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Lawsuit Could Expose Whether Top VC Firms Are Actually Good Investments
curtwoodward writes "Venture capitalists like to project the image of wise kingmaker, financial alchemists who have a unique gift for spotting the Next Big Thing. They do not like having anyone see data about their performance, which has been generally lackluster over the past decade. This can be a problem, however, when VCs cash big checks from investors at public pension funds — taking taxpayer money sometimes comes with public disclosure. That's the crux of a court fight happening in California, where the state's massive university system is resisting attempts by the Reuters news organization to decode a complex shell game intended to hide the return data of two giants of Silicon Valley: Kleiner Perkins Caufield & Byers and Sequoia Capital."
every day they are hyping some tiny startup that is a copy cat. a year or two ago it was a new social media start up every week. then after square became popular there were payment startups every other day.
figures i've read before are 7/10 VC investments lose money. 2 return the investment value. and one is a facebook or google returning many times its original investments
Venture capitalists ...financial alchemists who have a unique gift for spotting the Next Big Thing
No, they don't. What they do is invest in many different things that they think may have potential - they spread their bets. Couple that with deals where they get paid first at the ROI they demand (+40%), screwing over the initial founders in the process.
AND they use other people's money while making sure they get a big cut in fees and whatnot because of their "expertise" while giving their investors returns that don't quite warrant the risk they are taking.They, the VCs, can't lose - the founders and the investors take most if not all the risk.
The only thing these guys have is connections to money and a lucky hit or two.
I agree with your second statement while disagreeing with your first.
I would hope that the public is mature enough to understand that investing in alternative asset classes will result in lump, erratic returns – they are designed that way. Many have long lock up periods (10 years) to ensure that the investment managers focus on long term results. Alternative asset classes (VC being a subclass) has been touted as a wonderful thing – the reality has been less rosy. Many used cheap interest rates to leverage up during the good days or other cheap strategies. The good ones are great but there are too many poor ones out there. Owners of a fund have a right to good management and accurate reporting – demand no less.
http://www.economist.com/news/finance-and-economics/21568741-hedge-funds-have-had-another-lousy-year-cap-disappointing-decade-going
People who gamble others' money loathe to disclose depth and depravity of their addiction.
Silence is a state of mime.
Android Package (apk):
Go home. You're Drunk!
Drunk 24/7? I wonder whether this is actually a fledgling machine intelligence that has reached self-awareness and is trying to reach out in the only way it knows how.
Whether or not the returns from private equity are better than the public markets has been controversial for a long time.
However it is well known that other aspects of these markets are undesirable for investors. Lack of disclosure, poor liquidity and negative scaling are some of these.
http://www.economist.com/blogs/freeexchange/2012/09/private-equity
Given the lack of clear benefits and the well-known problems with these funds it's pretty obvious that pension funds should not be invested in these instruments.
Luck.
Really, that's it. All the other less successful VC firms have the same tools of the trade and people that are on average about as good at spotting a winner. The difference is that the successful firms have their 5% bet pay off 10% of the time rather than 0% of the time.
I am officially gone from
It seems more like someone wielding a shotgun in the dark shooting at targets. As long as he's got enough ammo, he will succeed.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
AND they use other people's money while making sure they get a big cut in fees and whatnot because of their "expertise" while giving their investors returns that don't quite warrant the risk they are taking.They, the VCs, can't lose - the founders and the investors take most if not all the risk.
It's not true that they cannot lose. While typically it is not their own money at risk (though sometimes it is), if a VC is unsuccessful with a fund they often find it difficult/impossible to raise money for their next fund. The risks to the VC are typically more long term. If I'm a big pension fund manager investing with a VC fund and I don't receive a return on my investment, I'm not going to invest with that VC again most likely. The VC community isn't a very big one and the people who invest in VC funds typically are pretty well connected. Screw up a VC fund and the VC fund manager can easily find themselves effectively blackballed from future work in the industry.
The only thing these guys have is connections to money and a lucky hit or two.
Connections to money is an extremely valuable thing. You talk about it dismissively but access to capital is difficult to come by. VCs do provide a useful service for a relatively small number of companies but their reputation as kingmakers is somewhat out of proportion to their actual ability to pick winners. Most successful companies do not ever get VC funding. Most of the Fortune 500 got there without a dime of VC money. A few (Google etc) probably wouldn't have gotten there without it.
On the other side, startups tend not to have audited financial statements, so it takes a lot of leg work for the due diligence.
Audited financials are somewhat overrated. See Enron. It's not terribly hard to make financial statements too confusing to interpret. I defy anyone reading this to look at the financial reports of any large bank and tell me how much risk they are exposed to or what their investment portfolio looks like. A VC will still have to do a ton of legwork for any company they plan to invest in.
