Disqus - Latest Comments for Kenosha_Kid

Re: What Keeps Me Awake At Night: Economy Edition

Kenosha_Kid — Fri, 08 May 2009 06:13:21 -0000

I think of the approach as a "managed bubble." Thinking as follows:

1) Our economy has for a long time been fueled by liquidity, rather than other way around.

2) Capital (liquidity) flows are based largely on perception/mood.

3) When bubbles grow, perception is that more liquidity will always follow, and when bubbles pop, perception is that liquidity has died and nobody wants to be the last one holding nothing. (If this reminds anyone of a Ponzi, that's because it really is.)

4) The Administration, aware of this, is working on mood rather than economic fundamentals, hoping that capital inflows will lead to improved economy. (I still believe that the inexplicable market rally was supported by TARP recipients using TARP funds to buy equities as directed by Treasury, but obviously no evidence other than inexplicable nature of rally and common sense.)

Bottom line: a "managed bubble", and the Ponzi continues. Which does not necessarily mean that the Administration is wrong.

Re: Regulatory Litmus Test: Can the "Four Horsemen" Ride Again?

Kenosha_Kid — Tue, 05 May 2009 16:05:13 -0000

Thanks for the note. Wow, this post is really from the archives. But I'm always happy to find agreement no matter how late.

Re: The End Of The IPO Drought Is Coming

Kenosha_Kid — Mon, 04 May 2009 10:01:46 -0000

Fred, this article is particularly interesting to read in conjunction with your December 2006 "Web 2.0 is a Gift" article that you linked, which argues that despite lower startup costs, building an internet enterprise is still a $20 million commitment. A couple of questions:

1) With hindsight, would you say this is still true? Or is it now more? Less? Have different variables come into play?

2) If the VC industry has been overcapitalized (as illustrated in your articles last week), and if the rule of thumb per venture is $20 million still, does this mean that too many of these have been funded?

3) Alternatively, is it the case that much more than $20 million has gone into many of these because of high VC liquidity, the result of which being that revenue/EBITDA pressure may have been put off or eased?

I ask these questions from the perspective that some of these factors could impact the IPO market as well, in addition to the capital markets demand side you describe above. I'm guessing, because my crystal ball is foggier than most, but I would say that the M&A market would have to rebound first before the IPO market does. One, strategics could probably handle the risk profile more easily and even assign value to pre-revenue or low-EBITDA businesses. Two, public equity investors could derive some confidence from a more positive strategic M&A market.

Re: The Venture Capital Math Problem

Kenosha_Kid — Wed, 29 Apr 2009 10:41:24 -0000

I wonder if another issue in the VC challenge is a valuation issue. In other words, what if 50% ownership is not the right allocation (i.e., too low)? In early stage investing, and especially in an industry as prone to constant change as digital media and IT, one could make a compelling case that value going into a deal is option value. When we're talking about 50%, that's more like full equity value, I think, especially when considering the absolute dollar amounts. Maybe, however, this also comes back to scalability, since too much capital chasing the same deals will lead to risk/return imbalances, much like the sub-prime credit bubble, etc.

Re: Private Equity Markets: Not Today, Perhaps Tomorrow

Kenosha_Kid — Mon, 27 Apr 2009 06:12:40 -0000

I wonder if one of the constraints on demand is in fact the absence of an organized system in which to efficiently arrange liquidity (i.e., without going through a less efficient banking process to find a buyer). There are other constraints, but this is probably one. If so, the "private equity market" could provide a boost to demand and solve some of its own problem. At least partially. No?

Re: Bailing out the Bailout

Kenosha_Kid — Mon, 06 Apr 2009 06:18:03 -0000

This is one of your best yet.

Two interesting points you bring up, which lead me to wonder... 1) that the exec comp issue is a PR smokescreen, and 2) that the recent market rally makes the administration look really good. If you combine these two thoughts, is it possible that the recent market rally is itself a PR smokescreen? I mean, there are a few TARP-supported institutions out there with capital and trading desks that could certainly move the needle, especially if encouraged to do so by the new primary stakeholder. I hate to get all conspiratorial, but is this far-fetched?

Re: Fred Wilson Dot VC

Kenosha_Kid — Thu, 02 Apr 2009 08:48:37 -0000

As a regular reader of Howard's blogs and follower of his tweets, this post reminds me a little bit of one of my favorite books by the French author, Michel Houellebecq, called The Possibility of an Island.

