Term Sheet 101: Preference

by mbmccall

Nearly all VC’s use convertible preferred stock as their vehicle of choice. Most entrepreneurs know this but many don’t fully understand the different flavors and elements of it.

Preference refers generally to the seniority of a given class of stock versus others. Preferred A stock usually gets paid back before common and follow-on Preferred issuances (B, C, D, etc) usually have seniority over both the A and common. This means that the investors will get their capital out before the entrepreneur and team usually.

There are two primary forms of Preferred stock: straight and participating. Straight convertible preferred stock is an either/or situation. Investors can opt to get their capital back but not participate in further upside (e.g. stay as preferred stock…usually the election in downside scenarios) or they can convert to common and participate alongside management & the entrepreneur. The kick point of this conversion is usually pretty clear. If an investor has put $10m in and has 10% of the company, for any exit that values equity above $100m, they will convert to common. For any exit below, they will stay as preferred.

With participating preferred, investors first get their initial capital out and then participate as common shareholders. So, in the above case, at $100m, the investor would get his/her $10m back and then would get an additional $9m (10% of the remaining $90m). Investors will often use this to hit return targets when having to pay a high initial price.

Some term sheets will include participation multiples where investors get 2x or 3x their capital out before other classes. This usually happens when there is significant preference (invested dollars) in the company and there is gap between when their get their capital back and when they start to participate in the upside.

Dividends also play a role in preference. There are cumulative dividends and “when & as declared by the board” dividends. With cumulative dividends, investors “preference” grows each year at a set rate (say 6%), thereby providing an ongoing discount for the investor. This dividend begins to kick in day one. Other dividends start only “when & as declared by the board”. I have not generally seen many boards vote to trigger a dividend.

New preferred stock can be either senior to previous preferred classes (say the Pref B gets its money before the Pref A) or it can be “pari passu” to them (the Pref B and Pref A have the same seniority and come out pro-rata based on their relative sizes). This term usually does not affect the entrepreneur who is subordinated to both classes but is an investor group matter.

As market conditions tighten, investors look to offset increasingly rockier environments through more aggressive terms. As they get more competitive, terms trend more loosely. Lastly, while earlier investors may lock in strong terms, everything is up for renegotiation when new investors come in. Previous preferred terms can stay in place or, in severe cases, get pushed to common. Participation multiples can be eliminated as can dividends. However, for entrepreneurs looking to use new financings to recut their deals, they should be careful. Earlier investors usually have blocking rights on new capital coming in. Additionally, entrepreneurs that play the sides against the middle (old vs. new investors) will significantly impair their relationship with initial investors if they blatantly play this card.

Preference takes many forms in venture capital. It is critical that entrepreneurs fully understand the implications of the terms they are accepting so that it does not impact future relationships going forward.

Term Sheet 101: Preference

by mbmccall

Nearly all VC’s use convertible preferred stock as their vehicle of choice. Most entrepreneurs know this but many don’t fully understand the different flavors and elements of it.

Preference refers generally to the seniority of a given class of stock versus others. Preferred A stock usually gets paid back before common and follow-on Preferred issuances (B, C, D, etc) usually have seniority over both the A and common. This means that the investors will get their capital out before the entrepreneur and team usually.

There are two primary forms of Preferred stock: straight and participating. Straight convertible preferred stock is an either/or situation. Investors can opt to get their capital back but not participate in further upside (e.g. stay as preferred stock…usually the election in downside scenarios) or they can convert to common and participate alongside management & the entrepreneur. The kick point of this conversion is usually pretty clear. If an investor has put $10m in and has 10% of the company, for any exit that values equity above $100m, they will convert to common. For any exit below, they will stay as preferred.

With participating preferred, investors first get their initial capital out and then participate as common shareholders. So, in the above case, at $100m, the investor would get his/her $10m back and then would get an additional $9m (10% of the remaining $90m). Investors will often use this to hit return targets when having to pay a high initial price.

Some term sheets will include participation multiples where investors get 2x or 3x their capital out before other classes. This usually happens when there is significant preference (invested dollars) in the company and there is gap between when their get their capital back and when they start to participate in the upside.

