Saturday, February 25, 2006

1995 Called. It Wants Its Blog Back

pop! I'm not usually catty.  Well, usually not usually.  Still, I couldn't help myself today.  I was inspired.

I'm not a venture person, of course, but I can't help but observe that, for someone who's only real claim to fame is that they worked for Apple back in the 1980s, started a failed software company in the 1990s and published a series of books, there is a lot of self-aggrandizement going on within the boundaries of Guy Kawasaki's blog, which dispenses critical advice essential to any aspiring founder like why you shouldn't start your company name with an X or Z, or that you should "sound different."

Of course, it's equally important, it seems, to "suck up to a blogger."  If that doesn't give you enough then you can always read about how Guy writes his blog entries, and how they differ from his book writing skills.  Oh, there are also lots of important looking pictures of Guy (obviously deeply contemplating weighty affairs).

No.  I am not making this up.

It's perhaps no wonder that, 4 years on, Kawasaki's fund, the "Garage California Entrepreneurs Fund, LP," which somehow managed to tear $5,000,000 from CalPERS and another $5,000,000 out of other investors is looking at a sad -2.4% IRR and has only managed to invest half its committed capital.

Really, if you're going to hold yourself out as an expert on venture capital and write books on "The Art of the Start" shouldn't you at least have a fund with more than $10 million in committed capital available?  And shouldn't it be doing well?

We wrote $15 million in equity last month and you don't see me writing a book.

Because of the long-term nature of investing in private equity, funds can produce low or negative returns in the early years of the partnership. In the first few years management fees are drawn from partner's capital and portfolio companies are held at cost leading to an understatement of ultimate value.

Yeah, ok.  One year on our firm doesn't seem to have an issue, though we are a buyout firm, not a VC.  Neither does Carlyle High Yield Partners IV, LP, which also is a vintage 2002 fund and also has $10 million in committed capital and has somehow managed to show a 19% net IRR.

But then, success in building companies doesn't seem to be his dream.  How can I describe his dream exactly?  Oh, let's let Guy do it himself in his own words from an entry he calls "How to be a Mensch."  I don't think I could sum it up better.

But The Goal is to spend eternity in first class--specifically Singapore Airlines first class. Here your seat reclines to a completely flat position, and there's a power outlet, personal video player, wireless access to the Internet, and noise-cancelling [sic] headphones. There are also chefs, not microwave ovens.

You've got a way to go, Guy.  Your 2% management fee on $10 million is only $200,000 per year by my count.

Wait.  Did I mention he's a Stanford grad?


Thursday, March 09, 2006


verses I really hate websites and blogs developed by someone who's written a book, or two.  Particularly if the books suck.  Nowhere is more hype expended to market more useless literary (and I use the term loosely) nonsense to larger numbers of people than in the fields of personal finance and venture capital.  Nevertheless, occasionally, you find something out there worth reading.

Compare the awful and awfully pretentious: Bona tempora volvantur the understated and simply good: O'Reilly Radar

Personally, I think if you are going to adopt latin mottos you either better be a large institution with a massive endowment, or at least be able to speak latin and get the grammar right.  Aut insanit homo, aut versus facit.


Wednesday, March 15, 2006

The Bono of Cable?

foreign policy expert The Wall Street Journal published a piece last week (WSJ Subscription required) quite critical of Charter Communications and its big-name backer, Paul Allen of Microsoft fame.  Among other criticisms the article points out:

Since leaving Microsoft two decades ago, Mr. Allen has struggled to dispel the notion that he owes his wealth solely to his prep-school camaraderie with Bill Gates. During the dot-com mania he dropped billions into the Internet, tech and telecom sectors -- in firms ranging from Inc. to broadband group RCN Corp. -- with little to show for it.

Now one of his biggest bets, in the cable business, has been dealt a blow. AT&T Inc.'s takeover of BellSouth Corp. raises the competitive ante for all cable operators. None are as feeble as Mr. Allen's Charter Communications Inc. Its $20 billion of debt is 50 times the market value of its stock ($409 million). Mr. Allen's 58% stake is worth $250 million, a far cry from the $7 billion-plus he spent buying Charter and Marcus Cable back in 1998.

