There's a buzz around the new Spread Pricing Liquidity Act
that was introduced to Congress last week by Congressman David Schweikert (R-AZ). Essentially, the act allows public companies that have a public float of $500 million or less and an average trading volume of less than 500,000 shares may have their shares quoted and traded in increments of $0.05 or $0.10, depending on average trading price. According to Rep. Schweikert's press release
, "[t]he bill is in response to overwhelming evidence that wider ticks for small-cap companies will stimulate liquidity, encourage capital formation, and grow jobs. The SEC has been inactive on this issue."
Dan Primack, of Fortune's Term Sheet blog, reported
on the bill and indicated that the change could "affect more than 3,000 companies currently listed on the NASDAQ and NYSE, with hopes that the wider 'ticks' would encourage coverage that has grown progressively sparse since 'decimalization' was introduced in 2001."Felix Salmon of SeekingAlpha has mixed views on the Act. He points out moving to a quote in increments of $0.05 and $0.10 will be to the detriment of small investors and to the benefit of the brokerage houses. He also points out that there is no guarantee that the profits generated by the brokerage houses will be reinvested into deeper coverage of small-cap companies.
In my opinion. I think the bill is an interesting step to address one of the many issues confronting small-cap stocks. I don't believe this bill is a panacea, but it seems like it would encourage brokerages to undertake research on smaller public companies. This in turn could help pave the way for more, and more successful, initial public offerings of smaller companies.
Text of HR 1952: http://www.govtrack.us/congress/bills/113/hr1952/text
Rep. Schweikert's press release: http://schweikert.house.gov/press-releases/rep-schweikert-introduces-tick-size-bill/
Dan Primack's article: http://finance.fortune.cnn.com/2013/05/13/small-cap-stocks-decimalization/
Felix Salmon's article: http://seekingalpha.com/article/1443041-why-dedecimalization-is-a-bad-idea
"4 Things Your Startup Needs to Attract Venture Capital
" which appeared today on Mashable, is short and to the point. Author Elisha Hartwig identifies four things startups need to attract venture capital:
- A unique idea with high barriers to entry. Included in this are ideas that can't be easily replicated and the technology can be patented.
- A compelling value proposition. The product/service must have high customer service, be scalable, must address a large market that is ripe for disruption, and must fill an unmet need.
- Market traction. Show the market opportunity is sizable and that there is early customer adoption.
- Having the right team in place. Management must have domain expertise, the right skill set and ability to evolve as quickly as the market does.
I would add reasonable valuation expectations. In my experience, many entrepreneurs have inflated valuation expectations that make it hard for VCs to invest.
It's a good article and worth a read. Here's a link: http://mashable.com/2013/05/06/startup-venture-capital/
In "Venture capitalists rethink big bets on China
", which appeared yesterday on MercuryNews.com, the article discusses a pull-back in investing in China by venture capitalists. Among the reasons given:
- Few and poor performing IPOs of Chinese companies, both in China and in the US;
- Uncertainty about the Chinese economy;
- The rise of "copycat" companies:
- Too much capital chasing too few deals;
- China's opaque regulatory environment;
- Intellectual property issues;
- Arcane laws on foreign investment in China;
- Complex ownership structures; and
- Uncertain tax environment.
The article does point out the huge potential of the Chinese market, and indicates that both mobile and cleantech are among the promising areas in China.
Here's the link: http://www.mercurynews.com/business/ci_23023790/venture-capitalists-rethink-big-bets-china
The unemployment rate recently dropped to 7.6 percent, which on its face sounds good. However, the economy only added 88,000 jobs in March, well below expectations. Given this dichotomy, I wanted to add a few of my own thoughts on unemployment rates, employment and the participation rate.Official Unemployment Rate (U-3)
. In my opinion, focusing on the official employment rate as issued by the Bureau of Labor Services (BLS) provides an incomplete (and potentially misleading) picture of the unemployment situation. This headline rate is known as the U-3 unemployment rate, and focuses on people out of work that have actively sought work in the past four weeks. According to the BLS
: "Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work." It ignores people that have stopped looking for work or people that are working part-time but who want to work full-time. The chart to the right shows the U-3 unemployment rate from 2007 to present, with the peak of 10% unemployment during the recent recession (data from the BLS website).U-6 Unemployment Rate
. The U-6 unemployment rate is based on the U-3 unemployment rate and adds people who are "marginally attached workers" and part-time workers who want to work full-time but cannot due to economic reasons. This broader measure of unemployment captures underemployed workers, but still excludes people who have given up on looking for work and so are not considered to be part of the workforce. This could be people who have retired or have simply given up looking for work because they couldn't find a job. This U-6 measure of unemployment was 13.8% in March 2013, down from a peak of 17.1% in October 2009. This data is not easy to find on the BLS website, but here's the link: http://www.bls.gov/webapps/legacy/cpsatab15.htmEmployment
. The BLS also publishes employment data, with the non-farm payroll employment data being the most commonly used. For example, the recent headlines that the economy added 88,000 jobs refers to non-farm payrolls (here's a link to the recent BLS announcement: http://www.bls.gov/news.release/empsit.nr0.htm
). According to preliminary numbers from the BLS, non-farm payroll employment reached 135,195,000 in March 2013, up from a low of 129,320,000 in February 2010. Many economists estimate that it takes a monthly increase in employment of at least 150,000 for the workforce to keep up with population growth.Labor Force Participation Rate
. The labor force participation rate measures the percentage of the labor force that is working or actively looking for work. The labor force in the US is defined by the BLS as people aged 16 and over. According to the BLS, the Labor Force Participation rate fell to 63.3% in March 2013, down from a high of 67.3 in early 2000. The Labor Force Participation Rate has trended down since 2000, but the pace of decline picked up in the latest recession. There's a good article on the blog Calculated Risk discussing the Labor Force Participation Rate - here's the link: http://www.calculatedriskblog.com/2013/04/labor-force-participation-rate-update.html?
