Exile From the Herd - Venture Crapital

Sprott ditches stake in alleged Google-scammer.

nospam@example.com (Mark Jeftovic) — Wed, 27 Jan 2010 22:04:58 -0500

From the earliest days of my investment education, I always liked Eric Sprott and his Sprott Asset Management. Sprott and his team are proven money managers and his Markets at a Glance commentaries are a great no-nonsense source of valuable insight.

As a tech guy, I was intrigued when I found some Sprott Asset Management 13G filings with the SEC that showed Sprott was taking a few positions in some (*gulp*) internet companies. Imagine that. Namely, Israeli start-up IncrediMail Ltd. (MAIL), an easyDNS customer Points.com (TSX:PTO) and Pacific Webworks Inc. (PWEB).

So the interesting one here is PWEB, but we have to take a bit of a tangent.

Continue reading "Sprott ditches stake in alleged Google-scammer."

Did "de-regulation" really cause this mess? I think not...

nospam@example.com (Mark Jeftovic) — Mon, 02 Mar 2009 13:43:50 -0500

You may be surprised to learn that I often listen to Democracy Now! on CIUT on my way into the office in the morning, because a lot of "business types" think DN is "left leaning" and "socialist". The thing I find so lonely out there, is that there is no coherent "grouping" for people who oppose the abomination that passes for "capitalism" outside of "the left".

If you think invading Iraq was a bad idea, you're left leaning.

If you think bailing out all these zombie banks will make things worse, you're a pinko.

In the height of Orwellian irony, it is now "in the interests" of our free market economy to become a socialist state, while the real leftists and socialists out there are gleefully pointing at this economic mess and gloating "See! We told you Capitalism doesn't work!"

As I say tirelessly (and perhaps pointlessly) here time and again:

What passes for "Capitalism", isn't
&
"Free markets", aren't.

As I hear the chorus growing louder that the financial crisis was caused by rampant deregulation of the financial industry, the rush is on to regulate it. But here's the thing: this mess was caused by government interference in various financial markets and asset classes going back a lot of years.
Continue reading "Did "de-regulation" really cause this mess? I think not..."

So now my car is a "troubled asset?"

nospam@example.com (Mark Jeftovic) — Fri, 12 Dec 2008 11:20:00 -0500

As the auto maker bailout drama unfolds, with the Senate now rejecting the latest attempt at one. Bush is suggesting the rescue proceed under TARP, which is widely slagged as the Trash Assets Recovery Program, or more simply "Cash-For-Trash".

The obvious remark aside, that this may be extremely fitting for the North American auto industry, even as a guy opposed to bailouts on principle I still can't wrap my head around why exactly the Big 3 are having such a hard time securing this bailout when the big banks who created this mess have since had second and third helpings of bailout cash of a higher order of magnitude NO QUESTIONS ASKED. It should be noted that if any of the Big 3 fail the US taxpayers will be on the hook for their pension obligations anyway - and said obligations (north of 30 billion for Chrysler alone IIRC) exceed the total amount being asked for in the package.

How could a US "commoner" not look at this and think there's an obvious double standard between blue collar and white collars here? The auto-execs where lambasted publicly for jetting into Washington on private aircraft, while Lehman's number #2 man still had a domestic staff of 29 (whom he's recently had to let go) and Merrill's top man was asking their Board (with a straight face) for a $40 million bonus this year?

The solution for all this is obvious. In Ben Bernanke's now famous anti-deflation speech where he inferred the Fed could drop money from helicopters to stave off Deflation (earning him the nickname "Helicopter Ben") we find a way out that solves everybody's problems:

The US Treasury could purchase 25 to 30 billion dollars worth of cars from the Big 3 and then drop them from helicopters. This would save the automakers and create enough work rebuilding infrastructure to goose the economy back into buy-now-pay-later mode.

I'm surprised this idea hasn't been floated yet.

