Monday, June 04, 2007

ummm, thank you, UPS. I feel much smarter now.

Today I was skimming through the Wall St. Journal, as is my wont, when a rather large ad spanning much of two pages caught my eye. It would seem that UPS "partners with Knowledge@Wharton to bring new and simplified insight to your business." ("Knowledge@Wharton"?? I am just waiting for my own graduate school alma mater to create some asinine, Web 2.0-ish nickname for itself and take up running silly ads. That would truly make my day. If the ad were foolish enough, I might memorize large chunks of it and quote it at parties).

Today's topic of enlightenment is "How VCs Capture Value From Start-up Firms." Now, this is a subject of frequent debate and great interest in my very own home, which is funded solely from income from a series of start-up firms which manage with varying amounts of luck to obtain and frivol away venture capital cash. As one can imagine, I read on with some interest, eager to hear the words of Associate Professor Andrew Metrick of the Wharton School:
When entrepreneurs want to start a firm, what sources of capital can they tap? According to Andrew Metrick . . . there are three. "The easiest is if you have the money yourself," he says. ["Duh", says I]. Second, angel investors -- people who know and trust the entrepreneur -- could provide funds. [I hate the recentish convention of calling investors "angels." That's a perversion of the old usage, where investors in plays or the arts were called "angels." One who invests in a play does so largely out of a love of the art, which is vaguely angelic as plays certainly do bring joy and interest to our lives, at least when we can hire a frigging babysitter. But someone who dumps a hunk of cash into a high tech start-up is just a more well-heeled lottery player, hoping to hit it big. That is self-interested, not angelic].. And third, institutional sources such as banks and venture capitalists (VCs) are professionals at giving out money to start-up companies.
Have you learned anything yet? I didn't think so. Next, Associate Professor Metrick, part of that awesome thinktank, "Knowledge@Wharton", turns his attention to a topic which has peculiar interest in our home, "Valuing Start-ups." He purports to explain the arcane reasoning by which a venture capital firm assigns a value to a company. The Sober Husband and I had a discussion on this very topic over the last week, precipitated by an offer from his CEO to buy out his small stake in the company. When I, a mere drunken housewife, argued with him that he should take the goddam offer before it evaporated, I used such concepts as net present value, the effect of inflation, and the statistical uncertainty of there ever being another event, such as a successful IPO or acquisition, which would yield another chance to turn those paper options into cash. But how would a real professional cover this ground?
Professor Metrick explains that VCs often use a 'quick and dirty method called the venture capital method of valuation. They look at the company and ask themselves -- if everything works out for this company, what will it be worth in five to seven years.
In other words, they guess.

Welcome to Silicon Valley, my darlings, where we all drink the Kool-Aid and talk as though we all knew things which are, in the final analysis, unknowable.


hughman said...

edith wharton-ish knowledge doesn't make one a gardner.

2amsomewhere said...

In regards to your husband's buyout offer, I am reminded of an oft cited quotation by George Berkeley in criticizing how Sir Isaac Newton computed (calculus) derivatives (fluxions).

And what are these fluxions? The velocities of evanescent increments. And what are these same evanescent increments? They are neither finite quantities, nor quantities infinitely small, nor yet nothing. May we not call them ghosts of departed quantities?

You may want to remind him that ghosts of departed quantities don't pay the bills. ;-)


Freewheel said...

LOL. If you don't have an MBA, you should be given an honorary one from Knowledge@Wharton for this clever post.

BTW, my grandfather graduated from Wharton. In the early 30's he was offered penny stocks in a fledgling company known as Coca-Cola. He declined the offer, declaring that "soft drinks will never take off in America."

Anonymous said...

you should place your own drunk@home 2 page ad!

the Drunken Housewife said...

What's really funny is that a serious financial website put up a link to this post in a section on "What Bloggers Are Saying" about venture capital. There I was, sandwiched between two professional, full-time blogs about financial matters.

Anonymous said...

VC firms scare the ba-jeebers out of me. It's all legalized gambling, if you ask me!

2amsomewhere said...

What's really funny is that a serious financial website put up a link to this post in a section on "What Bloggers Are Saying" about venture capital. There I was, sandwiched between two professional, full-time blogs about financial matters.

Good gravy, just think what that's doing to your PageRank!


the Drunken Housewife said...

Probably absolutely nothing, as the spiders would probably just sweep the main page, alas.

Anonymous said...

Much more entertaining to hear your read on this article, than the usual recap on the WSJ I get from my parents...

I really love that phrase 2amsomewhere quotes as well, "ghosts of departed quantities."

M said...

my understanding of the term "angel" investor was one who is willing to kick down some money but still let you run the company as you see fit (as opposed to those other VC devils who want to come in and run things just because they put up a chunk of cash.)

as a former .communist, I can see how both approaches have their merits. on the one hand, the business acumen that got (some) VCs to a point where they can afford to invest in startups could come in handy. on the other, if the company has good people with ideas nd enthusiasm, why mess with it?

finally, as partner in my own (non-tech) startup, I would have to say that funding it from personal savings (as I am doing) is only "easier" from the perspective of not having to beat the streets to find funding. instead, I get to worry over every dime, second-guess my decisions, and fret about my lack of managerial expertise. (then again, at least I don't have some business major telling me what I can and can't do with my company!)

as with most of life, there's really no one winning strategy - you just have to figure it out as you go along.

the Drunken Housewife said...

I think "angel investor" just means a rich individual who puts money into a company, and they call them "angels" because the company would fold without them. Interestingly the "angel investor" who came into the life of the Sober Husband's current start-up DID impose a new CEO on everyone, which has been extremely traumatic for the founder (the CEO and the founder get into pissing matches on a regular basis, and I have characterized the CEO's behavior as bullying).

I think they did take the term from the theatre world, where it's been in use for aeons to mean an individual who bails out a play, but it bugs me because angels in the theatre world are motivated to a large extent by love of the arts, while "angel investors" are motivated by self-interest.

I feel for you starting a business, M. When I started a solo law practice, I used my credit cards to fund things. Sigh.

Anonymous said...

First a side note ...

You actually have a funny typo in there.

"Venture capitalists can sue ..."

But to get to the point, sorry it took so long to get to your award.


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