The sky is gray, we finally have a nickname for private equity pros and my Sunday will include three hours of the Pats pounding the Chargers, and two more of Jack Bauer pounding the bad guys (plus some misguided good guys). In other words, it’s time for Friday Feedback.
Most correspondance this week concerned Monday’s column about East Coast vs. West Coast venture capital, in relation to Scott Kirsner’s Boston Globe piece. Entrepreneur Dave writes: “I have told countless wannabe entrepreneurs seeking startup capital to go West Coast first, and then East Coast for later rounds. Why? You get a better reception and audience on the West Coast. You also get quick answers – yes or no. East Coast VCs move slower than west coast VCs in making investment decisions. The two enemies of the startup entrepreneur: limited capital and time… I also have found the East Coast VCs are about stodgy old money and “who you know” versus West Coast VCs who are about nouveau money, ideas and creating wealth for everyone.”
George: “The major deficiency in the Boston area is that they companies and technologists concentrate on systems integration rather than on fundamental technology. This goes all the way back to Sprague Semiconductor moving to California. To make an analogy, Boston would rather tune the engine than design a new car. The other factor is the inherent financial focus of Boston VCs, who by and large came from the banking industry rather than from the technology industry itself. Finally, there is that old New England fear of being wrong, whereas, Californians are only interested in being right.”
Faruq: Some legal boilerplates are different too. East Coast lawyers will include clauses that assume that there is salvage value to the startup, and that investors should negotiate diligently upfront to maximize their share of this if the company fails. West Coast lawyers will agreeably focus instead on who gets what if the pie gets as large as everyone expects it to get, and everyone tacitly understands that while some failed startups will have valuable IP and that this needs to be properly split, in most cases this will not the case, and in any event the value will realistically be minimal. I am probably generalizing…”
*** Tom responds to Tuesday’s analysis of the ACG/Thomson DealMakers Survey, which showed expectations of increased M&A activity despite overwhelming acknowledgment that it is a seller’s market: “You arediscounting a key part of the equation: Significant liquidity in the leverage markets. Less discipline by lenders fosters less discipline by the GP community.”
*** Some emails from Wednesday’s discussion of Golden Gate Capital opting for an evergreen fund structure. A reader used the anonymous tip button: “[Golden Gate’s] desire to do an evergreen is undoubtedly due to their alliance with Sutter Hill Ventures (SHV is a special limited partner in GGC and has co-invested with GGC). SHV has used an evergreen structure since it started.” Mike adds: “Evergreen funds definitely cause accounting difficulties for the GP, but even more if the LP is a fund-of-funds. In fact, F-o-Fs are almost prevented from investing because they can’t make long-term commitments like that.” By the way, many of you wrote in to remind me that MFN in this context means Most Favored Nation. As Tim explains: “Any investor who has a MFN in a side letter with a GP gets the benefit of whatever subsequent LPs negotiate, such as reduced mgmt fees, reduced carry, etc… But peons with just $100 million to commit won’t be able to get a side letter with General Atlantic.”
*** Finally, Charlie goes off-topic: “I know you can’t stand him, but don’t you feel a bit bad for Doc Rivers? He doesn’t even have enough healthy players to run a scrimmage.” No, not really. All this means is that there are a few more guys in suits on the Celtics bench who would make superior coaches…