finance lawyer. "The problem when we look at the economy is that we have some businesses doing badly or closing, while others are flourishing. In a way, we still have two different economies, two different Americas out there."
Wednesday, February 29, 2012
14 Ways To Be A Great Startup CEO
http://onstartups.com/tabid/3339/bid/34321/14-Ways-To-Be-A-Great-Startup-CEO.aspx
Everyone thinks that being a startup CEO is a glamorous job or one that has to be a ton of fun. That's what I now refer to as the "glamour brain" speaking aka the startup life you hear about from the press. You know the press articles I'm talking about... the ones that talk about how easy it is to raise money, how many users the company is getting, and how great it is to be CEO. Very rarely do you hear about what a bitch it is to be CEO and how it's not for every founder that wants to be an entrepreneur. I've spent a lot of time recently thinking about what it takes to be a great Startup CEO that is also a founder. Here are some of the traits I've found.
Be A Keeper Of The Company Vision
The CEO is the keeper of the company's overall vision. I'm not talking about the vision for the next few months, but the larger road ahead. The CEO needs to be able to keep things on course for the current quarter to make sure that the large overarching vision of the company can be achieved. The takeover the world vision of a startup usually can't be achieved in one year or even in some cases, like Google, in a decade. It takes a great startup CEO to keep the company on track to achieve that vision. A great startup CEO will often judge upcoming initiatives to see if they fit in as a piece of the large puzzle for the bigger vision.
Absorb The Pain For The Team
A startup CEO needs to be the personal voodoo doll for a startup. They need to be able to take on a strong burden of stress, pain, and torture all while making level headed decisions. You can't have the troops stressing and worrying about the difficult challenges at hand. A good startup CEO will absorb the stress, so the rest of the team can carry on. He also needs to be able to mask this pain and stress. Not that he should hide or lie to the team- I'm not encouraging that. Most of the day to day nuances+stresses of a startup aren't worth having the entire team worry about and the CEO needs to bear that pain.
Find The Smartest People And Defer On Domain Expertise
A startup CEO has a great knack for finding talent. The key is finding people that are smarter than you on specific topics. It might be technical team members/leaders or it might be a new VP of Biz Dev. A startup CEO has to have the ability to find these people and make relatively fast decisions to hire them. They also have to be able to show the fire and passion to convince them to leave what is most likely a better paying and more secure job to join the company. The real key to hiring as a startup CEO comes after the hire. A great startup CEO will be able to trust the hires that they make and defer to them on areas of domain expertise. It's hard to let go, but you have to learn to, especially when the company grows.
Be A Good Link Between The Company + Investors
Whether you want to believe it or not, you are not an investor's only portfolio company. Even if you are a superstar, they have a handful of other companies to help and a ton of incoming potential portfolio companies. A good investor will pick 2-3 new companies per year to work with. A good startup CEO will be a good link between progress, issues, and areas where they need help with investors. A good portion of early stage startups that raise money will have a board comprised of 3 people: the CEO founder, the investor, and an independent board member. You are the lone representative for your cofounder and other employees.
Be A Good Link Between The Company + Product
I have this unwavering belief that the best companies are those that keep a founder as CEO for the long haul. Not because the founders have the right to be CEO, but because the CEO needs to be close to the product vision of the company. Founding CEOs understand this the best and can carry out that same unified vision over time. To fill in the management gaps a great COO, other board members, and heads of divisions will come along. It's a strategy that Facebook has employed and why Apple has had a great resurgence with Steve Jobs at the helm. It's all about keeping the CEO as close as possibly linked to the product.
Be Able To Learn On The Job
Most startup CEOs didn't start out with an MBA or some background in growing a company from nothing to something. The best have an ability to learn along the way and embrace their failures to become a better leader. Zuck started when he was 19 and now 7 years later, runs the most powerful internet company. Don't worry about whether "you're qualified" as it's hard to put typical qualifications on the job. You'll learn the really core stuff along the way. The best startup CEOs will surround themselves with smart mentors to be a sounding board along the way.
No Experience Almost Preferred
It's almost better to have a blank slate of zero experience as a startup CEO. If you come in with preconceived notions and block out the scrappy methods of a startup founder, it actually hurts you. Traditional education often trains you to be CEO or manager for a much larger company, not for a startup of under 50 people. It's a different kind of leadership and company.
Have An Uncanny Ability To Say No
You will be inundated with a list of requests from potential partners, investors, employees, and more. They will all sound absolutely wonderful. As you grow, you will also have the resources to execute more of them. Don't. It's easy to say yes, but so very hard to say no. By having an uncanny ability to say no, you can keep your company on track with the large vision you maintain. It will also keep your team members (notice I don't like to use the word "employees") laser focused and feel more rewarded as they are able to focus on one thing for a good chunk of time. I've seen too many startups sink because the CEO keeps changing what the head of product and engineering should be doing.
Have Some Technical Knowledge And Skillset
A good startup CEO shouldn't be afraid of a little bit of code and a text editor. They don't need to be diving into the source code on a daily basis, but they need to understand the technical requirements. It's easy to say "go build this", but it's a whole other ball game to understand how to build it. What seems simple may be a huge mountain of a technical feat that just isn't feasible with the given resources and deadlines. It can also help lend some street cred with hiring early technical team members too.
Be Able To Break Things Down Into Sizable Chunks + Milestones
Remember that huge unwavering vision that you are the keeper of? Odds are it only makes sense to you and your cofounder. You will need to break it up into sizable chunks and milestones for the rest of the team to understand it. You also need to be able to pick when and where to conquer things strategically. What is the past of least resistance so you can gain traction? What can you do first with your given resources?