. Here's a good discussion on Seeking Alpha on how declining labor force participation could actually be good for workers: http://seekingalpha.com/article/1330171-could-there-be-a-silver-lining-to-declining-labor-force-participation?Payroll to Population (P2P) Rate. Another measure of employment (or unemployment) is the Gallop US Payroll to Population Rate (P2P). This metric "is an estimate of the percentage of the U.S. adult population aged 18 and oder who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted." (Source: http://www.gallup.com/poll/161624/payroll-population-rate-stagnant-march.aspx.) According to Gallup, the P2P was 43.4% in March 2013, unchanged from 43.3% in February 2013. Another similar measure is the employment-to-population ratio (aka employment-population ratio).When I'm trying to understand unemployment, these are the measures that I use. So for example, the way I read the current release is that the drop in the official unemployment rate is misleading. The economy only added 88,000 non-farm jobs when 150,000 new jobs are needed just to keep up with population growth. So the pace of hiring has slowed down. Also, the decline in the participation rate tells us that more people are leaving the work-force, whether by retirement or going back to school (a popular route for younger workers) or other reasons. So in all, despite an improving official unemployment rate, the economy has taken a step back.
Thoughts? Please send me a note.
There's a good article on TechCrunch
from Saturday (4/6/2013) that takes a look at how venture capital firms handle succession planning. This is a very important, although often under-analyzed, aspect of the long-term success of a venture capital firm. The article explores how New Enterprise Associates (NEA), Kleiner Perkins Caufield & Byers, Sequoia Capital and Greylock Partners approach succession planning. Here's the link: http://techcrunch.com/2013/04/06/the-next-don-how-vcs-plan-for-the-future/
Glenn Solomon, a partner at GGV Capital
who also has a blog Going Long
, yesterday posted an article on Fortune called "Is your Company IPO ready
" that I found interesting. Rather than focusing on whether a company has a $100 million revenue run rate, which many banks used to use as a metric (along with several quarters of profitability), Glenn identifies three key attributes that the company must have to go public: (1) predictability and visibility; (2) underlying growth potential; and (3) no single points of failure (no significant vulnerabilities). It's a good and useful article.
From my investment banking days at Bear Stearns and CIBC Oppenheimer during the Internet bubble, these points ring true. However, while these may be three key attributes that a company must have in order to go public, they are by no means the only attributes a company must have in order to be ready to hold a successful initial public offering. Other attributes could include a phenomenal management team, differentiation from competitors, strong IP portfolio, impressive and consistent financial performance (for most tech companies this is rapid revenue growth), real cash revenues (no reciprocal agreements), operating in a large, rapidly growing market, sterling reputation, well-developed internal business processes and controls, and on and on. And while a tech company may not need $100 million in current revenue run rate to go public, they should be close (for example, a $20 million revenue run rate won't do it, but if a company has all of the other attributes, perhaps a $70 million revenue run rate might be sufficient). There are a lot of pieces to the puzzle that are required to fit for a company to be ready to go public and have a successful IPO, and the three attributes that Glenn identifies in his article are essential.
Here's a link to the article: http://finance.fortune.cnn.com/2013/02/25/are-you-ipo-ready/
, a principal of Union Square Ventures
, posted yesterday on his blog A VC
his thoughts on "Venture Capital Returns
." Using data from Cambridge Associates, he looks at one quarter, one year and 10 year returns for venture capital compared to DJIA, NASDAQ and the S&P 500.
He notes that the performance of early stage funds is disappointing. For the period ending 9/30/2102, early stage funds have one quarter returns of 1/4%, one year returns of 13.2% and 10 year returns of 3.9% compared to NASDAQ returns of 6.2% (one quarter), 29.0% (one year) and 10.3% (10 year). Early stage investing is hard, he states and asks that entrepreneurs have some empathy for VCs.
One thing I think is important to note is that these numbers are aggregate numbers and are intended to represent the overall industry. Most LPs are looking to invest in top-quartile or top-decile managers, where the alpha achieved by these managers can add 700 to 1000 bps, or much more, to the returns. So yes, early stage venture is hard, but the best managers (and I believe Union Square Ventures to be in this group) will still be able to provide exceptional returns to their LPs.
Here's a link to the post: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html
The recent Businessweek interview "Charlie Rose Talks to Sequoia Capital's Michael Moritz
" is a short but interesting conversation with one of the leading figures of venture capital. One interesting comment he makes in the interview was that it wasn't uncommon for Sequoia to hold investments for 10 years or more, and that it's not uncommon for the partners of Sequoia to own stock for 15 or 20 years. To me this highlights something that many investors in venture capital funds don't truly consider - that the life of a typical venture capital fund can be much longer than the 10 year stated term in the limited partnership agreement. Some funds have changed the term to 12 years, and most funds contain extensions to the initial term of two to four years. Investors in venture capital funds should be aware that the time from the initial capital call to the final distribution can be as long as 15 or 16 years, or even sometimes longer.
Here's the link: http://www.businessweek.com/articles/2013-02-07/charlie-rose-talks-to-sequoia-capitals-michael-moritz