in May, the Kauffman Foundation issued a report on its venture capital experience, and concluded that the venture capital model is broken.  Now, Ashton Newhall, the co-founder of Greenspring Associates, a well-known fund-of-funds manager, has written a response to the Kauffman report from an LP's perspective.  Ashton's commentary "Is Venture Capital Broken? Hardly" makes the following points:

• Returns from top-quartile funds have consistently outperformed the major stock indices
• Large funds (over $400 million) can deliver above-market returns
• Venture capital managers are not artificially marking up valuations in their portoflios so they can call themselves "top quartile" funds.

Ashton's commentary is an interesting and worthwhile read.  Here's the link:  http://news.cnet.com/8301-32973_3-57482579-296/is-venture-capital-broken-hardly/

Links:
Kauffman Foundation VC Report
http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf

Kauffman press release:  
http://www.kauffman.org/newsroom/institutional-limited-partners-must-accept-blame-for-poor-long-term-returns-from-venture-capital.aspx 

​Ashton Newhall's commentary on CNET:  
http://news.cnet.com/8301-32973_3-57482579-296/is-venture-capital-broken-hardly/ 

E2open, which provides enterprises with cloud-based software solutions for managing supply chain processes, had a disappointing initial public offering last Thursday.  The IPO raised $70.3 million through the sale of just under 4.69 million shares of common stock (3.75 million from the company and the rest from selling shareholders) at an IPO price of $15.00 per share.  The stock opened below the IPO price and as of today is trading around $12.50 per share.  BofA Merrill Lynch was the sole book-running manager on the deal.

So what happened?  E2open is in the attractive cloud-based software sector, and other cloud-based companies such as Splunk have seen their IPOs perform well.  Reasons for the disappointing performance may include:

• Lower revenue growth than other cloud-based companies that have recently gone public;
• Reliance on Research in Motion as a major client;
• Large exposure to Europe;
• Historical net losses;
  
• Possible aggressive IPO pricing; and
• Post-Facebook IPO investor nervousness.
  

Crosspoint Ventures held 19.8% of the outstanding shares pre-IPO and 16.9% post-IPO.

Link to E2open's final prospectus:  
http://www.sec.gov/Archives/edgar/data/1540400/000119312512315462/d45301d424b4.htm 

Articles on the IPO:
http://www.mercurynews.com/business/ci_21164376/silicon-valleys-second-post-facebook-ipo-e2open-falls 
http://tech.fortune.cnn.com/2012/07/31/the-other-tech-ipo-that-just-faltered/ 

A recent Wall Street Journal article "Social-Media Stock Frenzy Fizzles" provides an interesting look at public social media companies and some of the concerns that investors have about the business models.  The poor stock performance of the public companies has brought down the valuations of private social media companies as well, according to the article.  A worthwhile read.  Here's the link (may be behind subscription firewall):   http://online.wsj.com/article/SB10000872396390443477104577553431459135876.html

GigaOM has an interesting article today "The economics of Google Fiber and what it means for U.S. broadband."  The article discusses Google's fiber to the home network in Kansas City, Mo. that provides gigabit (yes gigabit) internet access for $70 per month.  And making a profit doing it.  Incredible.  How is Google doing this?

• It makes its own gear.  Google cuts out the middle man, use customized basic elements, and can control all of the physical infrastructure in its network.
• Social engineering.  It costs a lot of money to send a truck out to wire fiber to the home.  Google reduces this cost by getting neighbors to sign each other up for the service.  When enough people have signed up in a neighborhood, Google will send the truck.  Smart idea.
• Google TV Box.  Google has developed its own TV box that provides a DVR, TV channels and a modem that provides Wi-Fi connectivity to the home.

If Google starts rolling this service out to other markets, I think the traditional access providers are going to be in tro

Link:  
http://gigaom.com/2012/07/26/the-economics-of-google-fiber-and-what-it-means-for-u-s-broadband/
 

Today's article in The Times Of India "Global investors put Indian private equity story on hold" provides a glimpse of some of the challenges currently facing private equity investors in India.  Among the issues cited by the article:

• Slowing economic growth
  
• Inconsistent tax policy
  
• Poor corporate governance
• Nature of PE in India - investments are typically minority stakes
• Entrepreneur control issues
• Poor returns
• More attractive investment opportunities in other areas in the region

As a result of the above, the article predicts that the India PE industry is expected to contract in the future.  

In a post last month discussing a Reuters article, the following issues were also identified:

• Fierce competition for deals.
  
