Growthink Blog

The Rise of the Machines


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Last week, I shared three themes percolating in the dynamic Internet of Things (IoT) movement: 1) Wearable Devices driving health and wellness breakthroughs 2) Embedded Sensors “incrementally” improving industrial productivity, and 3) The converging trends of miniaturization, affordability, and “de-wireization” driving energy efficiencies and cost reductions the world over.

These are big themes - breathtaking in their “macro” - but sometimes very difficult to translate to specific opportunities from which we as entrepreneurs and investors can individually benefit.

But try we must, both because of the sin that it is to see an opportunity and to not pursue it, and if we don't

…we run the very real risk of being overrun by transformations so profound and all-encompassing as to threaten to the point of obsolescence virtually every business and investment model.

Overly dramatic? I don't think so.

For if the last 20 years of technology advances have taught us anything, it is that global, online connectedness naturally creates conditions where choosing winning strategies don't just give companies a leg up, but allows them to capture all of the market (including its profits).

Examples of this phenomenon?

Think Google for search, Facebook and LinkedIn for social networking. Twitter for one-to-many communication.

And how about SpaceX for rocket technologies? WhatsApp for free SMS? EBay for online marketplaces? Craigslist for classifieds?

The list goes on and on.

And this coming Internet of Things - with estimates as high as 25 Billion devices being online in some form by 2025 - will provide far greater opportunities for new entrants to rapidly scale and for incumbents to be rudely displaced than your “Father's Internet” ever did.

The revolution here can be boiled down to one word.

Data.

And the need to manage and interpret the vast and ever-streaming treasure trove of it that will always be flowing from these billions of interconnected devices.

I thought General Electric's Head of Software Bill Ruh, explained it best at Kamal Ahmed’s and Ali Tabibian’s IoT event last month. The example he used was of the jet engines that GE makes for Boeing and other aircraft manufacturers that both create and allow for tracking on huge amounts of performance data.

Now when that data confirms the belief of the technicians managing those engines, it is used.

But, when it contradicts long held assumptions and beliefs, more often than not it is ignored.

In an IoT world, this belief system, this hubris, one’s qualitative judgments in contradiction with “the facts” needs to be quickly and ruthlessly discarded.

And it must be replaced by the conviction, faith, and sternly pursued managerial practice that these facts, this data above all else is king.

Sound harsh? Un-feeling?

A foreshadowing of a Rise of the Machines world where we humans are regulated to a feeble processing power second class?

Perhaps.

But the optimists among us see many examples of long-held human prejudices cracking and disintegrating in the face of impersonal yes but also agenda-free data.

And another point – quality data analytics drives efficiency which in business and in life ranks right up there with sound strategy and impeccable ethics as pillars of asset and profitability growth.

When looked at this way, that in an IoT world good data analytics and analysis no matter the business trumps all, what naturally follows is that the particular business that one intends to start, build or invest in is almost secondary.

More important is one's relationship, one's willingness to let the data - well collected, accurate, and regularly and properly analyzed data - guide ones business decisions, strategies and tactics.

This is very hard to do in practice, as old habits and ways of thinking and doing die very hard.

But, as the habit is built, the competitive cost, and positioning advantages - built up incrementally over time in a business’ product and service offerings, in its marketing and sales conversion funnel, in its operational efficiencies - become unassailable.

And then, in the eternal words of the great Charlie Munger - Warren Buffet's investment partner for over 50 years - a business approaches a Low Cost, Hiqh Quality nirvana where assets and profits build steadily and wildly over time.

Hail to the Machines.

To Your Success,


The Spirit of America


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On this great day when we celebrate America, our freedoms and our way of life, please enjoy (and please share on Twitter with the hashtag #SpiritofAmerica) this list of twenty - five of why this is the greatest country in the history of the world:

#25. Lexington. Concord. Saratoga. Yorktown – Life, Liberty, and the Pursuit of Happiness. Fought for here.

#24. The Bill of Rights. The Supreme Court. The Rule of Law. Justice served here.

#23. The Stock Market. Home Ownership. Low Inflation. Assets built here.

#22. Driverless Cars (and Electric too!). Wearable Devices (the iWatch!). The Internet of Things. Tomorrow’s Technologies – Imagined Here.

#21. Diamandis. Kurzweil. Saffo. The future - abundant here.

#20. Hollywood. Disney. Broadway. Entertainment happens here.

