Written by Jay Turo on Tuesday, July 14, 2009
Some of the most interesting investment research over the last 6 months has been the application of traditional portfolio theory and hedging techniques to angel and private equity investing. Research compiled by the National Venture Capital Association, by the Kaufman Foundation for Entrepreneurial Activity, and by the Entrepreneurship in the United States Assessment, highlight a number of both subtle and startling insights.
When compared to other asset classes, there is relatively little correlation
between various private equity investing sectors. In other words, while the
prices of publicly traded aerospace and software companies, for example, will
move up and down more or less together, the success
probabilities of that hot drug development company and that wind energy startup
are reasonably uncorrelated.
The research also shows that the smaller the size of an equity financing deal,
the less correlated is the success probability of that deal with the equity
markets as a whole. A subtle, but critical point that had made a HUGE difference in
investment returns over the past 10 years. Try on these two facts:
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Written by Jay Turo on Wednesday, June 24, 2009
The general misery that the public markets have subjected us all to over the past year (and really the past 10 years, with the Dow Jones, the S & P, and the NASDAQ all trading lower today than they were in 1999), begs the question - how does stock market performance affect angel investing returns?
The answer, on the one hand, is very obvious. A falling tide sinks all boats. So as goes the public markets, so go the private equity markets, of which both venture capital and angel investments are subsets.
This is best illustrated by the amazing (and depressing) statistic that in the last 10 years there has been more money invested into the venture capital industry than has come out of it. A lot of effort for naught.
But in spite of this, and maybe even because of it, average angel investing returns this decade have been surprisingly, even shockingly good. According to data compiled by Thomson Financial, average angel investing returns have been in excess of 20% annually since 1999.
Why is this and will it continue? Well, it has to do with the difference between the "macro" and the "micro."
To hear more on this, please click the below.
Written by Jay Turo on Tuesday, June 23, 2009
Accelerant. C8 Medisensors. Dakim. DCIP. Free Conference. Fresh Games. Green Medical. Helix Wind. InfoSpace. Integreon. L3D3. Mobeze. MyPublicInfo. Nolatek. Ometric. Pocketsonics. Precision Time. Raise Capital. Recoup IT. Research Scientists. Sandel Medical. Spring Medical. Telverse. Thrombovision. XCOM Wireless. Xorbent.
These companies all share a few things in common:
1. They are either past or current Growthink clients and/or investments (though this is by no means a complete list).
2. They all either achieved - or are on the path to achieve - successful exits through a public offering or a company sale.
3. They are all led by CEO's and senior executives that are a cut above. Men and women that are entrepreneurs and business-builders in the best and highest sense - the kind of managers and visionaries that are the bedrock of America's vibrant, free enterprise system and way of life.
I have been privileged to work and get to know inspirational, entrepreneurial leaders like Dan Michel at Dakim, Liam Brown at Integreon, Walter Alessandrini at Ometric, Brian Ashton at Precision Time, Rick Singer at Raise Capital, Peter Sobotta from RecoupIT. Jack Smyth at Spring Medical Systems, Ed Teitel at Thrombovision, and Dan Hyman at XCOM Wireless.
Here are 5 qualities they all share:
1. Their Work Ethic is Off The Charts. This may sound really obvious, but the great entrepreneurs are extremely disciplined and organized and make the sacrifices to commit themselves fully to their business. Work - life balance is a nice theory, but in entrepreneurs to back, the more zealous the better.
2. They Have Great Numbers Fluency. As Guy Kawaski so eloquently puts it, we live in the age of excel, not of PowerPoint. Great 21st century leaders are "Super Crunchers," - they undertand the power of statistics, of "evidence-based" decision-making, of testing, and of managing by the numbers. They are not enslaved by the numbers nor do they lose sight of their human and qualitative aspects, but they are highly informed by them. They are hungry for unbiased, third-party information about their markets, their customers, their competitors.
3. They Have Done it Before. Following up on #2, the entrepreneurs most likely, statistically, to be successful are those that track records of success. It doesn't mean that just because they have succeeded in a past company mean that they will necessarily succeed in the next one. Nor do this mean that those who have failed in the past will fail in the future. Only that the probabilities are that this be the case. All of the managers above had track records before their existing business of successes - entrepreneurial successes, corporate successes, educational successes. Success follows them, not the other way around.
4. They Know When To Manage and When To Lead. Successful business exits require first and foremost, organization-building. Teams of people need to be assembled and directed to accomplish a common objective that can be quantified on the scorecards of business - revenues, profits, and cash flow. Balancing these left and right brain objectives require a sense of knowing when to manage and when to lead. Management is left-brained - it is analytical, numbers-driven, and dispassionate. It see business as a black box, with the sole objective of turning cash into more cash as fast as possible. Leadership is right-brained - it is conceptual, more long-term focused, and sees the business more as an organism as opposed to a collection of individual parts. Leaders sometimes will sacrifice short-term results for long-term gain, but do so carefully, deliberately, and warily. They are soft-hearted but hard-headed.
