Tag: Venture Capital

A Look Into the Growing Trend of Family Offices

Posted on by Taylor Webb

Private equity firms were reluctant to make deals in the first half of 2012, as the number of deals dropped 15 percent from last year. [1] A lack of large deals could create negative repercussions going forward, as firms address the need to deploy the large amount of cash that they have built-up. Firms currently hold about $1 trillion in cash, $200 billion of which will be handed back to investors if firms are unable to find large deals within the next year. [2] The increased need to find large deals will lift multiples for the larger target companies, providing less upside potential going forward. [3] Although well priced deals may be harder to find for some of the major private equity firms, some wealthy investors are beginning to seek out alternative ways to invest their capital. A growing number of wealthy families are beginning to make direct investments in companies, rather than investing in large private equity firms. [4]

As wealthy individuals look for new ways to invest after experiencing a period of low returns, some wealthy families have begun to hire top Wall Street talent to manage their investments.[5] Between 2006 and 2010, the share of private equity investments in multifamily investment portfolios rose from 3.8% to 10%. [6] Moreover, the current environment is ripe for investors who want more control over their investments because of the pressure some of the major funds are facing. [7] Not only does the idea of being closer to their investments appeal to wealthy investors, but it opens the door to numerous investments that may not be readily available when investing in large private equity firms. Investing in a family office allows investors to make investments with longer time horizons. Managers within family offices have found success in making long-term investments in a few platform companies with the aim of growing the companies through smaller acquisitions. [8] This holding company approach is just one example of the ability of family offices to be flexible in the type of strategies they employ.

Although family offices usually do not have the same amount of resources at their disposal as some of the major private equity firms, the resources they do have are streamlined.[9] The number of individual investors in any given family office is relatively small, with some offices starting out with only one family. [10] At the same time, some managers are drawn by the opportunity to work closely with clients, while being relived of worrying about marketing or spending time doing client development and have left large investment houses to work with these family offices. [11]

Running a family office also has the advantage of flexibility when it comes to the type of investments that are available for managers to consider. [12] Simply put, the size of many of these family offices allows managers to consider a broad spectrum of investments that may not be as appealing to many of the large private equity firms. Many of the family offices are able to invest in young, promising startups because they are dealing with a smaller pool of money. [13] In fact, some family offices seem to focus mostly on young startup companies, almost acting as a venture capital fund. [14]

As the industry continues to face challenges, investors continue to adjust their actions to seek out better rates of return. For those who seek greater control and a more personal atmosphere, investing in a multifamily office is an attractive alternative to investing with a major firm. At the same time, managers in family offices will also benefit from the small amount of investors they will be communicating with and the greater flexibility in the investments that are available to them. With the advantages of size, flexibility, and greater control, it is easy to see why family offices have become a favored alternative for wealthy investors and managers alike.

[1] Mohammed Aly Sergie, Survey Says: PE Flat in First Half, Eyes Carve-Outs in Second, Wall St. J. Blog (July 2, 2012, 4:57 PM) http://blogs.wsj.com/privateequity/2012/07/02/survey-says-pe-flat-in-first-half-of-2012-eyes-carve-outs-in-second-half/.

[2] Andrew Ross Sorkin, More Money Than They Know What to do With, N.Y. Times Dealbook (Oct. 1, 2012, 8:42 PM) http://dealbook.nytimes.com/2012/10/01/more-money-than-they-know-what-to-do-with/.

[3] Id.

[4] Azam Ahmed, Family Investment Funds Go Hunting for Wall St. Expertise, N.Y. Times DealBook (Apr. 4, 2012, 3:50 PM), http://dealbook.nytimes.com/2012/04/04/family-investment-funds-go-hunting-for-wall-st-expertise/.

[5] Id.

[6] Steven R. Strahler, Families Jump Into the PE Pool, Crain’s Chicago Business (May 28, 2012) http://www.chicagobusiness.com/article/20120526/ISSUE02/305269999/families-jump-into-the-pe-pool.

[7] Id.

[8] Id.

[9] Ahmed, Supra note 3.

[10] Strahler, Supra note 6.

[11] Ahmed, Supra note 3.

[12] Id.

[13] Id.

[14] Id.

