Here's a link to a presentation on the China startup environment:  http://www.slideshare.net/bowei/the-china-startup-report-a-15min-crash-course-by-bowei-gai which was prepared by Bowie Gai.  Bowei Gai is a Chinese-born, American-educated entrepreneur who co-founded CardMunch, Inc. which was acquired by LinkedIn in January 2011.  He recently spent time in China researching the startup environment and I believe that his presentation is pretty insightful.  

A recent article in the Financial Times, "Venture Capitalists Count Costs of EU Diktats to Funds" discusses the impact of regulation, primarily Basel III and Solvency II, on investment in VC funds by pension funds, insurers and banks.  Here's the link (behind firewall):  http://www.ft.com/intl/cms/s/0/6440741e-ff2d-11e0-9769-00144feabdc0.html#axzz1cPLr2DFB.  

The article indicates that investment in European VC funds has fallen since the regulations have been implemented, but adds that other factors, such as poor returns for average funds and long holding periods, may have compounded the problem.  The article then discusses proposed regulations that might ease the problem.  Overall, I think this is a good read.

I'm in the midst of reading "Steve Jobs", the authorized biography by Walter Isaacson and have found it to be, so far, a fascinating read of a visionary, complicated man.  There have been a plethora of articles on Steve Jobs in the press over the past several weeks, but in the past couple of days a few articles have really caught my eye.

The first is an opinion column by Walter Isaacson in the New York Times entitled "The Genius of Jobs".  To me it is a good glimpse of the tone of the biography and well worth a read.  Here's the link:  http://www.nytimes.com/2011/10/30/opinion/sunday/steve-jobss-genius.html?pagewanted=all

Another is his sister Mona Simpson's eulogy for her brother Steve that was delivered on October 16 at the memorial service at the Stanford chapel.  Very touching.  Here's the link:  http://www.nytimes.com/2011/10/30/opinion/mona-simpsons-eulogy-for-steve-jobs.html?pagewanted=all

Jean-Louis Gassée, who worked with Steve at Apple and who is featured in the Isaacson biography, writes his own review entitled "Steve's Bio: A Personal Perspective", which I found to be enlightening.  It can be found here:  http://www.mondaynote.com/2011/10/30/steve%E2%80%99s-bio-a-personal-perspective/

Finally, I find Steve's commencement speech at Stanford University at 2005 to be incredibly motivational.  Here's the link:  http://www.youtube.com/watch?v=UF8uR6Z6KLc

California is now one of 11 states nationwide that offer online voter registration.  Good discussion at TechCrunch:  http://techcrunch.com/2011/10/28/california-finally-approves-online-voter-registration-sadly-its-just-1-of-11-states-to-have-done-so/.

The Wall Street Journal reports today that investor appetite for Groupon's IPO is strong and that people close to the IPO speculate that the IPO price range may even be raised.  Here's the link (behind subscription firewall):  http://online.wsj.com/article/SB10001424052970204505304577004240932059400.html?mod=WSJ_Tech_INTL_LSMODULE

Interesting article on growth economics, innovation and entrepreneurship by Tom Kane that appeared recently in the American.  Here's the link:  http://american.com/archive/2011/october/macro-vs-growth.  In the article, Mr. Kane discusses the differences between macroeconomics, which is the focus of our politicians in Washington DC, and growth economics, which deals more with long-term trends in output per capita.  Growth economics deals with entrepreneurship and innovation - important topics for the US economy.

Henry Blodget of Business Insider has a very interesting article analyzing the IPO valuation of Groupon.  Here's the link:  http://www.businessinsider.com/how-much-is-groupon-worth-2011-10?op=1.  I think this is article serves as a very good basis for discussion of IPO valuation.  I also agree with his statement:  

"So don't believe anyone who tells you they know what Groupon's worth. They don't.  All they know is what their estimate is of what Groupon is worth. And, unfortunately, the range of "reasonable" estimates of what Groupon (or any stock) is worth is wide enough to fly a 787 through."  

Valuation is a very subjective analysis and is a little bit art and a little bit science.  We won't know Groupon's IPO valuation until it actually prices.

eWeek.com reports that Google has paid over $1.4 billion for 57 acquisitions through the first nine months of 2011.  Here's the link:  http://www.eweek.com/c/a/Search-Engines/Google-Paid-Over-14B-for-57-Acquisitions-in-2011-822213/

This includes $676 million for ITA Software (flight software), $151 million for Zagat (restaurant reviews) and $114 million for Daily Deals (daily deals, naturally).  According to the article, the 57 acquisitions in the first nine months of this year compares to 48 acquisitions for the entire year last year.  So what does the fourth quarter hold for Google?  I'll be curious to find out.