In it, there are two basic stories told in alternating chapters. One is a first-person narration by a modern day commedian/philosopher/"shock-jock" reflecting on his life (much of it sex-life) and his times. The other is of a future society in which the human race as we know it is replaced by two types: a hyper-civilized group of isolated beings, each a clone in a chain of identical predecessors and successors, each living in isolation in his/her own hyper-technified and sterile castle, interacting only through computers; and outside a population of nomadic barbarians reduced to the state of animals.

Iggy Pop is about to release a new album inspired by this book. Here's a link with an embedded video: http://blog.iggypopprelimin...

Re: Venture Capital - Thoughts On The Asset Class

Kenosha_Kid — Mon, 30 Mar 2009 09:19:34 -0000

I wonder if the seed finance model is better to execute independently anyway. From an entrepreneur's perspective, the the risk is that the sponsor VC does not follow through with the larger Series A round and the issuer not only has to explain why this is the case to other potential investors, but now also has a VC as seed-stage investor with maybe a different agenda than new VCs coming in. From the sponsor VC's perspective, investing in seed stage may require more hand-holding and active management than the size of the opportunity is likely to justify, as you point out, at least relative to the VC's core investment focus. With this said, the Sequoia/Y-Combinator approach is "one step removed", as it were, but I'll be curious to watch how Start@Spark and the others pan out.

Re: The PPIP Reading List

Kenosha_Kid — Mon, 30 Mar 2009 05:50:28 -0000

Coincidentally, Mrs. K_K was reading the same article last night and showed it to me. I agree with the general theme, but particularly like the author's view about the rise of entrepreneurship and the role of venture capital in this environment. That would be good on many levels, I hope he's right.

Re: The PPIP Reading List

Kenosha_Kid — Sun, 29 Mar 2009 11:39:36 -0000

I am not Marxist, but here is some food for thought. Someone sent me this by email, and I don't know the specifics of the source.

Karl Marx 1867: "Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism."

In order to avoid this outcome, and perhaps in response to Mark Olson who asked for proposals, I believe the solution is not so much technical as it is cultural. The focus of our economy, society, educational systems, and even arts (i.e. Hollywood) for at least the last 50 years has been on consumption and the encouragement of it. The focus has to shift to creation, production, etc.

One of the main impediments, but one that has to be overcome, is our diminishing attention span and increasingly short-term orientation. Creativity takes time and patience, whereas consumption is instant. The Geithner plan, I think, is more of the instant gratification variety, and is designed to stimulate consumption.

The two sides go hand-in-hand, I understand that, but it's a matter of balance, and I think for a long time the balance has been skewed. Perhaps the responsibility is with our schools... I don't know... the issue is so complex.

Re: So What Do We Think Of Geithner's Toxic Asset Plan?

Kenosha_Kid — Fri, 27 Mar 2009 20:13:06 -0000

I think of everything to do with our current economy (and some other things too) in terms of a simple graph in which the horizontal axis is a timeline and the vertixal axis a value range, and on this graph there are two lines: one represents the "intrinsic/fundamental" value of an asset, and the other represents the "market" value of an asset. As long as the latter deviates above the former, then there is only one source of return for a current investor, which is a future investor providing a take-out or exit or refinance, because the intrinsic asset value itself does not support the amount of the investment. This is one way to illustrate what happens in a bubble, but also in a Ponzi scheme, and for that matter in an inflationary environment... all of which are sort of synonymous.

In the context of this graph, the present Fed actions can be seen as a way of perpetuating the Ponzi, a system in which the Fed has become the source of take-out/exit/refinance, and so the "market value" line is protected and the bubble continues (eventhough we may not realize it). What needs to happen is for the two lines to merge, at which point there is no longer a bubble. For this to occur, the ideal solution is not for the bubble to burst, in which case the "market value" line moves down, but rather for the "intrinsic value" line to move up. In other words, fundamental value has to be created.

I'm not sure I see this being emphasized these days, and I don't see a plan addressing this objective, at least not directly.