Cyber Security Start-Ups

Posted on by Rachel Shapiro

Enterprises and consumers alike have experienced two recent and rapid technological innovations that will continue to alter the tech landscape: the rise of cloud computing and a mass move to mobile devices and applications. “‘We are on a shift that is as momentous and as fundamental as the shift to the electrical grid,’ said Andrew R. Jassy, the head of [Amazon Web Services]. ‘It’s happening a lot faster than any of us thought.’” [1] Indeed, recent research concludes that paid cloud services are expected to double among small and midsize businesses in five years. [2] Computing giants Microsoft, Google, and Amazon, each with its own set of cloud offerings, will compete to meet this growing demand.

Cloud computing, which promises substantial cost-savings for businesses via “pay-as-you-go access to sophisticated software and powerful hardware,” [3] also poses certain security risks that derive primarily from the security, or lack thereof, of the channel by which information travels to the cloud and that of the data itself while on the server and in use by the cloud service. [4] When it comes to mobile devices, the risks are no less. In fact, the frequency of mobile threats doubled between 2010 and 2011 and the volume of malware targeting smartphones increased 155 percent in 2011 alone. [5] The rash of hacks on mobile devices and public and private networks by “pranksters, criminal syndicates or foreign governments” [6] illuminates the disconcerting reality that “[n]o one is immune to the threat posed by cyber criminals.” [7]

From an economic standpoint, the risks posed by potential security breaches are great: a typical breach might cost a business more than a half million dollars to rectify.[8] Likewise, such an occurrence might have a detrimental psychological effect, reducing the confidence of customers in a particular company or, worse, chilling the transition to cloud and mobile services overall, since no sector is impervious to the security threats.

It is perhaps of little surprise that, against this backdrop, “big companies are expected to spend $32.8 billion on computer security this year, up 9 percent from last year. Small and medium-size businesses will spend more on security than on other information technology purchases in the next three years.”[9] The “white hat” cyber security professionals, whose challenge is to “foster a faster and more open exchange of valuable information [while striving to] stay a step ahead of technically advanced, well-financed cyber criminals,” [10] are not only security powerhouses like McAfee, but also obscure security start-up companies, such as Imperva, Splunk, and Palo Alto Networks. [11] The remarkably strong stock performances that these companies have enjoyed since going public, with shares ranging from 26 to 65 percent above their offering price, has piqued the interest of the venture capital world. Not to be understated, venture capital contributions to these tech security start-ups reached $935 million in 2011, nearly doubling 2010 venture capital investments in the same genre. [12]

Most security start-ups seeking venture financing are focused on one of the following areas of weakness: mobile devices, authentication, intrusion detection, or “big data.” [13] For example, Bit9 is a start-up that blocks malware, Zenprise brings enterprise-level security to consumer mobile devices, and Solera Network tracks breaches in real time. Each of these companies has recently raised tens of millions of dollars in investment rounds led by top-tier venture capital firms, including Sequoia Capital and Intel Capital.[14]

Though this infusion of capital into the cyber security realm is likely spurred on by the potential for big monetary gains for venture capital firms and not altruistic motives, the ultimate security outcome, if the start-ups are successful, will be highly beneficial for many, if not all. Given the positive externality that seems to ensue from this particular type of investment in this age of increasing cyber crime, I can only hope that the unusual risks borne by investors of security companies, such as death threats and aggressive cyber counterattacks by criminals, [15] will not dampen its popularity going forward.
__________________________________________________

[1] Quentin Hardy, Active in Cloud, Amazon Reshapes Computing, The New York Times (Aug. 27, 2012), http://www.nytimes.com/2012/08/28/technology/active-in-cloud-amazon-reshapes-computing.html?ref=technology .

[2] 2012 Microsoft/Edge Strategies Cloud Adoption Study, http://www.edgestrategies.com/component/k2/item/117-just-released-2012-microsoft-edge-technologies-smb-cloud-adoption-study.html (last visited Oct. 13, 2012).

[3] Jeff Beckham, The Top 5 Security Risks of Cloud Computing, Cisco Blog (May 3, 2011, 8:36 AM), http://blogs.cisco.com/smallbusiness/the-top-5-security-risks-of-cloud-computing/ .

[4] Id.