VC firm Andreessen Horowitz is in the early stages of raising a $900 million fund, according to Uncrunched.  Here's the link:  http://uncrunched.com/2011/10/26/andreessen-horowitz-raising-huge-new-900-million-fund-iii/.  The posting indicates that the firm raised its first fund of $300 million in 2009, its second fund of $650 million in late 2010, and an annex fund of $300 million in mid-2011.  This means the firm has raised an impressive $1.25 billion in under 3 years.

Two articles from Reuters on the Groupon IPO.

The first article focuses on Groupon's 4,800-strong salesforce and CEO Andrew Mason's statement that he plans to replace the bottom 10% of the salesforce.  The link is here:  http://www.reuters.com/article/2011/10/26/groupon-salesstaffcuts-idUSN1E79P0YQ20111026.  In my view, replacing poor performing salespeople only makes sense, but it's unclear to me whether this is a new policy or an existing policy that's being highlighted.

The second, and more interesting article in my view, focuses on competition in the daily deals space and barriers to entry.  Here's the link:  http://www.reuters.com/article/2011/10/26/markets-stocks-ipos-idUSN1E79P2DZ20111026.  My view is that three is significant competition in the space and very low barriers to entry.  The combination of these factors could lead to margin compression.  In my experience, this is similar to a distribution business model, and even though margins may be strong now, over the long term, margins may be pressured.  On the other hand, in the near term, Groupon has created a recognizable brand and an overwhelming market presence.  This suggests to me that in the near term, the business model may be fine, but in the longer term may come under pressure.

According to the second article, the IPO should price on Nov. 4.  I'm curious to see how it prices and trades in the aftermarket.

A recent post by Gregory Roth on PEHub.com indicates that Carlyle is in no hurry to go public.  Here's the link:  http://www.pehub.com/123747/breaking-carlyle-co-founder-says-firm-may-stay-private/.

KKR, Apollo and Blackstone have all gone public.  Blackstone has been public since 2007, KKR since 2010 and Apollo since earlier this year.  The stock prices for all three are down significantly from the April time frame.  Given the current volatility in the market and the drop in valuations of its peers, Carlyle's strategy seems sound to me.

TechCrunch reported today that private stock transactions totaled $435 million in the first three quarters of this year, up 73% over the same period last year.  Here's the link:  http://techcrunch.com/2011/10/26/private-stock-transactions-up-73-percent-this-year-on-secondmarket/

What I found interesting was that former employees made up the largest group of sellers, at 64.5%, followed by existing employees at 16.9%, investors at 8.4%, founders at 3.6%, and "other" constituting the remainder.  What interested me here was not that former employees were the largest group, but size of the differential between former employees and existing employees/founders.

The article also lists the top 10 "most watched" companies on its service, which includes Facebook, Twitter, Groupon, Zynga and Foursquare.  There are also listings of "Rising Stars" and "Newbies" which contain a number of companies that I was not familiar with, but will now certainly watch.

Here's a link to a fun video by people endorsing Ed Lee for Mayor of San Francisco:  http://www.youtube.com/watch?v=fbdd_Fasz0k 
Here's a TechCrunch article discussing the video:
http://techcrunch.com/2011/10/25/ron-conway-marissa-mayer-mc-hammer-and-others-endorse-sf-mayoral-candidate-ed-lee-in-amazingly-silly-video/.  According to the article, the video was financed by Ron Conway and Sean Parker, and features Brian Wilson of the SF Giants, former SF 49er Ronnie Lott, will.i.am of the Black Eyed Peas and former SF mayor Willie Brown, among others.Note:  this is not an endorsement of Ed Lee, just a link to a fun political video.

