Taken from http://www.venturecompany.com/opinions/files/stung_by_subprime.html
Here is how entrepreneurs can recognize a sting from subprime VC:
Step 1: We like the idea, but before we invest please finish the product some more, then come back
Step 2: 6 Months later, you finished the product. Great, now prove it works by getting 100,000 daily users, then come back
Step 3: Fantastic, now we'll take 60% of your company for $1M
Ouch, that hurts.
Here is why sub-prime tactics hurt our innovative ecosystem, just like sub-prime lendings have a negative effect on the housing market as a whole.
ad 1/ Technology development is the investment risk we understand quite well, timely applicability to a market is the real issue. So, proving that the entrepreneur can build a product can easily be derived from the entrepreneur's vision, knowledge and credentials in that space, juiced up with some kitchen-sink prototyping. On top of that a 6-month self-funded development timeframe with 2-3 developers can hardly yield a sustainable competitive advantage anyway, so R&D development proves nothing.
ad 2/ In many cases it is impossible to land 100,000 users before you have a critical mass of product capabilities. That critical mass comes from an R&D investment that generates substantial differentiation, and rarely from tip-toeing into the marketplace. Marketplaces, for example, only grow when a critical mass of both supply and demand are lured in and participate, which often requires a bolstering of technology to support all constituents, rather than minimizing it. Already, too many technology products enter the market unfinished as a result of underfunding and yield false negatives.
ad 3/ Control and valuation of the company are a direct indication of the future success of an early-stage company. The vast majority of technology success stories are derived from retained majority control by its founders and CEO (Facebook, Google, Twitter, eBay etc). Investors are terrible operators (no surprise given their background and experience) and should not want to own a majority stake in their companies, simply out of self-preservation.
The only early-stage investors who may be able to turn sub-prime deals into prime are the investors who:
- have proven to be successful operators themselves
- support the vision before the product is there
- have great syndicates to support the full runway of a disruptive market entry going forward.
Showing posts with label Venture Capital. Show all posts
Showing posts with label Venture Capital. Show all posts
Saturday, July 11, 2009
Monday, May 11, 2009
http://paul.kedrosky.com/archives/2009/04/vinod_khosla_at.html
Interesting Video.
One interesting quote:
"What we are tending to do is increase technology risk so we can reduce market risk. We will generally take on more market risks, have a bigger jump, and a larger probability of failing at the technology such that when we enter the market we have a larger competitive advantage."
- Vinod Khosla
Assuming that two companies have equivalent risks, but one has more market risk then technology and vice versa, Kholsa would rather invest in the one with technology risk then the one with market risk.
Based on that very statement, I can infer that Kholsa is more a technology person. He's more comfortable with technology, he's a technologist, THAT's why he prefer companies with more technology risks. A salesman, someone very good at doing bulk sales, or a VC who knows market strategy very well, would choose the former.
Individual Judgement determines the perspective of risk. Yet, the inherent risk still exists!
Therefore, investors must always face the contradiction of knowing the company inside out, but have the ability to look at it from a "fresh" perspective.... a skill I'm always trying to achieve.
Another Interesting Nugget!
"One good metric of where there is good innovation potential is to go MIT and Standford and see what's the 1st choice for PHD studies in choosing project."
Hmm interesting metric. Have to test it out somehow by looking at the innovations at these Universities and see how many actually succeed.
Some of the ideas and investment he discussed.. I didnt think were very interesting after doing the maths. Lets see how things turn out lol
Interesting Video.
One interesting quote:
"What we are tending to do is increase technology risk so we can reduce market risk. We will generally take on more market risks, have a bigger jump, and a larger probability of failing at the technology such that when we enter the market we have a larger competitive advantage."
- Vinod Khosla
Assuming that two companies have equivalent risks, but one has more market risk then technology and vice versa, Kholsa would rather invest in the one with technology risk then the one with market risk.
Based on that very statement, I can infer that Kholsa is more a technology person. He's more comfortable with technology, he's a technologist, THAT's why he prefer companies with more technology risks. A salesman, someone very good at doing bulk sales, or a VC who knows market strategy very well, would choose the former.
Individual Judgement determines the perspective of risk. Yet, the inherent risk still exists!
Therefore, investors must always face the contradiction of knowing the company inside out, but have the ability to look at it from a "fresh" perspective.... a skill I'm always trying to achieve.
Another Interesting Nugget!
"One good metric of where there is good innovation potential is to go MIT and Standford and see what's the 1st choice for PHD studies in choosing project."
Hmm interesting metric. Have to test it out somehow by looking at the innovations at these Universities and see how many actually succeed.
Some of the ideas and investment he discussed.. I didnt think were very interesting after doing the maths. Lets see how things turn out lol
Companies supported by policy: To invest or not to Invest?
"As Venture Capitalists, we won't take policy risk. If the company will only be successful based on the implementation of policy XYZ, we won't invest."
Quote by David Gold, a partner at Access Venture Partners.
Interesting Statement.
I'll always had to struggle between whether one should invest in companies that are heavily dependent on policy.
One thing for sure is that if we treat this statement as a black and white ultimatum, we'll be missing out on much less economically viable companies.
Here in Asia, local governments such as Philippines and Thailand are favorable governmental incentives to make projects which would be otherwise ignored attractive.
Yet, Projects are still well-structured, makes fundamental economical and environmental sense and can still offer stable cash flows.
A single "policy", the kyoto protocol, created an entire market based on carbon cap-and-trade altogether, attract billions of dollars. Yet, it is also heavily dependent on policy.
I believe we have to be comfortable with companies that are only economically viable with the help of certain policies, and as long as it makes economical/environmental sense, with an adequate risk/return, it should be a viable project.
One should not simply ignore policy but really understand why it was there in the first place and what the long term impacts will be like.
