Given where we are in the market cycle, we should be seeing explosive growth in the IPO world. The Dow has set a new record high, high profile acquisitions like YouTube are providing lucrative exits and the economy continues to walk the fine line between inflation and recession. These bursts of activity are the life blood of venture capital where years of toil are rewarded with big IPO paydays.

So, where are the IPO’s? Over 500 venture backed companies went public in 1999 & 2000 and throughout the 1990’s, on average, 150+ companies a year went public. Through the third quarter of this year, less than 40 companies have gone public. This is on track to match 2001 when it looked like the wheels were coming off of the economy. Additionally, many legendary investors like Julian Robertson (of Tiger Management fame) are going heavily into cash in expectation of a tough 2007-8.

On the other end of the pipeline, VC’s in the valley are putting money out like there is no tomorrow. Many went back to market in 2004-5 to raise significant funds. Post-bubble, many swore off large funds and cut back their fund sizes to $300-400m, stating that is what could logically be invested. By 2003, they were feeling more confident in the world and most bumped up their funds to $500-700m. As in 1998-9, they have quickly deployed these funds and are coming back to market in 2007 for even larger ones. VC’s have pumped over $20B into companies this year. While this is significantly below the $100B of 2000, it is twice the “steady state” rate of $10B many feel leads to sustainable solid returns.

There are two reasons for the decline in IPO’s. One is that entrepreneurs are chosing  to go the acquisition route and the other is that the markets are still weary of the small, high growth technology companies.

While acquisitions often yield just 70% of what an IPO might, they eliminate several issues associated with going public. 1) you avoid the 6-12mo lock-up while also locking in a value, 2) you avoid the hassle and costs of SOX compliance. It is estimated that these annual costs run north of $2m/year and 3) you avoid the Fair Disclosure and option pricing risks. More and more firms are looking to the AIM in London or the Asian exchanges for exit versus the Nasdaq.

So,
1) VC’s need to show restraint in how much capital they raise and how quickly they put it out. This is unlikely, unfortunately, when they can raise $500m every two years, locking in $15m/yr in management fees for each.
2) Entrepreneurs need to focus on building businesses for the long-run and no for the flip (which is back in vogue). This means getting to breakeven as soon as possible while also raising moderate amounts of capital (less than $15m).
3) Firms that are not breakeven should raise enough capital (or maintain enough capital) to credibly reach breakeven.
4) we need to overhaul how we regulate our smaller companies versus our larger ones.

A pessimist sees the difficulty in every opportunity;
an optimist sees the opportunity in every difficulty. ~Winston Churchill

Historically, yearend has been a slow time in the venture world. From Thanksgiving through New Year, firms focused mostly on wrapping up loose ends in their portfolios. Last year, as echoed in the public markets, ended with a bang. With VC’s looking to pump money out, entrepreneurs have been actively looking for funding. As a result, between existing financings, new deals and Christmas/New Year, I took a break from the world of blogging. However, as they say, Elvis is back in the building.

As blogged, we took a much anticipated (by my kids) cruise through the Caribbean. We signed up to take a cruise on one of the largest boats around. It had everything and this seemed like a brilliant vacation solution until…

In late November, CNN ran a story about a cruise ship coming in early because over 500
passengers had come down with the Novovirus (Norwalk Virus). This wasn’t just any ship…it was our ship. In fact, I have since discovered that the Novovirus has become an increasingly significant issue on cruises because of the high population densities combined with the large percentage of kids on-board (little germ incubators).

Unfortunately, I could not find any bubble suits for the family, so we hoped for the best and did a lot of handwashing. Everything on the ship was oriented around preventing the spread of germs including putting Purell machines everywhere. Ironically, this may have done a disservice since Purell doesn’t kill viruses (just bacteria). So, people were more likely not to wash their hands given that the machines where everywhere.

This experience has me thinking more about the world of viruses and our current behaviors. The Economist wrote a recent article about all of the modeling banks have been doing around flu epidemics including having employees work, trade, etc from home. The CDC reports that 80% of infectious disease is spread by hands.  This includes touching salt & pepper shakers, ketchup bottles, hand rails, cash, bathroom faucets, doorknobs and such. Lysol claims to handle viruses as well as other germs. They have an interesting site related to germs and avian flu if interested (can’t hurt to be prepared…).