[5] Ian Paul, Mobile Security Threats Rise, PCWorld (Sep. 7, 2012, 9:36 AM), http://www.pcworld.com/article/262017/mobile_security_threats_rise.html .

[6] Nicole Perlroth & Evelyn M. Rusli, Security Start-Ups Catch Fancy of Investors, The New York Times (Aug. 5, 2012), http://www.nytimes.com/2012/08/06/technology/computer-security-start-ups-catch-venture-capitalists-eyes.html .

[7] Kevin Johnson, CIOs Must Address the Growing Mobile Device Security Threat, Forbes (Aug. 16, 2012; 7:55 PM), http://www.forbes.com/sites/ciocentral/2012/08/16/cios-must-address-the-growing-mobile-device-security-threat/ .

[8] Id. (citing cash outlays, business disruptions, and revenue losses as elements of the cost of a security breach).

[9] Perlroth & Rusli, supra note 6.

[10] Johnson, supra note 7.

[11] Nicole Perlroth & Evelyn M. Rusli, Security Start-Ups Catch Fancy of Investors, The New York Times (Aug. 5, 2012), http://www.nytimes.com/2012/08/06/technology/computer-security-start-ups-catch-venture-capitalists-eyes.html .

[12] Id.

[13] Id.

[14] Id.

[15] Id.

Health Care and Venture Capital: An Uncertain Outlook

Posted on by Sumit Gupta

When most people hear “health care” today, their minds automatically pivot to the national health care debate dominating the election season. Many venture capitalists, however, are thinking about their next target in the broad health care and biotechnology industry. Investment in the sector, which includes companies developing “medical devices, diagnostic [platforms], technology based healthcare services, life science tools,”1 and pharmaceuticals, has been on the rise. In 2011, venture capital investment in biotechnology reached $4.82 billion, with medical devices and healthcare services financings realizing gains of 17% and 41%, respectively, year-over-year. 2

What’s behind the uptick in a sector “long shunned by venture-capital investors?”3 Two key explanations are optimism over “new U.S. laws that could speed up drug approval in key areas”4 and the increasing role of software in health care. The current regulatory climate makes it a difficult and lengthy process to receive FDA approval for pharmaceuticals and medical devices.5 As the founder of a short-lived medical device startup, I can attest to the difficulties that FDA approval can bring a similarly-based business – our startup’s projections, for example, indicated that simply becoming eligible for 510(k) clearance (which is necessary to market certain categories of medical devices in the United States) would cost $20 million and take at least 5 years. The FDA has since established the Center Science Council to improve the predictability of its decision-making on new innovations,6 and the response from venture capitalists has been cautiously positive.7

Entrepreneurs remain hopeful, as increased software penetration, beyond electronic medical records, exposes new opportunities in the field. Venture firms have begun “broadening the types of businesses they consider part of the life-sciences field”8 to include those creating software solutions to many of healthcare’s most pressing problems. These firms aren’t comparable to those such as Google or Facebook when they were still startups, but that’s a good thing – venture capitalists such as Kevin Kinsella of Avalon Ventures recognize that “every therapeutic idea or product is a big idea”9 and has a better chance of disrupting a field still relatively foreign to the Internet. Cyrus Massoumi, founder of ZocDoc, a startup which allows users to find and book appointments online, finds the current financing landscape superior to that of years prior. In 2007, the reaction to ZocDoc’s pitch was “less, ‘Good idea,’ and more, ‘Good god, you’re crazy.’”10 In the five years since, Massoumi and his team have raised $95 million, culminating in a $75 million Series C last year with DST Global and Goldman Sachs.11

While some parties are optimistic for biotech’s resurgence, “[p]ricing pressures, slower economic growth and greater regulatory scrutiny”12 continue to make investment difficult to come by. Ernst & Young’s global life sciences practice released a report two weeks ago finding capital harder to come by for younger companies in the sector.13 According to their numbers, venture capital investment in biotechnology remains substantially lower than the $5.40 billion peak reached in 2006-2007,14 and the situation may not be improving to the degree that 2011’s numbers suggest. The data available so far for 2012 support their pessimistic stance. In Q2 2012, biotech companies received $697 million, or 42% less money in deals than the same quarter a year prior, the lowest amount seen by the National Venture Capital Association “since the first quarter of 2003.”15 Most affected by these trends are the small, young startups hurting for cash, especially those on the software-side of things. While more established companies, such as Merck, who launched its own $250 million venture fund in 2011, “invest in [early-stage] innovation with a portion of the dollars they would have invested in their own R&D,”16 these dollars end up at companies immersed in the pharmaceutical sector – the bread and butter of companies like Merck. Nevertheless, the experience of ZocDoc and others in the field show that substantial venture money is still out there – only now it’s being packaged in smaller, but smarter, deals.17