• Few willing sellers.
• A regulatory ban on leverage.
• A fickle market for exits through IPOs.
• Investment holding periods have lengthened.
• India's economy has weakened as growth has slowed.
• Public share prices have slumped.

Here's a link to the article:  http://timesofindia.indiatimes.com/business/india-business/Global-investors-put-Indian-private-equity-story-on-hold/articleshow/15163018.cms 

Here's a link to the prior post on India PE:  http://www.allenlatta.com/1/post/2012/6/rupee-slump-deepens-india-private-equity-quagmire-reuters.html 

Governing, a magazine and website covering state and local governments, has a good map of the country showing municipal bankruptcies.  California leads the nation with four bankruptcies, followed by South Carolina with three.  Here's a link to the map:   http://www.governing.com/gov-data/other/municipal-cities-counties-bankruptcies-and-defaults.html

Venture capital firms are quickly adapting to a changing environment and are hiring public relations experts to help promote themselves to entrepreneurs.  While several firms have long engaged in public relations marketing, the catalyst for the rapid adoption of public relations strategies is credited to the rise of Andreessen Horowitz, which was formed in 2009 and has jumped to the top of the venture capital firm pile.  The New York Times article "Venture Capital Firms, Once Discreet, Learn the Promotional Game" provides a good look at the ways venture capitalists are now promoting themselves.  Worth a read.  Here's the link:   http://www.nytimes.com/2012/07/23/business/venture-capital-firms-once-discreet-learn-the-promotional-game.html?

Brazil has been on the radar of venture capital for several years.  Firms including Accel and Benchmark have invested in Brazil technology companies; Atomico has opened an office there and Sequoia is rumored to be in the process of opening an office there as well.   Redpoint e.ventures, a joint venture between Redpoint Ventures and e.ventures, has announced that it has close on  have raised a $130 million fund to focus on early-stage Brazilian technology companies.

Why Brazil?

• 6th largest global economy
• Largest and most populous country in South America
• Rapidly growing middle class
• Rising entrepreneurial activity
• High internet adoption and engagement

Articles:
"Venture Capital Firms Jump Into Brazil After Years of Testing Water":  Bloomberg
http://go.bloomberg.com/tech-deals/2012-07-23-venture-capital-firms-jump-into-brazil-after-years-of-testing-water/ 

"Sequoia Capital Said to Be Expanding to Brazil:  NY Times DealBook  
http://dealbook.nytimes.com/2012/05/23/sequoia-capital-said-to-be-expanding-to-brazil/ 

Redpoint e.ventures press release:  
http://redpoint.com/files/news/rpev_pr__july_20_final.pdf
 
Prior posts on Brazil:
http://www.allenlatta.com/1/post/2012/03/redpoint-eventures-new-brazil-venture-firm.html

http://www.allenlatta.com/1/post/2012/02/atomicos-brazil-foray-ny-times-dealbook.html 

http://www.allenlatta.com/1/post/2012/02/entrepreneurship-in-brazil.html 

http://www.allenlatta.com/1/post/2011/11/jim-breyer-interview-on-techcrunch.html  

Kayak Software Corp., the online travel search engine, raised $91 million in its IPO on Friday, July 20.  Kayak priced its shares of Class A Common Stock at $26.00 per share, above the $22 to $25 indicated pricing range.  At the IPO price, Kayak had a market cap of approximately $979 million.  The stock opened trading at $30.10, for an IPO pop of 16%, and closed its first day of trading at $33.18, for a 28% first day performance.

All of the IPO shares were being issued by the company.  The company will have two classes of stock outstanding after the IPO, Class A common and Class B common.  The Class B common will be held by insiders and will have super voting rights of 10 votes per share.  The company is listed on NASDAQ with a ticker of KYAK.

Morgan Stanley was the lead-left book-running underwriter on the deal, and Deutsche Bank was the joint-book-running manager.  Piper Jaffray, Stifel Nicolaus Weisel and Pacific Crest Securities served as co-managers on the IPO.

Venture capital investors listed on the prospectus as 5% shareholders include General Catalyst, Sequoia, Accel and Oak.  Other venture capital investors include Gold Hill Capital, Norwest Venture Partners and Trident Capital.  AOL is also an investor in the company. 