5. They are Proud and Humble. Great entrepreneurs are proud of their accomplishments and greatly desire more of them. They are confident in their vision and their abilities, and do not let adversity, criticism, objections or rejections deter them from their chosen path. They are not, however, headstrong nor arrogant. They respect facts, statistics, and informed opinions. And when these are in conflict with even their most dearly-held beliefs and strategies, they change. Not with the wind, but nor only at the point of a gun.
If you find these 5 attributes in an entrepreneur, savor them, appreciate them, learn from them, and back them. Till the cows come home. And then some more.
Written by Jay Turo on Tuesday, June 16, 2009
The typical wisdom regarding the appropriate financing course for startup goes as follows:
It all sounds wonderful and it is. The only problem is that it mostly a fairy tale. Here is what really happens:
New, groundbreaking research from the Ewing Merion Kauffman Foundation on Entrepreneurship shows that the #1 key for the angel investor returns in emerging technology deals is that there is never any venture capital invested in the company!
As interestingly, the data shows that when you remove a follow-on venture capital round from angel invested deals that expected returns skyrocket.
The data is somewhat inclusive as to why this is. I surmise three main reasons:
My suggestions for the angel investor looking to make money? First, look for "one and done" deals - companies that need just one round of outside capital to get them to positive cash flow. Second, look for companies that have short and realistic liquidity (exit, IPO) timelines. And third, don’t get star-struck by big VC interest in your deal. It can often be a double-edged and very sharp sword.
Written by Jay Turo on Wednesday, June 10, 2009
With the Dow Jones up more than 35% from its early March lows of 6,440, the investing mood has undergone a 180 degree turn for the better. How does this rebound affect the angel investing returns?
Here are the negatives and the positives:
But we are getting our groove back. Consumer and business confidence have skyrocketed since March. Bank lending is up. Business capital expenditures are increasing. The real estate market, in most parts of the country, has at least stabilized (and in many places, greatly rebounded). Jobless claims are down. Most importantly, corporate profit forecasts are up.
All of this drives deal-making. It drives big companies to buy small companies to gain access to their people and their technology. It drives venture capitalists to agree to bridge financings. It drives entrepreneurs to get back to pushing the envelope with their growth plans. And all of this positive, forward-looking acting and thinking drives angel investing returns. Entrepreneurs grow their businesses faster, they exit faster, and investors turn their money faster and at great multiples.
All these factors have turned 180 degrees since March. And for those that love America and its entrepreneurial spirit, not a moment too soon.
Written by Jay Turo on Wednesday, June 3, 2009
The next big private equity investment idea is the “Early Exit.” The best articulation of it comes from Basil Peters, a serial technology entrepreneur, co-Founder of Nexus Engineering, former Canada Entrepreneur of the Year, and Managing Partner at 3 venture capital funds – Fundamental Technologies I and II and the BC Advantage Funds. His blog is one of the best resources on technology investing out there.
Aptly to the point, Basil is the author of a great new book – “Early Exits: Exit Strategies for Entrepreneurs and Angel Investors.” His core thesis is that successful private equity investing is now driven by quickly getting to the smaller investment exit. Or, as he says it, "Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30 million."
I love this strategy because it is realistically attainable for the individual investor. Here's why:
You, Mr. or Ms. Main Street Investor, are NOT getting a piece of the next big IPO: The 2 best known venture capital funds –Sequoia Capital and Kleiner Perkins - because of their reputations and massive bankrolls – will continue to get the lion’s share of the deals with rockstar IPO potential. Try these names on for size – Electronic Arts, Apple, Google, NVIDIA, Rackspace, Yahoo!, Paypal, Amazon.com, America Online, Intuit, Macromedia, Netscape, Sun Microsystems.
They were all Sequoia and/or Kleiner investments that became mega-successful IPOs. To give a feel for the power of their investment model, estimates are that Kleiner’s investment in Amazon scored returns of 55,000%!
YOUR big problem – your friendly neighborhood stockbroker (if they exist anymore) isn’t getting you in on any of these deals anytime soon. And if you don’t have a $100 million bankroll and the very right connections to become a Kleiner or Sequoia LP, you’re not joining their club.
Hit’em Where They Ain't: The size of most modern venture capital funds has increased, with the average sized fund now having more than $160 million under management. As a result, the vast majority of professional investors simply can’t and won’t invest in smaller deals. The new VC model has, for better or for worse, become “Go big or go home.” As such, competition for smaller deals is much less and the deal pricing on them far more favorable.
Small Deals Rock: You don’t need a lot of money anymore to build a technology startup – not with outsourcing, viral marketing, and the Software as a Service (SaaS) revolution. And if your business isn’t cash flow positive REAL FAST, you probably don’t have a very good business.
So the new technology investment model is to place small amounts (under $1 million) into companies that a) develop intellectual property and compete in markets with lots of active strategic acquirers (think Internet, software, biotechnology, digital media, and energy) and b) have management with the mindset and track records to ramp-up and exit FAST and at very attractive but not pie-in-the sky multiples.