Dividends also play a role in preference. There are cumulative dividends and “when & as declared by the board” dividends. With cumulative dividends, investors “preference” grows each year at a set rate (say 6%), thereby providing an ongoing discount for the investor. This dividend begins to kick in day one. Other dividends start only “when & as declared by the board”. I have not generally seen many boards vote to trigger a dividend.

New preferred stock can be either senior to previous preferred classes (say the Pref B gets its money before the Pref A) or it can be “pari passu” to them (the Pref B and Pref A have the same seniority and come out pro-rata based on their relative sizes). This term usually does not affect the entrepreneur who is subordinated to both classes but is an investor group matter.

As market conditions tighten, investors look to offset increasingly rockier environments through more aggressive terms. As they get more competitive, terms trend more loosely. Lastly, while earlier investors may lock in strong terms, everything is up for renegotiation when new investors come in. Previous preferred terms can stay in place or, in severe cases, get pushed to common. Participation multiples can be eliminated as can dividends. However, for entrepreneurs looking to use new financings to recut their deals, they should be careful. Earlier investors usually have blocking rights on new capital coming in. Additionally, entrepreneurs that play the sides against the middle (old vs. new investors) will significantly impair their relationship with initial investors if they blatantly play this card.

Preference takes many forms in venture capital. It is critical that entrepreneurs fully understand the implications of the terms they are accepting so that it does not impact future relationships going forward.

Life Is Too Short…

by mbmccall

"In looking for people to hire, look for three qualities: integrity,
intelligence and energy. And if they don’t have the first, the other
two will kill you."
— Warren Buffett

I was having dinner with a good friend the other night and we began to talk about ways to deal with the increasing pressures and velocity of today. We were talking about my recent post on burnout. He agreed that the current late stage of the business cycle increases demands on the average person but added that the intrusion of instant communications (Blackberries, IM, etc) exacerbates everything. You can’t wind down and it becomes more difficult to escape the rat race.

My friend is one of the most productive people I know. He gets more done by Tuesday than most people do by Friday. I probed him for a nugget or two on how to manage the 28 hour day. Instead of a time management strategy, he surprised me with one simple piece of advice:

                          “ Life is too short to deal with assholes, so I don’t"

As I reflected on his advice, I realized how much this resonated with my world. There is no shortage of stress, surprises or setbacks in the life of an entrepreneur or venture capitalist. Over 50% of VC deals end poorly and the ones that succeed usually dance with death at least once or twice. While this is not enjoyable for either entrepreneur or VC, it is the interpersonal behavior that makes life bearable or miserable for all involved.

As I look back at the variety of experiences I’ve had, I see several themes or characteristics that emerge. I’ve had successful investments like FeedBurner where the management team was phenomenal to work with. I’ve also had situations where, despite the success, it was contentious to the very end. I’ve also had less than successful investments, like 800.com, where the team (led by CEO Greg Drew) worked ethically, hand in hand with the investors to find the best solution for all.

What are the early signs that your partner (VC or entrepreneur) will be easy to work with or a potential nightmare? Looking backward, I’ve come up with several guide posts:

1)    Are communications open, transparent and proactive or are they reactive and filtered? Good CEO’s communicate frequently and openly with investors and give them the good and the bad. They take responsibilities for poor decisions and identify potential icebergs well before others see them. Poor CEO’s filter the information that flows up from the ranks. They continually spin bad news (only after having to divulge it). They suppress comments from the rest of the management team and make comments/threats to them like “are you committed to being a member of this team or not…”. Both sides know when the other is being insincere and less than forthcoming.
2)    Do they help others or are they always taking? Good CEO’s realize that building up goodwill is critical for future success. Opportunists are always trying to figure out how to suck more out of others. Look at their behavior and see how often they are helping others advance, especially when there is nothing in it for him/her.
3)    Is the leadership in the game for a greater good/purpose or solely as a mercenary? When you ask a CEO what motivates him/her, will he/she say “to make a lot of money” or “to change a part of the world”? Investors are playing with fire when they back leadership that is looking primarily to strike it rich in two or three years. They are driven primarily by profit motive and will either begin to self-optimize or head out when things don’t go as planned. This is not to say that managers don’t burn out or lose conviction in realizing the greater good, but how they interact and respond to crisis illustrates a lot.
4)    Does the CEO (or VC) strive to grow the pie or simply to enlarge his/her piece of it? If the different sides continually try to recut the deal or comment on how they are getting screwed, you will have trouble on your hands. Should things not go well, the in-fighting will make the external developments pale in comparison. CEO’s or VC’s that portray themselves as “victims” will make very poor partners.
5)    Does the CEO (or VC) look out for the other key team members or will he/she self-optimize his/her own position at each point in time? Early on, you get a taste of this when dilution from a new financing occurs. Some CEO’s will take less for themselves so that others on the team are taken care of. Others will spend very little time discussing the impact of the event on others.
6)    In the end, do you trust your partner or are you plagued by suspicion? Your gut is very accurate on matters like these. Does it question your own behavior/actions or do you worry that others’ key actions are going on behind your back? If you find either your partner’s responses evasive or that you are being evasive, then you’ve got trouble brewing.