Mr. Allen's company is in poor shape for a fight. Last year interest payments of $1.8 billion nearly matched its cash flow as measured by earnings before interest, tax, depreciation and amortization. To cope, it has refinanced debt and shed some cable assets. This financial weakness may explain why Verizon chose a Charter market in Texas to launch its TV services. Charter halved prices in response, but Verizon still nabbed a quarter of the market.

Any other company in Charter's condition would probably seek bankruptcy protection. But that would wipe out the bachelor billionaire's interest, with possible tax implications for his investment firm, Vulcan Ventures.

Is it wrong of me to be amused by these college-degreeless one trick ponies who made their billions in the tech bubble, name their investment vehicles after Star Wars and Star Trek terms and are slowly discovering that an internet baron is about as useful to business as an A-List celebrity is to a health care and foreign policy debate?

My advice?  When you hit 23 black on the roulette table on your first try and get a 35 to 1 payout, leave the casino and dump the money into t-bills.

The debt piece of this discussion is interesting.  I have commented before on the slow dilution of convenant pieces on large debt pieces in response to a booming market for debt.  Interesting then that the Wall Street Journal highlights the fact that S&P discontinued their covenant rankings product back in the 1990s.  I wonder, if they made a revival, what sort of rating would Charter get?


Saturday, March 25, 2006

Long Live the Bonos

they're everywhere I would respond to Mark Cuban, but given the total lack of content or facts in his (still remarkably long) blog entry on CEO compensation, I don't really know how to begin.  But we can't really blame him.  He pulled substantially all of his multi-billion in net worth out of the single dot-bubble sale of to Yahoo! in 1999.  (You remember, back when "pooling of interests" accounting was still permitted?)  Still, given his position it is strange that he seems to think shareholders have it tough.  Then again, if Yahoo! or actually had strong management teams back in 1999 I doubt Cuban would be a billionaire today.  Strong management teams aren't rewarded in Mark Cuban's world.  Lucky shareholders are.  Internet spin doctors are.  Is it wrong of me to refuse to accept the change when spellcheckers try to get me to capitalize the word "internet"?

Yahoo! effectively closed Yahoo! Radio (the leftovers of in 2002.  Not a sign of it remains today.  And how much did their next big bet on internet radio cost after the bubble?  $12 million.  (That folded too).  Yet, I would be surprised if anyone even lost their job over either bet.

And if I'm supposed to be impressed with Cuban's management acumen, shouldn't the Dallas Mavericks have done better than a $17.8 million EBITDA loss in 2005 and a $36.0 million EBITDA loss in 2004?  And this with a 35-40% debt load?  Only the Portland Trailblazers had greater losses in 2005.  Portland.  Population ~500,000.  Dallas.  Population ~1.2 million.  What does that tell you?  And guess who owns the Portland Trailblazers?  I'll give you a hint, his performance since his one-trick has flagged too.

Thank god Cuban has got an investment newsletter targeting the "little investor."  I'm sure his years of experience in that category guide his scintillating advice. Or maybe anyone with real money won't touch his advice with a ten foot pole.

Well you have to give the guy this, he's having fun with his money.

You see a lot of this lately.  The return of the internet spin doctors.  After 6 years they are bored.  Some are broke.  People, they hope, have forgotten.  It was so long ago, after all, that whole "bubble" thing.  Now they need money again.  A second chance.  A third, even.  Why not?  Their poster boy is back in the game.

They don't own internet companies anymore, of course.  They are pretending to be managers though.  You can recognize them because a lot of people think they are cool, and want to hang out with them or go to their parties, (they are talented speakers, the top of the bullshit salesman foot chain; that's how they snowed everyone in the 1990s) but they have almost no real performance to point to. Not even 6 years after the bubble.  What have they been doing?  If they got lucky back then, or got fired and cashed all their options before the crash, then they have probably been spending a lot of money.  They also love to hold themselves out as authorities on everything from social policy to international relations to, yes, CEO pay.  This despite the fact that they might have sunk a big piece of their net worth into something stupid and they might not even have a college degree.