#19. The World Series, The Super Bowl, The Masters. Sports are spectacle here.

#18. Jesus. Moses. Mohammed. The Buddha. Religion gets along here.

#17. Gates. Jobs. Page. Zuckerberg. BIG stuff - invented here.

#16. Murphy. Martin. Seinfeld. Rock. Life is a laugh here.

#15. Madonna. Mariah. Whitney. Elvis. Michael. Frank. Songs are sung here.

#14
. Faulkner. Hemmingway. Roth. Franzen. Stories are told here.

#13. Kaiser. Pfizer. Genentech. Merck. Healing happens here.

#12. Boeing. Caterpiillar. Deere. UPS. FedEx. Stuff gets built here and gets there.

#11. Amazon. eBay. Ecommerce - transacted here.

#10. Facebook, Twitter, LinkedIn. Networks - connected here.

#9. Google. Yahoo. Bing. Information - organized and accessible here.

#8. Kleiner. Sequoia. Mayfield. Ideas - backed here.

#7. The Inc. 500. The Fast Company 50. Entrepreneurs - inspired here.

#6. Alaska. Montana. Wyoming. Space - open here.

#5. Chicago. Boston. San Francisco. NYC. Cities pulse here.

#4. Jefferson, Lincoln, and Roosevelt walked the Earth here.

#3. The first guy in charge here voluntarily gave up power, when he could easily have been named ruler for life. Character stands here.

#2. The current guy in charge was born to an immigrant father and a teenage mother who was so poor that she received government assistance in raising her only child. Possibility abounds here.

#1. The Greatest Generation was born here, fought and won there. And then they came home, put their heads down, and built a new America. Civil rights, cities, suburbs, highways, schools, and more.

So on this day especially, we say THANK YOU!


The Internet of Things


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I had the good fortune to attend GTK’s and Pillsbury’s amazing Internet of Things Private Executive Event in Palo Alto last week.

It was a star-studded, technocratic affair - drawn from Kamal Ahmed’s and Ali Tabibian’s amazing Silicon Valley network, by the high-profile speakers and panelists including Qualcomm’s chairman Paul Jacobs, General Electric's Head of Software Bill Ruh, Cisco's Vice President Tony Shakib, Splunk CTO Todd Papaiaonnou and by the incredibly exciting and timely topic itself.

Whatever name you want to call it - the Internet of Things (IoT), the Internet of Everything, Machine-to-Machine Computing, the Embedded Internet, Smart Services - the fundamental idea is that we are moving rapidly to a world where online connectedness exists not just on our desktops and smartphones, but rather is woven into the very fabric of our world (cars, planes, factories, our bodies and more).

This coming reality is scary to some for sure, but the myriad of productivity and efficiency gains an IoT world promises is as exciting as business gets.

And so the attendees - from Fortune 500 tech stalwarts like Intuit, Amazon, HP, and Oracle, to high-profile VCs like Andreessen Horowitz and Google Ventures, to some of the hottest IoT start-ups in the world (StreetLine, Jasper Wireless, Liquid Robotics) - listened as the speakers shared both the key IoT tech. advances (miniaturization, affordability, de-wireization) and the corresponding best areas of business opportunity.

My Three Takeaways:

Better Health and Wellness. Any fears of big brother and losses of privacy in an IoT world are well offset by the opportunities to save and prolong lives via inexpensive, unobtrusive, and accurate monitoring of “on the body” health data and events.

We can see the possibilities in the early successes of the quantified self-movement, pioneered by companies like FitBit and Jawbone that monitor sleep, exercise, diet, heart rate, and body temperature, and more.

As technology and the collective data sets naturally grow and improve, the opportunity to intervene quickly (and remotely!) in both catastrophic and chronic health events is incredibly exciting.

The Industrial Internet. General Electric’s Billion Dollar Bet to transform the 122 year old company from one based on building and selling large and complex machines - jet turbines, locomotives, and power plants - into one based on selling analytics and services to ensure that these machines run incrementally ever-more efficiently highlights the promise of the Industrial Internet.

Its decidedly low glamour goal? To apply a form of Moneyball to the gigantic Old Economy backbone of our modern world and “eek out” 1%, 2%, and 3% efficiency gains that in their aggregate represent trillions of dollars of increased productivity and profitability.

Energy. Energy is a HUGE area where converging and coalescing IoT tech advancements are starting to allow for massive reductions in our global carbon footprint while making the energy to power our cars, drive our factories, and light our homes cheaper and more accessible and reliable.