If we experience a flu epidemic (or a series of smaller outbreaks), it will be interesting to see how everyone responds. For example, what about using currency to buy goods & service? Dollar bills move from hand to hand and are a perfect carrier for germs. Will more and more people begin to use debit/credit cards and, will this lead to a greater push for RFID or biometric payment methods such as the Mobil/McDonald’s wireless payment key fob (which require minimal contact). I assume that there will be  a variety of opportunities across the board for infrastructure and services ranging from tele-services to biometrics. Even secondary effects with provide opportunity such as delivery services. As the Chinese proverb goes: “Out of chaos comes opportunity.” If you want to think more deeply about different opportunities, think how your daily life would change if viruses become a greater concern and what behavior you’d change and what increased or new services you’d use.

Who knows if we will be able to avoid this nastiness. Viruses are getting more virulent and bacteria more drug resistant. All of my friends have been commenting on how, in recent years, colds and flu have stretched from a couple of days to weeks.

Bob Geras, perhaps Chicago’s most prolific angel investor, sent me an email with the following quote from his dad. I liked it and thought I’d pass it along:

"Money and success come and go. What’s really important and lasting is your integrity, reputation and self respect. It’s really very simple. Treat others the way you would like to be treated. Do business with integrity and be fair and reasonable to all. Validate everyone as human beings, no matter what  their station in life or how menial their jobs might be…and always try to look at matters from the other person’s point of view before making any jugments or reacting to their actions."

"
We hold these truths to be self-evident, that all men are created equal, that
they are endowed by their Creator with certain unalienable Rights, that among
these are Life, Liberty and the pursuit of Happiness."
— Declaration of Independence

I saw a very intense movie with my wife and another couple just before vacation called the Pursuit of Happyness starring Will Smith. It is based on the true life story of Chris Gardner who sacrificed everything in the pursuit of his dream of making it to Wall Street. My wife was expecting something a little lighter, so be prepared for a serious movie about perseverance.

I am thinking about taking my kids to it to reinforce two things: 1) that like on the Chicago North Shore is not the norm and that large parts of America struggle to make ends meet (versus crying over not getting a new pair of Healy’s) and 2) the power of perseverance and having dreams. In this story Gardner risks it all to give his son a better life. It is a very moving story. In one scene (in the ads so I’m not ruining much), he is homeless and has to spend a night in the train station bathroom with his son. It tugs at your heart to see him trying to keep his son asleep as the tears flow while someone continuously knocks on the door to get in.

It puts things into perspective; it highlights how what we view as tragic or important in our daily lives is more disappointment and inconvenience; it also shows how close success and failure are and that nothing in life is guaranteed.

Critics liked Smith’s performance but thought it over reaching at times. I don’t disagree, but a cool movie overall.

— Matt "VC Ebert in training" McCall…

Reposted with working links to photos…

I am back from the Caribbean and fully tethered back to my
Blackberry. In addition to the beauty of the Caribbean, what struck me
was also the poverty surrounding the high end luxury tourist sites. The
Cayman Islands are selling $3m two bedroom condos at the Ritz. In
Haiti, Royal Caribbean has a private enclave called Labadee that is
hidden from the rest of the country. All you can see is rich forest
running up the mountain. An yet, according to Wikipedia:

"Haiti remains the least-developed country in the Western Hemisphere and
one of the poorest in the world. Comparative social and economic
indicators show Haiti falling behind other low-income developing
countries (particularly in the hemisphere) since the 1980s. Haiti now
ranks 153rd of 177 countries in the UN’s Human Development Index. About 80% of the population lives in abject poverty, ranking the country second-to-last in the world for that metric."

Whitney
Tilson recently sent me the following passage and photos. He is the
hedge fund manager whose parents now live in Africa helping Kenyans.
With the New Year kicking in, it certainly helps put things in
perspective. Make certain to add something altruistic on the
Resolutions this year… 

"I just got back from Kenya and
wanted to share the story of the most interesting two hours of my trip — a
visit to a family in Kibera, the notorious Nairobi slum that is home to
approximately 700,000 people — 1/3 of the population of the city — squeezed
into a tiny area that can’t be larger than two square miles.  Kibera is the
largest slum in Africa and, from all reports, is one of the poorest and most
desperate in the world — to get some sense of it, see the bottom four pictures
below.