Have The Ability To Call An Audible
Nothing goes according to plan. Things fall through, people quit, shit happens, servers crash, and other random things go bump in the night. You're going to have to deal with it and fast. This is a football term:
"Seen when the quarterback goes up to the line of scrimmage, sees a defensive alignment he wasn't expecting, and adjusts by yelling out a new play."
You're going to come up against things that you didn't expect and just be able to call an audible. Launch faster, spend more money here, or even abandon a project.
Can Motivate The Team Through Despair
People love to talk in this business. People love to talk even more when you're company isn't fairing well. A great CEO will be able to take those moments of public despair and keep the company focused. They will be able to debunk the rumors or even approach them head on by keeping the members of the company focused on the bigger mission at hand. It can come in simple 5 minute talks or motivational emails. The worst thing you can do is avoid the situation and be passive aggressive. I repeat: DO NOT WUSS OUT.
Be A Great Communicator
You need to be able to portray the energy and passion that you feel into others...over and over and over and over and over and over again on a daily basis. As a startup founder you need to communicate the vision and hope for the future of your startup to the rest of the world. You need to be able to break down the overall vision of the company into something that mere mortals can understand. You can't speak in crazy technical jargon or industry terms. It needs to be simple, clear, and compelling. You also need to be able to argue your point. Many will pick "fights" with you just to see how strong willed you are. Be respectful, but be very confident in your answer. Often wrong, but never in doubt my friend.
Don't Be A "Fake CEO"
Mark Pincus, CEO of Zynga, makes a strong case for not being a fake ceo. In short, worry about things that produce results, not fame. If it's between going to a conference/doing an interview or completing a deal, get the deal done. Don't "leave it to someone else". You need to get your hands dirty every single day.
By no means is this an exhaustive or definitive list. In some cases, the traits listed above might be counter-intuitive. What are some traits you've seen in great founding startup CEOs? Not the glamorous job you thought it was, eh?
You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: jbaptiste@onstartups.com, or even call: 201.305.0552
Everyone thinks that being a startup CEO is a glamorous job or one that has to be a ton of fun. That's what I now refer to as the "glamour brain" speaking aka the startup life you hear about from the press. You know the press articles I'm talking about... the ones that talk about how easy it is to raise money, how many users the company is getting, and how great it is to be CEO. Very rarely do you hear about what a bitch it is to be CEO and how it's not for every founder that wants to be an entrepreneur. I've spent a lot of time recently thinking about what it takes to be a great Startup CEO that is also a founder. Here are some of the traits I've found.
Be A Keeper Of The Company Vision
The CEO is the keeper of the company's overall vision. I'm not talking about the vision for the next few months, but the larger road ahead. The CEO needs to be able to keep things on course for the current quarter to make sure that the large overarching vision of the company can be achieved. The takeover the world vision of a startup usually can't be achieved in one year or even in some cases, like Google, in a decade. It takes a great startup CEO to keep the company on track to achieve that vision. A great startup CEO will often judge upcoming initiatives to see if they fit in as a piece of the large puzzle for the bigger vision.
Absorb The Pain For The Team
A startup CEO needs to be the personal voodoo doll for a startup. They need to be able to take on a strong burden of stress, pain, and torture all while making level headed decisions. You can't have the troops stressing and worrying about the difficult challenges at hand. A good startup CEO will absorb the stress, so the rest of the team can carry on. He also needs to be able to mask this pain and stress. Not that he should hide or lie to the team- I'm not encouraging that. Most of the day to day nuances+stresses of a startup aren't worth having the entire team worry about and the CEO needs to bear that pain.
Find The Smartest People And Defer On Domain Expertise
A startup CEO has a great knack for finding talent. The key is finding people that are smarter than you on specific topics. It might be technical team members/leaders or it might be a new VP of Biz Dev. A startup CEO has to have the ability to find these people and make relatively fast decisions to hire them. They also have to be able to show the fire and passion to convince them to leave what is most likely a better paying and more secure job to join the company. The real key to hiring as a startup CEO comes after the hire. A great startup CEO will be able to trust the hires that they make and defer to them on areas of domain expertise. It's hard to let go, but you have to learn to, especially when the company grows.
Be A Good Link Between The Company + Investors
Whether you want to believe it or not, you are not an investor's only portfolio company. Even if you are a superstar, they have a handful of other companies to help and a ton of incoming potential portfolio companies. A good investor will pick 2-3 new companies per year to work with. A good startup CEO will be a good link between progress, issues, and areas where they need help with investors. A good portion of early stage startups that raise money will have a board comprised of 3 people: the CEO founder, the investor, and an independent board member. You are the lone representative for your cofounder and other employees.
Be A Good Link Between The Company + Product
I have this unwavering belief that the best companies are those that keep a founder as CEO for the long haul. Not because the founders have the right to be CEO, but because the CEO needs to be close to the product vision of the company. Founding CEOs understand this the best and can carry out that same unified vision over time. To fill in the management gaps a great COO, other board members, and heads of divisions will come along. It's a strategy that Facebook has employed and why Apple has had a great resurgence with Steve Jobs at the helm. It's all about keeping the CEO as close as possibly linked to the product.
Be Able To Learn On The Job
Most startup CEOs didn't start out with an MBA or some background in growing a company from nothing to something. The best have an ability to learn along the way and embrace their failures to become a better leader. Zuck started when he was 19 and now 7 years later, runs the most powerful internet company. Don't worry about whether "you're qualified" as it's hard to put typical qualifications on the job. You'll learn the really core stuff along the way. The best startup CEOs will surround themselves with smart mentors to be a sounding board along the way.
No Experience Almost Preferred
It's almost better to have a blank slate of zero experience as a startup CEO. If you come in with preconceived notions and block out the scrappy methods of a startup founder, it actually hurts you. Traditional education often trains you to be CEO or manager for a much larger company, not for a startup of under 50 people. It's a different kind of leadership and company.