Great for those of us in America, but life-changing for the three billion people around the world without daily access to electricity, heat, clean water, and reliable food.
 
An overly optimistic take? Perhaps.

But even if only 1/10 of the productivity and efficiency promises shared in Palo Alto last week come to pass, IoT represents a business opportunity so large, multi-faceted, and all-encompassing as to make even the most grizzled and cynical market observers more than a little giddy.

And that about sums up my time in Palo Alto last week - a bunch of big, technologically literate kids talking and acting as if we all together are about to enter one of the biggest candy stores in any of our lifetimes.
   
To Your Success,


Today’s Market: A Bubble Waiting to Burst?


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The incredible prices paid for high flying technology stocks this past year - whether it be in the form of acquisitions, in the cases of Dropcam, Open Table, WhatsApp, OcculusVR, and Nest, or in the form of financings, in the cases of Uber, Airbnb, Dropbox, has raised the age old questions, worries, and doubts about whether this market and these technology deals constitute a bubble.

And if so, when and how it will burst.

These concerns are mirrored in the recent price run-ups in both the stock and real estate markets.

As detailed last week, since March 2009 the S&P index has almost tripled, while real estate prices are up 10.5% this year and are now approaching their 2007 highs.

So, will it all inevitably come crashing down? Again?

And more importantly - whether it is or isn't a bubble - how can the individual entrepreneur and/or investor profit and win in the current conditions?

Let's take the bubble question first.

By almost any objective standard, paying into the billions of dollars for businesses with little revenues and/or significant operating losses - as is the case with all the companies mentioned above - is absurd.

There are very few plausible scenarios where the cash flow that these companies will be able to generate can any way justify the prices being paid for them now.

It is just hard to see how Nest will ever be able to sell enough thermostats, Occulus enough virtual reality headsets, Uber to take on enough ride shares, Airbnb enough spare bedroom rentals to justify the prices being paid for their businesses.

So, in this context yes, these businesses are wildly over-priced and there is a very good likelihood that the investors in them will experience a painful comeuppance.

This, however, represents a theoretical view of pricing, one driven by the relationship between current and future cash flows.

In the real world however, prices are determined by supply and demand.

And more to the point, by the relative abundance or paucity of Next Best Alternatives.

In this context, these prices make a LOT of sense.

You see, what we have in the world today is a lot of cash chasing a very small number of growth opportunities.

Some of this cash comes from expansionistic Monetary Policies pursued by the Federal Reserve and other Central Banks.
 
And a lot more of it comes from massive commodities-driven wealth in places like Russia, Africa, South America, and the Middle East.

And the owners of all this cash - trillions upon trillions of dollars of it - are naturally seeking to put it to work.

And their options for doing so are far more limited than one might think.

Bank interest rates the world over remain pathetically low.

Political instability, corruption, immature financial systems and securities laws close off private equity-type investments close to home.

So when it comes to true growth opportunities – the kinds driven by technologies that transform industries and markets - businesses like these are extremely unique and relative to the amount of cash out there seeking to be put to work, also in exceedingly short supply.

These global macroeconomic conditions show no sign of abating, so from these perspectives No are not high and the current conditions can and should continue for some time.

So that leads to our second question - how can today's investors and entrepreneurs benefit and win in these markets.

Well, as discussed last week, first of all by cultivating a bullish mindset in line with these strong economic times.

By recognizing the Sucker’s Bet that cash now is and likelihood will remain for the foreseeable future.

By fully embracing that this is not 2009 anymore - that the Great Recession has ended and that we are in the beginning stages of a Technology-Driven Growth Boom with no end in sight.

And to be resolved to grab your piece of it.
   
To Your Success,


Getting Robbed at the Bank, Part II


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Last week, I talked about Getting Robbed at the Bank - how today's Low Interest Rates (0.1%!) combined with High Inflation Risk make this one of the worst times ever to build wealth via savings.

Thankfully, this may also be one of the best times to invest, as never before have there been so many well-performing alternatives.

Start with Housing: 95 of the 100 largest US Metropolitan areas have seen housing prices rise since last year, with CoreLogic’s much-watched Home Price Index showing an average 10.5% Year-over-Year increase.

This has mirrored a solid rise in the Public Stock Market, which despite its extremely Poor Long-Term Performance, is up 5.5% this year.