A good partner is rewarding to work with and you are appreciative of their commitment and value-add. In venture capital & entrepreneurship, whom you back or hire will amplify the good or the bad. Good CEO’s attract top talent and deceptive ones repress it. Both types are competitive but one sees a broader horizon while the other simply looks at his/her own path.

Julian Robertson, the legendary founder of the Tiger hedge funds, was maniacal on the importance of management. “Have you done your work on management?” He’d grill subordinates on all aspects of management ranging from where they went to school to actions they had taken to details about their lives. He wanted his team to know everything there was to know about the people running the companies they invested in.

Life is too short to deal with assholes. Be very careful with how you pick partners to work with. It is very difficult to stop the cascade of misery once you start down the path of “overlooking” certain personality flaws or “explaining away” certain aberrant behaviors. Over time, work towards creating an asshole free environment.

Buckle Up

by mbmccall

This summer has been a crazy one for me and I have, as one friend wrote, "gone dark" since early June. So, as I begin to sprout prose again here, why not jump back in with a depressing post on the debt debacle & its impact on the our entrepreneurial world…

Over the past year, money has poured into the buyout world.  Enabled by cheap debt, buyout firms have been taking companies private at a eye-popping rate. Many observers have noticed the comparison of this activity to the venture bubble of 1999-2000. Many pension fund managers have justified this insane ramp, stating that these companies are cash flow positive or that the public market is sizable or that “this time is different”. However, when you buy firms at 9-11x EBITDA and use significant leverage, everything will eventually end in tears.

Well, the punch bowl has formally been taken away this month. With the growing credit crisis spreading from the sub-prime debacle, banks have dramatically ratcheted back their lending terms and activity. The public markets, having continued their ascent driven by the ever-present buyout offers, are now growing more volatile. The failed UAL buyout triggered a dark period in the markets in the late 1980’s when I was on Wall Street and it looks like an encore performance is happening now with deals like Chrystler stalling. As Roach over at Pequot mentioned, brace yourself when the first major buyout deal files for Chapter 11.

Bill Gross, the Sage of the Debt world at Pimco, wrote in his Enough Is Enough article (worth the read):
"But the Blackstones, the KKRs, and the hedge funds of recent years also climbed to the top of the pile on the willing backs of fixed income lenders too meek and too passive to ask for a part of the action. Covenant-lite deals and low yields were accepted by money managers as if they were prisoners in an isolation ward looking forward to their daily gruel passed unemotionally three times a day through the cellblock window. "Here, take this" their investment banker jailers seemed to say, "and be glad that you’ve got at least something to eat!"…Well the caloric content of the gruel in recent years has been barely life supporting and unhealthy to boot – sprinkled with calls and PIKS and options that allowed borrowers to lever and transfer assets at will. As for the calories, high yield spreads dropped to the point of Treasuries + 250 basis points or LIBOR + 200. Readers can sense the severity of the diet relative to risk by simply researching historical annual high yield default rates (5%), multiplying that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life of future loans. At LIBOR + 250 in other words, high yield lenders were giving away money!