Have An Uncanny Ability To Say No
You will be inundated with a list of requests from potential partners, investors, employees, and more. They will all sound absolutely wonderful. As you grow, you will also have the resources to execute more of them. Don't. It's easy to say yes, but so very hard to say no. By having an uncanny ability to say no, you can keep your company on track with the large vision you maintain. It will also keep your team members (notice I don't like to use the word "employees") laser focused and feel more rewarded as they are able to focus on one thing for a good chunk of time. I've seen too many startups sink because the CEO keeps changing what the head of product and engineering should be doing.
Have Some Technical Knowledge And Skillset
A good startup CEO shouldn't be afraid of a little bit of code and a text editor. They don't need to be diving into the source code on a daily basis, but they need to understand the technical requirements. It's easy to say "go build this", but it's a whole other ball game to understand how to build it. What seems simple may be a huge mountain of a technical feat that just isn't feasible with the given resources and deadlines. It can also help lend some street cred with hiring early technical team members too.
Be Able To Break Things Down Into Sizable Chunks + Milestones
Remember that huge unwavering vision that you are the keeper of? Odds are it only makes sense to you and your cofounder. You will need to break it up into sizable chunks and milestones for the rest of the team to understand it. You also need to be able to pick when and where to conquer things strategically. What is the past of least resistance so you can gain traction? What can you do first with your given resources?
Have The Ability To Call An Audible
Nothing goes according to plan. Things fall through, people quit, shit happens, servers crash, and other random things go bump in the night. You're going to have to deal with it and fast. This is a football term:
"Seen when the quarterback goes up to the line of scrimmage, sees a defensive alignment he wasn't expecting, and adjusts by yelling out a new play."
You're going to come up against things that you didn't expect and just be able to call an audible. Launch faster, spend more money here, or even abandon a project.
Can Motivate The Team Through Despair
People love to talk in this business. People love to talk even more when you're company isn't fairing well. A great CEO will be able to take those moments of public despair and keep the company focused. They will be able to debunk the rumors or even approach them head on by keeping the members of the company focused on the bigger mission at hand. It can come in simple 5 minute talks or motivational emails. The worst thing you can do is avoid the situation and be passive aggressive. I repeat: DO NOT WUSS OUT.
Be A Great Communicator
You need to be able to portray the energy and passion that you feel into others...over and over and over and over and over and over again on a daily basis. As a startup founder you need to communicate the vision and hope for the future of your startup to the rest of the world. You need to be able to break down the overall vision of the company into something that mere mortals can understand. You can't speak in crazy technical jargon or industry terms. It needs to be simple, clear, and compelling. You also need to be able to argue your point. Many will pick "fights" with you just to see how strong willed you are. Be respectful, but be very confident in your answer. Often wrong, but never in doubt my friend.
Don't Be A "Fake CEO"
Mark Pincus, CEO of Zynga, makes a strong case for not being a fake ceo. In short, worry about things that produce results, not fame. If it's between going to a conference/doing an interview or completing a deal, get the deal done. Don't "leave it to someone else". You need to get your hands dirty every single day.
By no means is this an exhaustive or definitive list. In some cases, the traits listed above might be counter-intuitive. What are some traits you've seen in great founding startup CEOs? Not the glamorous job you thought it was, eh?
You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: jbaptiste@onstartups.com, or even call: 201.305.0552
Tuesday, February 28, 2012
Would you invest some of your retirement savings in a VC fund?
http://curvefinancialservices.com/
The clock is ticking. Yesterday, and even today, people are waiting to begin investing for retirement until they are 50 years old. This delay brings about unneeded stress, financial complications, and worry for the years ahead. Couple that scenario with a stock market crash and Americans can easily lose 40% of their savings in the blink of an eye at one of the most inopportune times of their lives. The landscape for retirement savings in this country is muddy, unprotected and, in fact, systematically exposed to the downpours of market turmoil. But that was yesterday. Tomorrow we bring innovation to the market for retirement savings. We’re starting the movement with young professionals, and our clients will not make the mistake of waiting too long to begin saving. Our clients are getting ahead of the curve.
In a recent ING survey, nearly half of Americans wish they had started saving for retirement earlier. In fact, 89% of respondents agree that retirement savings process should begin with a person’s first job. However, the survey also found that nearly 70% of people in their 20s have no retirement savings accounts! Aside from societal opinion, the simple concept of an account’s worth compounding over such a long time horizon should be enough to persuade young people to begin investing, right? Yet the young professionals have remained stubborn and are caught in the quicksand of the status quo. With so much information available, how could this be? What is causing this pure neglect for future financial stability among young people? Our belief is that the problem does not lie in the young professionals themselves, yet it is due to the inability among today’s financial firms to draw in this demographic because of the pure mismatch of personalities between the target client base and the bureaucratic, gray-haired wealth management firms. No longer is this the case. Curve, Inc. is spearheading America’s retirement revolution, offering retirement solutions that are attractive, appropriate, and convenient for young professionals.
Curve is approaching the market with innovative retirement products that will provide young professionals access to many asset classes. We’re taking the traditional stock, bond, and cash allocation that current 401(k)s utilize in and adding private equity, hedge funds, and other alternative investments. This not only gives the retirement investment opportunity some sex-appeal, but more importantly it’s a smart option for young people given their long time horizon until withdrawal and limits their dependence on the stock markets. Therefore, next time the market crashes and our clients are in their 50s, their retirement savings will be protected. This is a wildly different concept from what we see today. Alternative investments are usually reserved for institutions and the mega-rich. Curve is bringing this possibility to young professionals by offering structured Roth 401(k) and Roth IRA products.
