Musings of an Entrepreneur

                                                 

Paul Graham has a fantastic article on the perils of raising money and advice on how to best do it.

Read it at:
http://paulgraham.com/fundraising.html

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If you had purchased $1,000 of Delta Air Lines stock one year ago, you would have $49 left.
With Fannie Mae, you would have $2.50 left of the original $1,000.
With AIG, you would have less than $15 left.

But, if you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash.

Based on the above, the best current investment advice is to drink heavily and recycle.

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My good friend Auren Hoffman just wrote an interesting article on why entrepreneurs end up investing mostly in consumer focused companies. As he points out, we have day jobs running our own companies and spend less than 2% of our time as angel investors. As such we don’t have time to do a lot of due diligence and consumer Internet companies are just a lot easier to evaluate.

It costs so little money to build a B2C company (in the early stages at least), that when they approach us, direct to consumer sites already have a product up and running. We meet the team once, play with the product, check a few references, evaluate the deal and that’s it. With one meeting, we can make a call on whether we want to invest or not.

B2B companies are much more capital intensive to build. When they seek angel money, they are looking to build the product. As a result both validating the market need and evaluating their execution potential is much harder and requires much more work.

There are many professional angels and early stage investors whose job is essentially to make investments and who will take the time to do the due diligence, but as a full time entrepreneur and part time angel, I completely agree with Auren. It’s reflected in my most important investments: Lab Pixies, Sonico, 24h00, Phanfare, Allmydata, Bandongo, FamilyBuilder, RateItAll and even Dineromail are all mostly consumer facing.

Read the full article at:
http://blog.summation.net/2008/09/why-angels-continue-to-invest-in-consumer-internet-deals.html

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It annoys me to no end that even as banks have massively diluted their shareholders to raise capital, they are still paying dividends. In the current environment they should focus all their efforts on capital preservation. They should completely eliminate their dividend. Besides, given the number of new shares they have issued, cutting the dividend per share by a certain percentage, does not decrease the cash outflow by that percentage.

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Vanity Fair has a fascinating article on Rupert Murdoch. Michael Wolff has been given unprecedented access to Murdoch for an upcoming biography. I was surprised by the picture that emerges of him as a man. He seems much less well thought through than I imagined.

Read the article at:
http://www.vanityfair.com/culture/features/2008/10/wolff200810?printable=true&currentPage=all

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It’s very rare for former heads of states to play a meaningful role in world affairs after their presidency. In fact, their employment option is often limited to tours on the speaker circuit. The Clinton Global Initiative is a welcome exception.

I had the privilege of attending the inauguration on September 15-17, 2005 and have been impressed with all they have accomplished since then. I also respect the work they have done with their Millennium Network to broaden their appeal beyond donors who can afford to pay $15,000 to attend their annual meeting.

I especially admire the launch of MyCommitment.org. The Clinton Global Initiatives has always been about making a commitment to better the world. In fact people who make commitment and do not honor it are not invited back. It’s a great idea to open up the concept to everyone and anyone and to publicly recognize the commitment and difference that individuals can make.

Many sites from Wikipedia to Yelp have recognized the potential of empowering their users and publicly recognizing their contribution. I am glad charities are opening up to it as well!

I look forward to impact of all those pledges in the years to come!

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Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

Yours Faithfully Minister of Treasury Paulson
–
Seen at: http://www.boingboing.net/2008/09/22/hank-paulsons-bailou.html

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I am not usually a fan of his style, but in this case, his outburst was justified and eerily prescient!

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By Steven E

Worst financial crisis since the Great Depression? Yes—but don’t be cowed by talk of calamity. Disasters call for prudence and circumspection, not frenzied action. Congress, in particular, must carefully consider the downsides of any bailout plan before granting the Treasury department the unprecedented, unfettered, and certainly un-American power to nationalize private assets of dubious value with $700 billion of public money—a monumental sum that eclipses even the cost of the Iraq war. For congress, waiting a few weeks to legislate a solution does mean protracting the current crisis. But there is no reason to believe that the world economy would collapse in that time. On the other hand, it is reasonable to believe that implementing the proposed bailout plan may have long-term adverse effects on capitalism. The solution congress is about to legislate will foster corruption, increase market volatility, address the effects of a problem rather than its cause, and it sets a dangerous precedent. None of these shortcomings are being discussed by the press.

1. It will lead to corruption.
   Laws that govern securities trading are designed to prevent malfeasance and self-dealing. These regulations don’t apply to the Treasury department because the department was never intended to transact with the private sector. Having the Treasury department bid on private securities would be a mistake. The department has no checks and balances. We’ll see cronyism in the distribution of these funds. At the same time, there will be no provisions for judicial review, public contests, or appeals. The process will be secretive, undemocratic, and anticapitalist.
2. It will not resolve market volatility, and may increase it.
   The lack of transparency that is bound to accompany the infusion of $700 billion into the economy—more specifically, into firms that took down our economy—will rally some investors sometimes and disappoint others. The point is there will be more surprises, not fewer.
3. It addresses the effects of problems rather than their cause.
   This bailout addresses the effects of serious problems (declining house prices; defaulting mortgages; a drying credit market) but ignores the cause of those problems (regulatory missteps). An approach that offers the veneer of financial security without addressing the roots of instability amounts to a formula for disaster. A sudden flurry of liquidity in the credit markets can lead to a bout of foolish borrowing by distressed corporations. Financial institutions may repeat some of their earlier mistakes.
4. It sets a precedent. This begins with $700 billion, but who knows where it ends?

The entire country is faced with an economic catastrophe. Two men—Henry Paulson and Ben Bernanke—say the solution is to have every American lend $2000 to a secretive governmental agency. This is not our only option. We can think of others. Ask yourself this: Even if all the Bush administration’s hyperbole about financial mushroom clouds is true, even if that rhetoric weren’t suffused by the administration’s ignoble history, even if Henry Paulson and Ben Bernanke were the two most capable, trustworthy men on the planet (and yes, they are capable and trustworthy, but in a few months a new administration will take office and there may be a new treasury secretary), even if a solution were absolutely necessary to avert a full-scale depression—even if all that were the case, wouldn’t it still be preferable for congress to take time to evaluate other options? This solution may prove more dangerous than the problem.

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