Re: The Book Market Stares At Ubiquity

Kenosha_Kid — Sun, 22 Mar 2009 08:36:59 -0000

May be a personal quirk, but I hate the idea of digitizing and converting to lifeless screen shots a book that could otherwise be held, touched, leafed through, marked up, shared with a friend, put away on a shelf and rediscovered years later when the cover seems a throwback and the pages are more yellow and have a slightly musty smell. Books are not tweets, at least not yet. Just as the music industry lost a lot of its quality and charm when LP records were replaced by digitization, so too will the book industry. Sure, we will have easier selection, and easier consumption, and instant gratification. But we will look back on the days of old fashioned print, like we do now upon vinyl analog, feeling that the esthetic has been stripped and cooled, and the enrichment we may feel as consumers will turn out to be slightly vacant.

Re: Bonuses

Kenosha_Kid — Wed, 18 Mar 2009 21:07:11 -0000

I think you are right.

I think some companies, especially at the high end, pay the enormous fees because they need the institutional support... and there again, they hire the firm much more than the individual. (I've met so very many who lose sight of this, who actually believe they have personally been responsible for hundreds of millions in fee income.)

I think that what happens to M&A is the same that happens to all industries: excess capacity leads to consolidation and supply adjusts to meet demand. Until now, it may not have made sense for M&A bankers to work on a $275 million transaction for a penny less than $2.75 million. I'm guessing that this will rapidly change, because the opportunity cost is vanishing.

Maybe at some point the pricing model migrates to that of law or consulting (i.e., time based rather than volume based). Maybe at some point the economics change to a degree at which it will be more efficient for USV to outsource the work.

Re: Bonuses

Kenosha_Kid — Wed, 18 Mar 2009 14:12:27 -0000

Valid points. I still see a huge difference, however, in that moviegoers go specifically to see Julia (not me, but just saying), as opposed to MGM. Wall St. clients, on the other hand, use Goldman Sachs and Morgan Stanley. Once upon a time, M&A was a little bit like "Julia", to your point, but much of this has changed. Whereas Rohatyn and Wasserstein and Greenhill and the like used to attract clients on their own personal franchise, in the past 10-15 years advisory assignments were more like tips handed out for balance sheet access. So, while it is true that Julia is not in her living room acting, she can literally take her act anywhere and the result is a film star, whereas Wall Streeters (with few exceptions) do need a firm with lots of capital and resources and brand name.

Re: Bonuses

Kenosha_Kid — Wed, 18 Mar 2009 11:54:38 -0000

Difference is huge between entertainment and Wall St. In the former, Julia Roberts gets paid because she, individually, personally, has a demonstrated track record to increase box office receipts by a quantifiable amount. In the case of the latter, a trader or banker relies on a balance sheet of someone else's money, and an infrastructure that took years if not decades to build, to make bets that either win or lose.

Re: Bonuses

Kenosha_Kid — Wed, 18 Mar 2009 10:46:55 -0000

The issue of guaranteed bonuses and lucrative contracts has always been a problem for Wall Street, which ironically prides itself on an "entrepreneurial" spirit. All the good reasons why guaranteed cash packages make no sense for startups, are the same reasons why these never really made sense for Wall Street. And some in addition:

1) Not only is the fire in the belly factor diluted because the near-term downside is minimized, but also because the absolute dollar value of Wall St. packages can be quite huge and in many cases results in a financial safety-net forever.

2) When revenues decline, the first overhead that gets cut is the non-guaranteed employees (i.e., the guys with the fire in the belly) because that's the easiest thing, and this is counter to maximizing productivity.

For a long time Wall Street has gotten away with this counterintuitive and illogical business model, because when times are good and the water level is high, nobody notices the junk at the bottom of the river. Like everything else these days, the drought is causing the river to dry up, and things start to get noticed. AIG may be just the beginning.

Re: Is the US Treasury the Next Bear Stearns?

Kenosha_Kid — Sun, 08 Mar 2009 09:19:14 -0000

Very interesting thoughts, and great idea. If the Treasury is not already planning something like this, I would be really curious to know why. Because I can't believe it would be due to oversight.

1) I wonder if there is an issue along the lines of 40-100 year paper being one step away from equity, and equity in the public sector being like privatization, which is the antithesis of what the current government stands for.

2) I wonder also if the amounts of the issuances, in order to make a dent, would be way more than the market will take. The price volatility on long-term paper is very high, so you would think that the risk associated with 40-100 year paper in a low-interest rate environment far outweighs the return. I'm not sure that 40-100 year paper is still flight to quality from an investor's perspective.

Re: Valuations Don’t Matter…Are You Worth More Than Cash in Your Pocket?