The market of Young Professionals in the United States, defined by Curve Financial Services as those with a college degree under the age of 36 making at least $40,000 per year, is approximately 12 million people. Only 32% of them have a retirement savings plan, which gives Curve 68% of this total market as year one non-competed for clients. That’s nearly 8.2 million people and $41 Billion worth of potential assets unclaimed by any other financial institution. Looking at the market as a whole, assuming a $5,000 annual contribution, the asset potential nears $60 Billion. Furthermore, that’s only the United States market, and market potential grows as the model is transferred to other countries.
Curve has a competitive advantage that stems from our ability to easily and effectively engage and interact with our target market. The founding team consists of young professionals with backgrounds in the financial services industry, which gives Curve the ability to communicate with prospective clients in a professional manner regarding the benefits of signing up with Curve. Finally, Curve is going to leverage its three-fold mission of educational, financial, and social aspects to relate with clients on an open and non-intimidating level. Young professionals will be inclined to open accounts with Curve since the company is positioning itself around the lifestyles our clients. We can do this better than today’s wealth managers because the leadership and employee base of Curve consists of young professionals.
Curve is introducing a highly scalable business model that allows for ultra-high revenue growth without a substantial increase in overhead costs. Our scalability is due to our operational plan in which we grow assets through employer-sponsored programs, thus lowering our cost of a sales force. We then bundle client accounts into one large account and pass through to our selected fund managers at one hedge fund, one private equity firm, and one financial adviser. Curve, as well as portfolio managers will earn a management fee off the total account. Therefore, we need not employ more portfolio managers as we take on more clients. Beginning in year three, Curve will begin franchising new locations, each of which will pay a 5% gross revenue royalty fee.
Our founding team’s skills have been honed over the years due to experiences at a global bank, UBS Financial Services, as well as hedge funds and regional commercial banks. One member brings previous entrepreneurial experience, and both members of the founding team possess the Masters in Business Administration (MBA) distinction.
By working with young professionals, we’re going to positively enhance the financial stability of our clients for years to come. In an industry recently dominated by profit-minded investment banks, Curve offers a breath of fresh air to an otherwise stale industry. Curve is going to draw in young professionals by leveraging our familiarity with their trends and lifestyles, and sell them on the aspirational notion of being able to allocate assets across many asset classes when they are newly college graduates. This is something they wouldn’t otherwise be able to attain unless they had a net worth in the tens of millions.
At the end of the day, Curve is a company that seeks to better the financial lives of today’s society. With social security issues looming ahead, and with the recession and market crash of the recent years still fresh on everyone’s mind, we’re creating a smart, desirable, and “cool” option that’s going to incline young professionals to begin saving for retirement at a younger age. It is our belief that America has been waiting too long to start saving for retirement. Today, we’re working on getting our young professionals ahead of the curve.
Thursday, February 23, 2012
Wednesday, February 15, 2012
Private Equity: Fact, Fiction and What Lies in Between
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2939
What good is private equity, anyway?
As its critics see it, these investment pools make money the wrong way -- buying "target companies," slashing jobs, piling on debt and selling the prettied-up remnants, which by then are doomed to fail. To make matters worse, private equity firms get a stunning tax break, paying 15% on profits instead of 35%.
But the industry and its defenders, including presidential candidate Mitt Romney who made his fortune in PE, say it is a strong creator of jobs and value, and a vital source of outsized returns for pension funds, university endowments and other investment pools that serve ordinary people.
Which is true?
While there is fodder for both views, academic research finds that the truth for the industry as a whole is not so dramatic. If the entire PE industry were to disappear overnight, the economy probably would not feel much effect, positive or negative. "In the absence of private equity firms and funds, there are a lot of other types of capital that are trying to do very similar types of things," says Wharton accounting professor Wayne Guay.
Adds Wharton finance professor Richard J. Herring: "The question of whether they add value, in my mind, is really one of whether they only undertake financial restructuring ... or whether they replace management and the board, and undertake an operational restructuring that improves the efficiency of the enterprise."
Financial restructuring, he notes, "usually means withdrawing equity and leveraging the firm's balance sheet, and has very dubious social value." But operational restructuring "can really add value to the economy."
Executives both in and outside of the PE industry say that pure financial engineering is less common than in the past because lenders are pickier, and investors in PE funds are less eager to take the risk that comes with leverage. Adding borrowed funds to the investment pool can increase returns, but also amplifies losses when bets go wrong. While some leverage is still widely used to boost returns, most experts say the goal in most PE investments today is to grow the target firms.
"Private equity firms seek out companies in which they believe they can unlock significant value by changing the business strategy, investing new capital or injecting new managerial talent," says an industry trade group, the Private Equity Growth Capital Council, responding to the recent wave of criticism. "Private equity ownership fosters a climate in which companies can do what is necessary to achieve increased profitability over the long run."
Private Equity versus Hedge Funds
Private equity firms form investment pools with contributions from limited partners, largely pension funds, university endowments, wealthy families and the occasional sovereign wealth fund. The general partners, or owners and managers of the PE firm, typically contribute as well, and many funds, though not all, also borrow to increase their investment resources. A typical fund operates for 10 or 12 years and may or may not distribute some profits to investors along the way before a payday at the end. Limited partners -- LPs -- thus tie their money up for the duration, and they typically have little say in the general partners' investment decisions. Big PE firms run multiple funds at the same time, smaller firms only one.
Worldwide, the industry is estimated to have about $2.4 trillion under management, although minimal reporting requirements make assessments difficult. The Private Equity Growth Capital Council says about 2,300 PE firms are headquartered in the United States, and that they have stakes in 14,200 companies with 8.1 million employees.
