Fund Mashing

i’m taking a week off of whatever it is i do in sf and hanging out in hawaii with my girlfriend. i’m having my own more ghetto version of bill gates’ think week, reading magazines instead of deep thought treatises and surfing the net and even some blogging.  here’s my first big thought…maybe we have entered a new era where great investment opportunities are actually worth more money. maybe the balance of market power between the capital providers and capital users is undergoing a permanent shift. we are seeing the top venture capital firms command 25-30% carries and an explosion in the number and size of hedge funds whose managers can earn more in a good year than even the most over paid ceo or innovative entrepreneur. i have been lamenting the lack of leverage for people like myself to spend their waking hours on new ventures, but maybe the  market is more efficient than i’ve realized. in a world of massive capital pools chasing fewer return opportunities it is exactly those people who create the most leveraged investments who will command the greatest profit for their ideas and efforts.

many people (including myself) have questioned the sustainability of this type of environment, where there seems to be more funds than actual investment targets.  however, it seems that the world of investment creation is beginning to evolve as well. in recent months we’ve seen hedge funds begin to replace banks and private equity firms in financing some major buyouts such as kmart and the manchester united football club (which i still dont get).  bill burnham and fred wilson have talked about vc’s shifting to a more proactive macro theme based approach rather than the more passive waiting for good plans to hit their desks.

sure sounds like they’re talking about the age old practice of merchant banking. i wonder if this was originally born in a time when the world’s financiers ran out of enough bankable visionaries and found themselves in need of manufacturing their own.

idea capital may be open to anyone

i wonder whether the best entrepreneurs will also evolve to this merchant banking approach where they create much more leveraged investment opportunities to pursue new markets with far greater capital from the outset rather than bootstrapping.  in this new world, we may see a complete blurring and mashing of entrepreneur, vc and hedge fund. 

9 thoughts on “Fund Mashing

  1. Closing the Gap Between Capital & Innovation

    Mark Pincus has an interesting post about the possibility of a blurring of the lines between entrepreneurship and venture capital. If this is a trend, it’s certainly one that I would encourage–the idea of co-creating vs. waiting is one that…

  2. Mark,
    Long time reader, first time poster:
    Is this like the Idealab model of raising capital to work on a bunch of ideas (and then spinning off the ones that show promise)? Not sure that the entrepreneur gets the management fees from the pot of capital though…Also, using the fund to do buyouts might not be pretty if entrusted to the entrepreneurs to ‘fix’ (vs. operators).

  3. I’ve been thinking a lot about your last two posts (Dream job and this one) about and the New York Times Magazine article about serial entrepreneurs. I see a trend coming from you and other successful entrepreneurs who are looking around for the next thing: they want to come up with the ideas and then let someone else execute.
    This seems counter-intuitive to me. The real value of a serial entrepreneur is in her ability to execute where others just dream. Put slightly differently – the team is the only thing that matters – so without you, or some other proven entrepreneur, any plan is too risky to back. I think it would be a mistake to take a back seat and try to run businesses from the Board level. The model is a proven failure (incubators) – you need great management to make any idea work, no matter how innovative.
    –A

  4. Mark,
    The rules are being rewritten because knowledge is becoming transparent. Hedge funds are doing buyouts now because they know they can arbitrage the value opportunities themselves. Additionally, the supply of funds is forcing them to innovate. I think you were saying that the supply of capital is forcing innovation across the board. VCs will compete with buyout firms and angel investors. Mutual funds are competing with hedge funds. PE firms are competing with hedge funds. It’s going to get crazy, which many have already negatively commented on, but what about the upside? I think in 20 years we’re going to look back at crop of financiers that rewrote the book on legacy investment paradigms. I think you’re right in that they will be talking about the guys who were best able to fund a secular trend and capitalize on it. But isn’t that what the capitalistic systems is supposed to do? Doesn’t our society want to put capital in the hands of people who can look forward and determine where best to invest our resources (as measured by the dollar)?

  5. Hedge funds are bucking the odds. They are increasingly seeking mainstream money with mainstream investment objectives. Is there something about the concept of a reversion of expected returns to the mean (median)? If so, what can the hedge funds expect. Come to http://www.merceronvalue.com and see a number of posts about hedge funds.

  6. Next up – VC’s offshored

    There have been several conversations lately about how the VC industry is changing, along with the general private equity market.

  7. I think you would see a little bit of a different approach if the VC’s and hedge funds had personal guarantees on the money they play with. This would probably help to limit the amount of easy money floating around.
    We run a small merchant bank in toronto and while our basic model is to work as invoice discounters, what we do is we find an opportunity we like, put our capital behind it (a portion of which is ours, a portion is investors, we have our names on) and we find someone to help us build the business. They get a share of the profits, and take actual monetary risk along with us.
    While we are not talking huge dollars, the potential is there for some serious leverage as there is still some good upside, you just don’t need a home run every time.

  8. New Breed of CEO: Beyond the Bootstraps

    As an experienced CEO [see my LinkedIn profile] and blog post about my availability, I’ve already bootstrapped dozens of companies. To be honest, I’m out of boots and out of straps. I’ve traded them for stock, options, warrants and a bit of cash. I’v…

  9. In a VC and more angel market that has recently been though a sizable amount of downrounds, one way of protecting acompany’s valuation is to have the initial managemnt team tied closely to the investors….just a thought.

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