A VC - Latest Comments in We Need A New Path To Liquidity

Re: We Need A New Path To Liquidity

TedMurphy — Tue, 17 Jun 2008 09:08:29 -0000

Great comment. Only problem arises when management blinks and refuses to step up and buy the commoditized component. Then, the component can reach back and eat the platform (ie Microsoft and IBM).

Re: We Need A New Path To Liquidity

gballman — Thu, 24 Apr 2008 13:13:06 -0000

Trading of private equity has been occurring since 2005 in Canada amongst high net worth accredited investors on Genesis Exchange. The company is a private seed stage private equity exchange blessed by the regulators in 2004 (see www.genesisexchange.com). Some notable groups with similar systems operational in this market are Restricted Stock Trading Network (RSTN) and New York Private Placement Exchange (NYPPE). As far as I know Genesis Exchange is the only market dedicated to the companies from seed stage through middle market. Full disclosure - I am the chairman of Genesis Exchange.

Re: We Need A New Path To Liquidity

Ron Thompson — Thu, 17 Apr 2008 15:07:05 -0000

Interesting idea.

As an active Angel investor looking for options to increase venture value and liquidity, please let me know of developments with a Private Equite Market / Exchange.

Regards,

CAIL

Ron Thompson

905-940-9000 X244
www.cail.com/angel

Re: We Need A New Path To Liquidity

Ethan Bauley — Tue, 15 Apr 2008 03:11:09 -0000

PG weighed in on this vis-a-vis Umair's "Fix VC" post today...

http://news.ycombinator.com...

My take on this is that profitability = sustainability. Businesses that are producing cash flow have all the options in the world (as long as the founders can get some liquidity)

Re: We Need A New Path To Liquidity

BenParis — Mon, 14 Apr 2008 12:18:01 -0000

I totally agree with you on the theory, but I am wondering how one would deal with the frenzy which such a "private" exchange would create? I mean that when a private company is looking for liquidity to continue its growth (or to allow an exit for entrepreneur and VCs), then secondary offerings are already a very active way of providing more liquidity. And there are very well known PE funds, and funds of funds, already on top of their game at sourcing good secondary opportunities in the Boston area and elsewhere.

So, if "good" private companies can privately exchange/offer some of their shares to accredited investors more easily than it's already the case, it will attract more and more investors dying to enter these companies capital, and you will end up with a "private OTC exchange"...

Am I totally talking rubbish, or am I on the right track?

Thanks for your answers

Re: We Need A New Path To Liquidity

Alex — Mon, 14 Apr 2008 05:55:45 -0000

Yes, I agree. But, your model is a little bit out of line. When I contacted your firm to sell my founders stock one of your associates didn't return two of my calls. Your model ONLY works for large portfolio acquisitions of existing VC funds that are nearing there 10 year date.

Re: We Need A New Path To Liquidity

Robert Brown — Mon, 14 Apr 2008 02:49:40 -0000

Go to www.unifiedmarket.com.

Re: We Need A New Path To Liquidity

Robert Brown — Mon, 14 Apr 2008 02:42:14 -0000

Go to www.unifiedmarket.com.

Robert

Re: We Need A New Path To Liquidity

chris tacy — Sun, 13 Apr 2008 12:36:26 -0000

The Venture community absolutely needs a new liquidity option. Without it, the whole business (and value proposition) will collapse.
But I don't think that entrepreneurs need a new liquidity option. I think the only ones who truly do are those who are first and foremost in it to get rich (not win, not innovate, not create great products, but simply cash out).
And sorry... but the lack of liquidity does not destroy innovation. Innovation exists outside of the capital market.

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 17:44:02 -0000

Umair wrote a post on this at the harvard business school blog on friday

Fred

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 15:37:02 -0000

That's a good solution Ken and I'd like to learn more

Fred

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 15:24:03 -0000

Totally agree

Re: We Need A New Path To Liquidity

bobwyman — Sat, 12 Apr 2008 14:11:55 -0000

As the pieces become "smaller and smaller," the barriers to entry are lowered and thus there are more opportunities to enter the market. Lower barriers lead to intensified competition, reduced differentiation and lowered returns -- even as the overall market grows. In such a market, the qualities of your implementation become irrelevant. Sustainability comes from one of: lowered expectations, integration with a larger platform or branding. Getting bought out early is the best thing you can hope for...