__________________________________________
1ARBORETUM VENTURES, http://www.arboretumvc.com/about.php.
2 Sarah McBride, Venture firms see signs of rebirth in life sciences, REUTERS (Sep. 24, 2012, 2:42 PM), http://www.reuters.com/article/2012/09/24/us-venture-capital-life-sciences-idUSBRE88N0UG20120924.
3Id.
4 Id.
5 Kate Greenwood, Venture Capitalists Complain of ‘Regulatory Challenges,’ FDA Responds, HEALTH REFORM WATCH (Dec. 20, 2011), http://www.healthreformwatch.com/2011/12/20/venture-capitalists-complain-of-regulatory-challenges-fda-responds/ (“The venture capitalists blame ‘regulatory challenges,’ primarily ‘the hostile FDA.’”).
6 See CDRH Center Science Council FAQs, U.S. FOOD AND DRUG ADMINISTRATION (Mar. 31, 2011), http://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDRH/CDRHReports/ucm249249.htm.
7 See Greenwood, supra note 5.
8 McBride, supra note 2.
9 McBride, supra note 2.
10 Cyrus Massoumi, Healthcare Momentum: Our Shared Responsibility, THE HUFFINGTON POST (Oct. 4, 2012), http://www.huffingtonpost.com/cyrus-massoumi/appointment-booking-tech-startup_b_1939854.html.
11 ZocDoc, TECHCRUNCH, http://www.crunchbase.com/company/zocdoc.
12 Susan Kelly, Venture capital for medical technology harder to come by: report, REUTERS (Oct. 2, 2012, 1:23 AM), http://www.reuters.com/article/2012/10/02/us-medtech-investing-idUSBRE89104D20121002.
13 Id.
14 Id.
15 John Carroll, New biotech deals scrape record low as VC groups lose steam, FIERCEBIOTECH (July 19, 2012), http://www.fiercebiotech.com/story/new-biotech-deals-scrape-record-low-vc-groups-lose-steam/2012-07-19.
16 McBride, supra note 2.
17 See McBride, supra note 2.

Ann Arbor has the Right Stuff

Posted on by Joseph R. Morrison, Jr.

Jason Mendelson (@jasonmendelson) and his partner, Brad Feld (@bfeld), visited Ann Arbor and UofM back in the fall. They made the rounds of TechArb, the University Office of Tech Transfer, and even stopped by a Ross School of Business Class taught by Dr. David Brophy that pairs students with budding companies trying to land Angel or VC funding. I was enrolled in the class and I got to pitch Jason on my company… WHAT a great experience! I was REALLY impressed with both of them and I love their dedication to cultivating a culture of entrepreneurship in Boulder, Ann Arbor, and throughout the US more generally. It is definitely something that helped stoke my entrepreneurial fire. However, the best thing I heard was at a lunch talk at the Law School. Both gentlemen raved about Ann Arbor and, while I am way overdue in sharing, this recent post encouraged me to mention their trip.

I thought I would share this blog entry, written by Brad, since it has a number of good thoughts and links to some of the other posts from their visit. Enjoy!

http://startup-communities.com/2012/02/28/action-in-ann-arbor-mi/

LLC Fiduciary Duties in Delaware Private Equity and Venture Capital

Posted on by Justin Taylor

In its January 27th decision of Auriga Capital Corp. v. Gatz Properties, LLC, the Delaware Chancery Court put to rest any ambiguity in its reading of the Delaware LLC Act as it applies to establishing default fiduciary duties in the LLC context. (1) Although the topic had been addressed in a number of recent cases, none approached the depth and breadth of analysis exhibited by the Court in Auriga. (2) In his opinion, Chancellor Strine definitively establishes that a manager or member of an LLC owes the default duties of care and loyalty to all other members, unless an LLC agreement effectively expands, limits, or eliminates these duties.