PE investments are long-term bets on illiquid assets. Hedge funds, in contrast, tend to make comparatively short-term bets on liquid assets such as stocks, bonds, commodities and derivatives. Venture capital firms, a subset of the PE industry, invest in young companies, while PE firms specializing in leveraged buyouts generally look for businesses that have been around for some time. This may include privately held companies with founders ready to retire, or firms that need growth capital but -- because of poor credit ratings, jittery lenders, low cash flow or other impediments --cannot get it from traditional sources like bank loans or bond issues.
Because investors tie their money up for so long, they expect returns to exceed what they could earn with liquid investments like stocks. Whether the average PE fund achieves this is debatable.
The industry claims enviable returns. "As of September 2010, private equity outperformed the S&P 500 by 11.4 percentage points, 7.3 percentage points and 19.4 percentage points for one-, three- and five-year periods," according to the Private Equity Growth Capital Council. But those figures cannot be verified because the industry is secretive, and findings of academic studies vary.
An oft-cited study by Steve Kaplan of the University of Chicago and Antoinette Schoar of MIT found that PE funds did not produce outstanding results during the 1980 to 2001 period. According to Herring, "it showed that the returns earned by limited partners were more or less equivalent to what they could have obtained by investing in the [Standard & Poor's 500] index once you netted out the substantial fees that were paid to the general partners."
A study by David Robinson of Duke and Berk Sensoy of Ohio State covered more recent performance, from 1984 through 2010, finding that PE investors earned 18% more over the life of the fund than in the S&P 500. While that is a good margin, an 18% edge over 10 or 12 years is not jaw-dropping rewardfor tying money up for so long.
Other research shows that, in contrast to the mutual fund industry, past performance in PE is an indicator of future results, as PE firms that are successful with one fund tend to be successful with the next. If so, investors who stick with the top funds can indeed get outsized returns.
The future, of course, is cloudy. Many PE executives and outside experts warn that while returns may beat the public markets, they are likely to come down as competition in a growing PE industry makes it harder to find good target companies. Reduced leverage may also take a toll. And although PE may be profitable for its investors, critics say the cost in lost jobs and destroyed target companies is too high. This issue flared up in the presidential campaign, with Republican candidate Newt Gingrich describing PE as "exploitative" and job-destroying, and attacking Romney -- a founder of private equity giant Bain Capital who is now worth in excess of $200 million -- for his role in it. Some top PE executives have become billionaires.
Wealth Creation versus Wealth Transfer
The issue is whether PE firms create wealth or merely transfer it from target companies to themselves. One of the most recent studies, by Jarrad Harford and Adam Kolasinski at the University of Washington, looked at 788 large U.S. PE buyouts from 1993 through 2009 and found plundering was not the rule. "All of our evidence is consistent with value creation," the study reported.
"We test and reject the hypothesis that on average private equity sponsors transfer wealth or damage the portfolio company's long-term value," the authors write. "We also test the hypothesis that private equity sponsors extract capital through special dividends and leave the target firm in distress," they add, referring to payments from portfolio firms to the PE fund that are often derived from having the target firm take on new debt. "First, despite the impression given by the public press, we find that special dividends are rare. Second, those that occur are uncorrelated with future portfolio company financial distress."
A look at portfolio firms with publicly traded debt found only 42 special dividends issued in 2,435 firm years, with the issuers and non-issuers showing the same return on assets.
One way for PE firms to extract value is by skimping on research and development and other needed investment at portfolio companies, and then using the savings to pay down debt to improve short-term results. The fund can then sell the firm before the underinvestment comes back to haunt it. But again, Harford and Kolasinski found no evidence that PE firms are damaging their portfolio firms in this way, while they did find evidence that PE ownership tends to reduce damaging over-investment. The results, the authors said, suggest PE ownership mitigates destructive "agency problems," where a portfolio firm's executives put their own interests ahead of the firm's.
PE funds make the bulk of their returns by selling portfolio firms at a profit. The Harford/Kolasinski study noted that only about 10% of these "exits" involved sales to the public through stock offerings. The most common exit was to a "strategic buyer," such as a corporation wanting to add a new unit, and about a third of exits were sales from one PE fund to another. This means most portfolio firms are sold to sophisticated buyers, who could be expected to shun the market if the typical target firm was a gutted shell destined to fail.
But are PE funds and their portfolio companies profiting at employees' expense? Is the industry creating jobs or destroying them? In what they say is the most comprehensive study of the question to date, researchers from the University of Chicago, Harvard, the University of Maryland and the U.S. Census Bureau found that private equity "catalyzes the creative destruction process in the labor market, with only a modest net impact on employment." In other words, change took place faster at portfolio firms than among companies in a control group, but the net job loss among PE firms was only slightly higher -- about 1%.
The study, titled Private Equity and Employment, looked at 3,200 target firms in PE transactions from 1980 to 2005. "Relative to controls, employment at target establishments declines 3% over two years post buyout and 6% over five years," the study reports. "The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1% of initial employment."
Control firms were selected for factors like size, age and industry, but the study did not consider whether controls and target firms were in the same financial condition. Because PE firms scour the market for targets with unrealized value, it is possible some of the targets were overstaffed relative to the controls. If so, greater job losses would be expected, but there is no way to know for sure. Of course, many jobs are shed at firms that are not owned by PE funds, some by necessity and some through mismanagement. Most of the millions of jobs lost in the U.S. since the financial crisis were at firms that were not owned by PE funds.
The study is a strong challenge to critics' claim that PE is a massive job destroyer, and it does not support the industry's claim to be a large job creator.
Tax Incentives
The second issue concerns the tax treatment of private equity earnings known as "carried interest," the general partner's share of the fund's profits. Carried interest is taxed at the 15% long-term capital gains rate rather than as ordinary income, at rates as high as 35%.