I am going to start calling these people "Bono."  (I was going to use Tom Cruise and call them Cruisers, but "Larry (Ellison) and the Cruisers" just seemed too spin-doctorish).  Managers because they could afford to buy a firm and run it poorly and unprofitably for years without wincing.  Able to afford it only by fluke.  Authorities on everything, lack of knowledge notwithstanding.  Celebrity is their asset.  Attention span is their leveraged finance.  But their significant use of attention leverage means you have to service the quarterly attention debt payment.  No wonder they all have blogs now, are getting slapped with record amounts of fines from their sports leagues owing to their "straight talk," or buying toilet companies to be outrageous.  Attention.

Oh, they love attention.  They love to be heard.  And they work at this.  Shameless self promoters.  Sometimes they write a bunch of "pop-biz" books that hit it big, but say almost nothing.  They love to brag about how they dropped out of school, because learning how to really work would change them in some bad way.  Sometimes this portion of their bio, the bragging about dropping out, can go on for 1/3 of the total print surface inside the dustcover.  These books of theirs usually have bright covers and cool titles.  They are usually endorsed by all sorts of interesting types, who turn out, on further investigation, to be endorsed by the people they endorsed and the whole crowd appears to have worked at the same now defunct start-up together.  No one talks about this, of course.

The books themselves are primarily a series of war stories and platitudes that pass for "advice" for the masses.  Finance is a particularly popular subject, it being just complex enough in which to hide bullshit from the layman.  Anyone who might be able to spot the bullshit is too busy working to actually spend time reading such books, much less calling attention to the bullshit in them, although this is quite easy because there's some on every page.

Sometimes they take long understood concepts or quotes that have already been stolen from someone once, and put some lipstick on them, give them a new name, and unveil them to the world as original ideas. The few surviving dot-com firms (maybe able to survive because they are employed by a sea of jobless Bonos, filled with answers to tough questions like "is it ok to lie on your resume?" and manged to get sponsored by Starbucks) then endorse these posts with awards.  People buy this because no one who finds cutsie concepts important bothers to do any real work, reading or research on where they came from.  This brings me to a corollary to Leo Rosten's original genius quote, "First rate people hire first rate people.  Second rate people hire third rate people."  The corollary seems to be: "Third rate people quote first rate people to second rate people."  I also think the term we are looking for here is a Bono Explosion, not a Bozo Explosion.

I think Rosten would have been good at spotting Bonos in their many forms.  He once also said: "I never cease being dumbfounded by the unbelievable things people believe."

If the Bono has a blog it purpose is generally to tout how cool they are.  (Financial performance or real management experience is rarely accessible on the blog).  Instead, it is common to point out what their Technorati rank is. (This being a proxy for the financial performance they do not have). Strangely, while the less well-to-do Bonos are always wearing expensive shirts and ties in their many expensive head-shots, and though they may have dozens of books in print or professional sports teams in their portfolio, somehow they still seem to need context-based advertising on their weblogs.

It is enough to make me scream, "Please, who must I plead with, what petition must I sign to have these Bonos finally exorcised from management positions?"  It is enough to give me cramps.  But I can't scream.  We buyout types need broken firms to snatch up.  And no one leaves a wider trail of wrecked and shattered shells of former firms than the Bonos.  And given the direction of interest rates?  The Corporate Highway of Death is about to be quite full.

Don't want to be a little smoking cinder?  Just lay down your wireless microphones and walk off the stage with your hands up.  Then we won't have to bomb the company into a charred wreck with you still in the driver's seat.

The Bonos are dead!  Long live the Bonos!

Ok that's over.  Where'd I put the Midol?

Wednesday, March 29, 2006

Wait, The Lock Up Period is HOW Long?

bono the gpElevation Partners is a newly formed private equity firm that makes large-scale investments in market-leading media, entertainment, and consumer-related businesses. We focus on investing in intellectual property and content oriented businesses, as well as traditional media and entertainment companies, where we can partner with management to enhance growth and profitability through a combination of strategic capital and operational insight. Elevation Partners has nearly $1.9 billion in committed capital to be invested over the next six years.

