Daniel Primack wrote a great piece on the continuing insanity in the buyout world. It is amazing that the writing is clearly on the wall and is nearly identical to the venture world in 2000 and yet the LP’s and funds continue unabated. VC’s kept raising massive funds even though it was clear that the liquidity engine (IPO’s) had died. This capital festered in the funds and either a) was returned or b) was pumped mindlessly into misguided companies. With the credit markets down, the LBO world has lost its primary liquidity engine (dividend recaps, etc). So, I am amazed that LP’s are going along with these funds doubling their size. More on the Venture cycle version of this soon…

Warburg Follows the Herd
Warburg Pincus yesterday announced that it has closed its tenth fund with $15 billion, or nearly twice what it secured for its ninth fund in 2005. It’s also $3 billion more than the firm was targeting when it began fundraising last May.

This certainly fits the recent mega-firm pattern, in which Bain, KKR and others have raised record amounts despite a paucity of new deal opportunities. Fee today, call-down in a few hundred tomorrows (unless they spot a problematic PIPE or cratering leveraged loan portfolio).

I had really wanted Warburg Pincus to help retard this trend, which skates the thin line between optimism and greed. Few other firms exude the same spirit of independent thinking – having been an early adopter of globalization and stubborn defender of transacting both massive LBOs and early-stage venture deals out of the same fund. If there was any firm willing to stand on objectivity, it would have been Warburg.

But, alas, it was not to be. Maybe I should have been stripped of my delusions when Warburg propped up MBIA, in a bid to replicate its long-ago success with Mellon Bank (Question: Did LPs who came in on the final close get some sort of discount?). I guess Warburg is willing to stand apart, but not too far apart.

So Blackstone is the now the only fundraising firm left with enough gravitas to help stem market overcapitalization, but looking to Blackstone for moderation is like looking to the Boston Bruins for a Game 7 goal. Sure a few big firms will claim fundraising sanity, but beware the difference of intentional and unintentional fundraising scale-back (yeah, I’m gazing toward Chicago)…

Warburg Pincus would likely respond that it has a flexibile enough investment strategy to handle macro-economic fluxuations, and that it’s investing for the long-term (Note: It declined to comment for this piece). Fine, but it’s a specious argument.

How can any private equity firm claim that it requires the same amount of money today that it did in May 2007? Even if Warburg plans to do the exact same number of deals, many of them will require less cash due to decreased valuations. In fact, the only reason Warburg was raising more money in the first place was because the private equity targets were getting larger and more expensive. Doesn’t what goes up also go down?

Finally, it’s worth emphasizing that LPs share much blame for this fool’s goldrush. I keep hearing investors complain about 2008 fund sizes and strategy drift, but then learn that Warburg got its highest-ever level of LP re-ups. If you don’t want mega-firms raising so much money, then don’t increase your commitments. It’s just as simple as it sounds…

We are very happy to announce that we recently hired Eric Olson as an Associate at DFJ Portage. We originally got to know Eric when he was in publisher services at our portfolio company, FeedBurner. He also co-founded TechCocktail which is now in several cities around the US and is one of the key tech networking events held quarterly. He has a strong interest in making the tech community stronger and in helping to build it up…a strong philosophical match with our mission.

So, today I took Eric out on his first due diligence trip to see a local medical clinic that was using the services of a potential investment. I thought the clinic was on the south side of the Chicago loop. However, as we drove on, the navigation system showed that we had another 5 miles west to go. The next thing I knew, we were in North Lawndale, which is one of the poorest communities in the city, if not the state. I had spent several months there when I was younger and researching the plight of inner city poverty. As we turned onto the clinic’s street, I noticed a youth in a padded Bears jacket hand another gentleman a small clear bag with one hand and take cash back from him with the other. Eric asked me if it was often that VC due diligence trips happened around drug deals in front of burnt out houses. I said it was first for me (though I have been around many a burnt out portfolio company…).

We parked the car and as I got out, Eric noticed that the youth was now on our side of the street and two plains clothes officers pulled up suddenly, jumped out and surrounded him. In the melee that followed, the officers cuffed the kid (who was about 220 lbs) and were pushing him into their car. Eric had to step around the officers to get forward on the sidewalk. The meeting and interview at the clinic went fairly routinely after that.

Eric said he could hardly wait for his next assignment. I mentioned that we had some interviews we needed to do in Kenya with Raila Odinga. Who said VC isn’t an exciting and adventurous job?