Not a game that big private equity or venture capitalists are interested in playing because it is just too hard to put large amounts of money to work in such a fragmented marketplace.
But if done right, an EXTREMELY lucrative one for thoughtful entrepreneurs and the investors that back them.
Written by Jay Turo on Thursday, May 28, 2009
In my role as the CEO of Growthink, I get asked variants of the same questions a lot, namely: "What do you think about this economy?” “Do you see things turning around?” “Are there any deals getting done out there?” I answer these questions based on a number of factors:
What does this all sum up to? The Beatles say it much better than I ever could:
Written by Jay Turo on Wednesday, May 20, 2009
"Those who cannot remember the past are condemned to repeat it" - George Santayana
The financial panic of 1873, which set off a severe nationwide economic depression that lasted for 6 years, included The New York Stock Exchange closing for 10 days, 89 of the country's 364 railroads going bankrupt, and unemployment as high as 14%. During this extremely challenging time, a gentleman by the name of Thomas Edison started a company called General Electric. You may have heard of both of them.
The Great Depression of the 1930's is even scarier in statistics than in legend. Industrial production fell by 45% between 1929 and 1932. Homebuilding dropped by 80%. 1,000 of the nation's 25,000 banks failed. US GDP fell by 30%.
And during these dark days, DuPont created new products and indsutries including rayon, enamels, and cellulose film. RCA invented television. And a little company called IBM started pouring research dollars into something called the computer.
The 1970's are commonly remembered as a dark period for American finance and business - stagflation, negative stock market returns for the decade, and hits to the national psyche including Vietnam, Watergate, and the Hostage Crisis. It was also the era that 2 ambitious and visionary young men named Bill Gates and Steve Jobs got their start.
My 20 years in angel investing, small business and entrepreneurship have taught me to separate the world into two kinds of people: Those that comment and complain on how things are and those that do something about it.
Unluckily for all of us, television and the always on Internet give those that comment and complain bigger megaphones than ever to spread their false prophesies of doom. It is only human nature to be affected, depressed, and even scared by their strident negativity.
Very, very luckily for all of us, however, there always be budding Bill Gates and Steve Jobs and Thomas Edisons and Thomas J. Watsons amongst us. And where are these future shining stars devoting their prodigious energies to these days? I promise you that most of them aren't working at General Motors, nor are they drawn to politics or working in the public sector, nor to non-profits.
No, they are capitalists. They are entrepreneurs. They start and work at Internet companies, they research alternative energy technologies they discover new drugs to make us all live longer and healthier lives. They are and they discover Black Swans. They - in the words of Voltaire - make "life throb to a swifter, stronger beat."
And you know what else? They're in it for the money. They want to build companies like Pure Digital (makers of the FlipCam) did and sell out to Cisco Systems for $590 million. Or Facebook, on the verge of a public offering that will make its early investors billions. Or Integreon, whose business plan was perfected in a small Growthink conference room 10 years ago, and is now the largest legal outsourcing firm in the world (and saving a lot of folks a lot of money on their legal bills).
With apologies to Doris Day, the future is in fact ours to see. As long as little boys and girls are raised to grow up to do something great with their lives, progress will march on. Technologies will be commercialized. New industries will arise. Companies will be born and will grow and grow and grow. Fortunes will be made.
The question, of course, is what will be in it for you? Will you be on the couch with the critics? Or will you be in the game with the builders and the doers?
Written by Jay Turo on Tuesday, May 12, 2009
Scott Shane, one of the world's most respected statisticians regarding entrepreneurship and angel investing, has a new book out - "Fools Gold? The Truth Behind Angel Investing in America." It is without question the finest compilation of statistics and cold, hard facts regarding the REALITIES - as opposed to the myths - of the keys to successful angel and emerging company investing. Some amazing statistical nuggets from Scott's book:
My overall takeaway: If you want to invest in private company deals, only do so via one of two avenues: 1) Via a GOOD angel investment group like The Band of Angels or the Tech Coast Angels (if you can get in) or via a managed portfolio approach such as a private equity or venture capital fund targeted toward the space or via a hybrid, operational approach like Growthink.
Written by Jay Turo on Monday, April 27, 2009
Adobe. Akamai. Amazon. Amgen. Apple. Baidu. Bed Bath & Beyond. Biogen. Broadcom. Check Point. Cintas. Cisco. Citrix Systems. Dell. eBay. Electronic Arts. First Solar. Flextronics. Garmin. Genzyme. Gilead Sciences. Google. Hansen Natural. Infosys Technologies. Intuit. Juniper Networks. Logitech. Maxim Integrated Products. Microsoft. NVIDIA. Oracle. Paychex. QUALCOMM. Research in Motion. Seagate Technology. Sigma-Aldrich. Starbucks. Symantec. Urban Outfitters. VeriSign. Xilinx. Yahoo!
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