Interesting article on the erosion of the American Dream from Nin-Hai Tseng of Fortune Term Sheet.  Here's the link:
http://finance.fortune.cnn.com/2011/10/24/american-dream-is-gone/

Today's SF Chronicle has a good interview with Google Ventures Managing Partners Bill Maris.  Here's the link:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/10/22/BULI1LKMD0.DTL

Groupon has amended its S-1 with a pricing range of $16 - $18 per share, link to SEC website here:
http://www.sec.gov/Archives/edgar/data/1490281/000104746911008605/a2205238zs-1a.htm

Bloomberg Businessweek has a good analysis of the pricing and valuation here:
http://www.businessweek.com/ap/financialnews/D9QGLA6O0.htm

See the Groupon IPO roadshow presentation here:
http://www.retailroadshow.com/sys/launch.asp?qv=7519056762608856&k=61094248141

And see a tongue in cheek, slide by slide commentary of the IPO roadshow here:
http://jackp27.blogspot.com/

A critical look at Groupon's revenue growth:
http://blog.yipit.com/2011/10/21/the-chart-that-will-scare-away-many-groupon-investors/

There is a review in the Atlantic of the movie Margin Call: http://www.theatlantic.com/entertainment/archive/2011/10/margin-call-a-financial-crisis-film-thats-on-the-money/247116/.

I saw this movie, and was a little disappointed.  The movie focuses on the drama of a firm dealing with its exposure to Mortgage-Backed Securities, but only deals with MBS at a very high and vague level.  Perhaps the subject matter is too complex to adequately explain in a movie, but without understanding more about the issue, the movie lacked substance to me.  And maybe I went to the movie with expectations that were too high, given the positive reviews I read and the great cast.

So set your expectations lower and enjoy the film!

Dow Jones VentureSource has released third quarter 2011 venture capital investment statistics.  Link:  http://www.dowjones.com/pressroom/releases/2011/10212011-USVC-0164.asp

According to the press release, $8.4 billion was invested in 765 deals for US-based venture capital-backed companies.  On an annualized basis that equates to over $34 billion being invested into venture-backed companies.  While total investment in 2011 will likely be below $32 billion, the trend give me pause.  In my experience, when the venture industry raises and invests too much money in a given year, performance suffers.  The question then becomes, how much investment is too much investment?

This cluttered chart shows dollar amount invested (in billions of dollars) in US deals and number of deals in a given year (data from VentureSource).

As the chart shows, at the peak of the internet bubble in 2000, there was over $94 billion invested in over 6300 deals.  The returns from funds formed in 2000 (known as the 2000 vintage year) are very poor.  Cambridge Associates reports that 2000 vintage funds have a median IRR of (3.14%) and average IRR of (3.35%) as of June 30, 2011.

A warning sign goes off in my head when annual venture investment is greater than $30 million.  At above a level of $35 million, my view is that there is a danger that too much money is chasing deals, leading to overpaying for deals (higher valuations) or funding too many companies in a given sector, or both.  While the industry is a bit away from the $35 billion level, this is something I will watch carefully.

A report was released today by the IPO Task Force with recommendations on how to revitalize the IPO market in the US.  The report, slides and press release can be found at the NVCA's website, www.nvca.org.  Basically, there are four recommendations:

1. Allow Emerging Growth Companies to transition into full compliance with certain SEC reporting and compliance regulations (such as Sarbanes-Oxley) over a period of time.
2. Improve the Availability and Flow of Information for Investors.  This would be accomplished by increasing the availability of research coverage to Emerging Growth Companies, clarifying safe-harbor provisions, eliminating certain research quiet periods, easing restrictions on analyst communications and allowing confidential filing of IPO registration statements.
3. Lower the capital gains tax rate for investors who purchase shares in an IPO and hold them for a minimum of two years.
4. Industry Education Efforts.  Educate Emerging Growth Companies on the IPO process, from choosing a balanced investment banking syndicate, having the Emerging Growth Company more involved in the IPO allocation process in order to obtain an optimal mix of investors, and improving investor communication.

In general, I applaud this report.  Most of the recommendations are well-reasoned and welcomed.  However, in my opinion, there are a couple of recommendations with which I respectfully disagree.  First, the report recommends easing the financial statement disclosure requirements in the IPO registration materials.  In my prior experience as an investment banker, these regulations didn't hinder the IPO process in the past, and these financial disclosures provide useful financial information to investors.  Second, the report proposes to make the initial S-1 filing confidential, similar to the treatment that foreign issuers are afforded.  In my experience, having an S-1 be a public document never served as a disincentive or hindrance to going public.  My thinking is that this provision is to enable the US IPO market to have a more even playing field with international markets, but again, in my experience this hasn't been a problem in the past.

All in all, I believe this is an excellent report and should be strongly considered by policy makers.