Auriga Capital v. Gatz Properties

The dispute in Auriga centered on Gatz Properties, LLC’s management of property held by Peconic Bay, LLC. William Gatz, as the sole actor for Gatz Properties, formed Peconic Bay with Auriga Capital Corporation in order to develop land held by the Gatz family into a golf course. Peconic Bay then leased the golf course land from Gatz Properties. While the LLC Agreement required dual class majority approval for any “major decision affecting the company,” Gatz was effectively able to approve his own decisions as Manager without interference from minority members due to majority control of both the A and B Peconic share classes by Gatz Properties and the Gatz family.

Gatz made and approved such a “major decision” when he chose to perform a sale of Peconic, which ultimately led to a dispute with Auriga and other minority owners of Peconic Bay. In 2010, after the underperforming golf course operator with a sublease on the property chose to exercise its early termination option, Gatz turned away a serious bidder for Peconic Bay and orchestrated a sham auction. Gatz was the only bidder for the company, and purchased Peconic Bay at an unfairly low price. The minority members, whose invested capital amounted to $725,000, received a paltry $20,985 distribution from the sale. This led them to file suit and claim Gatz breached his fiduciary duties.

At trial, Gatz raised various defenses. However, of particular interest was his assertion that the LLC Agreement of Peconic Bay “displaced any role for the use of equitable principles in constraining the LLC’s manager,” and thus removed his actions from any fiduciary duty analysis. The Court rejected this argument, however, and affirmatively determined the existence of default restrictions on the actions of a managing member of an LLC beyond the requirements of good faith and fair dealing.

Existence of Default Duties

Like the Delaware General Corporation Law (“DGCL”), the LLC Act (the “Act”) does not plainly state the fiduciary duties of care and loyalty apply by default to managers and members of an LLC. However, unlike the DGCL, 6 Del. C. § 18-1104 of the Act provides an explicit default application of the “rules of law and equity.” Do those rules of law and equity include the duties of care and loyalty? Footnote 34 of Auriga explains they do.

That § 18-1101(c) provides for the contracting out or modification of fiduciary duties implies these duties exist by default. The Court goes on to explain that when §§ 1101(c) and 1104 are read together, these sections establish that when a manager or member would traditionally owe fiduciary duties, they are a fiduciary and are subject to the express right of the parties to contract out of those duties. So far as a manager or member would not owe fiduciary duties under traditional equitable principles, they do not owe any in the LLC context. This is not by operation of the Act, but by those same traditional equitable principles. The Act does not create a broader range of duties.

The Court also pointed to the 2004 amendment of the Act (in addition to the amendment of Delaware Revised Uniform Limited Partnership Act (“DRULPA”)) by the Delaware Legislature. The amendments were instigated by a Delaware Supreme Court holding in Gotham Partners L.P. v. Hallwood Realty Partners L.P, which questioned the extent to which default duties could be completely eliminated in the partnership context. (3) Both the Act and DRULPA were reworded to permit the complete elimination of fiduciary duties, as well as full contractual exculpation for breaches (through the introduction of §18-1101(e) for LLCs).

The Court in Auriga reasoned if the “equity backdrop” did not apply to LLCs then: 1) the amendment would have provided that members and managers owed no duties to the LLC other than those set forth by agreement or in the statute; 2) the General Assembly would have eliminated or modified the default application of the rules of law and equity in §18-1104; and 3) the General Assembly would not have provided for the elimination and exculpation of something if that something did not exist. These factors combined with the case law establishing the existence of default duties in the LLC setting and the policy concerns surrounding displacement of a widespread investor belief in the same, firmly established, in the Court’s mind, the alignment of those holdings and the legislature’s intent.