While terms are subject to negotiation with the fund's limited partners, PE firms typically receive an annual fee equal to 2% of the capital the LPs have committed to the fund, plus carried interest equal to 20% of the fund's profits. Often, the carried interest applies only to profits exceeding a given annual "hurdle rate," or rate of return on the fund, such as 7% or 8%.
The PE industry argues that the 15% tax on carried interest is consistent with the rate all investors get on long-term capital gains, or profits on investments owned longer than a year. But critics focus on a key difference: Carried interest is profit paid to general partners on money put at risk by the limited partners; with ordinary investments, people get the capital gains rate only for risking their own money. For the general partners, carried interest is a gain without an offsetting risk.
"It's a fee for service," says Wharton accounting professor Jennifer Blouin, rejecting the argument that carried interest is an investment return. "How can you make the argument that that's [the GP's] capital at risk?" Carried interest, she notes, is income the GPs receive for running the fund -- for research, analysis, management and all the other work it takes to find target firms and improve them. "It doesn't look like an investment," she notes. "Those are attributes for which you generate ordinary income" that is taxed as income, not capital gains. When people are compensated for know-how, the compensation is income, she adds.
Critics say carried interest is like other compensation linked to performance and taxed as income, although some of them concede that the general partners are entitled to the low long-term tax on any of their own money put into the fund. Limited partners enjoy the long-term rate and have not been targets of criticism, because they clearly put their own money at risk.
Democratic Congressman Sander Levin of Michigan has been trying since 2007 to get carried interest taxed as income. His measure has passed the House four times but has stalled in the Senate. He has said he will try again this year and may perhaps get a boost from the issue's higher profile.
Legal definitions of income and capital gains aside, the tax break on carried interest can be seen as an incentive, like a tax break to spur oil exploration, to find new medications or to encourage people to save for retirement or to buy homes. "Having lower taxation on long-term capital gains, on long-term investments, is probably a good thing," says Wharton accounting professor Gavin Cassar, arguing it encourages investors to tie their money up. "You make these longer-term projects that require more capital investment more attractive."
But it is difficult, he adds, to disentangle the costs and benefits of applying lower rates to specific types of investments. And even economists, he says, tend to have dogmatic positions on how tax rates affect the incentive to work. In private equity, it is the limited partners who contribute the bulk of the fund, and no one is suggesting they lose the incentive to invest provided by the long-term rate.
Do talented people need a tax incentive to work at private equity firms? Clearly, a higher after-tax income would make any job more appealing. On the other hand, many of the top people in PE are so wealthy that it is likely they have non-monetary reasons for continuing to work, such as satisfaction, prestige and excitement.
To say that tax rates are key to job selection is "a false argument," Blouin states. "The story is that you are there because profits are high, not because tax rates are low." Guay sees carried interest as a type of bonus, because it is paid only after the fund exceeds set performance levels. Bonuses are taxed as ordinary income, he notes.
A study by Andrew Metrick, a former Wharton finance professor now at Yale, found that carried interest makes up only about 30% of PE profits. The rest comes from the 2% annual fee on committed funds. Because the fee income is already taxed as ordinary income, raising the rate on carried interest would affect less than one-third of annual pay.
The broader question is whether there is any need to use tax policy to encourage the private equity industry. Would society suffer if PE were smaller or did not exist at all?
PE firms do make it easier for pension funds, endowments and wealthy individuals to invest in collections of privately held companies, just as mutual funds allow small investors to hold diversified baskets of stocks. But there are many other ways for investors to acquire privately held companies. Wealthy individuals and groups can buy firms, corporations can acquire them, and small companies can merge on their own.
Whatever contribution PE is making, it is not irreplaceable, Guay concludes: "If there are inefficient businesses out there, capital will be drawn to them, whether it's in the form of private equity or in the form of something else."
Tuesday, February 14, 2012
Venture capitalists favor Silicon Valley, but Silicon Alley is rising fast
February 7, 2012
by Grace Nasri
http://venturebeat.com/2012/02/07/venture-capitalists-favor-silicon-valley-but-silicon-alley-is-rising-fast/
Despite a still sluggish economy, venture capital firms poured a total of $28.4 billion into 3,673 deals last year—one of the highest levels of dollar investments of the decade—with the majority of deals going into the software and biotechnology industries.
The annual figures represent an increase of 22 percent in dollar terms and a 4 percent increase in the number of deals compared with the 2010 figures, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
This year’s VC funding figures represent the third highest annual investment (in dollar terms) of the past decade.
While the overall annual figures were positive, there was a year-end dip: The fourth quarter numbers saw a 10 percent decrease in dollars and an 11 percent decrease in deals when compared to the previous quarter—with $6.6 billion invested into 844 companies last quarter.
Comparing last year’s quarters, the third quarter saw the strongest numbers of the year both in terms of dollar investments and number of deals, with $7.3 billion invested into 953 deals.
Most-funded industries
The industries that experienced some of the largest dollar increases in 2011, according to data from Thomson Reuters, included
•Consumer Products and Services (103 percent increase);
•Media/Entertainment (53 percent increase);
•Electronics/Instrumentation (52 percent increase); and
•IT Services (39 percent increase)
But despite these high increases, the software and biotechnology industries continued to dominate, receiving the largest overall investments of the year according to The MoneyTree™ Report.
The software industry saw the largest investments with $6.7 billion invested into 1,004 deals. The 2011 figures for software represent a 38 percent dollar increase and a 7 percent increase in deals when compared to 2010 numbers. The year didn’t end as high for the software industry, as investments fell in the fourth quarter, with $1.8 billion going into 238 deals. But despite a dip in investment in the fourth quarter, the software industry retained its hold as the number one sector in terms of dollars invested and number of deals in the fourth quarter.