Mark Andreessen, co-founder of Netscape and venture capitalist at Andreessen Horowitz, was recently interviewed at the Fortune Brainstorm Tech conference in Aspen, CO.  The interview covers a wide range of topics including the $100 million Series A investment made by Andreessen Horowitz in GitHub, the environment for taking a company public and being a public company, public tech sector valuations, and current innovations in technology.  The interview is well worth a read.  Here's the link:   http://tech.fortune.cnn.com/2012/07/16/marc-andreessen-transcript/

Renowned venture capitalist Vinod Khosla, of Khosla Ventures and previously of Kleiner Perkins Cauflied & Byers, recently contributed a guest post to the New York Times Bits section, warning entrepreneurs against building a company with the main goal of being acquired.  This focus is the antithesis of the Silicon Valley culture, and is more of a mercenary, Wall Street type of mentality.  The Silicon Valley way of building successful businesses is by missionaries, those founders that believe in a vision and execute on that vision.  If an attractive opportunity arises to be acquired during this process, then that's fine, but it should not be the focus.  An interesting perspective from an insightful venture capitalist.  Here's the link:   http://bits.blogs.nytimes.com/2012/07/13/khosla-the-silicon-valley-vision/

There are two recent Forbes articles that are food for thought for entrepreneurs.  "5 Sure Signs A Startup Will Succeed" and "5 Sure Signs That a Good Startup is Going Bad" offer two views of startups.  The first offers five signs for success:

1. Has validated customers
2. Shows a strategic purpose
3. Is cash conservative
4. Operates with transparency
5. Communication

I agree with the above, and would add leadership to the list.  To me, leadership is a combination of installing an exceptional team (starting with management and board), articulating a vision, and then providing an environment that is conducive to success.  Leadership overlaps with the elements of #4 and #5 above.

The second offers five signs that a startup is going bad:

1. A switch to survival mode
2. Big bad investor interference
3. Misunderstood pivots
4. Troubling talk around the water cooler
5. Lack of communication from the top

Links:
5 Sure Signs A Startup Will Succeed:  
http://www.forbes.com/sites/cherylsnappconner/2012/07/12/5-sure-signs-a-startup-firm-will-succeed/ 
5 Sure Signs That a Good Startup is Going Bad:  
http://www.forbes.com/sites/martinzwilling/2012/06/02/5-sure-signs-that-a-good-startup-is-going-bad/ 

Four venture-backed companies are on deck to price their initial public offerings next week.  They are:

• Durata Therapeutics, a pharmaceutical company backed by Canaan Partners, Domain Associates, New Leaf Venture Partners and Sofinnova Ventures;
• Fender Musical Instruments, the maker of Fender guitars backed by Weston Presidio;
• Kayak, the travel search engine backed by Accel, General Catalyst, Gold Hill Capital, Norwest Venture Partners, Oak Investment Partners, Sequoia Capital and Trident Capital; and
• Palo Alto Networks, the Internet firewall security company backed by Globespan Venture Partners, Greylock, Jafco Ventures and Sequoia Capital.

How the rest of the summer may depend on the pricing and performance of these IPOs.  I'll be watching them with interest.

Here's a link to a Wall Street Journal article discussing the IPOs:  
http://online.wsj.com/article/BT-CO-20120713-711226.html 

Two California cities, Stockton and Mammoth Lakes, have filed bankruptcy in the past several weeks.  Another California city, Vallejo, recently emerged from bankruptcy.  San Bernadino has authorized a bankruptcy filing.  In the New York Times article "Bankruptcy in California Isn’t Seen as a Trend," the bankruptcies of these California cities isn't having a big impact on the municipal bond market and is not seen as a national trend.  The issues confronting California cities include falling revenue, fiscal mismanagement (or over-optimistic financial planning), and rising pension and healthcare costs.  Here's the link:  http://www.nytimes.com/2012/07/13/business/bankruptcy-in-california-isnt-seen-as-a-trend.html?_r=2 

Legendary venture capitalist Mike Moritz, who led Sequoia Capital's investments in Yahoo!, Google and PayPal, has pledged £75 million (~$116 million) to Oxford University to establish scholarships for low-income students.  Moritz recently announced that he was stepping back from some of his management duties at Sequoia Capital due to an incurable disease.  I applaud his spirit of giving and wish him all the best in the future.

Links to articles:
Forbes:  
http://www.forbes.com/sites/ryanmac/2012/07/12/billionaire-venture-capitalist-michael-moritz-pledges-115-million-to-oxford/
The Wall Street Journal:  
http://online.wsj.com/article/SB10001424052702303644004577521003926080824.html 
The Oxford Student:   
http://oxfordstudent.com/2012/07/12/record-donation-from-oxford-alumnus-to-fund-300m-scholarship/ 

San Bernadino, California, has voted to file for bankruptcy.  San Bernadino, a city of roughly 210,000 residents, is located about 65 miles east of Los Angeles.  It will become the third California city to file for bankruptcy this year, following Stockton and Mammoth Lakes.  According to the city's report on the problem, the insolvency is due to a variety of issues including:

• Accounting errors
• Deficit spending
• Lack of revenue growth; and 
• Increases in pension and debt costs.