Branding is ephemeral, lowered expectations tend to reduce the drive for innovation, and integration has a plethora of problems. It is hard to do, but even if done well, integration leads to the problem of the "whole being greater than parts." The result is that it is exceptionally difficult to evaluate the marginal contribution of an integrated component. Rewards to the component builders inevitably end up being determined by their negotiating skills or their luck -- not the true value of their work or their skill as innovators.

I learned a great deal about the "component economy" with ALL-IN-1 at Digital in the 80's. Then, I took what I had learned to Microsoft where I was Senior Product Manager for Applications Programmability in the early 90's (91-93), I used to explain to people on a regular basis that by building a platform that encouraged components (COM, Active/X), we were "architecting monopoly" for Microsoft. The logic was simple. By providing ways that people could build components to extend Microsoft's products, we would lower the barriers to entry into the software market at the same time that we lead people away from competing with us. Innovators would focus on developing small components that produced "sufficient" rewards to motivate them but they would find themselves in a competitive marketplace that limited their returns and thus ensured that they didn't have enough revenue or energy to tackle competing with Microsoft itself. At the same time, as small developers built better components, those components strengthened the Microsoft platform and made competition against the platform itself unthinkable. Over time, the aggregation of innovations in any single component space would result in commoditization of the component. (i.e. dozens of small competitors, each trying to build a "better" component of type X would eventually define a "commodity" or standard implementation of the component.) Once a component was commoditized, the idea was that we would simply either build our own version of it or buy in one of the existing implementations. By packaging a component with the platform, we would remove it from the the realm of competition and force innovators to start the cycle over with some other component. I always argued that the preferred approach would be to *buy* an existing implementation, and to over pay for it, since to do so would lead developers to believe that one day they might be relieved of wearying competition by being bought out... The strategy seems to have worked for Microsoft... And, we're seeing the basic pattern repeating, perhaps less intentionally, in the Web 2.0 space.

As many others have said, much of what people are building today is "features" not products. As long as that is the case, raw economics is the real problem with the software business. Most customers want integrated, consistent systems and will prefer an integrated solution to a collection of "Best of Breed" implementations even if the integrated system is somewhat less powerful than a cobbled together set of Best of Breed solutions. Thus, the market drives us to integrate our components, yet we don't know how to value and reward a component which is only a small part of a greater whole. Given that we have no model for valuing and rewarding component builders, we're lucky that large companies are willing to buy out "feature companies" and component builders. If developers couldn't look forward to such buyouts, they wouldn't have the motivation to innovate.

The alternative to building components is building platforms, but the market can never sustain more than a few platforms at once. The platforms that "win" are typically the first in a space since platforms attract component builders and rapidly become too strong to attack. Thus, the only things you should take to IPO are platforms. And, the only opportunity you have to build platforms is when there is a major market disruption or when the platform defines a new market. Thus, Microsoft, Apple and Sun became the "Graphical UI" platforms. Google, Yahoo! and Amazon got the opportunity to be "Internet" platforms. Now, FaceBook and a few others are hoping that the "Social Web" is enough of a disruption to justify platform creation. (I doubt it...)

Well, this is already too long for a comment... Sorry to bore you.

bob wyman

Re: We Need A New Path To Liquidity

Andy Lee Graham — Sat, 12 Apr 2008 10:45:01 -0000

i feel you are explaining two groups.
- Venture Capitalist one with a short term return motivation and the second wanting long term viable. businesses.
- Entrepreneurs

I on the other hand think you are complaining about some bad choices:

A good post, thanks, however the internet is still a trendy beast, an infante in diapers.
You said,
"services we have come to rely on"
Flckr, Facebook, and other things are just trendy toys, and can easily be replaced by a better service.

You outlined the good companies like Google.com, ebay, probabably Amazon.com.

I own a large Travel Site, I do not partner with toys, I partner only with solid companies that will not divorce me, Flickr, MySpace, etc will divorce, I do not agee on the YouTube.com, I think they will remain viable, but lesser important as they become diluted by competition. Most companies will soon host videos on their own servers when he tech become availalbe.

But.. Do not rely, do not partner with trendy companies, but trendy companies do make big money for VC money.

But the Entrepreneur needs to create a stand-alone system, like YouTube.com, Google.com, Ebay.com.

It is the system a VC should buy, not the trendiness, an autonomous system will succeed, the to be the first one is the hope, but in the end you must contiually expand and innovate.

