Financial institutions that are “too big to fail”

I personally worked with VC’s. I was treated with respect, and everyone made a little money. Similar with private equity (although I didn’t make money there).

The argument about a few days was a simple statistical argument. The shape of the distribution curve has a high number of failures and a relatively low number of successes. That is not the fault of the culture of VC, that is the nature of early investing. The highest correlating factor to success is the track record of the entrepeneur. And guess what? They all go to the top shops.

Angels are a lot like property flippers – it doesn’t take a lot of skill in a favorable market. Angels are history. We are back to friends and family and sweat equity.

small tech tends to flourish in the turndowns, as entrepeneurs are less likely to be be fully employed and over compensated.

Your arguments are not very fact based and not very convincing. Saying that VCs are patient does not prove that they are good investors or a good deal for people who put money in them.

I recall seeing a study cited in the Economist, and now years later cannot track it down, that found that venture capital produced equity like returns with far more standard deviation. In other words, it was an inferior deal on a risk/return basis to straight stock investment.

Your “few days” is no response to the charge that the entire industry’s performance rests on a very few deals. The promise of VCs is that they can find and nurture superior opportunities. If there are very very few that pan out, that says that the VCs are considerably overselling their ability to find good situations. You’d expect a much less steep gradient of outcomes if the VCs were making a difference in selection and management.

My attorney does a tremendous amount of work with entrepreneurs with promising technology. Engineer, both research and big corporate experience in developing technologies, then worked for a major PE player. He steers clients away from VC, towards debt, angels, anything but VC. There are networks of investors affiliated with Stamford and MIT, for instance, who fund deals and the VCs never get their hands on them. His belief is that you have to overpromise to get VCs interested and when you come short, they are much more aggressive in reducing the ownership interest of the founding group than other capital sources.

Now that is probably an isolated opinion, but if even a few lawyers and accountants feel that way, it also suggests some very good deals are being steered away from VC to other money sources.

I have founded a venture backed company, as well as participating in an LBO (but never did an IPO). None of these innovations are particularly beautiful up close, but venture capitalists behave the most predictibly, and have by far the longest time horizon.

Your 3 con arguments strike me as false logic:

1. A few deals amount to all the industry profit. Yeah? A few days a year mark all the stock profits in a year.

2. A few usual suspects make the good profits amongst VCs. Well, same with hedge funds. Talent matters, and there have been too many wanna-be’s hanging out their shingle.

3. Since the dot-com bubble burst, there has not been much profit. VC relies entirely on IPOs to repay investors. Its been a bad decade for the stock market. No surprise that VC’s are in the same boat.

VC is highly cyclical, and we are at the bottom of the cycle. Easy to throw stones right now.

In the same vein, something that needs to go are soft dollars. Their just another hidden charge “helpers” levy on unsuspecting clients…unbelievable that the sec still allows that sort of unabashed conflict of interest to continue…it completely defeats the whole purpose of wrap/fixed mgmt fees.

Please, please please tell me why this is bad. I am a layman and a loyal reader who has divvied up his life savings among various Vanguard index funds, a la Wllm. Bernstein. You know, the basic 70%-30% stock/bond allocation with 30% of the stocks in a variety of international funds. I’ve stuck with this for 10 years. Am I a fool? If so, why? I have enormous respect for you and the work you do on this blog, but I entreat you to explain your reasoning on this.
Thank you.

And even with millions of dollars, if you are, say, inventing a drug, you’ll still probably need a collaboration with a major drug company to get through FDA drug testing. If your friend was disappointed about running VC firms, maybe he wasn’t running the right kinds with the right motivations. They have some great biotech VCs in the Northeast that help bridge the gap between academic research to useful ideas.

Just one PhD student’s view.

On the lighted side, here is a list.

You cannot say you believe in free markets if:

1. You think that the economic cycle has been repealed.
2. You think that the Federal Reserve will rescue the economy.
3. You think inflation is a blessing and deflation is a curse.
4. You mistake a lobbying department with a profit center.
5. Your business’ best friend is a senator.
6. You think that a war will save the economy and your business.
7. You dislike government spending unless you benefit from it.
8. You tolerate that a public company be run for the benefit of the apparatchiks, I mean management, and not the patsies, I mean owners, of the company.
9. You think that a company can increase profits well above inflation in perpetuity and all hedge fund managers are geniuses.
10. You think that the government is not the solution. The government is your sugar daddy.

Re: “Clearly, if the level of the spot yield is significantly different from the defined notional coupon, or if the slope of the yield curve differs significantly from zero, the conversion factors defined by the exchange will not equate the net delivery costs of all eligible deliverable issues.”

This CDS/derivative thing is all about the maturity and underlying future cash flow of defaulted collateral…. but then again, it could be connected to The Large Hadron Collider, so any help appreciated!

See: The LIFFE, like the CBOT, calculates the conversion factor for each bond by discounting the individual bond’s remaining cash flows using the assumption that the spot yield curve is flat at the level of the notional coupon defined in the futures contract. Clearly, if the level of the spot yield is significantly different from the defined notional coupon, or if the slope of the yield curve differs significantly from zero, the conversion factors defined by the exchange will not equate the net delivery costs of all eligible deliverable issues.

See Kilcollin (1982) for biases that conversion factor systems of this type introduce into the delivery mathematics and Garbade and Silber (1983) for a more general discussion of penalty versus equivalence systems for quality adjustments on contracts with multiple varieties