Elevation Partners is led by six accomplished professionals:

Fred Anderson, the former EVP and CFO of Apple Computer
Marc Bodnick, a founding principal of Silver Lake Partners
Roger McNamee, a co-founder of Silver Lake Partners & Integral Capital Partners
Bret Pearlman, a former Senior Managing Director of The Blackstone Group
John Riccitiello, the former President and COO of Electronic Arts
Bono, lead singer and co-founder of U2

I'd definitely want my money back.  Now.

(Via: Sand Hill Slave)

Monday, April 03, 2006

Closet Italian: Bono

singing for italy Thank god Bono is here to rationalize Italian politics!  Thank god the BBC is here to cover it!

Monday, April 10, 2006

Just Copy-Paste It

they're everywhere

Asked how to write executive summaries by some poor sap misdirected enough to think he's appealing to some kind of actual authority, Guy Kawasaki does what any Stanford educated, former dot-comer Bono would do.  He copy-pastes work someone else has already done (poorly). At least this time he cites the work (you're making progress since that whole "Bozo Explosion" theft, Guy), but that's probably only because it is a buddy-ole-pal who he lifted the material from in the first place.

To learn how to write a two-paged, one page executive summary of the sort that would cause me not only throw it out before I hit the first half-page mark, but also set up a permanent junk-mail filter on the off chance I might potentially be the recipient of even one more piece of blithering nonsense that might conceivably one day emanate from the sender, investigate his post here.  Thank god I'm not in the venture business or I might have to actually subject myself to the vomitous creations of Guy's many deluded disciples.

Don't despair if your expertly crafted teaser doesn't create any interest.  You can still rely on Guy to teach you how to put together roving ticker-tapes of the many pictures memorializing the numerous expense account funded sporting event outings you attend in the many hours you are not working on actually creating value for some shareholder or limited partner somewhere.  Excellent!  Your site looks just like Vegas (or perhaps the Morgan Stanley building in Times Square) now!

I know I'm mud slinging.  I can't help it.  I keep trying to ignore Kawasaki, but his book-buddy sponsoring, self-promoting drivel is inflated with such dot-com era hype that it is impossible to avoid hitting links to the university of pure vapidity that is his American Cheese laden site.  It repeatedly sneaks up in the midst of real content like a kind of bird flu-like, viral, context driven keyword ad.  And then it just slaps you in the face with the undaunting gaudiness of its lack of substance.  It lacks substance with such clarity and perfection that it is actually offensive to those who place even a moderate value on substance.  It is operational anti-matter.  Everything that is anathema to even the basic concept of "operational excellence."

That weblog is like a construction crew outside your window on a Saturday morning.  Relentlessly annoying, smelly, gratingly loud, on union wages, totally out of touch with the rest of the world and, despite producing nothing but chipped concrete, corrosive dust and the occasional cut phone line, somehow possessed of the misguided view that early morning noise, in sufficient quantity, will be mistaken for hard work and competence.  And, you know, I suppose that if I were going to tap someone to tell me how to pen a teaser it would be an individual from a firm with a track record at least slightly more significant than that possessed by the Garage California Entrepreneurs Fund, LP.

Have I sufficiently expressed my view yet?

Perhaps I'm hard on Guy.  At least he has, for the moment, stopped blowing his own French Horn by signing his posts with the exotic locale he wrote them in.  "Posted from a flight to Bradula, Africa."  Perhaps he's been sitting quietly in San Jose for the last several weeks.  No wonder he stopped.  Who wants to brag about sitting idle in San Jose?  Let the good times roll!

Again, I need the Midol.  Guy gives me cramps.