I feel you have created some entangled business partners that some of your VC companies rely on and now the return has dropped. They company managment made the choice, not the company that purchased, so the company lost interest, like delicious, so what, the error was not the bad management after the purchase, it was the company that became entangled in the company in the first place.

Solution: Stand Alone Web Site, not relying on others to thrive, but relying on the whole Web to survive, the viability of a company should not be dependant on a wanna be trendy site. And if you need to partner up, google.com, Ebay.com, the big boys with long-term goals, nothing so trendy.

Andy an American Citizen in Panajachel, Guatemala

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 10:35:02 -0000

That is a good idea and I think we'll see a lot more of that kind of thing.
Kudos to FF for their innovation in this area.

Fred

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 10:17:02 -0000

Johnk

Yes, you are right that it's hard to keep a team motivated but I am involved
in companies such as alacra, comscore, ibiquity, and return path where the
founding/early stage team is still at it 10 years after starting the
company. You have to keep re-incenting people, increasingly with cash
incentive comp plans in addition to equity. You need to build an amazing
culture (which is something that all companies need to constantly work on),
and you need to keep the work interesting and engaging. It can be done

Fred

Re: We Need A New Path To Liquidity

fredwilson — Sat, 12 Apr 2008 08:22:02 -0000

Re: We Need A New Path To Liquidity

Krishna Mony — Fri, 11 Apr 2008 19:54:47 -0000

A mini regulator ( can be a board with nominees from NVCA, Institute of CPAs or Audit professionals) of sorts.

Re: We Need A New Path To Liquidity

Guest — Fri, 11 Apr 2008 18:16:00 -0000

drug biotech still needs lots of money, however, even that pales in comparison with energy. $100M rounds are becoming quite common in that group. You have not seen exits yet, it is very new, however a few companies will make it out big: Ausra, some of the geothermal plays...

Re: We Need A New Path To Liquidity

Paul Wallbank — Fri, 11 Apr 2008 18:02:23 -0000

The problem is many of these ventures don't have a sustainable business model. Without a sugar daddy in the form of a VC or big corporate parent to pay the bills, they can't keep giving their stuff away for free.

This is the downside of the "free is good" argument.

http://avc.blogs.com/a_vc/2...

It's fine as long as it's a loss leader for your revenue generating products, but when the free stuff is your product then you can't survive.

Eventually the VCs and Corporates get sick of subsidising something that doesn't add to the bottom line and grow disinterested too.

Re: We Need A New Path To Liquidity

Guest — Fri, 11 Apr 2008 17:59:29 -0000

That's a bit rude and uncalled for. I have had interactions with Saints and came away really impressed. They are smart, efficient and get to the point. There's no real reason for you to lash out like that, without substantiation...

Re: We Need A New Path To Liquidity

Factchecker — Fri, 11 Apr 2008 17:26:50 -0000

I get your general point, and kind of like it .... and I am no AOL fan... but still think it is important to inject a few facts into the conversation, per Comscore March: Mapquest is the largest service in its category by far (2x over Google Maps), Moviefone is #2 behind IMDB which was also integrated via acquisition into Amazon. Netscape and Tacoda are messes to be sure, and they probably should have never been bought, but Advertising.com, another purchase is pretty much the strongest display ad network out there. So, I suppose even in a tough environment like AOL, some companies flourish and some perish, much like the private company world.

Re: We Need A New Path To Liquidity

Factchecker — Fri, 11 Apr 2008 17:09:20 -0000

Just looked at March Comscore and Moviefone is #2 with 16MM uniques, behind IMDB which was another acquired property (Amazon bought it).

Re: We Need A New Path To Liquidity

Thomas — Fri, 11 Apr 2008 16:42:18 -0000

As a former tech banker myself Lucaf, I completely agree with you on this point. What's the matter with owning and operating and getting dividends from businesses? I think the first LT ivnestment fund that does this will cause a tidal wave as some big institutions (CalPers, Harvard, etc...) will be happy to harvest above normal cash-flows over a 20 year timeframe. This short-term thinking is a requirement of the VCs who really want to cash their carried interest. Maybe carried interest needs to be changed to some form of cash flow sharing.

Re: We Need A New Path To Liquidity

Thomas — Fri, 11 Apr 2008 16:29:14 -0000

Smaller and smaller pieces = smaller and smaller exits