Before you take the word of the "experts", watch this video

nospam@example.com (Mark Jeftovic) — Wed, 19 Nov 2008 17:07:15 -0500

This is quite simply an amazing video clip of Peter Schiff being laughed out of every major financial newsroom from Fox to MSNBC by all the "recognized experts" from 2006-2007 as he was predicting "the worst is yet to come" over the howling protests of talking heads who smugly belittled him at every step:

Simply amazing. Ben Stein predicting a significantly higher Dow Jones next year than now in August 2007 (when the Dow closed at 13,000 much to everybody's chagrin), Mike Norman all but called him a complete idiot. The moronic pundits asking for opinions nodded attentively as the cheerleaders breathlessly predicted massive rebounds in financials, a weaker than usual housing market meant a mere 10% gain in 2008 and this was the singularly best possible time in history to go "all-in" with stocks.

When Schiff opened his mouth the other commentators were audibly laughing at him.

In honor of today's Dow closing under 8,000 for the first time since 2003, I humbly submit that these idiots should watch themselves in this video, publicly apologize for leading their viewers astray, and quit the financial advisory business.

Except for Schiff of course. His Little Book of Bull Moves in Bear Markets provides a great overview of what's really happening in the markets today.

Newsflash: Some Web 2.0 Companies are Over Valued

nospam@example.com (Mark Jeftovic) — Tue, 03 Jun 2008 11:31:38 -0400

I like Techcrunch a lot, and have always been proud that they're an easyDNS DNS hosting client, but sometimes I find myself shaking my head a lot as I scroll through their feed in my bloglines reader. The still pre-revenue Twitter just got something like a Q-round funding giving them a post-money valuation somewhere north of Canada's GDP and some of the A-rounds being announced stand less of a chance succeeding than bluetooth enabled salad forks.

While the current VC's of these deals may succeed in their own business plans (that of achieving subsequent fundings at ever higher valuations, or effecting a liquidation event where some large elephant with too much money takes the entire thing over), whoever ends up ultimately owning these start-ups at the highest valuation will never recoup that "investment" out of earnings from the venture.

With some of these Web 2.0 companies it's like trying to build a business plan and monetize a really hot knock-knock joke. It catches on like wildfire, soon everybody's telling it in the elevator or at the water-cooler. Your cab driver knows it and so did your waiter at lunch. And then some VC firm comes along throws 60 million into the pot thinking eventually people will pay to hear it, or that they can sell advertisements just before the punch line.

I don't see it happening.

The Grand Swindle

nospam@example.com (Mark Jeftovic) — Thu, 28 Feb 2008 22:17:34 -0500

LTCM, Bre-x, Enron, Subprime, oh my, will we wake up before the Visa IPO scam plays out?

Last week while I watched Orwell Rolls in His Grave and Enron: The Smartest Guys in the Room I began to experience the feeling that I was hearing the same story again, only describing a different setting and different characters. There was a great line by an obscure singer named Tony Carey which sums it up: "Nothing changes but the names, one more ace shot down in flames, in Tinseltown".

It seems to be happening on both macro and micro scales at all levels of our society: whether it's billion dollar hedge-funds imploding because they can't mark their bullshit derivatives to market, or some Hollywood glam-addicted celeb whose exterior life is coveted by the masses publicly unravels or dies with a whimper and a thud; the consistant theme of today's Zeitgeist is The Flameout. It's been happening for years, their intensity is quickening while their ramifications expand and compound and yet, we rarely learn a damn thing from any of them.

Continue reading "The Grand Swindle"

Are domain names recession-proof? Probably not, next question?

nospam@example.com (Mark Jeftovic) — Mon, 28 Jan 2008 14:08:03 -0500

I didn’t see the Fortune article Are domain names recession proof until the weekend, and being the author of the now infamous Domain aftermarket overdue for an asset repricing last year I feel somewhat obligated to comment on it.