Links to articles on the bankruptcy:

San Bernadino Sun:  http://www.sbsun.com/ci_21044462
Los Angeles Times:   
http://latimesblogs.latimes.com/lanow/2012/07/san-bernardino-bankruptcy-only-150k-bank-accounts.html 
Reuters:  http://www.reuters.com/article/2012/07/11/us-sanbernardino-bankruptcy-idUSBRE86A05320120711 

Link to the budget analysis report by the City of San Bernadino:  
http://www.ci.san-bernardino.ca.us/civica/inc/displayblobpdf2.asp?BlobID=13757 

Rob Go, a co-founder and partner of NextView Ventures, has an interesting post on his blog "Why Do VC's Have Ownership Targets? And Why 20%?"  In this post, he explores why venture capital firms target 20% - 30% ownership in their portfolio companies, and whether that metric makes sense for all fund sizes.  In his post, he indicates that while a 20-30% ownership stake in a portfolio company may be necessary to generate a meaningful return for larger funds, smaller funds may be able to generate meaningful returns from smaller ownership positions. 

While I agree with Rob's post, I would add that a larger ownership stake brings some additional benefits, such as possibly being the lead investor in a round (which means the ability to negotiate terms), obtaining a board seat (versus observer rights), and having a larger role in planning and negotiating future financing rounds and exits.

Here's a link to his post:  
http://robgo.org/2012/07/09/why-do-vcs-have-ownership-targets-and-why-20/
 

Tyler Newton, a Partner and Research Director for private equity firm Catalyst Investors, has posted an interesting piece on Fortune's From the Crowd commentary site.  In his post "5 Questions Every Private Equity Investor Needs To Ask," Newton discusses five key strategic questions that private equity investors should ask about their portfolio companies on a regular basis.  Worth a read.  Here's the link:   http://finance.fortune.cnn.com/2012/07/09/5-questions-every-private-equity-investor-needs-to-ask/

Fender Musical Instruments Corp. has set the expected price range for its initial public offering.  According to its latest S-1/A registration statement filed with the SEC, there will be 10,714,286 shares of common stock sold in the IPO at an estimated price range of $13.00 to $15.00 per share, for an IPO of $160.7 million at the top end of the range.  Fender is planning to sell 7.1 million shares in the offering, and private equity firm Weston Presidio is planning to sell 3.6 million shares in the offering, and up to another 1.6 million in the over-allotment option, if it is exercised.  At $14.00, the midpoint of the pricing range, the IPO market cap would be $369 million.

JP Morgan is the lead left book-running manager of the offering, and William Blair is the joint-book running manager.  Baird, Stifel Nicoluaus Weisel and Wells Fargo are co-managers of the offering.

Link to Fender's latest S-1/A registration statement on file with the SEC:  
http://www.sec.gov/Archives/edgar/data/767959/000119312512296698/d293340ds1a.htm
 

Kayak, the online travel website, has set its expected terms for its initial public offering.  The company plans to issue 3.5 million shares with an expected price range of $22.00 to $25.00 per share for an offering of $87.5 million at the top of the range.  Kayak originally filed for its IPO in November of 2010 and has previously postponed its offering after Facebook's IPO performed poorly in its debut.

Kayak may issue additional shares in connection with the IPO, some as part of a private placement to existing shareholders, and others as part of an automatic issuance if the IPO price is less than $27.00 per share.  At an IPO price of $21.50, up to 2.5 million additional shares may be issued through the private placement and automatic issuance.  At an IPO price of $21.50, the mid-point of the range, and assuming all of the private placement shares are issued, there will be38.95 million shares outstanding, giving the company an IPO market cap of $837 million.

All of the IPO shares are being issued by the company - there are no selling shareholders.  The company will have two classes of stock outstanding after the IPO, Class A common and Class B common.  The Class B common will be held by insiders and will have super voting rights of 10 votes per share.  The company plans to list on NASDAQ with a ticker of KYAK.

Morgan Stanley is the lead-left book-running underwriter on the deal, and Deutsche Bank is the joint-book-running manager.  Piper Jaffray, Stifel Nicolaus Weisel and Pacific Crest Securities are co-managers on the IPO.