And for those that can still remember the 2008 talk of Doomsday and of the collapse of our financial system, it is heartening to note that the S&P is up an amazing 189% since its March 2009 nadir.

And as good as the news has been in the Housing and Stock markets, it pales in comparison to this Golden Age of technology and venture investing that we are currently experiencing.

Almost every day comes barely able to believe valuations on technology company financings, acquisitions, and public offerings.

From last week's news of Open Table being purchased by Priceline (itself once an incredibly high flying Internet darling) for a whopping $2B, to transportation service Uber commanding the highest pre-public technology company valuation ever, to the fantastic and quick riches made by the early investors in companies like Nest, Occulus VR, and WhatsApp, the list just goes on and on.

And while it is human nature to feel more than a little jealous of those lucky enough to be the Founders and the Early Investors in these companies, what we really should feel is gratefulness for their roles in helping to right our national economic ship.

Start with jobs - unemployment went from a very impressive low 4.4% in 2007 to a very discouraging 10% by October 2009.

But with the addition of another 217,000 jobs in May, Unemployment now stands at a very manageable 6.3%, and there are now more people with jobs in the United States than ever before.

And when asset values go up, when purchase and sales transactions occur that result in huge capital gains, when people are working and earning good wages, Tax Receipts increase too.

And, in turn, the National Credit Rating improves.

After being embarrassingly downgraded in 2012, S&P now says that they are prepared to increase the rating back to AAA as the ongoing evidence of the economic good times (and Congressional Good Behavior) continues to build.
 
So for investors, this is as good as it gets. Real Estate, the Stock Market, Technology and Private Equity, Jobs, the Deficit, and more.

All that is lacking now are those “psychological” final pieces of the puzzle: Optimism and Confidence.

There is still a holding back, an unwillingness to believe that all of it is real and not a mirage.

And as a result, when it comes to those very precious dollars that we do not spend, that we put away for the future, we are still saving too many of them and investing too few.

Yes, we must proceed carefully and deliberately - because investing always involves risk - but we most proceed.

Leaving money in the bank is not a viable option anymore, not when interest rates are so low, not when the threat of inflation is so high.

And certainly not when the investment pickings are so good.
   
To Your Success,





Getting Robbed at the Bank


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I took my six and eight-year old sons to the bank this weekend to open their first savings account.

It felt like the right thing to do - they are at an age where they can understand the power and importance of money, albeit if mostly from the perspective of the things that can be bought with it.

But the hope of course is that the habits of savings, of delaying gratification are ones that will stay with them for a lifetime.

So off we walked to our local Bank of America branch - both boys clutching around $100, and proudly announcing our intentions to the teller.

We were then escorted to a BofA “personal” banker, who graciously walked us through the account opening process.

All was going quite swimmingly, and then I did something that I knew I shouldn't but couldn't resist.

I asked what the interest rate was.

And our banker glibly informed me that it was one tenth of one percent. 0.1 %.

And then instead of feeling all fatherly and a great role model…I felt like a real chump.

Every year my boys will earn one dime in interest.

Let's say they really button down and build up their accounts to $1,000.

That will get them one dollar per year.

Heck, how about those folks that work hard and save for a lifetime and accumulate $1 Million in savings?

Well, in the bank they are now earning a beyond miserly $1,000 per year.

Sure there are savings accounts that pay a little more, but has there ever been a time where the risk – reward gap between saving and investing was greater than it is right now?

Let’s define savings as what I did with my boys this Saturday: Putting and leaving money in the bank.

And let's then define investing as pretty much everything else: Public and Private Stocks, Bonds, Real Estate, Commodities, Collectibles, and more.

When it comes to return (0.1%), the comparison is an utter and complete joke.

But, it is when it comes to Risk, well…
 
…Investing, of course, involves risk. Always has, always will.

And while it is understood that while cash savings offers far lower returns, the tradeoff always was the assurance that your money was safe in the bank.

But in today’s economy, very unfortunately it simply is not.

Why? Because of massive inflation risk.

As in 10%, 15%, 20% annually or more.

And potentially coming not in the distant future, but very possibly in the next few years.

Since 2008, our Gross National Product has increased approximately 10%.

In that same time, the Federal Reserve has expanded the Money Supply more than 400% - from $800 billion in 2008 to over $3.9 trillion today.

As in four times as many dollars floating around here and abroad than there were six years ago.

Even generously taking into account the fact that the Greenback remains the reserve currency of choice the world over, this can only account for a fraction of the money supply increase.