There can be no doubt now that the recession is here. I went on record nearly a year ago that it was coming, so I nearly gagged when I saw Jim Cramer say something along the lines of “I told you all this was coming” over the Christmas holidays. So now it’s ok to say “recession” in polite company although the politicians and the pundits still try to soften it up by making sure they modify it with words like “maybe”, “slight”, “mild” and “possible”. Make no mistake, it’s underway and I think we’re far closer to the beginning of it than the end.

So, how will domain names fare in a recession? The Fortune article was upbeat:

Continue reading "Are domain names recession-proof? Probably not, next question?"

The Economy: Time to Panic? (Not yet, but wear diapers)

nospam@example.com (Mark Jeftovic) — Fri, 18 Jan 2008 13:23:17 -0500

As a child, my mother remembers peaking through a window into the bedroom of her grandfather, my great-grandfather, who would sit at a table frantically counting and recounting a few gold coins in a bag. He had gone off his nut, basically, and this was his obsession: emptying a few coins out of his bag and recounting them into it. I was told this tale at a fairly young age and had taken it as a cautionary tale against being miserly or otherwise obsessed with money.

It was only during a recent visit from my mom that I learned the other piece of my great-grandfather's story. He was rich, already a wealthy man before all that "Great War" unpleasantness. WWI ended and he had all of his wealth in (wait for it...) gold. What happened next is what broke the man. A business partner of his convinced him that gold was old news and about as valuable as it was ever going to get (A "barbarous relic" in today's parlance). My great-grandfather agreed he may be right and liquidated the vast majority of his gold bullion and coins into cash. This was in around 1920's Germany, better known then as "The Weimar Republic". Ask any halfway competent student of history about the Weimar Republic and they will all say the one thing it was remembered for the most: HYPERINFLATION.

What is the best possible thing to have oodles of during a period of hyperinflation? Gold What's the worst thing you can do with gold just prior to an episode of hyperinflation? Sell it for cash.

That's what my great-grandfather did and he spent the rest of his days a crazed pauper with OCD. For some reason that story really, I mean really resonates with me on a lot of levels. If I believed in re-incarnation, I would say "I'm that guy, and this time I'm going to get it right goddammit. "

When I flipped past Larry King's show last night and the headline was "The Economy: Time to Panic?" I realized just how badly spoiled we are here in the west.
Continue reading "The Economy: Time to Panic? (Not yet, but wear diapers)"

The web 2.0 VC Roadmap, as blogged by Rick Segal

nospam@example.com (Mark Jeftovic) — Tue, 30 Oct 2007 16:35:25 -0400

Just kidding Rick, I saw one of your posts the other day and couldn't resist For those unfamiliar, Rick pens one of the premier VC point-of-view blogs at Post Money Value

The CEO is way smarter than I am
The CEO has built a team of people way smarter than he is
The CEO has assembled an advisory board of incredibly smart people who just "get it". They're brilliant. Doc Searls, Rick Scoble, Seth Goodin, and Guy Kawasaki. Just to name a few.
The CEO works 16 hours a day, 7 days a week and is driven by total passion and intensity. He doesn't draw a salary and drives a 1983 Lada. He donated his founders shares to charity and his family hasn't seen him in nearly a year.
The first three funding rounds all took place at successively higher valuations.
The developers are amazing. You should see the mashups these guys are cranking out. They came up with a very neat facebook application that's going to be just killer!
The guy we brought in to replace the CEO made the company very attractive for subsequent funding rounds.
The revenue projections look very promising.

And then....
We sold the company for $400 million, a great exit. Congrats to all involved.

or
Microsoft buys a 0.25% stake for $200 million, valuing us at 800 billion dollars, not bad for a pre-revenue venture with oodles of mindshare.

More on panic containment and let the good times roll

nospam@example.com (Mark Jeftovic) — Wed, 15 Aug 2007 12:17:05 -0400

I watched with bemusement the talking heads on BNN this morning, as is my habit since CNBC has been swapped out for a movie channel on my digital cable feed (a better value, I find). They were describing how "normalcy" is returning to the European financial markets and how other sectors are positioning for a "decoupling" from the financial sector being dragged down by the subprime sludge and credit tightening.