Don’t know what we’ll do to orient our next hire…

"The brick walls are there for a reason. The brick walls are not there to keep us out. The brick walls are there to give us a chance to show how badly we want something. The brick walls are there to stop the people who don’t want it badly enough."  — Randy Pausch

Well, I am back after a prolonged absence. With the Holidays, several company sales and New Year efforts, I had trouble finding time to post. Once you begin to drift, it is easy for habit and firedrills to take over. I did enjoy one comment from a reader who asked "Is this blog dead because of the credit crisis?". The good news is that we don’t use much leverage in venture, so the blog is back.

I have my mother-in-law to thank for bumping me out of blogging retirement. She sent me an article to read from the WSJ "A Beloved Professor Delivers The Lecture of a Lifetime". In academics, professors will do "Last Lectures" in which they give parting words of advice as if they were dying. Well, Randy Pausch at Carnegie Mellon has pancreatic cancer and actually is dying. Rather than feeling sorry for himself or dropping deeply into depression, he decided to pull a presentation together for his three young children. He gives an amazingly motivational talk that I think all entrepreneurs should see. It has an incredibly deep array of messages in such a short period of time.

Last Thursday, I gave a speech at Ignite Chicago on the relevance of "black swan" events on entrepreneurship. I had originally been asked to talk on fundraising.  However, after a compelling talk by Steve Jurvetson on our monthly network partners call, I made an audible at the line.  So, thanks to Steve for inspiration and content here.

A lot has been written on "black swan" events since Nassim Taleb’s book, The Black Swan: The Impact of the Highly Improbable. In my mind, there  is some overlap with this and chaos theory & non-linear systems. I have attached my presentation if anyone is interested Download 2007_12ignite_blackswan.ppt

Quick points:
— a Black Swan is 1) a rare event, 2) with high impact, 3) that is hard to predict (pattern attributed post event)
    * examples include 9/11, stock market crashes, discoveries like Penicillin, start-ups (eBay, etc)
— most of mankind’s development has been driven by black swans (unstructured randomness)
— black swans key in driving big entrepreneurial successes (payoff inverse to predictability)

When this is coupled with the Law of Accelerating Returns (Ray Kurzweil’s book, The Singularity Is Near: When Humans Transcend Biology), you realize that the opportunity for entrepreneurs continues to grow exponentially. As technology improves non-linearly, this means we will experience as much change in the next 20 years as we have over the past 100. Buckle up…

And we wonder why Buffett says that the credit markets are redefining the term "junk" debt…

My friend, Mike Iannelli, sent me the following link Here Comes Another Bubble. Clearly, we are seeing some funny money deals popping up as the economy takes a dive. Perhaps there is a blog on why Billy Joel seems to be the song writer of choice for these music montages…

I
have been using LinkedIn for a couple of years now and Facebook for
about 6 months. While I have found both interesting and have played
with an array of Facebook applications, I haven’t found either
extremely useful from a business perspective. In comparing notes with
others, most tell me that they use them but neither has led much to new
sales, key introductions, etc. Why is this?

One of the readers at Ask the VC posted the following question and I did a guest post on it for Brad and Seth:

Question: (1) How do Web 2.0 companies like Feedburner make money?  (2)
What makes a blogger or content provider select one network or blog
community over another (i.e., are the bloggers themselves being paid or
are they essentially working for free)?  (3) How is online media
advertising different now than during the internet boom?

The most popular Web 2.0 revenue model is based on advertising. There are three key players in the ecosystem: Publishers (owners of the sites like blogs, media sites, etc), Ad Networks (aggregate advertiser on behalf of the Publishers) and the Advertisers themselves. Publishers get paid by advertisers who advertise on their site. FeedBurner is an ad network and while it made some money off of licensing its platform to large publishers, most revenue came from the ads inserted into the feeds. This ad inventory comes from either the company’s own direct ad sales force or from ad networks. Some of the ads are CPM based (impressions viewed) while others are CPC ($ per click…a la Google). The publisher generally keeps 60-70% of the ad dollars and the ad network gets 30-40%. So, if Motorola runs an ad campaign through an ad network like FeedBurner, they might pay $5-10/CPM (cost per thousand impressions). The ad network then takes that ad and serves it up on the various websites it has deals with. If the ads are viewed 1,000,000 times, Motorola would pay the network $5-10,000. The network would keep $2-4,000 and the publishers would get the rest. In the case of bloggers, they first pick which ad networks to go with (usually based on which drive the most revenue for the space given) and then approve different ad campaigns. They get a cut of those ad dollars.