Inflation – and lots of it – will eventually cover the rest.

And when it does, the savers amongst us are in for a world of hurt.

This is sad, because in so many ways the savers are the responsible ones - delaying gratification.

Planning for the Future. And for a rainy day.

But when the inflation deluge comes, our poor and pathetic savers probably won't even be able to afford an umbrella.

When I think of it like this, next week I'm marching my boys back to the bank and we're closing those accounts.

On the walk back, I'll teach them how to invest.

To Your Success,


--

Jay Turo

CEO

Growthink

 

P.S. Are you an accredited investor? Are you looking for opportunities now? If so, click here to tell us more about your current objectives and investment outlook and have a cup of coffee on us! 

 

 


Why Wall Street Can’t Be Trusted and What to Do About It


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Over the last three weeks, we have discussed the various factors that drive the 25% IRR return potential of the startup and emerging company investing class.

We then reviewed the various approaches to gain exposure to this return potential: Investing directly in operating companies, doing so through a Venture Capital Fund, or “Doing as Warren Does" and utilizing “The Berkshire Approach” of investing in an operating company that in turn invests in other operating companies.

Unfortunately, all of these approaches rely on something in exceedingly short supply in today’s financial marketplace.

Trust.

Now, wouldn’t it be great if investing actually worked like all of those lovely ads that mutual funds, brokerage firms, and insurance company say it does?

As in, Trust Us and we will take care of it for you.

If this were really so, it would free up so much valuable time and energy.

For family, hobbies, volunteer work, and more…knowing that one’s financial future was in someone else’s safe and capable hands.

But it just doesn’t.

A big part of the problem is that "Us" is for the most part large Wall Street banks and brokerage firms.

And if the last few years have taught us anything, it is that banks and brokerage firms are NOT places where smaller investors (and today small is anyone with less than $100 Million) should be expecting anything approaching extraordinary and high trust treatment.

Now, let me be clear: I am not a conspiracy theorist nor do I see Wall Street as at the heart of our Country's ills.

But I am someone that has looked at stock market return records of the past 15 years and sees too many people on Wall Street making a lot of money while delivering extremely average returns.

The word that best describes a state of affairs like this is institutional.

Self-preserving, bureaucratic, slow, dull.

And what it creates is a just a lot of…Blah.

Tired, mediocre ideas.

Blah Results and Blah returns.

Think of it this way: How much of a fish out of water would an innovator and a wealth creator like Steve Jobs have been on today’s Wall Street?

Yet, for the very most part, it is to this world that most of us turn to manage our money.

So when results come back that are barely average, we should not be surprised.

Now, there are alternatives. 

Let us not forget that the most famous and lauded investor of them all hails from Omaha.

And more to the point, the great entrepreneurs, the builders of businesses, those that actually create wealth…

…have always percolated at the edges and NOT in financial centers.

In The Silicon Valleys and The Silicon Beaches and The Salt Lakes and The Seattles and The Austins of the World.

The challenge is to see and act upon this reality.

To not be swayed nor frightened by the financial industry’s omnipresent marketing machine.

Because just like the greatest investor of them all became famous and fabulously wealthy far from Wall Street…

…We too can earn portfolio - transforming returns by doing something not any more complicated than thinking and acting for ourselves.

And when we do, a world of opportunities open up that are anything but institutional.

To Your Success,

--

Jay Turo

CEO

Growthink

P.S. Are you an accredited investor? Are you looking for opportunities now? If so, click here to tell us more about your current objectives and outlook and have a cup of coffee on us!


The Perfect Investor


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There were a lot of Warren Buffett "hero worship" type responses to my posts last week on "Doing As Warren Does" and applying the principles utilized to make Berkshire Hathaway the most successful investment company of all time.

And it is understandable why so many people - from very different world views and levels of financial sophistication - rightly consider Mr. Buffett to be the “Perfect Investor.”

His qualities in this regard are almost cliché - honest, humble, frugal, opportunistic in the face of adversity, and possessing of an other-worldly foresight as to where and how to find outsized returns.

But there are a couple of problems.

First, Mr. Buffett, for all of his amazing track record, is 83 years old.

And he is on record as saying that he rarely invests in technology companies as he does not feel qualified to properly diligence and understand them.

Both of which beg the question as to whether the “Buffett Way” is still the way to win in this global, technological age of ours?

And if it is not, then who will be the The 21st Century Warren Buffett?

