What about Venture Capital?

[lobodelmar]

I work a little bit with vc investors...it seems there is a ton of money and nowhere for it to go... Not only are they raising way too much for the available investments out there, they all seem to be focused on the same investments.

Surprising to me was learning that most vc firms do such little due diligence before they invest. Only a few of the bigger firms really have the research capacity to make sure that their money is going into a serious investment. You would think that anyone making investments in the range of 1 to 10 million in unproven technologies like biotech or IT would certainly want to rake the idea over the financial coals before tossing money at it. Learning that so many of them do not employ people to do that work beforehand was shocking to me. Thoughts?

[stevenstevensteven]

I live in Silicon Valley, and while I have been on hiatus from the tech world for a few years I am thinking about re-entering. It is interesting to see your comment, because I was wondering if we are on the verge of creating another bubble. Obviously, this will nothing on the order of what we saw in the 90's, but when you have VC's competing over too few deal, I'd say that's a recipe for over inflated equity value projections for early stage companies. Certainly, these guys learned their lesson the first time, right?

[jeffolie]

Bank of America is the latest victim of the conceptual incoherence and labyrinthine demands of FAS 133, the U.S. accounting standard for derivatives.

Last year, according to The Wall Street Journal, at least 40 companies had to restate financials because they could not cope with this Byzantine accounting rule.

Warren Buffett has stated that derivatives are weapons of financial mass destruction, due to their incredible leverage. Every year now, we hear of old time banks and new ones going broke in a day or two when a derivatives trade goes south for them. The recent victims are the Chinese petroleum procuring company that lost about $700 million in some air fuel hedges gone wrong. The trader responsible has been arrested, as I recall, and probably going to rot in a Chinese work prison.
I could talk about the Barings collapse, the LTCM collapse, and others.

Credit derivatives rocked by loss at GM finance arm

The discovery of huge hidden losses at General Motors's finance arm have raised fresh fears of bankruptcy at the world's biggest carmaker, sending tremors through the credit derivatives markets. The struggling group asked for a filing delay after admitting to an extra $2bn (£1.1bn) in accounting errors at its finance arm GMAC, raising total losses last year to $10.6bn. The news triggered a sharp spike in the cost of default insurance on GMAC's bonds, rising 75 basis points overnight.

Concern that General Motors may now be sliding towards the brink - linked to an estimated $200bn in credit derivatives - has renewed fears that the over-heated credit swap market could seize up in a crisis.

[JC Ernharth]

There is way too much liquidity out there. On one hand, you have to like that corporate balance sheets have cleaned up, and that there is a lot of cash like this sitting around.

On the other hand, when the U.S. consumer is buried under debt and lacking the self control or the ability (stagnating wages) to save, you have to wonder where the domestic VC opportunities are. B to B only goes so far. Healthcare? For heavens sake -- yes, the boomers are getting older... but limits are limits.

IMO way too many structural imbalances / headwinds loom out there for this to be as secure VC environment. That's not to say there are no opportunities -- only that they are limited, and folks ought to avoid buying into the belief that we are in full-recovery mode. More likely than not, we may have dipped into recession, but for the fact that we now rig GDP, CPI and unemployment to look better than they truly are...

That, and folks need to consider the massive impact of home equity withdrawals to GDP over the last few years in this absurdly low rate / unsustainable borrowing environment..

This is not the time to be complacent...

Stay Vigilant!

[jeffolie]

A new version of venture capital is call "private equity". A private equity fund is a collaboration of funds that directs a private company's or individual's equity, either in the stock market or in real estate. These perform highly leverage buy outs and mergers. These funds have doubled in the last year now reaching $1.6 Trillion.

from NASD: Guidance regarding use of related performance information in sales material for private equity funds.

"...a "private fund" as an investment fund (i) the interests of which are sold through private placements exempt from registration under the Securities Act of 1933, as amended ("1933 Act"), (ii) that are exempt from registration as investment companies under the Investment Company Act of 1940, as amended ("1940 Act"), and (iii) the interests of which are exempt from registration under the Securities Exchange Act of 1934, as amended (the "1934 Act"). You indicate that private equity funds are one category of private funds, as are hedge funds.



You state that private funds are pooled investment vehicles that are only made available to investors that meet the requirements applicable to "qualified institutional buyers" as defined in Rule 144A(a)(1) of the Securities and Exchange Commission ("SEC") under the 1933 Act, "qualified purchasers" as defined in Section 2(a)(51) of the 1940 Act, or "accredited investors" as defined in Rule 501(a) under the 1933 Act. You state that private equity funds are a category of private funds that have certain characteristics that often require investors to invest at the time the fund is initially formed or shortly thereafter, require investors to commit their capital over a long investment horizon, and often prohibit investors from withdrawing their investments except under narrow circumstances. You also note that a private equity fund does not have a performance history prior to its formation, and typically will not have a meaningful performance record during the period it is open to new investors. Accordingly, you note that investors frequently request information regarding a private equity fund manager's prior performance history as part of the investors' due diligence investigation of the private equity fund and its sponsor.

[lobodelmar]

Re: What about Venture Capital?

Hi everyone...I posted this original thread a few months ago...and just saw a few articles if others are interested in VC investments that I thought you might like to see...

VC Investing Hits 4-Year High - Healthcare, IT sectors lead charge, along with renewables: http://www.redherring.com/Article.as...ts+4-Year+High

Q2 2006 VENTURE CAPITAL INVESTING REACHES HIGHEST LEVEL
SINCE 2002 AT $6.3 BILLION http://www.nvca.org/pdf/MoneytreeQ22006.pdf

I'm not sure what this means as a measure of the market, especially in the context of other discussions on this forum...it is interesting that these riskier investments are actually growing during this period of instability in both the economic and political climate...More heads in the sand? The Bush tax cuts having to go somewhere?

[zmas28]

Re: What about Venture Capital?

I work a little bit with vc investors...it seems there is a ton of money and nowhere for it to go... Not only are they raising way too much for the available investments out there, they all seem to be focused on the same investments.

Surprising to me was learning that most vc firms do such little due diligence before they invest. Only a few of the bigger firms really have the research capacity to make sure that their money is going into a serious investment. You would think that anyone making investments in the range of 1 to 10 million in unproven technologies like biotech or IT would certainly want to rake the idea over the financial coals before tossing money at it. Learning that so many of them do not employ people to do that work beforehand was shocking to me. Thoughts?

In reading Marc Faber's book "Tomorrow's Gold" (Dec. 2002 but updated Dec. 2004), he points out that recent spending patterns in the US are evocative of those that preceded the Great Depression, ie high profit margins with minimal or negative real wage growth. Increased consumer spending has been driven by the wealth effect (first from stock market gains, then by those in real estate), rather than from income, possibly leading to the problem of underconsumption or drop in domestic demand.
On the business side, we hear that a number of companies are buying back shares rather than investing in their business. I believe the recent report also indicated smaller business spending than anticipated.
All this would seem to point to a lack of opportunities for money to go. Does this not point to deflationary pressure in the economy?