So all is well again, all it took was about a half-trillion dollar Hail Mary from Central Banks the world over and we're all supposed to either go back to buying houses with nothing down, no income, no visible means of servicing the debt and an adjustable rate mortgage to boot. Either that or we buy packages of these mortgages bundled together of other people doing exactly that and we're supposed to call it "investing". In any case, the talking heads obliquely referred to this last week of cratering stock markets as a "buying opportunity" that hedge funds will surely position for.

Continue reading "More on panic containment and let the good times roll"

Canadian PPT hard at work

nospam@example.com (Mark Jeftovic) — Tue, 14 Aug 2007 11:38:14 -0400

Background: the sky is not falling. Subprime woes will be confined to the subprime market, the contagion will not spread to other financial sectors. In fact, this is a non issue, there is even this video of Jim Cramer telling you as much last month, so it must be true.

Oh, then what happened?

Continue reading "Canadian PPT hard at work"

Wave of private equity IPOs the final stage of distribution?

nospam@example.com (Mark Jeftovic) — Tue, 03 Jul 2007 23:17:31 -0400

First Blackstone went public, not to be outdone, the Carlyle Group decided to follow suit, and now KKR is jumping on the band wagon.

If the first part of '07 could be characterized by an orgy of private equity deals (subprime woes aside), and it looks like the back half of the year will be all about private equity IPOs (does that make them public equity funds?)

Continue reading "Wave of private equity IPOs the final stage of distribution?"

I don't get the new "New Economy" (2.0)

nospam@example.com (Mark Jeftovic) — Fri, 26 Jan 2007 15:51:51 -0500

Back in 1999 I was walking around in a mental fog because I was coming off of a multi-year bender and had recently stopped drinking, smoking and,uh, other related recreational vices. At the time I was worried I was going to die from boredom (turned out not to be the case at all. My life has been more exciting and fulfilling since I cleaned up than I ever could have imagined, but that's another story...)

So I decided to start daytrading. I took out a $1,000 cash advance on my VISA card and opened an E-trade account. By March 2000, it was worth over $9,000 and I thought Warren Buffet was a pussy. I keep that E-Trade account open to this day as a reminder. It's worth $200 now.

Anyway, at the time I remember walking around the warehouse district where my office was thinking about "the new economy". I just couldn't wrap my head around it. A lot of the companies trading on the stock market weren't making any money. A lot of the start-ups getting funded had no prospects of revenues. "Aha" I thought. "I guess what it's about now, is the stock price and investment flow". Companies didn't make money by selling stuff at a profit, I realized, they made money by raising it in the capital markets!

It was one of the many moments I stood on the precipice of a major epiphany, had I thought it through properly I probably could have done well, but once again, I missed the point. My mind couldn't make the critical leap to where it needed to get in order to profit handsomely ("Aha! We're in the middle of a bubble! START SHORTING STUFF") and knuckled under to the flawed, murky newspeak "I guess that's how things work now. This is a new paradigm for wealth building. The old rules don't apply at this new, permanently high plateau of the New Economy", and I went along with it. Silly me.

Well lightning does strike twice. Here we are and the DOW is reaching new highs daily while insider selling outpaced insider buying 55 to 1 last month (this ratio has been higher than 30 to 1 for over two years). The new Kook-aid (that was a typo for Kool-aid but I think I'll leave it), is "Web 2.0".

Continue reading "I don't get the new "New Economy" (2.0)"

5 VC gambits start-ups should watch out for

nospam@example.com (Mark Jeftovic) — Wed, 20 Sep 2006 15:32:09 -0400

I wonder if I'm the only person blogging about VC who has never had a VC investment? Over the years I've signed two term sheets:

Term sheet #1) Before easyDNS had it's first customer, we had a fully functional platform ready to launch and VC interest. The deal never happened, and the night it fell through I went home to my apartment and cried like a baby murmuring "We're so fucked" over and over to myself.