Investors are nervous that the sub-prime credit issues will spread to other credit sectors. They are asking if S&P/Moody’s missed the boat on assessing the sub-prime risk, then they probably have missed in the other sectors as well. Banks are balking at the terms proposed by recent large buyouts, despite some serious strong-arming tactics from the likes of KKR. And, debt origination is plummeting. Collateralized Debt Obligations (CDO’s) which peaked at $42B, have fallen to under $3B as bank credit groups retrench. Less mortgage credit and less buyout credit will impact both corporate revenue streams and market values.

So, what does this all mean:
1)    increasing volatility in the public markets as investors try to figure out if changes represent the coming of Armageddon or a fantastic buying opportunity.
2)    tighter credit guidelines and terms as banks and debt markets demand more return and more protection for the risks they are taking (yes, the laws of gravity are returning)
3)    increasing difficulties in the buyout world as firms have to put more equity into deals while still paying higher EBITDA multiples due to competition. It will turn into a blood bath.
4)    junk debt spreads will widen significantly as bankruptcies soar.
5)    the IPO market will begin to soften again as the public markets try to figure things out. Quality companies will still go out but bankers will be increasingly selective.
6)    later stage venture investors will begin to tighten terms.

This all said, should things go south, it will provide a strong opportunity for entrepreneurs who are disciplined. Venture capital and angel capital will be increasingly more cautious in backing new competitors into spaces. Should market conditions hit truly rocky times, weaker competitors will be pruned. This is why breakout companies such as Cisco often have their genesis or ascension coming out of difficult times. Focus on your core business and customer value proposition. Get to cash flow break even as quickly as possible. And, spend every penny as if it were your last. Buckle up for some interesting times. The markets may not necessarily go through major corrections, but investors are going to be reminded that there is risk associated with leverage, alternative asset classes and excessive liquidity.

My BarCamp Fundraising Talk

by mbmccall

Jason Rexilius pulled off another great BarCamp in Chicago over the weekend of 6/23. I loved the energy and creativity flowing at the event with developers coming together from a broad array of backgrounds to code, share and bond. We definitely need a lot more of this in Chicago. Jason asked if I would do a quick Q&A with the crowd on fundraising for start-ups. I would give an overview here on what I talked about, but David Dalka and John Mascarenhas did a much better job than I could at this.

David’s post, Matt McCall gives venture capital investing tips at BarCamp Chicago, which includes John’s guest post, is at the link above.

As I’ve gotten to know Matt McCall more, I begin to appreciate his approach. He doesn’t fit the preconceived mold that many would think of when they picture the typical venture capitalist. He’s more of…

Thanks guys for pulling this together.

Sea of Change

by mbmccall

One of benefits of being in venture capital is that you can see activity and trends across a broad array of industries. Additionally, you spend a considerable amount of time talking to people about deals, career changes, financings or general assistance. You can also get a sense of how certain companies are doing based upon how many resumes are coming out of the firm or how difficult it is to recruit people from that firm.

Over the last four months or so, I have been noticing a different kind of trend occurring than I have seen in the past. Normally, we see a lot of people looking to move within their industry or to get into private equity. However, I am now seeing a lot of people seriously reconsidering what they are doing and whether they should remain in their given profession. A lot of this is being driven by fatigue or disillusionment. This includes a number of people in the private equity world (and other investment circles) looking else where. In other words, there is a lot of soul searching going on right now, much, much more than I have seen in the past.

I believe this is being driven by the maturity of the current economic cycle as well as by the continuing swell of liquidity into all investment sectors. It has become harder and harder to find undervalued real estate, buyout targets, product markets and such. As people grind harder and harder to drive returns (or profits), the future upside has become increasingly less apparent. This is a sign of an extended market.

Now, I am not saying that a correction is around the corner or that I see anything in particular. However, I can say that the overall conditions remain increasingly unstable with an occasional upswing or downswing in the markets.

So, if you happen to be one of those who is seriously reconsidering your chosen path, you are not alone. It is harder to do what you need to do (unless you are a corn farmer). On one hand, I would comment that life is too short to not be doing something you love or were made for. These challenging times can create a needed forcing mechanism to move. However, on the other, I would say that every industry has its cycles and even preferred professions will hit very difficult times. Persevere through these downturns and you are in a strong position on the recovery. Only you really know what you love to do (and have the skill set for) so as to determine which course is right for you.

