NOTHING VENTURED: Up With the Angels
KARLGAARD, RlCH
to the amount of total long-term debt that it's carrying on the balance sheet. And you should consider whether the company will generate enough cash in addition to its current liquidity to...
...Their appetites grew during the Internet boom of 1995-2000 and at the peak they allocated up to 5 percent...
...and hisVC firm remains active today...
...The extreme volatility in Fed rate moves this year is strange given that the economy is having nowhere near these kinds of problems...
...Hardly.VC is headed for bigger and better days, 2001 and maybe 2002 notwithstanding...
...And you should consider whether the company will generate enough cash in addition to its current liquidity to fully fund its business plan...
...If you're "partners" with a group of serious and successful investors and operators who've got a lot at stake, that's a big plus...
...Backers who've put in cash equity and who stick around when times are tough...
...Our angel gets plugged back into the engineering world, finds the hottest fields, makes friends with some crazed-eyed 24year-oids, and writes them a check for $250,000...
...Corporate VC investing is one way out of this innovator's dilemma...
...a well-respected management team has the credibility to put together difficult financing at crunch time...
...CEO Daniel Akerson is a wellregarded veteran from MCI...
...By 2010 it will be a trillion-dollar global industry...
...The bond market's thinking it over, and so should you...
...So has venture capital seen its peak...
...Unless~aha!~you're an angel...
...It has spread from a few dozen VC firms in the 1970s to thousands today...
...Maybe 5,000...
...So what else should you be looking at...
...How many angels in America are there...
...Call it the innovator's dilemma, a term popularized by another Harvard biz school professor, Clayton Christensen...
...XO Communications' bonds trade in the 50s, yielding more than 24 percent...
...Such boldness in capitalism proves that Harvard's asset managers, by ignoring the dismal bleats of IOTHING VENTURE...
...But by 2000, there were some 1,200 firms, 64 THE AMERICAN SPECTATOR 9 June 2001 and two new breeds of venture investors had appeared on the scene...
...For the next 30 years, an asterisk differentiated his record from Ruth's 60 home run total, denying Marls the satisfaction of his accomplishment...
...It's hard to tell, but the money from them continues to pour in and no one knows how to measure it...
...This person quits his job, travels the world, buys a big house, maybe a fast airplane or boat, and then discovers he is...bored...
...PEDIGREE...
...A choir of ten thousand angels has joined in...
...But he's 42 years old now, not 24, and he wants back in the game without having to work 80-hour weeks...
...More or less...
...After years of seeming in control, the Fed looks out of control...
...BY BRIAN WESBURY I n 1961, Roger Maris hit 61 home runs to break Babe Ruth's 1927 record...
...But most of the 1,200 or so VC firms in the country today don't play with family money...
...If a company's bonds are trading much below 40 cents on the dollar, you'd better have some compelling reasons to continue to own the stock...
...Up With the Angels Venture capital hasn't yet seen its peak BY RICH KARLGAARD M oney going into American venture capital firms rose fiftyfold in the last decade, from $2 billion in 1990 to $100 billion in 2000...
...But that was then...
...Now our angel is working 40 hours a week, having a blast...
...With few exceptions, only entrepreneurs can do this...
...One was the angel investor...
...Look for VC to be a $250 billion global phenomenon when the economy recovers...
...Rickenbacker used the funds to start what became Eastern Airlines...
...After a recordbreaking recovery, high-tech stocks have crashed, the economy is closer to recession than it has been in over a decade, and many think that inflation is returning...
...Likewise, AT&T'S pension fund, another active VC investor, demonstrates it understands the future better than its own guys at the top...
...The Fed has cut rates faster in 2001 than it has since 1982, when the economy was in the worst recession since the Great Depression and inflation was rising at double-digit rates...
...Intel leads the pack, plowing back $1 billion a year into the hands of entrepreneurs...
...In leaner 2001, pension funds are inching back down to a 2 percent allocation...
...Angel investing is a fairly new development, too, one made possible by the 1992-2000 bull economy...
...BOND PRICE...
...Does the company have sponsors with a track record...
...Either they conduct poor research in the first place, or, infamously like Xerox in the 1970s, they invent the future but fail to commercialize it...
...This is perfect...
...This is fun, so he writes another $250,000 check to a second company...
...I don't believe it...
...That compromise is hard to find in Silicon Valley...
...Most of the Forbes 500 corporations have followed Intel's lead and now invest in startups, if on a smaller scale...
...of the bounce of youth...
...K DOes Greenspan...
...The valuation that the highyield bond market places on the publicly traded debt securities of an issuer can be indicative of the odds of the company's survival with its current financial structure intact...
...Typically, an angel is somebody who got rich starting a company or who earned a boatload of options as an early employee of Cisco or Sun...
...Bonds trading above 80 cents indicate likely survival...