The biotechnology industry was the second largest sector of last year, increasing 22 percent in dollar terms but dropping 9 percent in deals, with $4.7 billion going into 446 deals. The industry also saw gains in the fourth quarter, with an increase of 10 percent in dollar terms and an increase of 6 percent in the number of deals, as compared to the third quarter.
The medical device and clean technology sectors also saw large investments; the medical device sector increased 20 percent in dollars to $2.8 billion and decreased 2 percent to 339 in terms of deals, while the clean technology sector increased 12 percent in dollars to $4.3 billion and 12 percent to 323 in terms of deals, when compared to 2010. Last year was the highest level ever recorded for the clean tech sector.
Investments by stage of development
Last year, early stage investments saw the highest increases in terms of both dollars invested and deals—increasing 47 percent in dollar terms and 16 percent in number of deals as compared to 2010. Early stage investments also saw the highest number of deals last year, but it was the expansion-stage investments that brought in the most dollar investments.
•Expansion: $9.7B (+9%) in 999 deals (-8%)
•Later stage: $9.5B (+37%) in 864 deals (-5%)
•Early stage: $8.3B (+47%) in 1,414 deals (+16%)
•Startup/Seed: $919M (-48%) in 396 deals (no change)
California leads but New York rising faster
Comparing California and New York VC investments and deals, Silicon Valley continues to overshadow Silicon Alley, with California-based investing almost 6.5 times that of New York-based investing in terms of dollars, and almost 5 times in terms of deals. (See first graph below.)
But when comparing 2011 numbers to 2010 numbers, VC investments in New York are rising 64.3 percent in terms of dollars and 10.2 percent in terms of deals, while investment in California is only rising 24.4 percent in terms of dollars and 5.0 percent in terms of deals.
Predictions for 2012: Which industries to watch
According to predictions by the NVCA and Dow Jones VentureSource, the IT sector is the one to watch this year. Venture capitalists and VC-backed CEOs predict this year will see investment increases in consumer IT, healthcare IT and business IT. On the other hand, VCs predict investment decreases in the biopharmaceutical, medical device sectors and clean technology companies.
Kevin O’Connor, founder of FindTheBest, O’Connor Ventures and DoubleClick, predicted increased investments in the consumer web, energy-efficient devices and the 3D industry. (Disclosure: FindTheBest contributed this article to VentureBeat, and also provides the product comparisons that appear on our site.)
“The consumer Web will see huge increases this year, as well low-energy components and devices,” O’Connor said. “The crossover hasn’t happened yet, but in the near future our mobile devices are going to become our primary device. Another industry that will see big gains is the 3D industry, especially in the adult and gaming areas. On the flip side, I think investing in social companies will be more discerning.”
While California’s Silicon Valley still trumps all other regions in terms of VC funding and the start-up ecosystem, VCs predict New York will provide a more fertile ground than even Silicon Valley this year. Thirty-four percent of VCs and 42 percent of CEOs see the start-up ecosystem in Silicon Valley improving, while 46 percent of VCs and 41 percent of venture-backed CEOs predict the start-up ecosystem in New York will improve this year.
VC predictions on the presidential elections
Interestingly, when VCs were asked about the upcoming presidential elections, 79 percent predict Mitt Romney would be the Republican presidential nominee with Gingrich coming in a very distant second, according to the NVCA. But despite strong predictions that Romney will win his party’s vote, 56 percent of VCs predict President Obama will be elected to a second term.
by Grace Nasri
http://venturebeat.com/2012/02/07/venture-capitalists-favor-silicon-valley-but-silicon-alley-is-rising-fast/
Despite a still sluggish economy, venture capital firms poured a total of $28.4 billion into 3,673 deals last year—one of the highest levels of dollar investments of the decade—with the majority of deals going into the software and biotechnology industries.
The annual figures represent an increase of 22 percent in dollar terms and a 4 percent increase in the number of deals compared with the 2010 figures, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
This year’s VC funding figures represent the third highest annual investment (in dollar terms) of the past decade.
While the overall annual figures were positive, there was a year-end dip: The fourth quarter numbers saw a 10 percent decrease in dollars and an 11 percent decrease in deals when compared to the previous quarter—with $6.6 billion invested into 844 companies last quarter.
Comparing last year’s quarters, the third quarter saw the strongest numbers of the year both in terms of dollar investments and number of deals, with $7.3 billion invested into 953 deals.
Most-funded industries
The industries that experienced some of the largest dollar increases in 2011, according to data from Thomson Reuters, included
•Consumer Products and Services (103 percent increase);
•Media/Entertainment (53 percent increase);
•Electronics/Instrumentation (52 percent increase); and
•IT Services (39 percent increase)
But despite these high increases, the software and biotechnology industries continued to dominate, receiving the largest overall investments of the year according to The MoneyTree™ Report.
The software industry saw the largest investments with $6.7 billion invested into 1,004 deals. The 2011 figures for software represent a 38 percent dollar increase and a 7 percent increase in deals when compared to 2010 numbers. The year didn’t end as high for the software industry, as investments fell in the fourth quarter, with $1.8 billion going into 238 deals. But despite a dip in investment in the fourth quarter, the software industry retained its hold as the number one sector in terms of dollars invested and number of deals in the fourth quarter.
The biotechnology industry was the second largest sector of last year, increasing 22 percent in dollar terms but dropping 9 percent in deals, with $4.7 billion going into 446 deals. The industry also saw gains in the fourth quarter, with an increase of 10 percent in dollar terms and an increase of 6 percent in the number of deals, as compared to the third quarter.
The medical device and clean technology sectors also saw large investments; the medical device sector increased 20 percent in dollars to $2.8 billion and decreased 2 percent to 339 in terms of deals, while the clean technology sector increased 12 percent in dollars to $4.3 billion and 12 percent to 323 in terms of deals, when compared to 2010. Last year was the highest level ever recorded for the clean tech sector.