Brian Kim has a very popular post for a quick exercise on “How to Find What You Love to Do“.

FeedBurner Pro Stats for Free Now

by mbmccall

I have been using the FeedBurner stats PRO and MyBrand services since day one and paid the monthly fee. FeedBurner recently announced, in Google customary fashion, that these both will now be available for free to all users. Definitely worth checking out if you are using or have considered using FeedBurner’s core service to manage your feeds. As their release states:

FreeBurner for Everyone

One of the many benefits that FeedBurner publishers will enjoy now that FeedBurner is part of the Google family is a little something we like to call, "more for free!" Beginning today, two of FeedBurner’s previously for-pay services, TotalStats and MyBrand, will be free.

Yep, free. Not in the sense of soaring high above the clouds or recently sprung from the hoosegow, but free like you’ll no longer gladly be billed on Tuesday for a burned feed today. We suspect this will be welcome news to the 450,000+ of you using many of our other free services, but understanding that your feed is your feed, you will need to activate these newly freed-up services in order to partake in their awesomeness.

FeedBurner Stats PRO
PRO is feed analytics taken to the next level. You will now have access to the number of people who have viewed or clicked individual content items in your feed and "Reach," which estimates the daily number of subscribers who interacted with your feed content. You can turn this on by signing in to your account, navigating to the Analyze tab and heading to the FeedBurner Stats PRO section. Click the "Item Views" checkbox to activate these PRO features.

MyBrand
The MyBrand service (also PRO-level) is located under the "My Account" tab after you’ve signed in. MyBrand lets you maintain consistency between your feed address and your hosted website’s domain, if matchy-matchy is your thing. For example, rather than using feeds.feedburner.com/MyFeedName, your MyBrand-ed feed address can be feeds.myexcellentdomain.net/MyFeedName. To get started with MyBrand, sign into FeedBurner, click the "My Account" link in the upper left-hand corner, and then click "MyBrand".

Previous "PRO" customers will not be charged for the month of June 2007 and beyond. Also, after newly activating either of these features or services, you’ll notice a nifty new "PRO" badge next to your feed(s) on My Feeds page.

Welcome to FreeBurner!

FeedBurner Pro Stats for Free Now

by mbmccall

I have been using the FeedBurner stats PRO and MyBrand services since day one and paid the monthly fee. FeedBurner recently announced, in Google customary fashion, that these both will now be available for free to all users. Definitely worth checking out if you are using or have considered using FeedBurner’s core service to manage your feeds. As their release states:

FreeBurner for Everyone

One of the many benefits that FeedBurner publishers will enjoy now that FeedBurner is part of the Google family is a little something we like to call, "more for free!" Beginning today, two of FeedBurner’s previously for-pay services, TotalStats and MyBrand, will be free.

Yep, free. Not in the sense of soaring high above the clouds or recently sprung from the hoosegow, but free like you’ll no longer gladly be billed on Tuesday for a burned feed today. We suspect this will be welcome news to the 450,000+ of you using many of our other free services, but understanding that your feed is your feed, you will need to activate these newly freed-up services in order to partake in their awesomeness.

FeedBurner Stats PRO
PRO is feed analytics taken to the next level. You will now have access to the number of people who have viewed or clicked individual content items in your feed and "Reach," which estimates the daily number of subscribers who interacted with your feed content. You can turn this on by signing in to your account, navigating to the Analyze tab and heading to the FeedBurner Stats PRO section. Click the "Item Views" checkbox to activate these PRO features.

MyBrand
The MyBrand service (also PRO-level) is located under the "My Account" tab after you’ve signed in. MyBrand lets you maintain consistency between your feed address and your hosted website’s domain, if matchy-matchy is your thing. For example, rather than using feeds.feedburner.com/MyFeedName, your MyBrand-ed feed address can be feeds.myexcellentdomain.net/MyFeedName. To get started with MyBrand, sign into FeedBurner, click the "My Account" link in the upper left-hand corner, and then click "MyBrand".