Venture capital investors listed on the S-1/A as 5% shareholders include General Catalyst, Sequoia, and Accel.  Other venture capital investors include Gold Hill Capital, Norwest Venture Partners and Trident Capital.  AOL is also an investor in the company.

Link to Kayak's latest S-1/A registration statement:  
http://www.sec.gov/Archives/edgar/data/1312928/000119312512296709/d117777ds1a.htm

Link to my prior post on Kayak:  
http://www.allenlatta.com/1/post/2012/5/kayak-delaying-ipo-again.html
 

Biotechnology venture capital investing is a unique animal.  Impressive returns can be obtained, but there are attendant risks: uncertain and lengthy FDA approval process; long investment holding periods for investments; reimbursement issues; difficult IPO environment; and the rise of milestone payments in M&A deals.  Peter Johann of NGN Capital discusses the Biotech venture investing environment, including IPOs, M&A, Private Investments in Public Entities (PIPEs), and more, in an interview with the Jutia Group "Follow Venture Capital to Big Gains in Biotech: Peter Johann."  The interview gets a bit technical towards the end, but overall it's an interesting look at Biotech venture investing.  Here's the link:   http://jutiagroup.com/20120705-follow-venture-capital-to-big-gains-in-biotech-peter-johann/

BlackRock has announced that it is acquiring SwissRe's private equity fund-of-funds business.  In the past few years, there has been an ongoing consolidation among private equity fund-of-funds.  Other private equity fund-of-funds that have been acquired include:

• Alpinvest - acquired by The Carlyle Group in 2011
  
• Parish Capital - acquired by StepStone in 2011
• Gartmore and Hermes merged their funds-of-funds businesses in 2010
• HRJ Capital - acquired by Capital Dynamics in 2009
  

I believe that the consolidation will continue among these large, generalist private equity fund-of-funds businesses.  This is due to a number of factors, including regulatory changes forcing financial institutions to reduce their private equity exposure, and a reduction in commitments to the private equity industry overall.  

However, I believe specialist funds-of-funds will continue to see robust demand.  Specialist funds-of-funds include those focused on technology, venture capital, emerging markets, small-to-mid-market buyout and small funds.  In my opinion, these specialist funds-of-funds will continue to thrive providing these focused programs as these programs are difficult to create in-house (due to the expertise and access required) and are also difficult to offer effectively as part of large PE fund-of-funds (as they are often too small a component of the overall business).

Links to articles:

Reuters article on the SwissRe sale to BlackRock:
http://www.reuters.com/article/2012/07/03/swissre-blackrock-idUSL6E8I33EK20120703

Bloomberg article on Alpinvest deal:  
http://www.bloomberg.com/news/2011-01-26/carlyle-group-agrees-to-buy-dutch-pension-fund-manager-alpinvest-partners.html

Press release regarding Parish deal:  
http://www.businesswire.com/news/home/20111130005435/en/StepStone-Group-Acquires-Parish-Capital 
 
FT article on Gartmore-Hermes merger:  
http://www.ft.com/cms/s/0/473c6a84-41ac-11df-865a-00144feabdc0.html#axzz1zlmKfzF5 

Press release on HRJ deal:
http://www.capdyn.com/newswriter_files/Media-Release-CapDyn-HRJ-closing-EN-Jul-2009.pdf 

The Reuters article "In IPO Capital of the World, Western Banks Go Hungry," highlights Shenzen's meteoric rise in the rankings for initial public offerings.  While Shenzhen's IPO market is currently a local market for local participants, this may change as China is planning to spend $45 billion to create a financial hub in Shenzhen.  According to the article, this is part of a drive to internationalize the yuan, deepen ties with Hong Kong and establish a financial market on par with New York or London.  Here's the link:   http://www.reuters.com/article/2012/07/02/us-china-shenzhen-ipos-idUSBRE86108U20120702

The Wall Street Journal reported yesterday that the global IPO market saw its fourth consecutive quarter of fewer initial public offerings.  According to the article "Global IPO Market Keeps Shrinking," there were 201 total IPOs globally in the second quarter of 2012, which is less than half of the 428 IPOs in the second quarter of last year.  The downward trend is attributed to:

• The credit crisis in Europe;
• Concerns over slowing growth in China; and 
• Signs that the US economy may be losing steam.

Here's the link:  
http://online.wsj.com/article/SB10001424052702304830704577497062475691348.html