Outcome of Auriga

The Court determined, and Gatz conceded, as an LLC manager without clear and unambiguous elimination or modification in the LLC Agreement, Gatz owed the other members of Peconic Bay the fiduciary duties of care and loyalty. The Court then determined that:

“Gatz breached his fiduciary duty of loyalty and his fiduciary duty of care by: (1) his bad faith and grossly negligent refusal to explore any strategic alternatives for Peconic Bay from the period 2004-2005 forward when he knew that American Golf would terminate its lease; (2) his bad faith refusal to consider RDC’s interest in a purchase of Peconic Bay or a forward lease; (3) his bad faith conduct in presenting the Minority Members with misleading information about RDC‟s interest and his own conduct in connection with his buyout offers in 2008; and (4) his bad faith and grossly negligent conduct in running a sham Auction process that delivered Peconic Bay to himself for $50,000. The results of this conduct left the Gatz family with fee simple ownership of the Property again, a Property that had been improved by millions of dollars of investments and now contained a clubhouse and first-class golf course. The Minority Members got $20,985.” (4)

Chancellor Strine awarded the minority members what they should have received in a fair auction: their initial investment of $725,000 and a 10% return. He deemed this “a modest remedy and the record could support a higher one.” Additionally, because the “record is regrettably replete with behavior by Gatz and his counsel that made this case unduly expensive for the Minority Members to pursue,” Strine required Gatz to pay one half of the minority’s attorneys’ fees and costs. If the manager or a member of an LLC wants a lesson on what not to do, this case is a very instructive read.

Key Takeaways for Private Equity and Venture Capital

In reflecting on Auriga, drafters and parties to LLC Agreements should find some comfort in the relative certainty the holding provides. In drafting their LLC Agreements for Management Company, General Partner, and Portfolio LLCs, parties should ensure their Agreements clearly and unambiguously reflect their intentions as to the types and extent of duties they intend to apply between members and management. Some key takeaways include:
• The traditional duties of loyalty and care apply by default to Delaware LLCs.
• A manager of a Delaware LLC is a fiduciary and subject to those default duties.
• Such duties may be altered or eliminated and liability exculpated by clear and explicit agreement under the LLC Agreement.
• Evaluation of fiduciary duty claims “cannot occur without a close examination of the LLC agreement itself.”
• The duties of good faith and fair dealing, as they exist independently from the duty of loyalty, apply to all LLCs and cannot be contracted around.
• LLC agreements in existing Private Equity and Venture Capital investments should be evaluated for clarity in any desired modification of fiduciary duties, with necessary amendments made to bring them in line with the intentions of the parties to the agreement in light of the Court’s clarifications.

1- Auriga Capital Corp. et al v. Gatz Properties, LLC et al, C.A. 4390-CS (Del. Ch. Jan. 27, 2012).
2- See Kelly v. Blum, 2010 WL 629850 (2010), Bay Ctr. Apartments, 2009 WL 1124451 (2009).
3- Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002).
4- Auriga, C.A. 4390-CS at 62.

Bad Apples Spoiling the Crate?

Posted on by Joseph R. Morrison, Jr.

The New York Times “Bits Blog” had an article this past Sunday titled “Disruptions: Tech Valuations Defy the Restraints of Reality.” Unfortunately, this short read paints a broad brush of the Venture Capital industry and plays to a few of the oft-discussed and unflattering stereotypes about venture capitalists (…as if there was any need for fuel to be added to the raging fire stoked by Republican presidential candidates.)

The article lays out a number of problematic investment rationales pursued by some within the VC industry. Among the rationales listed are:

• Investing only based on a “herd mentality and a yearning to be a part of a potential next big thing”
• Investing in a company “so they can stick the logo on their Web site”
• So-called “spite investing” when you invest in a company “simply because they were not given the opportunity to invest in the competitor”

Do these practices go on? Clearly they do, which is why the failure rate of venture capital firms can exceed 50% during some periods (per the Harvard Business Review) and so few earn solid returns on investment. However, it would be unfortunate to paint the industry with such a broad brush. The few bad apples with money to spend, but not the sense to invest it wisely, should not pollute the image of an entire industry.

A number of successful (and tenured) VCs have spoken in classes at Michigan, and they have consistently preached the polar opposite of the approaches noted above. Their principles are simple: don’t follow the crowd, be true to your investment analysis methodology, and be steady in how you invest your money. Quite apart from the investing process described in this article, these VCs described the process as akin to “courting a significant other” in order to become personally close with the founders. They also spoke of the industry’s increasing talent. Many VCs have built their own companies or have been executives at Fortune 100 companies.