The Perfect Investor for our era? 

While the identity of this person will be almost impossible to discern before the fact, he or she will almost assuredly possess these characteristics:

They Will Love Risk. Relative to the Mid-Century America in which Warren Buffett developed his philosophy and approach, our era of global and hyper-warp speed technological change requires a much different approach to uncertainty and loss.

While Mr. Buffett was able to build an alpha-performing portfolio without significant risk-taking on any one position, the modern investor simply does not have this luxury.

Instead, they must be far more comfortable and proficient with an “Outlier” approach, where a few big wins offset middling performance - and even complete loss of principal - on the significant majority of held positions.

They Will Focus on Market Opportunities More than on Execution. While quality, determined execution will always be at the heart of successful business-building, our Modern Day Perfect Investor will recognize this as a necessary, but by no means sufficient condition for business and investment success.

Far more important will be “visionary” assessments of global markets, specifically as to which types and forms of technology will disrupt these markets over the next 5 to 10 years.

Think Dropbox for Storage, AirBnB for Travel. WhatsApp for Communication, and Nest for the Internet of Things.

They Will Possess a “Modern” Morality. The idea that that which is moral and right needs to be updated alongside the wild, rapid, and continuous updating of our technologies is a hard one for those of a certain age and era to accept and embrace.

Yes, perhaps “prudent” and “conservative” in this Brave New World of ours are as much barriers to success as they are emblematic of it?

Maybe pomp, flash, celebrity - as opposed to being things to be frowned and looked down upon - instead are assets to be nurtured and promoted.

Maybe morphing one's business model on annual, quarterly, or even monthly basis is not a sign of scattered focus, but rather a necessary competence to survive and prosper in our modern conditions of permanent uncertainty.

It may sound and be unsettling.

But to paraphrase an old but yet very modern philosopher it is sometimes only chaos that can give birth to a dancing star.

In short, our Modern, Perfect Investor will probably not look anything like Warren Buffett. 

Other than in the one quality that matters above all else…

…outsized results earned over time.

That never goes out of style.

To Your Success,

 

P.S. Like to learn how to apply these principles to your portfolio? Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.


Improved Liquidity, Investment Flexibility, and Labor Arbitrage


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There were some great responses to my post last week as to the poor returns experienced by venture capital fund investors.

Some suggested that the blame for this lied more with the very difficult market and deal conditions of the past decade than with the VC investment model itself.

Typical was this comment submitted by a San Diego VC: "I agree that the VC fund industry is guilty as charged when it comes to being opaque as to real returns data, but I challenge you to revisit your analysis in 24 to 36 months, when we all will have had time to benefit from today’s strong M&A and IPO markets."

One reader reference Gust Founder David Rose’s new book - “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups” and to Rose’s main contention that to access the 25% IRR potential of the asset class one must hold positions in not less than 20 companies.

He asked, “Is this practical advice? I mean - who really has the time to find, diligence, and invest in dozens of companies? And for those that don’t, are there really any “Warren Buffet-types” to back in this asset class?”

This is the billion dollar question, is it not?

And while of course anyone will be very hard-pressed to even approach Warren Buffett’s other-worldly track record, there are some powerful forces right now driving the timeliness of venture investing via the “Berkshire Model.”

These forces fall into three main categories – Improved Liquidity, Investment Flexibility, and what let’s call “Labor Arbitrage.”

Improved Liquidity. Illiquidity is a huge elephant in the room when it comes to startup and emerging company investing. Most startups and early stage companies that seek outside investors are years away from investor liquidity – either via sale to a strategic or financial acquirer, or far more rarely via a Public Offering of the Company’s stock.

Now Berkshire Model companies, as entities with fundamentally investment vs. operating mindsets more naturally position, language, and network their businesses in finance contexts.

While doing so by no means assures successful outcomes, it does create the far more likely possibility of secondary market liquidity alternatives for investors that “want out” in the interim before the final exit.

Investment Flexibility. Investment companies in the Berkshire mold have great flexibility to structure investments of various types: traditional straight cash-for-equity, warrants, contingent warrants, revenue certificates, convertibles, in exchange for professional services, on project-by project bases, and more.

This flexibility is a game changer, as when done right it can provide managed, diversified exposure to a portfolio of deals and opportunities inaccessible via more “traditional” means.

Labor Arbitrage. A wise man once said that all businesses fundamentally do is “bridge the gap” between markets for labor and those for products and services.