Disclosure: I'm am a certified accountant.
The stock market is now a sucker's bet. There's too much underhanded wheeling and dealing going on. Warren Buffet gets a sweetheart no-risk deal to buy up GM (?) stock, then the papers report he's investing in Detroit so that the rest of the sheep will follow. Jim Cramer built a career pumping and dumping stocks and the guy got a SHOW out of it! I took a look at investing years back and came away thinking I should avoid it like the plague (unless you've got a buddy on the inside of a deal).
I swear to God...I swear to God! That is NOT how you treat your human!
If the venture capitalists made money hand over fist, they wouldn't need and ever increasing amount of inward funds to invest. They'd simply invest their profits.
It's because their profits are so bad (and often non-existent) that they don't have enough money of their own to invest.
What if Jeremiah Cornelius is the real APK & the one trying to implicate Jeremiah Cornelius. is the fake APK?
GP here: I see what you're saying. Here's the but ,,,
While typically it is not their own money at risk (though sometimes it is), if a VC is unsuccessful with a fund they often find it difficult/impossible to raise money for their next fund.
Isn't that what this lawsuit is about? Hiding the "bad apples"?
Sorry, another "but" ..
Connections to money is an extremely valuable thing. You talk about it dismissively but access to capital is difficult to come by. VCs do provide a useful service for a relatively small number of companies but their reputation as kingmakers is somewhat out of proportion to their actual ability to pick winners.
You are absolutely right: connections are important (maybe more important than anything!) and I cannot argue against that. But the thing is they can't pick winners. They are just playing the odds and transferring most if not all the risk to others.
OTOH, yes I agree, I've seen some VC deals that have done exceptionally well for the founders and original investors - Apple is a case in point. But (again with the but, I know) those are outliers. Most VC deals are not that lucrative by a long shot and that's where the founders and investors get screwed - and that's another thing that this lawsuit is about.
I hear what your saying and there's plenty of truth in it - but it assumes everyone is playing fair -and this lawsuit is trying rectify that. Now, we get into the unfairness of lawsuits and lawyer fees and lawyers winning on all sides ....
Why did public pensions invest in venture capital firms in the first place? Years of ever-escalating pension benefits plus years of severe underfunding those same pensions means that they needed unrealistic growth rates to even come close to meeting their targets.
Take California for example. Not only did they keep increasing pensions promises while underfunding them, they used a variety of accounting tricks to cover it up. On top of that, they assumed unrealistic returns (7.5% or higher in many cases).
How could they get away with? California has essentially become a one-party state where public employee unions are the most powerful interest group. So the process is:
1. Public employee unions use mandatory union dues to contribute to Democratic candidates.
2. Once elected, Democrats vote for ever escalating pension benefits.
3. Democrats appoint pension board officials who ignore underfunded pensions. And the CEO of CalPERS, California's largest pension fund, was just indicted for fraud. "The indictment charges that the falsified documents allowed Villalobos to reap $14 million in fees for serving as a middleman between CalPERS and a prominent investment firm handling $3 billion in CalPERS' money."
Combine this with ever-higher taxes, and a faltering economy, and you have a recipe for the governing class looting the treasury at the expense of the middle class (and future generations that will have to deal with the consequences of bankruptcy and crushing debt loads). Several California cities have already declared bankruptcy, and newer, more transparent accounting rules will probably force more into bankruptcy.
VC funds are probably the least of their worries.
Lawrence Person (lawrencepersonh@gmailh.com (remove all "h"s to mail)
http://www.lawrenceperson.com/
Being involved with some VC myself, one of the things that we value highly is the proprietary nature of our operations. If we advertise our strategies, others will try to get in on the deals. This will drive prices up and dilute the potential return on our investment. In a market where survival means making a 60% return on one out of three startups and seeing the other two go bust, that would kill the VC business.
The alternative (which we practice) is to tell people with a duty to publicly disclose to kindly go f*k themselves when they try to buy in. There's plenty of money around and my heart wouldn't be broken if us wealthy people made 20% returns per year while the teachers union pension makes 0.1%
Have gnu, will travel.
Venture Capital is a glorified name. Let's call it what it really is - junk bonds.
Just fyi, the posts link failed for me. Try these :
http://www.xconomy.com/national/2013/03/27/kleiner-sequoias-fund-returns-could-be-exposed-in-ca-lawsuit/
http://www.xconomy.com/national/2013/03/27/kleiner-sequoia-fund-returns-could-be-exposed-in-ca-lawsuit/
The Christian religion has been and still is the principal enemy of moral progress in the world. -- Bertrand Russell
and using them.
