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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.
People who gamble others' money loathe to disclose depth and depravity of their addiction.
Silence is a state of mime.
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.
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.
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.