More advertisers understand the benefit of online advertising and so, there are more ad dollars flowing into this space than during the Bubble. More importantly, Google has created an entire ecosystem based upon its CPC model where advertisers only pay when ads are clicked on. They feel there is more accountability since they only pay when an action is taken. Also, there is very little cost associated with running many of these publisher sites, so it doesn’t take much to get to break even.

That said, the economy is likely sliding into recession and ad budgets will get slashed. CPC and CPA (cost per action) based revenue should hold up better than CPM based ones since there is a clearer ROI. In  2000, Yahoo saw its revenue plunge 40% in one year. When the cycle corrects, there will be quite a lot of carnage in the ad supported publisher world. Smart operators will get their costs inline and focus on driving the best possible results for advertisers.

Whitney Tilson noted the following in his recent email newsletter. I think this is amazing and hope that our buyout and venture brethren follow suit. I have always believed that the philanthropy tsunami unleashed by Gates, Buffett & the Silicon Valley crew would lead to new era of giving equal in impact to the robber barons. The latest move by Goldman only adds momentum to this…

"Kudos to Goldman!  Goldman really is an exemplar in many, many ways.

On the back of record profit so far this year, Goldman Sachs, the global investment bank, is starting a donor-driven philanthropy fund that aims to reach $1 billion over the next few years.

The fund, GS Gives, is initially focused on the firm’s roughly 350 partners who will be strongly encouraged to donate a fixed amount of their compensation.

If each partner gives $250,000, the fund will begin with $87.5 million. Eventually the fund will be open to a larger group of Goldman employees. Goldman’s asset management group will manage the fund free.

The program comes at a time of tremendous wealth creation for Goldman employees. The firm is one of a few that has been largely untouched by the meltdown in the subprime mortgage market and it stands out among its peers in the amount of money it has been able to make so far this year. In 2006 Goldman made $9.4 billion in profit; for the first nine months of 2007, it earned $8.2 billion.

“We know we make a lot of money, and we know that we live in this world and we have a responsibility to give something back,” said Lloyd C. Blankfein, chairman and chief executive of Goldman Sachs.

Over the years, Don Valentine (founder of Sequoia Capital) has had quite a few memorable quotes. He was the original investor behind successes like Apple, Cisco, EA and Oracle and is known to never mince words.  After coming across one of his quotes the other day, I used Google to chase down an array of others as listed below:

"The trouble with the first time entrepreneur is that he doesn’t know
what he doesn’t know. After a failure he does know what he doesn’t know
and can beat the hell out of people who still have to learn."

"That’s easy. I just follow Moore’s Law and make a few guesses about its consequences." (on his success investing in semiconductor plays)

"I got to Silicon Valley in 1959. Nothing is revolutionary; it’s
evolutionary. Look the sequence of Intel microprocessors. It’s all
predictable. The nature of silicon and software and storage go hand in
hand. In the case of software, you just have to be more clever about
the nature of the application. So all these things kind of tick along,
feeding off each other"

“All companies that go out of business do so for the same reason – they run out of money.”

"Why did you
send me this renegade from the human race?" (comment after meeting Steve Jobs)

"Great markets make great companies."

"I like opportunities that are addressing markets so big that even the management team can’t get in its way." 

“In
30 years we haven’t convinced ourselves to set up a presence in Boston.
It’s a very difficult business to be good at consistently over a long
period of time, and it requires a lot of thoughtful and integrated
decision-making….”We make enough mistakes on investments we make here
(in Silicon Valley), that we’re not comfortable we can (be successful)
3,000 miles away, never mind 8,000 miles away.”

"I am 100% behind my CEOs right up till the day I fire them."

"The world of technology thrives best when individuals are left alone to be different, creative, and disobedient."

"One of my jobs as a board member has been to counsel management to avoid distraction and to execute with constructive paranoia."

“I’ve always been mystified by the
critically important disc drive industry, without which the PC is a
useless device. You have to be brilliant in electronics, you have to be
brilliant in magnetics and you have to be brilliant in mechanics to get
all that memory capacity in a very little place and do it for next to
nothing. That market has never been rewarded financially for its
brilliance."