Investments by stage of development
Last year, early stage investments saw the highest increases in terms of both dollars invested and deals—increasing 47 percent in dollar terms and 16 percent in number of deals as compared to 2010. Early stage investments also saw the highest number of deals last year, but it was the expansion-stage investments that brought in the most dollar investments.
•Expansion: $9.7B (+9%) in 999 deals (-8%)
•Later stage: $9.5B (+37%) in 864 deals (-5%)
•Early stage: $8.3B (+47%) in 1,414 deals (+16%)
•Startup/Seed: $919M (-48%) in 396 deals (no change)
California leads but New York rising faster
Comparing California and New York VC investments and deals, Silicon Valley continues to overshadow Silicon Alley, with California-based investing almost 6.5 times that of New York-based investing in terms of dollars, and almost 5 times in terms of deals. (See first graph below.)
But when comparing 2011 numbers to 2010 numbers, VC investments in New York are rising 64.3 percent in terms of dollars and 10.2 percent in terms of deals, while investment in California is only rising 24.4 percent in terms of dollars and 5.0 percent in terms of deals.
Predictions for 2012: Which industries to watch
According to predictions by the NVCA and Dow Jones VentureSource, the IT sector is the one to watch this year. Venture capitalists and VC-backed CEOs predict this year will see investment increases in consumer IT, healthcare IT and business IT. On the other hand, VCs predict investment decreases in the biopharmaceutical, medical device sectors and clean technology companies.
Kevin O’Connor, founder of FindTheBest, O’Connor Ventures and DoubleClick, predicted increased investments in the consumer web, energy-efficient devices and the 3D industry. (Disclosure: FindTheBest contributed this article to VentureBeat, and also provides the product comparisons that appear on our site.)
“The consumer Web will see huge increases this year, as well low-energy components and devices,” O’Connor said. “The crossover hasn’t happened yet, but in the near future our mobile devices are going to become our primary device. Another industry that will see big gains is the 3D industry, especially in the adult and gaming areas. On the flip side, I think investing in social companies will be more discerning.”
While California’s Silicon Valley still trumps all other regions in terms of VC funding and the start-up ecosystem, VCs predict New York will provide a more fertile ground than even Silicon Valley this year. Thirty-four percent of VCs and 42 percent of CEOs see the start-up ecosystem in Silicon Valley improving, while 46 percent of VCs and 41 percent of venture-backed CEOs predict the start-up ecosystem in New York will improve this year.
VC predictions on the presidential elections
Interestingly, when VCs were asked about the upcoming presidential elections, 79 percent predict Mitt Romney would be the Republican presidential nominee with Gingrich coming in a very distant second, according to the NVCA. But despite strong predictions that Romney will win his party’s vote, 56 percent of VCs predict President Obama will be elected to a second term.
Monday, February 13, 2012
Clara Shih's Hearsay Social
http://www.businessweek.com/magazine/clara-shihs-hearsay-social-02022012.html
Her startup helps large companies control how workers interact with customers on Facebook and other social media outlets
By Douglas MacMillan
Since 2009, Clara Shih has published a bestseller, co-founded a fast-growing startup, and joined Starbucks’ (SBUX) board of directors. None of it would have happened if she’d followed some lame advice when she was writing her book, The Facebook Era, a how-to guide for using social media in business. “My editor wanted me to rename it The MySpace Era,” says Shih, 30. “I guarantee you I wouldn’t be sitting here if I called it that.”
In a short time, Shih has become one of the world’s top experts on how companies can navigate the new world of tweets, profiles, and pokes. She saw the opportunity while working at Salesforce.com (CRM) in 2007. That year, Facebook started letting outside developers build apps for its site. Shih noticed that no one was making business apps. Using her spare time and programming chops—she graduated at the top of her class in computer science and economics at Stanford—Shih built Faceconnector. The app pulled personal details from Facebook profiles into Salesforce software, so sales reps could learn the favorite music and other interests of potential customers. Faceconnector helped inspire a dialogue about social media in the hallways of Salesforce, which went on to create the Chatter messaging service for businesses. And it transformed Shih into a social media expert, delivering keynotes at tech and marketing conferences and winning a book deal.
While researching the book, Shih came up with the idea for Hearsay Social, which she co-founded in September 2009. The startup helps large companies control how workers interact with customers on Facebook fan pages and other social media outlets. For over $100,000 a year, customers such as 24 Hour Fitness get a dashboard to monitor the activities of their workers on Facebook, Twitter, Google+ (GOOG), and LinkedIn (LNKD). Hearsay’s software looks out for compliance violations (such as bankers discussing a deal) and keeps tabs on which branches and employees are best at bringing corporate messaging to the Facebook-friend level. The almost-70-person company has raised a total of $21 million and became cash-flow positive in 2010, Shih says.
Farmers Insurance (ZURN:VX) signed up for the service in 2010. “Having thousands of agents on Facebook posting things we have no insight into can be a challenge to the legal team,” says Ryon Harms, director of social media at the insurer. Hearsay alerts management if agents ask customers for Social Security numbers over the Web—a potential regulatory violation—and helps pinpoint which are best at using Facebook to get new business.
Shih continues to play public evangelist for social networking in business, and dedicates a quarter of her time to doing press and speaking. Her latest fan is Starbucks Chairman and CEO Howard Schultz, who named her to the board as part of an effort “to amplify the online experience” at the coffee chain, according to a press release. Executives “are looking for more than technology,” Shih says. “They are looking for answers.”
CODING
Graduated at the top of her class in computer science at Stanford
MARKETING
A Facebook app won her invites to speak at tech conferences
STARTING UP
Hearsay Social has raised $21 million from VCs
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