Previous "PRO" customers will not be charged for the month of June 2007 and beyond. Also, after newly activating either of these features or services, you’ll notice a nifty new "PRO" badge next to your feed(s) on My Feeds page.

Welcome to FreeBurner!

TCI Chief Donates $460m to Venture Philanthropy

by mbmccall

In addition to Bill Gates, one of the largest influencers in the venture philanthropy world is Chris Hohn, who is one of the most successful hedge fund managers in the world. His fund has been closed for some time and he donates a significant portion of its profits to his Foundation. He is known for his activist style of investing on the hedge fund, and, like the Robin Hood Foundation, is starting to do so on the philanthropy side. It will be interesting to see the direction he takes going forward as his Foundation, now at over $1.4B, has the ability to move the needle significantly in the venture philanthropy world…

TCI chief donates £230m to his charity

By James Mackintosh in London

Published: July 1 2007 22:02 | Last updated: July 2 2007 00:05

Chris Hohn gave £230m ($460m) to his charitable foundation last year, making the activist hedge fund manager one of Britain’s most generous philanthropists, with even more expected to be given this year.

Mr Hohn, founder of The Children’s Investment Fund, told investors in New York two weeks ago that the foundation – run by his wife Jamie Cooper-Hohn – had passed $1bn, less than five years after it was set up.

Mr Hohn’s donations put him at the forefront of venture philanthropy, which has seen financiers and businessmen bring entrepreneurial skills and hedge fund-style activism to charities.

His philanthropy contrasts with the aggressive activism of TCI, which helped block Deutsche Börse’s bid for the London Stock Exchange and led to the downfall of Werner Seifert, the Börse’s chief executive. Mr Hohn is credited with forcing Dutch bank ABN Amro to put itself up for sale, although last week his attempt to make Japan’s J-Power triple its dividend was rejected by shareholders.

Last year’s donation is one of the biggest single acts of charity by a Briton but pales in comparison with donations by US billionaires, with Warren Buffett last year pledging $31bn to the Bill & Melinda Gates Foundation, which already has $35bn from Mr Gates, founder of Microsoft.

The Children’s Investment Fund Foundation is understood to be worth about $1.4bn. CIFF finances projects for children in the developing world, with a focus on HIV.

The size of the donations is a result of the phenomenal returns Mr Hohn has generated for investors in TCI, which has more than $10bn under management. Last year he made more than 40 per cent, while in 2005 TCI returned more than 50 per cent.

TCI automatically gives 0.5 per cent of its funds under management to the CIFF, a third of its annual fee. Investors pay an extra 0.5 per cent to CIFF if it produces returns above 11 per cent a year, a level it has far outstripped since it was set up in 2002. In addition, Mr Hohn voluntarily donates the majority of the profits earned by TCI after paying staff.

According to documents to be filed with charity regulators on Monday, CIFF and its US affiliate were given £230m in the year to last August, and the foundation made investment gains of £94m on its investments, which are run by TCI.

Copyright The Financial Times Limited 2007

——————–

Feared fund turns to business of charity

By James Mackintosh in London

Published: July 2 2007 03:00 | Last updated: July 2 2007 03:00

When Chris Hohn and Jamie Cooper-Hohn set up hedge fund The Children’s Investment Fund (TCI) and its linked charity, the Children’s Investment Fund Foundation, they hoped to make a difference to children in the developing world.

Mrs Cooper-Hohn told recipients of aid that the foundation may one day be able to give out $5m-$10m a year.

Last year, five years after starting up, they passed that mark, while the success of Mr Hohn’s hedge fund has pushed assets in the CIFF to about $1.4bn (€1bn, £700m), enough to give out far more than the original target every year forever.

But the foundation does not just give out money. It has adopted the "venture philanthropy" model, pioneered by New York’s Robin Hood charity, set up by legendary hedge fund manager Paul Tudor Jones.

"I was very eager that if we did this we would do it very much in the way Chris invests, making long-term, well-researched investments," Mrs Cooper-Hohn says, "bringing business rigour and a private sector approach into development."

This extends to the language used: the charity hires "portfolio managers" to keep an eye on its "investments", and is willing to step in and make suggestions when it believes a recipient of aid needs help.