Kenosha_Kid — Tue, 03 Mar 2009 17:59:09 -0000

Actually, ideas don't mean much unless there is funding to execute or sell, which is not only a function of social leverage. Especially in this environment. And if there is burn, which there probably is for people who spend a lot of time on ideas without funding, you can see how one's net worth would be less than the value of a bank account.

All of the same factors apply in the same way to companies that trade at less than cash value. I'm guessing that 9 times out of 10 there is a good reason. Markets are not as inefficient as advertised.

Re: Regulatory Litmus Test: Can the "Four Horsemen" Ride Again?

Kenosha_Kid — Tue, 03 Mar 2009 12:23:56 -0000

Roger, if I understand some of your article correctly, you are arguing that the lack of an IPO market for venture-backed middle market issuers has been caused by the dearth of quality underwriters. I wonder if this is really a cause, as opposed to an effect.

During this decade, I think there have been two factors that have gone counter to the middle-market IPO trend of the 90s. One, the bubble that burst to start the decade and which left many scars in its wake; and two, a huge influx of market liquidity that has forced institutional investors to seek (and to trade) bigger and bigger positions. Would these two factors have been different if H&Q or Robbie Stephens were still out there beating the drum, or are these two no longer out there because of these factors?

Going forward, the issues may not be much different. On the one hand, a bubble that burst even more convincingly than the previous one, and capital markets that will probably still gravitate to the safety of size and market float. That said, a quality middle-market IB operation could add value in terms of risk mitigation, by providing (a) a "quality seal of approval" and (b) after-market trading support. But do you think the existence of such an effort is stifled by regulation?

Re: When Government Funds Business

Kenosha_Kid — Sun, 01 Mar 2009 10:21:57 -0000

I wonder if the old school vs. new school analogy is actually more of an observation that some of the old school companies had become too comfortable and as a result sloppy. However, I don't think this is a question of oldness vs. modernity, as much as one of substance and innovation vs. lack thereof. The old school companies became blue chip for a reason, while there are plenty of modern enterprises that are lacking in real substance and will probably disappear. The issue of substance vs. fluff (rather than old vs. new) is, I think, the real root of our problems... in fact a lack of substance is what defines a bubble. Maybe this relates to the government funding issue in that the availability of this form of capital does not push the fluff to fill up with substance or otherwise pop.

Re: Ten Thoughts On The President's Speech Last Night

Kenosha_Kid — Wed, 25 Feb 2009 16:58:23 -0000

Thanks, I guess I'll wait a while. Was just there for the Miro exhibit anyway... best to space MoMA visits out, it's always mobbed these days. Klee in Berlin must have been awesome, back in his Bauhaus setting.

Re: Ten Thoughts On The President's Speech Last Night

Kenosha_Kid — Wed, 25 Feb 2009 12:29:19 -0000

Shouldn't generalize, the positive or the negative.

Anyway, I think the issue is not immigration, but illegal immigration. Many capable, smart, entrepreneurial, industrious immigration applicants are probably seeing their visas being rejected as a result of the illegal immigration overload.

Re: Ten Thoughts On The President's Speech Last Night

Kenosha_Kid — Wed, 25 Feb 2009 12:16:58 -0000

Thanks for the link... right here at MoMA, will have to check it out. As you probably know, there's a boatload of Klee also at the Met, but this is deviating off topic.

Re: Ten Thoughts On The President's Speech Last Night

Kenosha_Kid — Wed, 25 Feb 2009 12:02:50 -0000

It's unfortunate that President Obama is beginning to sound more and more like a Washington insider who addresses his audience like walking on eggshells and talking to children. What we need now is adult speak ("time to put childish things aside") and specific solutions / ideas, not a bunch of feel-good speechifying and Pelosi jumping out of her seat like it's on fire. By the way, Fred, your linked twitter comment was hilarious, and I also love the wallpaper. Is that Paul Klee?

Re: A Time For Assessing "Strategic Opportunities"

Kenosha_Kid — Tue, 24 Feb 2009 09:30:57 -0000

On a different level, this is applicable to all industry these days, not only venture backed startups. For example, Detroit, and less immediately but almost as urgently, traditional media companies. Come to think of it, this probably also applies to very many individuals on a personal level... And while I'm at it, to the US Government itself, which keeps printing money but is still short on a plan. It's a little frightening to think about how long and how far we have gone - on so many levels - without a strategic plan, or even thinking about the concept.