Thousands of miles from home, poor ol VC investing in vaporware and primary wrecking ball of the dot com bubbles.
Most VCs are losing money, that is the norm, there a very few hits, sucessfull IPOs or buyouts..
Isn't that what this lawsuit is about? Hiding the "bad apples"?
I've read the article and it is hard to say. Probably you are correct but maybe not in the way you think. I suspect it might have more to do with the VCs not wanting their various clients to see who is getting a better deal. Furthermore if you know KP or Sequoia's returns it gives information to other VCs who might offer a better deal It's not probably about hiding the performance of specific investments so much as it is for competitive reasons. There are a finite number of good investments at a given time and it wouldn't be hard for a manager of an investing fund to do a bit of price shopping if they had enough information. After all, it doesn't matter if the VC charges a lot if their performance (alpha) is good enough to justify their rate. But if their performance is just average, no one wants to pay extra for average performance.
Most VC deals are not that lucrative by a long shot and that's where the founders and investors get screwed - and that's another thing that this lawsuit is about.
Anyone who invests in a VC fund knows the batting average is low. This is not an interesting fact. There probably will be around 1 successful company out of 10. That's not (usually) a reflection of the incompetence of VCs so much as it is a reflection of how hard it is build a successful business. The real question is why KP and Sequoia are hiding the returns of their specific funds. It's not shocking that they would do so - I can think of several reasonable explanations. My confusion is why the University is trying to protect that information.
correct link: http://www.xconomy.com/national/2013/03/27/kleiner-sequoias-fund-returns-could-be-exposed-in-ca-lawsuit/
I've worked with many VC firms over the years even working for one once. Everyone has to remember that the business of VC's is to find places to invest other peoples money. It's a lot harder than it sounds. One of my jobs was to read business plans by the hundreds. 99.99% of them were total junk, written by people who were totally clueless. Of the remaining .01% most were really pie in the sky ideas. Of the ~1000 business plans I read over the course of a year I think the VC firm invested in 2 companies only one of which lived long enough to get bought out by someone. Finding good investments was so difficult that the VC I worked for had to liquidate one fund of over $100 million dollars earmarked for mobile communications and return it to the investors because they couldn't find enough worthy ideas. Raising money is easy, all you need are a good idea, people who know how to execute the good idea and a viable exit strategy. The last is probably the most important part of any business plan if you want VC participation.
There are different types of VC firms, but overall, I think they are for investors who have a generally high risk tolerance.
I recently attended a conference and saw a presentation by a guy who was part of a small VC firm that funded startups. They understand and expect that many of the "ventures" will be losers. They even expect that they will invest in more losers than winners overall. They're betting on finding a small number of ventures that really take off and provide big returns that will compensate for other losses.
Hi all, author and submitter here. Sorry about the link problems - it's all my fault. I edited the headline to make Sequoia possessive, to avoid confusion with another fund. To be OCD about it, I also added the 'S' to the URL. Which means a ton of you bonked the 404 page when you went to read the article. Never edit before coffee. So I have changed it back. This one works again: http://www.xconomy.com/national/2013/03/27/kleiner-sequoia-fund-returns-could-be-exposed-in-ca-lawsuit/?single_page=true Thanks to the other commenters who found the temporarily working link, which is no longer live. That'll teach me.
"It's not terribly hard to make financial statements too confusing to interpret"
Simple solution: too complicated? - Failed Audit. Next step - suspend trading and/or daily fines (especially for private firms) until the financials are clearly and transparently documented to the approval and understanding of all shareholders and regulators, as well as third parties of average intelligence and training.
If a person of average intelligence (100 IQ) with a college degree in accounting can't understand the financials, they are too complicated to approve. We see this over and over - complicated financials are primarily (exclusively?) a way to hide the truth, primarily actual level of risk or insider dealing/conflict of interest. Prime example: bundling of subprime mortgatges and creation of derivatives.
Overall, complicated financial instruments (derivatives) and statements (Enron, most banks) are a net loss to society. They make a few criminals rich, but impoverish the rest of us. Accounting, like Banking, is killing itself and its own value by not demanding simplicity and transparency. To the average person a Banker (Ratings firms, etc.) is simply a criminal (I am not kidding.) Accountants risk the same attitude if they do not start cracking the whip.
If you are at all interested in growing your company and not selling out to greedy fuckstains, VC is not the way to go.
It is even worse than going public, something any company that cares about its product, image, employees, customers, or community should not do.
Jeremiah Cornelius is a lie projected on the wall of Plato's Cave, which in turn is wrapped in tin foil, and sprinkled with uranium hexaflouride.
Huzzah.