"They want to know that you are efficient and effective," says Bill Clinton, former US president, whose Clinton Foundation charity is given money by CIFF. "But in general they are quite tolerant if you try something that doesn’t work, as long as you stop. They are used to taking reasonable risks – that’s how they make money."

Mr Hohn and Mrs Cooper-Hohn are part of a growing trend towards venture philanthropy, and are rapidly becoming one of the biggest British foundations to push business practices into the charity world.

The growth is beyond anything they expected, thanks to the success of TCI. It now has $10bn under management, making it one of Europe’s biggest hedge funds less than five years after Mr Hohn left as manager of US hedge fund Perry Capital’s European fund to start up on his own.

Last year TCI’s concentrated portfolio returned more than 40 per cent, after 50 per cent in 2005 and 40 per cent in 2004, making it one of the world’s best-performing big hedge funds. It is also one of the most feared in boardrooms, particularly in Europe: TCI is credited with killing Deutsche Börse’s bid for the London Stock Exchange, and its appearance on a share register is closely watched by other investors.

But Mr Hohn, a bespec-tacled graduate of Southampton University whomet his wife while doing graduate work at Harvard,is deeply moved by the plight of children in the developed world, say people who know him.

Mrs Cooper-Hohn says that in the early days of the charity, her husband would ask every day whether the fund had generated enough to provide food aid to a particular village he had come across.

"Chris is truly passionate about kids in developing countries," she said. "His first job was in the Philippines and he saw kids scouring the rubbish dumps and I think he was deeply moved."

The extra money means CIFF can now move into areas in which it had previously decided it was too small to make a difference, such as water and hygiene. But its "portfolio" will remain concentrated, to allow it to be closely involved in each project. After intensive research it has decided not to fund some areas, including those aimed at ending sexual exploitation of children.

Some critics claim it is just a marketing gimmick to promote the hedge fund, pointing to presentations to investors about the work of the charity, including one last year by Mr Clinton. But if it was the plan, it has not worked. Almost no one invests in the fund because of the charity, Mrs Cooper-Hohn says.

So far, CIFF has spent relatively little money. However, it is now scaling up significantly but takes a conservative approach to the hedge fund’s long-term potential. "We are in this phase where our assets are rapidly accumulating," Mrs Cooper-Hohn says. "You can’t expect that to last for ever."

The Power of Technology & the Knowledge Economy

by mbmccall

The most recent issue of Institutional Investor (its "40th Anniversary Issue") has a series of interesting perspectives from the pioneers and leaders of the financial world ranging from John Bogle & Warren Buffett to Arthur Rock & Henry Kravis. If you can chase it down, it is quite the interesting read. One of the pieces is from Michael Milken who is on the road to redemption. In the piece he states:

"As financial technology is deployed around the world, it has the potential to reduce poverty and the kinds of tensions that breed terrorism."

The statistic that caught my attention the most was his comparison of Jamaica versus Singapore. He wrote:

"Taking this principle (giving talented leaders access to capital…e.g junk bonds) to the national level, there are only three ways for a country to build human capital: Increase knowledge and skills, improve the quality and length of life so people are more productive or import people with specific abilities. Some countries have done this better than others. Consider the two former British colonies of Jamaica and Singapore. Back when I was in school in 1960, their economies were similar, with a gross domestic product of about $1,900 per person (in current US dollars). But they chose different paths to development. Jamaica centered its economy on agriculture and tourism and today has a per capital GDP of about $3,900. Singapore, which developed its human and social capital and created a knowledge infrastructure, is a modern technology powerhouse with a GDP of more than $30,000 per person."

In the end, it is all about "empowering" the most talented people you can find, whether in entrepreneurship or philanthropy, through both capital and resources. This is what makes the difference in your city, your region or your country. Some view Venture Capital more as a day at the casino with bets spread out across the roulette table. Others view it is the critical enabler of innovation. I like Milken’s final conclusion on his piece on philanthropy (which could also cover VC)…"It always involves more than just writing checks. It takes an entrepreneurial approach that seeks out best practices and empowers people to change the world."

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