Why I thought that, I guess comes back to pure naivety. I simply didn't know better then than to think the start-up cycle included "funding" as a mandatory component. Besides, it all seemed so ...glamorous and it seemed then that we were going to miss out on all that glamour, fame and fortune.

Times change.

Term sheet #2) I was seeking funding for the buyout of my partners and it seemed the VC's were the last house on the street. I had already been to the vendors, the banks, the BDC and a couple angels and just couldn't quite piece together the funding I needed. On a complete and utter fluke, with all systems go and both sides committed to the deal, it blew up for what can almost be described as "clerical reasons".

When I got the phone call I was surprised at how it felt: it was an enormous release. I felt like I had just dodged a bullet and in retrospect I think that moment is the single, luckiest life-defining moment for me. Not a day goes by I don't thank my lucky stars that that second termsheet fell through. In the end I had to Plan-B it, and that is the single best thing that could possibly happened in my business career thus far. But that's another story.

It was quite the education that I picked up in both of those funding processes, in no particular order, here's a few "VC Tricks" I had the good fortune not to learn the hard way...

Continue reading "5 VC gambits start-ups should watch out for"

When are "exit plans" necessary?

nospam@example.com (Mark Jeftovic) — Tue, 04 Jul 2006 23:13:03 -0400

My last post led me to think about "exit plans". When we started easyDNS back in the late 90's, I thought "exit plans were for wimps". It made no sense. "Before you even get started, you're supposed to have an exit plan". It smacked of dotcom bubble thinking and that was something we were all hoping to avoid.

Over the years, the lack of an exit plan came back to haunt us. As it turns out, I think I now know when exit plans are necessary:

When there is more than one shareholder
When any kind of external investment occurs or is sought
When you're actually executing against a business plan

We never did have a unified exit strategy and whenever opportunities, offers or traps presented themselves, the lack of a unified plan amongst the partners pretty well derailed "liquidation events" before they ever got rolling. I think that overall we came out ahead as a result and this lack of planning ended up saving us from what were probably company-ending blunders. We got lucky in that respect.

But when the time finally came for the partners to really evaluate our life paths with respect to the business, we probably would have been better served to have agreed on an exit strategy going in and revised it over the years as our circumstances changed.

Now that I'm the sole shareholder in the business, there is no exit strategy, and I don't foresee one in the future. I'm grateful to be where I am today and wouldn't want to live my life any other way. The business for me isn't a job, it's a lifestyle (that dreaded L-word VCs despise) and I'm not executing against a rigid plan that calls for targets, milestones and an eventual liquidation event.

While I don't exactly expect to my daughter to take over the business (she is after all, only four months old and may want to do something else with her life) I like to think I may likely still be running easyDNS in 20 years, even though we may not be in the DNS business anymore (by then who knows what things will look like, computers may use some sort of quantum foam to find each other).

When you're fortunate enough to be able to write your own ticket, you don't need an exit plan and I think if you dwell on one you run the risk of "building to sell" or trying for a "quick flip" and even hardcore veteran investors and VCs think that is an unsound approach.

When multiple stakeholders are involved, part of playing nice with others is coming to an agreement over a unified exit strategy. Again, while you don't want to get too distracted over it (arguing over whether "the buyout number" should be 20 million versus 50 million is pointless if you haven't earned a dime yet), it should probably be done sooner than later.

One way to get it done early, without wasting too much time over it, is to create some basic "shape of deal" criterea and a formula to serve as a simple screen going forward.

Example exit strategy formula: Any buyout has to be a share sale versus an asset sale, be all cash and be a minimum 2X revenues or 7X earnings.

If your business gets anywhere off the ground, offers of some shape or form will come. Most of them will be distracting snipe hunts and a waste of time. Without a basic screening formula you and your partners may waste precious time and energy arguing over it, but with the formula you can quickly evaluate it and if it comes up short simply dismiss it and get on with running the business.