Given my own experience with a Citigroup company that underwent a carve-out and an acquisition, I was looking forward to insights from this panel of heavyweights.
The Investment Rationale, Diligence and Terms
The comprehensive discussion started off by covering the rationale for a carve-out. One could be the impact of the technology inflexion curve, which forces revenue contraction. The challenges lie in the due diligence- the new entity requires an operating infrastructure to be built around the business- and venture capital like agreements on the term sheet conditions around downside protection- like redemption rights. Factors like restructuring management also need to be considered as they impact investment risk. In the Intel- Dialogic deal, intellectual property discussions were also critical.
Exit Strategy
Given this context, the exit strategy pitch to the investment committee is also critical. The right expectations need to be set, from whom to sell to- IPO vs. general sale- to sale value. This is especially important when the investor would like flexibility on freeing up cash if necessary.
This raises interesting investing questions:
1> Investment Failure Rates
There are various ways to slice and dice the investment portfolio: have firms considered “failure” rates of different types of deals, e.g. a carve out vs. a public company acquisition, as a factor in their decision making?
2> Portfolio Synergies
Do investment committees consider synergies across their investment portfolio as a factor in deal making? If so, what kind of policy should govern such a process? Note: Dealmakers sometime tend to think of synergy as finding efficiencies by acquiring competitors and consolidating market share. There is more to synergies- it pays to think like an investment professional here.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Showing posts with label investment strategy. Show all posts
Showing posts with label investment strategy. Show all posts
Sunday, February 01, 2009
Panel: Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?
The discussion focused on the parameters within which the VC industry currently operates
A return to fundamentals
The discussion kicked off with a return to fundamentals:
1> Most venture capital firms are not setup to make small investments
2> Venture capital firms are more like asset managers
3> Deal making is not easy: A deal like that of EqualLogic was hard work for all parties involved
4> The venture capital business is fundamentally not about fundamental research for revolutionary technologies, but about applying technology
5> Depending on the industry, the average holding period can be up to 9 years
6> As the market for the pre-IPO company matures, it should grow larger, providing the opportunity for late stage venture capital firms.
7> Exit strategies are critical to the model. Is there a vibrant IPO market? Are there private company sales opportunities?
Investing during the economic downturn
The panelist opinion was that the quality of business plans and management teams gets better as the economy goes down. The panelists emphasized that they are being extremely selective; they are not into throwing 50 bets at the solar power industry.
A panelist pointed out that the CEOs of their portfolio firms were upset by the Sequoia deck. The economic downturn, though, has led them to revisit their breakeven analysis.
Economic cycles and the industry- a perspective
A panelist had an interesting perspective on the economic downturn- the VC firm sells a company to Microsoft in the good times -> Microsoft cuts products and jobs in the bad times -> the resources are back in the VC fold working on the next product.
Venture Capital Fund Management
Funds are structured as financial managers who can find good business managers, as opposed to operational managers making funding decisions.
In January 2009, Kleiner Perkins, raised a so-called “annex fund,” or reserve fund it can tap to support companies it has already backed to help ensure they get through the downturn.
http://venturebeat.com/2009/01/14/kleiner-perkins-forced-to-reach-out-to-new-investors-unheard-of/
Outside of the one off hits, a panelist pointed out that returns in the 4x range would be rare in exits. Valuations were down 50%, B and C round valuations were down 20% and 30 % respectively. Another panelist stated that the venture capital industry was saved from a sever flight of capital by the buyout collapse.
Some the questions that arise:
1. Do lower valuations imply a longer time to complete transactions, and require a better understanding of the potential investment’s core business?
2. Would there be a shakeout in the industry that favors more late stage firms that have strong networks with large, potentially private companies? Would the shakeout lead to a reduction of the number of multistage firms?
3. Would late stage venture capital firms resort to private investment in public equity (small cap companies)? Even at the risk of serious strategy drift?
4. Given the odds of hitting the ball out of the ballpark (and I am not even talking about the odds of innovation), how should a venture capital firm get more selective?
5. Given the context of the Kleiner Perkins Annex fund, would a fund consider trading extensively in a secondary private market only when it is considering liquidating? Would partial portfolio/ strip sales be a serious option? Would some sort of a CDO like market structure be useful in the venture capital industry?
6. How are funds helping the LPs? Is it just via managing the drawdowns?
7. Are more LPs checking on estimates on deal flow and deal sizes to assess the impact of the economic downturn?
8. Are investment charters of old portfolios being modified to provide more flexibility to the venture capital firms?
9. How frequently are LPs assessing their asset allocations strategies and communicating with funds to execute revisions?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
A return to fundamentals
The discussion kicked off with a return to fundamentals:
1> Most venture capital firms are not setup to make small investments
2> Venture capital firms are more like asset managers
3> Deal making is not easy: A deal like that of EqualLogic was hard work for all parties involved
4> The venture capital business is fundamentally not about fundamental research for revolutionary technologies, but about applying technology
5> Depending on the industry, the average holding period can be up to 9 years
6> As the market for the pre-IPO company matures, it should grow larger, providing the opportunity for late stage venture capital firms.
7> Exit strategies are critical to the model. Is there a vibrant IPO market? Are there private company sales opportunities?
Investing during the economic downturn
The panelist opinion was that the quality of business plans and management teams gets better as the economy goes down. The panelists emphasized that they are being extremely selective; they are not into throwing 50 bets at the solar power industry.
A panelist pointed out that the CEOs of their portfolio firms were upset by the Sequoia deck. The economic downturn, though, has led them to revisit their breakeven analysis.
Economic cycles and the industry- a perspective
A panelist had an interesting perspective on the economic downturn- the VC firm sells a company to Microsoft in the good times -> Microsoft cuts products and jobs in the bad times -> the resources are back in the VC fold working on the next product.
Venture Capital Fund Management
Funds are structured as financial managers who can find good business managers, as opposed to operational managers making funding decisions.
In January 2009, Kleiner Perkins, raised a so-called “annex fund,” or reserve fund it can tap to support companies it has already backed to help ensure they get through the downturn.
http://venturebeat.com/2009/01/14/kleiner-perkins-forced-to-reach-out-to-new-investors-unheard-of/
Outside of the one off hits, a panelist pointed out that returns in the 4x range would be rare in exits. Valuations were down 50%, B and C round valuations were down 20% and 30 % respectively. Another panelist stated that the venture capital industry was saved from a sever flight of capital by the buyout collapse.
Some the questions that arise:
1. Do lower valuations imply a longer time to complete transactions, and require a better understanding of the potential investment’s core business?
2. Would there be a shakeout in the industry that favors more late stage firms that have strong networks with large, potentially private companies? Would the shakeout lead to a reduction of the number of multistage firms?
3. Would late stage venture capital firms resort to private investment in public equity (small cap companies)? Even at the risk of serious strategy drift?
4. Given the odds of hitting the ball out of the ballpark (and I am not even talking about the odds of innovation), how should a venture capital firm get more selective?
5. Given the context of the Kleiner Perkins Annex fund, would a fund consider trading extensively in a secondary private market only when it is considering liquidating? Would partial portfolio/ strip sales be a serious option? Would some sort of a CDO like market structure be useful in the venture capital industry?
6. How are funds helping the LPs? Is it just via managing the drawdowns?
7. Are more LPs checking on estimates on deal flow and deal sizes to assess the impact of the economic downturn?
8. Are investment charters of old portfolios being modified to provide more flexibility to the venture capital firms?
9. How frequently are LPs assessing their asset allocations strategies and communicating with funds to execute revisions?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
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