Friday, April 28, 2006

Control, Liquidity, and "The Deal"

separated control from the king Augmenting the three day blitz on private equity regulation, liquidity and valuation, DealBook today points to an article on Investment Dealers' Digest that outlines the growth in the secondary market for private equity interests.  Says IDD:

The secondary private equity market that is taking shape today is more than simply a larger version of that of five or 10 years ago. The business is in the midst of a sea change-and a shift in the balance of power between buyers and sellers. But despite increasing liquidity, the market remains extremely opaque. And for the most part, general partners prefer to keep it that way.

I think the development of a stronger secondary private market further deadens the liquidity concerns and the valuation issues I touched on yesterday.  Obviously, a well developed secondary market provides liquidity, and gives more valuation data points.  It probably does not do so in the early stages of new funds (as I doubt interests often come up for sale in those stages) so that problem remains thorny.  That is, if you think it is a problem.  Personally, I do not.

A brief review of the theory of the firm is perhaps in order.  I've done it before, but a second pass is probably a good exercise to undertake.

The background that underlies corporate structure is specialization.  Those with capital don't always possess management expertise.  Those with management expertise don't always possess capital.  This is a critical concept.  Let me say this again in another way, because it really is critical.  Just because you are rich, doesn't mean you are smart.  In fact, there might be a negative correlation.  (See e.g., Mark Cuban).  Aside a few, exceptional, dynastic Italian families that bore exceptional eldest son after exceptional eldest son for five generations in a row, a lack of specialization locks a firm into (and therefore limits a firm to) the management abilities of the capital holder.

We solve this problem today via a corporate form that separates ownership from control.  Generally, this is a "good thing."  With a healthy market for corporate control and general liquidity of investment, capital holders have a wide variety of options in which to invest.  Careful selection combined with some speculation should permit capital holders to avail themselves of the best managerial talent, and concentrate their efforts on whatever other thing it is that they do best.  It is important to note that "whatever other thing it is that they do best" could easily be professional wine drinking, collecting expensive and beautiful silk panty garments, or simply the pursuit of plain 'ole debauchery.  Their incompetence is no longer particularly relevant to the economy.  We have removed it as a drag on assets.  Their large gains on their investment, made possible by specialized and outsourced managerial talent, boost the local economy via their equally large expenditures on frivolous parties, lavish dinners, opulent estates, and etc.  Of course, if they are actually good at something, their time is freed from managing their own investments and they can be productive at what they do best or most enjoy.  (Hopefully this isn't buying and manging their own sports teams and in turn creating massive losses).  Underestimating the impact of the introduction of these sorts of economies in the seventeenth and (more so) the late eighteenth century would be a serious error.

As a consequence of the separation, managerial talent can be "poor, smart and hungry" (thank you Gordon).  They can, with no pedigree whatsoever, rise from the dust through pure merit to succeed.  Their merit is measured simply: financial returns.  Let me distinguish "financial returns" from "wealth."  Wealth requires nothing more than birthright or the selection of a certain 6 random numbers on the right day to acquire.  Accumulated wealth is the wrong (but increasingly common) measure of financial acumen.  Occasionally, large windfalls (and I mean this in the truly random sense, not the recent, politically motivated oil profit redefinition) land in the laps of total idiots.  What is important is what they do with it.  What is important is their return on assets, not the size of the assets.

I strongly suggest those interested in these underpinnings do some research into the massive sociological and cultural changes that occurred during e.g., the transition between the Baroque and Enlightenment periods.  It was the rise of individualism in the face of the centralized power of the state and the aristocracy that broke down the caste structures in a way that permitted a "mere merchant" to act as a King's agent, for instance.  It is the kind of thing that permitted Armand Jean du Plessis, born only to lesser French nobility, to become "Cardinal Richelieu," the financial and political powerhouse behind Louis XIII's dynamic reign.  Appreciating the unprecedented nature of this agency relationship is both important and difficult.  Louis XIII effectively ceded all the financial decisions of the French Empire to Richelieu at a time when the centralized power of the monarch approached absolute.  It was both a departure and counter to the social norms of the day.

