A recent study by the NVCA and Dow Jones VentureSource reveals valuable metrics on VC board behavior, composition and dynamics. In the area of board conflict, one observation from the study begs to be discussed further in the context of the current operating environment: A suggestion that there is strong agreement between VCs and CEOs […]
Written for VC-backed entrepreneurs... Congratulations!
Today is your day.
You’re off to Great Places!
You’re off and away! Oh, the Mistakes You Will Make,
The Money you’ll Waste
Maybe Your are Moving
With much too much haste!
Late on December 18, the partners of Findadeal, Leverage & Flippit enjoyed a brandy together after putting the finishing touches on the PPM for their $1 billion-targeted fourth fund. They could already taste the success they would reap, confident that the forthcoming management fees would allow them to support the lifestyles they had built...
Three years ago, at 4am on the day after Thanksgiving, I rushed my pregnant wife to a Best Buy in Westchester, hunting for a laptop selling far below cost. Expecting to be among the very few crazy enough to shop on Black Friday before sunrise, I was shocked to see a line stretching around the block (including other pregnant women). By the time we were finally allowed into the store, all the best deals had all been snapped up, leaving laggards like us to scavenge through baskets of bargain-priced junk. Determined to have some sort of compensation for our lost hours of sleep, I purchased a deeply discounted DVD— the Arnold Schwarzenegger classic Total Recall. Since this event, I have taken to calling the purchase of a good or service to justify one’s effort “Black Friday Syndrome.”Now, just a week after Black Friday 2009, I have been asked by several investors in private equity if Black Friday Syndrome might be entering the secondary market for private equity LP interests. Since late summer, we have seen prices increasing in the secondary market. This has been reported by numerous sources and nicely summarized at peHUB by Erin Griffith.Are secondary investors starting to buy private equity LP interests to justify their fund-raising efforts or is there a more rational explanation? Will buyers be left with the private equity equivalents of Total Recall DVDs? At a secondaries conference I participated in several weeks ago, Dan Primack even speculated that secondary funds will be unable to find investable opportunities and return some of the capital they raised.
A lot has been written in the last week about the scandal at Canopy Financial, a venture-backed, high-flying start-up that attracted $75 million in capital at increasingly higher prices from top-tier firms, only to come crashing down in a dust of rubble and fraud. The VC community suffered a very similar scandal at Seattle-based Entellium last year, but few reporters seem to remember that one, perhaps because it wasn't located in the heart of Silicon Valley as Canopy was. Many of the VCs I’ve spoken to are frankly not surprised that these kinds of fraudulent schemes could have occurred. In truth, our industry is built on a trust model. We do our best to conduct due diligence on the team, market, strategy, technology, but at the end of the day many of these investment decisions get made in short periods of time (30-60 days) with incomplete information, particularly when a deal is competitive. Bandwidth-limited general partners and frenetic CEOs are under pressure to move fast and get things done, leading to rushed, sloppy work to secure the deals. Perhaps the Canopy Financial case study will finally force VCs into an approach akin to Ronald Reagan’s “Trust, But Verify” policy when it came to dealing with the Soviets during the Cold War. Prudence wins out over blind trust. Here are a few specific examples of things VC boards should do, and management teams should openly encourage:
Over the past few weeks we’ve seen extremely high activity in new venture investments. Starting in September, we witnessed the return of multiple term sheet deals, short fuse situations, and a renewed urgency to most fund-raisings. I heard last week of a hot late stage deal attracting ten (yes 10) term sheets. It’s a really great company, but just one quarter ago that number would have been much lower. FastCompany’s Q3 Venture Capital Activity Report picks up some of this, with Q3’s activity marking a high for 2009, and growing 14% from Q2. The same report shows Series A internet sector deals totaled 66 in Q3, up from 20 in Q1 of 2009. Our sense is that Q4 will show similarly high numbers. The same VCs who hunkered down in January were back in the game in September, and they were back in force. We call the rise in new investment activity, “back to school investing”, and it represents a significant return to health after the prolonged hiatus that started in Q4 2008 with the infamous “RIP Good times” slide deck. Venture is back. And it’s back because of one word: Exits.
In the late 1950’s and early 1960’s, the modern technology sector began its life. Unfortunately, the innovation was there, but the capital market funding wasn’t. So, in 1961, Arthur Rock raised $3.5 million from 25 limited partners and formed a venture capital fund. The rest is history. A similar void and opportunity exists today in the world of project finance. To put it simply: there’s very little financing available for projects that employ new technology in the fast-moving and fast-growing renewable energy sector. It’s true that the government is helping to fund projects in this area, but public-sector money, on its own, is hardly a long-term solution. To supplement and solidify these efforts, I believe we need to create the equivalent of a junk bond or venture capital market for renewable energy project finance.
Excessive Wall Street compensation illustrates the law of unintended consequences. To stabilize the global financial system, the Federal Reserve, Treasury, independent agencies and Congress acted to bail out banks and securities firms, guarantee deposits and commercial paper, and allow institutions still standing to convert to bank holding company status, thus opening the Fed window and […]
Even though I am a vegetarian, I love Thanksgiving. For me, it’s not about the turkey, it’s an opportunity to reflect upon my life and to recognize that for which I am truly thankful. It also presents an opportunity to focus on the communities of which I am a part and to think about ways […]
Nothing is more frustrating than expecting a check and then not getting it, and no one knows that better than the former shareholders of PayQuik.com. In a complaint filed in Delaware federal court recently, the representative of the former stockholders of PayQuik sued Citibank )PayQuik’s acquirer) and U.S. Bank (the escrow agent) to compel the release of the balance of the escrow. At the closing of the transaction, Citibank placed 10% of the merger consideration in an escrow account with U.S. Bank. Near the end of the escrow period, Citibank brought an indemnification claim, but the stockholder representative asserted that Citibank submitted this claim one day after the escrow period had expired. As is typical, the escrow bank took no position on the dispute, so the stockholder representative decided to seek a court order directing release of the funds. This raises an interesting question that we have come across on other transactions: What options do the former stockholders of an acquired company have if the acquirer brings a claim near the end of an escrow period that the stockholders believe is either invalid or of little merit?