Relatedly, one of the best advantages of the Berkshire model is the ability it affords to "Mark Up" the labor involved in effecting deals and transactions.

Let’s explain this by example.

Say a finance or advisory services professional is paid a salary of $80,000 per year, plus bonuses and incentives based on deals, transaction closings, and successful exits (not atypical terms).

Let’s then utilize a 20% load factor and assume that this worker’s fully loaded cost is $100,000 per year. Let’s then assume a 2,000 hour work year (we hope they work harder than this, as this is such an opportunity filled industry!).

Then, on a hourly basis, this professional’s fixed cost is approximately $50 per hour.

Now it is neither unusual nor unreasonable for even midlevel management consultants and investment bankers to bill out at $250 an hour and more on a cash basis, and much more than this on a cash equivalent basis when services are performed in exchange for contingent and / or equity compensation pay structures.

The critical point here is that when services are performed in exchange for equity compensation , even with average deal “picking” there is a natural Deal Arbitrage Effect that can easily create positive expected value on each and every deal.

A massive advantage.

Like everything associated with startup and emerging company investing, a lot of hard and smart work is needed to do it right.

But when done so, the payoffs can be enormous.

Just ask any Early Berkshire investor for confirmation.

To Your Success,

P.S. Like to learn how to apply these principles to your portfolio?   Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.


When it Comes to Venture Capital, Do Like Warren Does


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All of a sudden, it is boom time again for venture capital funds, with over $10.3 billion in fresh capital raised by 578 funds in the 1st quarter, up 36% from 2012.

And high profile exits on deals like Nest, WhatsApp, and Occulus - where fund investors saw returns in excess of 20x their original investments - have caught the public's fancy as to the power of startup and emerging company investing.

So it should come as no surprise that a lot of folks want in on the action.

But for the individual investor, is investing in a venture capital fund really a good idea?

It can be, as the return examples above attest, but more and more it has become a losing game.

Here’s why:

Market Efficiency. With now over one thousand active U.S. venture funds - and with so many of them pursuing similar deal sourcing strategies and approaches - it has become extremely difficult for VCs to find and secure high potential, well priced deals.

The result has been a “regression to the mean” - with alpha performance by fund managers being driven as much by randomness and luck (as it has been with public market mutual funds for decades) as by coherent design.

Fees. The world of low and no load management fees that so transformed mutual fund investing for in the 80's and 90's is far from being on the VC radar.

In fact, as opposed going down, venture fund fees have been going in the other direction, with a number of higher profile funds upping their annual fees to 3% (along with asking for a greater share of the returns) versus the standard 2-2.5%.

These high fees obviously eat away at returns, and more profoundly are in contrast to the “disintermediation spirit” so at the heart of modern technology investing.

Friction. Little discussed in most venture fund models are the high costs of deal sourcing, diligence, and oversight.

It is not unusual for a venture fund to sort through thousands of possible investments, deeply diligence a few hundred, prepare and submit term sheets on a few dozen, and then do zero deals.

This all costs money.

And all this doesn’t even begin to measure the management and oversight costs on the deals that are done – which at their barest minimum range from quarterly board meeting attendance to monthly, weekly, and sometimes daily calls and meetings with portfolio companies.

All this work is necessary to do venture capital right, but is also expense and friction filled.

Now, funds do work to charge some of these costs back to their portfolio companies, but usually these offsets flow to the fund’s General and not its Limited Partners.

So what to do?

Well, for those that love the startup and emerging company asset class, but are reluctant to either a) put all of their eggs in one basket via investing in one particular startup directly and / or b) get the problems with the current VC model per the above, here are two ideas:

1.    Explore Crowdfunding sites like Crowdfunder.com and peer-to-peer lending sites like Prosper.com and LendingClub, all of which offer various forms of fractionalized and securitized investing into the asset class.

2.    Do Like Warren Does. The Berkshire Hathaway model of an “operating company owning other operating companies” can be a great gateway to the asset class, combining both diversification along with the the “pop” and fast liquidity potential that a single company investment allows. Well-run companies like this that focus on the startup space are hard to find, but when one does they are definitely worth a closer look.

In short, when it comes to asset class, the advice here is to avoid the VCs and explore investment models – some new and some old – that provide access to it in a lower cost, higher expected return, and all-around more investor-friendly way.

To Your Success,

P.S. Like to learn how to apply these principles to your portfolio?   Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.


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