Will that approach counter the ills described in the Bits blog? It will not. If it did, everyone would be taking the same approach in an industry notorious for breaking the mold. However, those principles will help you avoid turning a venture capital portfolio into a junkyard of failed investments and, apparently, it will also prevent you from running with the rest of the herd (50% of which won’t see its next meal).

In the post dot-com crash and Sarbanes-Oxley world, companies are staying private longer. This allows companies to develop into real revenue-generating businesses without being scrutinized by public markets. The days of “pets.com” are history and also the irrational exuberance that came along with them. VCs that succumb to irrational investments fail, as they should. So, while the article seems to paint the whole lot as a bunch of crack pots, the truth is that the industry is full of extremely successful investors. Otherwise, why would there be so much money entering the market in first place? Success breeds copycats.

NYT article: http://bits.blogs.nytimes.com/2012/01/22/disruptions-the-sloshing-sound-of-tech-valuations/?ref=business&nl=business&emc=dlbka34

HBR article: http://hbr.org/product/risk-and-reward-in-venture-capital/an/811036-PDF-ENG

University of Michigan Adds Venture Capital Fund within Endowment

Posted on by Joseph R. Morrison, Jr.

The University of Michigan Board of Regents has approved a University-housed and managed venture capital fund.

The permanent allocation, part of the $7.8 billion endowment, will be called Michigan Investment in New Technology Startups (MINTS). The $25 million fund will be invested over 10 years and be co-managed by the University’s Office of Tech Transfer, a department that manages and funds technology spin-offs, and the Investment Office, which manages the University’s long-term endowment fund.

The Office of Tech Transfer has spun off a number of prominent venture capital-ready investments, as is recognized by Dr. David Brophy’s “Financing Research Commercialization” course at the Ross School of Business. The creation of this fund is further acknowledgement that the Office of Tech Transfer is going to be a growth engine for the University and that this technology center will be profitable enough to be worthy of the University’s investment attention.

The initial investment may seem small, but this fund will allow the University to make several small-to-mid-sized investments per year, a number that would be about average for a new fund in this area.

One can only hope that the creation of this fund will attract other venture capital firms to increase their focus on Michigan. Additionally, this new fund will provide students in the Zell Lurie program and the Ross School of Business a vehicle through which they can receive early exposure to venture capital investing. What a great development for the University and southeastern Michigan.

http://www.pionline.com/article/20111229/REG/111229904/university-of-michigan-to-start-venture-capital-fund

Venture Capital as Targeted Self-Help?

Posted on by Joseph R. Morrison, Jr.

Many believe there are serious issues with the economy and the trajectory of our two concurrent wars. Unfortunately, these two headline concerns come together to affect veterans more profoundly than the average American; the unemployment rate among young veterans (30%) is just short of double that of comparable non-veterans ages 18-24. How do you counteract this phenomenon and harness the power of disciplined young people who have served their country? Venture Capital seems to be part of the answer.

National Public Radio (NPR) had a story on Morning Edition about a Milwaukee, WI based group called VETransfer that is focused on helping veterans start their own businesses. The VETransfer program utilizes a huge (13,000+) network of volunteer experts to help its start-ups with a variety of services including connecting owners with financing and management assistance. The stated goal is “to teach veterans how to become entrepreneurs and assisting them to accelerate veteran owned innovations.” The group has 15,000 sq ft of space for collaboration, meetings, and organization, and a few small businesses that have been incubated by the program have plans to hire other veterans as part of their company expansion plans. One of the initial grants ($3 million) came from the Department of Veterans Affairs, but there are a number of other private sector supporters as well.

This isn’t “venture capital” solving the problem, but it is the ideas behind venture capital that are helping to attack the root of a problem. The military prepares young men and women for productive lives, but right now they seem stranded once they get home. Now, with some assistance from the government in the form of what looks like a block grant, there is some hope for these veterans and the power of the private sector is taking over. The venture model is serving as the self-help mechanism that the nation needs to attack the problem of veteran unemployment, and it is truly a great thing to see. Hopefully we will see more of it.

The website for the article is: http://www.npr.org/2011/10/25/141092122/a-business-incubator-gives-funding-and-jobs-to-vets
The website for the group is: http://vetransfer.org/

Venture Capital Industry Makes Inroads in Non-Traditional Markets

Posted on by Joseph R. Morrison, Jr.