Quote by David Gold, a partner at Access Venture Partners.
Interesting Statement.
I'll always had to struggle between whether one should invest in companies that are heavily dependent on policy.
One thing for sure is that if we treat this statement as a black and white ultimatum, we'll be missing out on much less economically viable companies.
Here in Asia, local governments such as Philippines and Thailand are favorable governmental incentives to make projects which would be otherwise ignored attractive.
Yet, Projects are still well-structured, makes fundamental economical and environmental sense and can still offer stable cash flows.
A single "policy", the kyoto protocol, created an entire market based on carbon cap-and-trade altogether, attract billions of dollars. Yet, it is also heavily dependent on policy.
I believe we have to be comfortable with companies that are only economically viable with the help of certain policies, and as long as it makes economical/environmental sense, with an adequate risk/return, it should be a viable project.
One should not simply ignore policy but really understand why it was there in the first place and what the long term impacts will be like.
Burying your Head in the Sand
http://www1.eere.energy.gov/vehiclesandfuels/pdfs/program/2008_energy_storage.pdf
About time someone notice that Li-ion batteries have several problems before mainstream application as batteries for EVs.
Not very sure why so many analyst are recommending stocks whose revenue comes from the sale of Li-ion Batteries to rise in price, the economies just doesn't make sense. Then again, whether EVs will be successful or not also relies on the car manufacturer's ability to have a economical car body that is well-suited for housing batteries.
I've always based my expectations on car batteries on the technologies' energy density/$ and efficiency, which I believe is the two most important elements, especially if you use a Life Cycle Cost Comparison Analysis.
I really dislike it when analyst write investment reports like journalist, they try to pick an "attractive" angle of a story eg :" Li-Ions are all the rage!!!" and just proceed recommend a stock.
The worst thing is that when the better alternative is not publicly listed, these analyst just ignore it and go for the "best available publicly listed" stock. Thats just so studpid. It's equivlent to burying your head in the sand.
About time someone notice that Li-ion batteries have several problems before mainstream application as batteries for EVs.
Not very sure why so many analyst are recommending stocks whose revenue comes from the sale of Li-ion Batteries to rise in price, the economies just doesn't make sense. Then again, whether EVs will be successful or not also relies on the car manufacturer's ability to have a economical car body that is well-suited for housing batteries.
I've always based my expectations on car batteries on the technologies' energy density/$ and efficiency, which I believe is the two most important elements, especially if you use a Life Cycle Cost Comparison Analysis.
I really dislike it when analyst write investment reports like journalist, they try to pick an "attractive" angle of a story eg :" Li-Ions are all the rage!!!" and just proceed recommend a stock.
The worst thing is that when the better alternative is not publicly listed, these analyst just ignore it and go for the "best available publicly listed" stock. Thats just so studpid. It's equivlent to burying your head in the sand.
Friday, April 24, 2009
Had the very good fortune of meeting a fantastic person yesterday.
He's probably every financier's dream entrepreneur --> passionate, leading expert in the field, practical, puts his own money, and has the rare ability to be self-critical on his own idea.
Throughout the discussion, I particularly like one saying : "Ideas are just like Children. The ones that belong to you always seem the best!"
He's probably every financier's dream entrepreneur --> passionate, leading expert in the field, practical, puts his own money, and has the rare ability to be self-critical on his own idea.
Throughout the discussion, I particularly like one saying : "Ideas are just like Children. The ones that belong to you always seem the best!"
Wednesday, April 22, 2009
Current Books
Suddenly Felt I should share the books I'm reading
1) Beyond the J Curve: Managing a portfolio of VC and PE fund
http://www.amazon.com/Beyond-Curve-Managing-Portfolio-Venture/dp/047001198X
Comments:
This is an amazing book. I've always been trying to find a good resource for VC/PE funds that goes beyond the theoretical surface information. Certain important parts such as how does the distribution waterfall actually work, whether the principal is repaid, how and when hurdle rate kicks in seems easy to understand but are difficult to apply. This is especially so when you try to contruct a financial model to see how does a PE/VC fund cashflow look like throughout the fund lifetime.
These concepts are very important but they are not explained fully in other books. So its very difficult when trying to understand a fully structured VC/PE model. This book however does provide much more indept explanation which is good :)
2) The 36 Strategies of the Chinese
Comments:
This is also a very good book, written by a NUS professor. It applies ancient chinese wisdom to a business setting. Being Chinese myself, and having a father who has sucessfully applied these strategies across various situations, I had read this book when I was very young in the past.
Now, with much more life experience, I have a very different pespective when reading this book. I will read it again when I reach 30 and see whether there is any new wisdom gained lol.
1) Beyond the J Curve: Managing a portfolio of VC and PE fund
http://www.amazon.com/Beyond-Curve-Managing-Portfolio-Venture/dp/047001198X
Comments:
This is an amazing book. I've always been trying to find a good resource for VC/PE funds that goes beyond the theoretical surface information. Certain important parts such as how does the distribution waterfall actually work, whether the principal is repaid, how and when hurdle rate kicks in seems easy to understand but are difficult to apply. This is especially so when you try to contruct a financial model to see how does a PE/VC fund cashflow look like throughout the fund lifetime.
These concepts are very important but they are not explained fully in other books. So its very difficult when trying to understand a fully structured VC/PE model. This book however does provide much more indept explanation which is good :)
2) The 36 Strategies of the Chinese
Comments:
This is also a very good book, written by a NUS professor. It applies ancient chinese wisdom to a business setting. Being Chinese myself, and having a father who has sucessfully applied these strategies across various situations, I had read this book when I was very young in the past.
Now, with much more life experience, I have a very different pespective when reading this book. I will read it again when I reach 30 and see whether there is any new wisdom gained lol.
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