Friday, January 06, 2006

Ennis Knupp

Today is a big day for venture capital and private equity. Today is - in my recollection - the first day that an investor in this category (either venture or private equity funds) has decided to release the performance of its investments in these funds - of which there are 54. This information has historically been kept very private for reasons i will go in to shortly. For those less informed than i, here is how this works. The funds that fuel innovation in the valley, or leveraged buyouts in the big apple, take on one distinct corporate entity. that of a Limited Partnership or L.P. With each fund formed (for instance sequoia might be on fund 12 or LP 12) a corporate vehicle is formed (LP) in to which investors place their capital. When VC superman 1 wants to invest in the next Google - he acquires the consent of his investment colleagues or general partnership (the monday morning meetings!) after which they execute a 'capital call' to the LP for the required money. All pretty simple really - and as a note - most if not all LPs require the personal capital of the general partnership (the VCs) to invest alongside. The company recieving the capital is valued at a pre and post money number (specifics on arriving at this methodology will we touched on in another blog) that $$ number is then assigned to the venture portfolio for tracking. Sufice it to say - the number is an art not a science and less relevant than the opportunity to BUILD the value. Now the vast majority of investors in the LP vehicles are public, state pension systems, university endowments and the such. These systems have a portfolio of investments that cover all types of risk categories - public equities, private equities, debt and so on - So now comes the interesting part. The Ohio Bureau of Workers compensation has decided - in its infinite wisdom - to divulge the intricate details of its private equity portfolio - this includes IRRs for each fund, valuation for each portfolio company - VC methods of valuing such companies and so on. OUCH i hear from the general partners!!! So to all you entrepreneurs who are seeking the capital, and would like to find out how the fund you are talking to is doing - here you go 3 concluding points: 1. I frankly dont see the merits of this approach - i dont see who benefits from this type of disclosure - certainly not the entrepreneur. 2. I am accutely interested in the view point of certain VC's on this. I hope we all see alot of commentary over the next few days. 3. Someone stop Daniel Primack from dragging the Private equity world in to some sort of people magazine gutter. His comments on this development were absolutely hilarious. He complained that Fred Wilson was blogging too much recently. Well (in the word of cartman) 'news flash tom brokaw!' Fred's readership is bigger than yours now, and he does it for fun.


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