 

On Friday morning, we went to
visit a health clinic on the periphery of Kibera and then drove deep into the slum to visit one of
the clinic’s patients — a woman with a heart-breaking story that captures what
AIDS is doing to Africa — see the first two pictures below.

 

Only a few years ago, she was
living a decent life: she lived in a rural area outside Nairobi with her husband
and five children.  They owned two acres of land, on which they farmed
tea.  Then she got HIV, most likely from her husband (philandering husbands
are, sadly, the norm), and with her resistence weakened, caught TB.  She
came to Nairobi with her children, seeking treatment, and could only afford a
tiny room in Kibera (her husband had left her by then; again, the norm). 
She is now being treated for TB for
the third time and is also taking antiretroviral drugs for her HIV, which are
keeping her alive — for now.  Her life expectancy can’t be more than a
year or two.

 

When we walked into to her
"home" — a 10′ x 10′ room — it was almost completely dark, with only a tiny
bit of light coming through a small translucent piece of plastic in the roof (I
guess they keep the light off to save the bulb and electricity).  Huddled
in there were the mother and three daughters, ages 12, 7 and 5
(roughly).  When they turned the light on, I could see the walls were made
of mud and there were a number of large insects on them.  It wasn’t clear,
but at least six people share the room and maybe as many as
10.

 

It’s hard to imagine anyone
being more destitute than this mother and her children, but it could get a lot
worse: monthly rent is $20, she’s fallen behind and the only reason they’re not
out on the street is a benevolent landlord (apparently quite a rarity in
Kibera).

 

In addition, the children may
have to drop out of school.  While Kenya recently declared that primary
schools are now free, they’re really not.  While the schools can no longer
charge $30-$40 annual fees, they charge for lunch (the only meal most kids get
every day; about $25/year thanks to food donations from the World Food Program)
and computer classes ($10/year), plus each child needs a uniform as well
(another $5).  Her oldest daughter said she’s 3rd in her class of
36.

 

She also told us about her two
sons, ages 16 and 18.  When the family moved to Kibera, they took to the
streets and she said they are dead — we later learned that they are, in fact,
still alive, but barely: they sniff glue and she rarely sees them anymore, so
what she meant is that they are dead to her.

 

At one time, she was able to
support herself and the family (barely) by selling charcoal (in the 2nd picture,
you can see the charcoal buckets stacked behind her) — my understanding of the
business is that she’d buy a relatively large quantity of charcoal (perhaps a
wheelbarrow full?) and then break it down into small pieces and sell it in her
neighborhood for $0.30/bucket.  To start the business, she received a loan
from the local Catholic church — your classic microenterprise loan — but her
sickness left her unable to continue the business and she had to use the seed
capital to feed her family.  I think the only food the four of them are
eating every day is the cup of porridge you see in the first picture below,
which is provided by the clinic as part of her TB treatment.

 

I asked our host from the
clinic how common her situation was among his patients — he said maybe 1/3 of
them are this bad off. 

 

In the face of such widespread hardship and destitution, what is one
supposed to do?  While a tiny amount of money could save this family, it
could reasonably be asked, "What’s the point?"  There are hundreds of
thousands of identically situated people in Kibera alone, millions across Africa
and maybe 1-2 BILLION worldwide.

 

I don’t know what the answer
is, but we sure as hell couldn’t walk out of there without helping one
family.  We told her we’d pay for her kids to go to school — a grand
total for three kids of maybe $120/year — and, though she doesn’t know this
yet, we are going to give her enough money to start her business again (if she’s
able) and cover food and the rent.

The mother and her three daughters.  On the table is a cup of porridge — all that they eat every day.

This is the narrow passageway that leads to the door of her home.  Stacked behind her are the charcoal buckets she used to use for her business.

Seen from the air, Kibera is almost entirely rusted tin roofs, with only a few narrow dirt roads.

The street fronts are almost entirely tiny shops — everyone seems to be selling something.