...Laurance Rockefeller is now 88 university endowments...
...That's the role of the entrepreneur: to disrupt...
...Called Venrock, it deploys Rockefeller family money into technology startups such as Check Point and Doubleclick...
...He spends 20 hours a week with the company, acting as chairman, a door opener, a rope shower, a gray eminence...
...Angels aren't new...
...Venture investing is fun, usually profitable, and infectious...
...The reward for virtue: Returns to Harvard from its VC investments have averaged 30 percent per year for the last 20 years...
...One is pension funds, the other Of course back in 1990, when American venture capital inflows were about $2 billion, it was easier to be sure of the numbers.The universe was small, consisting of only a few dozen VC firms, and research firms like Cambridge Associates, which tracksVC fund returns for its limited partner clients, had their arms around it...
...Metromedia Fiber (MFNX) is a metropolitan fiber carrier and service provider whose investors and sponsors include Metromedia Company andVerizon Corp...
...Something always seems to go wrong when companies set about to reinvent themselves...
...Maybe 10,000...
...Invent your future, sure, but just to hedge your bets, why not give some of your R&D money, and maybe some intellectual property, too, to entrepreneurs on the outside...
...Unfortunately, it took him eight more games than Ruth...
...They have a free hand that your corporate employees may not have...
...But the 30-year trend is decidedly up...
...Guy Kawasaki, head ofPalo Alto's Garage.com, is telling his seedlings not to expect a "liquidity exit" until summer 2002...
...He gets himself plugged back into the engineering world, finds the hottest fields, makes friends with some crazed-eyed 24-year-olds out to change the world, and writes them a check for $250,000...
...The second breed of newbie VCs are corporate investors...
...Corporate R&D is therefore caught in a bind...
...socialist sour donkeys like John Kenneth Galbraith, see more clearly than its own economists...
...Pension funds, understandably more conservative than endowments, historically have rationed just 2 percent of their funds to VCs...
...They get zero or negative return from it...
...The bonds trade in the 60s, yielding more than 17 percent...
...Between 40 and 80...
...Short of world war or global depression, the long VC boom is likely to march onward...
...This suggests that the Fed is managing the economy on the run, reacting to economic developments, not anticipating them...
...So an angel is what he decides to be...
...Essentially the dilemma is that successful corporations find it structurally impossible to disrupt current profit streams on a future bet...
...Rather, they raise funds from "limited partners" of which two classes dominate...
...What corporate investing represents is not "big dumb money" chasing a late bull market, as the skeptics portray, but a big, important, secular development: the outsourcing of corporate R&D...
...In late April, Forstmann committed an additional $250 million on top of $1.25 billion already invested...
...The word around Silicon Valley is that this year's inflow will plummet to about $40 billion, and may dip more in 2002 unless the intitial public offering market opens up later this year...
...Unfortunately, because there are so many moving parts, this type of analysis is probably not going to be as definitive---or as accurate---as you'd like it to be...
...Skeptics In 1994, Michael Jensen of Harvard's graduate school of business published a study showing that most large American corporations routinely botch their R&D...
...Nearly every large corporation also participates...
...It is given money to invent the future, but not disrupt the present...
...Rich patrons bankrolling wild-eyed entrepreneurs who promise to remake the world have been around at least since Queen Isabella's time...
...XO Communications (XOXO) is a voice and data service provider whose founders and sponsors include Craig McCaw and Forstmann, Little, a highly respected buyout firm...
...Harvard allocates up to 20 percent of its $20 billion endowment to venture capitalists...
...Today, as Alan Greenspan winds down his career, his stellar record is threatened with an asterisk as well...
...The American version got started in the 1930s...
...He's worth more than $10 million and is mostly cashed out, but he's still full say corporate VC money, late in, will be the first to bail if the downturn persists...
...This is critical, and not only from an operational point of view...
...eserve an Asterisk...
...Europe and Asia are awakening to the potential of risk capital...
...At various times Greenspan has focused on insecure workers, scrap steel prices, stock prices, consumer confidence, and GDP growth THE AMERICAN SPECTATOR 9 June 2001 65...
...He wants back in the game...
...Rich patrons bankrolling wild-eyed entrepreneurs who promise to remake the world have been around at least since Queen Isabella's time...
...This, not 200 l's retraction, is the big picture...
...Angels are showing divine courage in the hellish winds of 2001, even as some scared professionalVCs shake like puppies...
...Young Laurance Rockefeller, fresh out of Princeton, fell in love with aviation, and with the entrepreneurial blood of his oilbaron grandfather pumping through his veins, wrote a check to Eddie Rickenbacker, the World War I ace...
...QUALITY OF MANAGEMENT...
...Venture inflows, the world is learning again, can go down as well as up on a yearly basis...
Vol. 34 • June 2001 • No. 5