The Wall Street Journal today reported that Groupon is moving forward with its IPO, albeit at a reduced valuation to what had been previously expected.  Here's the link (behind firewall):  http://online.wsj.com/article/SB10001424052970204618704576641500783767700.html?KEYWORDS=groupon

Based upon my prior posts about IPOs, the reduced valuation comes as no surprise to me, for a few reasons.  First, the stock market has been volatile lately, which typically has a negative impact on valuations.  Second, Groupon has had a couple well-publicized problems with the SEC - the restatement of revenue, the controversy over its unique accounting metric, and the leaked employee memo - which have generated negative press.  Third, the company's business model has also been under scrutiny.

It will be interesting to watch how the IPO does...

Mary Meeker was a leading Internet equity research analyst at Morgan Stanley for many years before she joined Kleiner Perkins Cauflied Byers in 2010.  Ms. Meeker's views on the Internet are widely followed.  She gave a talk at the Web 2.0 Summit in San Francisco today on Internet Trends.  Her presentation can be found here:  http://www.kpcb.com/internettrends2011

There are some very interesting slides in this presentation, including a few on the US economy.  This presentation is definitely worth taking a look.

My firm, Campton Private Equity Advisors, tracks US venture-backed IPOs listing on US exchanges and prepares a quarterly report which is distributed to venture capitalists.  In the third quarter of 2011, there were only five venture-backed IPOs of US companies on US exchanges, with four of these occurring in July and one occurring in August.  There were no venture-backed IPOs in September.  I believe that the IPO window shut due to increased volatility in the stock market (VIX went from under 20 in July to over 40 in September) and concerns over the global economy.

I'm hopeful that the IPO window will open again soon.  There are many interesting companies that have filed for their IPOs, and several will be ready to go public as soon as market conditions warrant.

If you are a venture capitalist and would like to request a copy of our most recent report, please contact Campton Private Equity Advisors at info@camptongroup.com.

Bill Gurley of Benchmark Capital posted an article on his website this past May discussing the limitations of using a price / revenue multiple as a basis for company valuation.  Here's a link:  abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/.  I agree with much of what Bill says in his article and think it is good read for anyone interested in valuation.

In an Op-Ed piece that appeared yesterday on WSJ.com, Steve Malanga outlines how California is driving away jobs.  Interesting read and it adds to the discussion of articles from Michael Lewis and the Economist which are discussed in an earlier blog post.  Here's the link:  online.wsj.com/article/SB10001424052970204422404576594890367486316.html?KEYWORDS=california

An article by Dawn Kamamoto entitled "5 Warning Signs for IPOs" appeared yesterday on The Motley Fool website.  Here's the link:  http://www.fool.com/investing/general/2011/10/14/5-warning-signs-for-ipos.aspx.  In this article, the author lists 5 warning signs that there may be issues for an upcoming IPO:

1. Restatement of revenues in excess of 25%;
2. A new CFO is brought in prior to the IPO;
3. A change in auditors;
4. A change in lead underwriters; and
5. A change in lawyers.

As a former investment banker, these items seem pretty obvious to me, but I applaud the article for reminding people that IPOs are risky and one should pay close attention and really research a company and its prospects before investing in an IPO.  Based upon my experience, I would add a few more items that may signal areas of concern for an IPO:

1. Company-specific accounting metrics.  If a company creates an accounting metric and asks potential investors to focus on that metric, it usually means that standard metrics do not paint the company in the most favorable light.  Rapidly growing companies may generate significant losses as sales and marketing expenses ramp up.  Some company-specific metrics are useful, while others are not.  All in all, one should be wary of company-specific accounting metrics and research the story behind these metrics.
2. High percentage of selling shareholders.  As the time from initial venture investment to IPO has grown longer, it is more common to see existing shareholders sell in an IPO.  Insiders that don't sell in the IPO are usually prohibited from selling shares for a lock-up period of 180 days after the IPO.  However, in my view, it is better to have no selling shareholders in an IPO, which signals to the market that the insiders have faith in the after-market performance of the company's stock.
3. Two classes of shareholdings.  In many companies (such as Google) there exists two classes of common stock:  regular common stock (Class A) held by public investors, and super-voting common stock (Class B) held by insiders.  The purpose of super-voting common stock is to allow insiders (usually founders) to maintain control over a company after it goes public.  While in many cases this can be a good and stabilizing feature, it really depends on the company and the people who will maintain control.

These comments are in addition to the fundamental research one should conduct on a company that is in registration for its IPO.  Nothing can substitute for in-depth research on a company prior to investment.