A few of the shops up close.

Children are playing everywhere in the streets.  Note the open sewer in the middle of the road.  I don’t think there’s any running water in

The surprising answer is that the Cayman Islands is the Fifth Largest financial center in the world. This tiny island, because of favorable tax treatment and a host of other things, has become home to many off-shore vehicles, especially hedge funds, private equity funds and such. Amazing…

For those interested more in the stories of Read and Bonny, the female pirates mentioned in my previous post, Nik Rokop sent me the following link with more details on their lives: A General History of Pyrates (thanks Nik)

"The temptation to quit will be greatest just before you are about to succeed."
— Bob Parsons, founder of GoDaddy (supposedly from a Chinese proverb)

It occurs so frequently that it has become a cliche. The entrepreneur who is on the verge of dismal failure, grinds it out and builds a successful business. In many ways, failure is a rite of passage in the entrepreneurial world. Why? In many ways, it sometimes takes failure to strip away fascades and show what is really important in life and to redouble ones focus on those items. Sometimes, it strips away constraints, pseudo goals and pretenses. However, nothing in life is guaranteed.

The following is a short passage I came across on Buckminster Fuller. Interesting story that I was not aware of…

Life Brings Idea, Idea Brings Life
It’s true
that Buckminster Fuller had a flair for designing and making things
even as a child. As he grew up, he also demonstrated a flair for being
a non-conformist — getting expelled twice from Harvard! He married
young, served in the Navy during World War 1, and then went into
business with his father-in-law — a business that ultimately failed.
At age 32, Buckminster Fuller found himself bankrupt, jobless and
raising a young family in poor housing. When his beloved daughter,
Alexandra, died of pneumonia, Fuller was inconsolable with guilt and
shame. He blamed himself for her death and spiralled down into an
alcohol-fuelled depression that took him to the brink of suicide. But
just as he was contemplating killing himself, Fuller was struck by the
magic creative thought that saved his life and launched him on the path
that would make him world famous for his creative thinking.

The Magic Thought That Led Buckminster To A ‘Fuller’ Creative Life
So,
what was this amazing idea that could bust through the walls of
suicidal depression and wrench a man back towards life? What thought
was so intriguing and worth living for? Well, in his depressed mindset,
Buckminster Fuller had been thinking about everything that was wrong
with the world and all the awful challenges it faces. And the idea that
struck him was so exciting to him that he resolved then and there to
put it into practice and see where it led. In his own words, he
embarked on "an experiment, to find what a single individual can
contribute to changing the world and benefiting all humanity."

Unleashing YOUR Creativity
The World we live in
faces many challenges: environmental, social, economical,
political. Those problems can seem so huge and insurmountable that we
often give up on them before we even try to tackle them. But the mind
is designed to meet creative challenges. The way to unleash its
creative power is through responsibility and decision. When you decide that it’s up to you, that you
are going to do it, then your mind gets into gear and starts working at
a higher level. We are purpose driven beings. And in each and every one
of us there is a core desire to be of use. We all want to help make the
world a better place. We all want to make a significant contribution.
We all want to demonstrate to ourselves (and others) that our lives
have meaning, that we are important, that we are more than just an
"eating, sh*tting and fu**ing machine". And so, your enormous personal
creative power is unleashed by Buckminster Fuller’s thought: What can I do? How can I help? How can I make this world a better place? How can I help humanity have a better life and a better future?

Pirates of the Caribbean has been a popular Disney ride since I was a kid and now has become a series of popular movies (Jack Sparrow, the Black Pearl, etc). I never fully appreciated the history behind the title until coming down here on vacation.

To begin with, I did not understand that there are two types: Pirates and Privateers. Privateers sailed privately owned boats but were commissioned by their governments to pillage enemy ships and were allowed to keep a fixed percentage of the spoils. Pirates, on the other hand, raided all ships with impunity and were criminals across all countries.

Piracy reached its zenith in the late 1600’s and early 1700’s as Spanish galleons, loaded with treasure from conquests in Latin America, headed home to Spain along the Caribbean route. The standard cruise stops of Cayman, Jamaica, Cozumel, the Bahamas and such were all favorite pirate havens with the expected lawless environs typified in the movies.