The New York Times DealBook column is a useful source of interesting information. However, this week a few things struck me as particularly intriguing. Apparently the United States Department of Defense (DoD), the $600B+ entity that runs the largest supply chain operation in the world, has discovered the power of venture capital. The Defense Venture Catalyst Initiative is a collaboration between the DoD and venture capitalists that seeks to “utilize private sector Venture Capital (VC) expertise in discovering and evaluating the merits of emerging technology” in order to solve DoD problems. It is a huge vote of confidence for the VC industry, something most Americans are unfamiliar with and unsure of, to have the DoD explicitly acknowledge that venture capitalists have unique and important skills. While the government might not be broadly popular, the Department of Defense is a completely different entity, and I think their vote of confidence will speak to a large sector of the public.

Once the government acknowledges that venture capitalists can contribute meaningfully to the largest public sector agency, there can’t be much left out there, right? (Insert your “the government is the slowest adopter” joke here.) Actually, the NFL announced this week that it is looking to join the venture capital game too. The league, managed by some of the country’s wealthiest and most successful businesspeople, is looking to start its own $30M+ venture capital fund. The owners might even let the Players Union invest alongside its fund. While the NFL owners are looking to be active in the “angel” space rather than the traditional venture capital arena, you would have to think that the MLB, the NHL, and the NBA can’t be far behind the curve here. This, like the DoD involvement, is a positive step for the VC industry as a whole; if there is anything that can help shape a positive view of venture capital with Main Street America, its good old football.

It’s no secret in the financial industry that venture capitalists are skilled entrepreneurs with a keen eye for trends and good investments. However, having two giants like the NFL and the Department of Defense openly acknowledge that the industry offers a unique skill set is a great thing. It is good for the investors, and it’s good for the profile of the Venture Capital industry as a whole.

The Defense Venture Catalyst Initiative website can be found here: http://devenci.dtic.mil/
The NFL investment reference can be found here: http://www.sportsbusinessdaily.com/Journal/Issues/2011/10/17/Leagues-and-Governing-Bodies/NFL-fund.aspx

Michigan & the Smart Money: What the State Needs Today to Build Tomorrow

Posted on by Joseph R. Morrison, Jr.

The smart money has not been flowing into Michigan in a long time. However, that money is starting to come back to Michigan again. This smart money—investments coming from well-informed and experienced financiers —is the key to a recovery for Michigan, and the state government needs to work hard to accelerate that trend. As Michigan shifts away from the auto-dependent economy that has forced the state into a multi-decade decline, the state government needs to focus its effort on attracting the smart money, and it needs to ramp that effort up now.

In order for the state to diversify away from the auto industry, Michigan should make a concerted effort to attract smart money with as much effort as it expends trying to attract tourists. Central to a recovery will be the smart money that helps grow new businesses. Venture capital companies can provide the money and expertise to help young companies get off the ground at a time when traditional funding routes are not open to start-up businesses. Michigan is ripe for continued growth if it focuses on showcasing what it has in spades: a strong university system that spins off opportunities and talent, an abundance of skilled labor, and low barriers to investment. Not only is there room for more money in Michigan but also the demonstrated venture capital returns are impressive enough that the state should be able to sell itself as an attractive investment locale if it makes the effort.3

Michigan’s CEO, Governor Rick Snyder, and its Board, Michigan’s legislature, need to coalesce around this reality; the path to recovery will come if Michigan focuses on attracting the smart money. Quick hits and fun headlines will not help, but venture capital firms like Detroit Venture Partners will. The venture capital investments can help build a solid foundation for a diverse economy, and they can leverage the work already done, such as Governor Granholm’s focus on attracting new industries by encouraging investment in battery and alternative fuel manufacturers. The blitz should ensure that local companies know where to seek the funds. Michigan should also showcase what the state offers to large venture firms around the country. This won’t be a sexy, short-term investment like film tax credits, but it will help create jobs, and it will build a strong foundation for growth and diversification.

Right after Governor Snyder gets home from his trip to Asia, where he will try to drum up trade deals, he needs to have his Chief of Staff put together a domestic itinerary. If Gov. Snyder puts in some hours promoting Michigan in Silicon Valley and New York City, those cities will be promoting Michigan in the not-too-distant future as the next great American turnaround story