Captain Henry Morgan started as a Privateer based out of Port Royal in Jamaica who mercilessly raided Spanish ships “on behalf” of the English crown. He was eventually knighted by King Charles II and made lieutinent governor of Jamaica. He was one of the few to meet an orderly death (of old age).

Edward Teach (alias Blackbeard) was another story. He originally started off as a Privateer around 1715 on behalf of England. You can still visit the remains of his castle in St Thomas which he often used as a lookout for approaching ships. However, he soon decided to go off on his own, working out of a base in North Carolina, plundering ships coming up the coast. He died in battle with the British Navy and had his head mounted on a bowsprit as a warning to others. (I have seen VC’s treated so in bad investments).

Piracy was an equal opportunity employer with Mary Read and Anne Bonny both enjoyed initial success (in disguise) as pirates. Unfortunately, Read was captured and died of fever in prison, so it did not take off as a favored career for young ladies.

And I thought software piracy was a racy topic…

We spent yesterday on Cozumel (Island of the Swallows), which I had always associated with Spring Break, Cancun and such. However, I did not realize the deep & tragic history the island had. Most recently, it was devastated by Hurricanes Emily and Wilma two years ago which basically flattened the island, destroyed its hotels and ripped up the thick cement docks (which they are still rebuilding) used by the cruises. The 150 mph winds and 11 foot waves tore through the island and shut down the island’s tourism life blood.

The Mayans (of Apocalypso fame) inhabited the island originally around 300 AD and it became a key port of trade due to its location and spiritual destination for Ixchel, the Mayan Goddess of fertility and love. At the height of the Mayan civilization, it became the religious center of the Mayan empire with a population of over 50,000. By the 1500’s, Cortez and the Spanish army invaded the island and began to destroy the Mayan temples, replacing them with Catholic churches. They also brought smallpox. Within 50 years, the population had dropped to less than 200. It is amazing to see the destructive impact this “colonization” had on the indigenous population. The pirates used the nearly deserted island in the 1600’s and 1700’s as one of their key bases.

Jacque Cousteau put the island back on the map in the 1970’s when he began filming underwater footage of the Mayan reefs (second in size only to the Great Australian Barrier Reefs).

So, realize that your kids are seeking historical research and not a rich party life when they ask if they can go to Cozumel and Cancun for Spring Break.

Trivia: name the fifth largest financial center in the world (no Googling!)…

I am with my family on the Freedom of the Sea, Royal Caribbean’s newest addition to its fleet which is now the largest cruise boat in the world. It has multiple pools, a wave machine for surfing, minature golf course & simulator, an ice skating rink, a climbing wall and a sports court. The most mind-boggling part of the boat is its four story “promenade” open shopping mall with stores, boutiques and restaurants surrounding both sides of this walkway. On New Year’s Day, they had a full blown parade with trapeze performers, costume processions and confetti down the middle of the Promenade.

Given the scale, it is amazing that it floats. Over 3,600 passengers and 1,600 staff reside on the boat. More than 130 chefs prepare over 15,000 meals a day to sittings of 1,800 people across three levels. Staff vacuum over 1 mile of carpeting a day and computer generator conveyor belt systems wash the thousands of a towels a day. Six generators crank out enough power to light up all of Aruba across 164,000 miles of wiring.

Another interesting part of the trip is that 80% of the passengers are from Mexico and South America (we left from Miami, heading into the Caribbean). Everywhere we go, everyone is speaking Spanish. The crew of the boat come from over 40 countries. Given how homogenous living in the North Shore of Chicago can be, this (along with our ports of call) is a great reminder of how diverse the world is outside of our narrow daily experiences. We are definitely the minorities here.

There is no Blackberry coverage nor cell coverage here and my internet connection (WiFi across the boat) is a modem speed satellite connection. As a result, I am pretty liberated from my normal electronic shackles. It’s not such a bad feeling once you get used to it…

One ironic side note. Tonight, as I went to get dinner at the buffet, I heard some music coming from a performer playing his guitar. Listening more closely, I realized he was playing the theme song from the movie, Titanic. The passenger ahead of me in line commented “probably not the best choice of music on a cruise ship…”