A full understanding of these social changes and the rise of individualism in this context is essential, I believe, to grasping the importance of these concepts, and to understand where we might be stuck today without them.  Without an understanding of this basic premise an understanding of the theory of the firm is incomplete.  If you are a glutton for punishment you might even read Richard Evans' political biography of Caius Marius' whose reform of the Roman legions from a strictly caste based military system into a citizen army opened the way for Rome to meet the many military challenges that would follow.

There are, of course, complications related to the separation of ownership and control.  Agency costs, as they are known, are perhaps the most thorny.  Simply put, how can we be sure that the agent is acting for the principal, rather than in self-interest?  The modern answer is that we impose some duties on the agent.  The duty of care.  The duty of loyalty.  As a result the playing field looks like this:

Capital holders have a variety of fairly liquid options and a variety of illiquid options in which to invest.  They go into these investments knowing that they are appointing agents to mind their capital and direct it.  There should be no surprise to the holder of a public security that they do not have much power over the decisions to manage the firm.  They can vote on a variety of corporate actions including the election of directors.  Their vote is proportional to their holdings.  Some votes are binding.  Some are not.  All of this is fairly carefully laid out in the by-laws and other charters of the corporation.  It is not a mystery that compelling the management to change the color of the walls because you read a recent study that indicates off-pink increases productivity is not in the cards.  This arrangement is what Justice Scalia is famous for calling "The Deal."  The arrangement between holders of capital and management talent.  Don't like "The Deal"?   Don't buy the stock.  Today, with the many information sources (like ISS and such) on corporate governance and control provisions there is no "ignorance" excuse left.

Enter the market for corporate control.  Occasionally, we come across holders of significant capital who also possess superior management acumen.  Today, through the market for corporate control, these capital holders can wrest from existing managers control of the corporation.  This gets easier when management performs poorly and control (in the form of reduced stock price) gets easier to acquire.  This is the check on management incompetence.  Shareholders can vote with their feet, move their capital into another investment (creating a lower cost for the acquisition of corporate control by new managers- wonderful thing capitalism, yes?) or band together and oust the current leaders.  Very democratic, really.  Also remember, no one requires shareholders to invest in these public firms.  So long as there is liquidity there are a wealth of other opportunities.

Now enter the complications and interference.  There are a variety of modern constraints on the market for corporate control.  Usually, calls for these constraints are shrouded in evil characterizations of the character of aspiring candidates for corporate control.

Then, there are daft holders of capital like, say, Mark Cuban, who seems to believe that if you permit management to run the company in which you hold shares you are, to put it a brand of eloquence unique to him, "a Corporate Ho."  As Bonos go Cuban is on a roll.  He's got his own radio program on satellite now.  A bigger microphone to distribute his drivel on corporate America.  I suppose there might be someone less qualified to criticize "windfall profits" but I'm not sure who it is.  I guess I don't know why Cuban doesn't just mount some hostile takeovers if he is such an outstanding manager.

See, to Cuban your interest as a shareholder extends to a variety of things over and above providing capital for other managers and voting with your feet if your profits are low.  Things like "corporate responsibility," a term which has a meaning that varies depending on what is convenient to the speaker, and denying your shares to other capital holders who want to short the company you are invested in.  I constantly marvel at those who are all for free markets when they rise but whine about the inequity of short sellers when they fall.  But then, these things are to be expected from people who don't understand corporate law or the separation of ownership and control or why it is a good thing.  People who, in the manner of as many spoiled brats, want to buy shares under one set of assumptions but then change the underlying restrictions intrinsic to the corporate form once they own them.  They want to be owners and managers, suddenly.  Are they willing to forgo limited liability protection as well then, I wonder?  If they want to be managers so bad why not spur a shareholder revolt, or sell their stake and found their own corporation.  (Bet you my last dollar they will resort to the public equity markets to fund this corporation and then whine about shareholder activism too).

I speak of those who call for liquidity in private equity investments in the same breath.  It was no secret that you were going to be subject to a lock-up period when you wrote the check.  Why do you now want to change the rules?  The "have your cake and eat it too" crowd seems to get louder (if not larger) every day.  Leave the market for corporate control alone.  Stop legislating takeovers.

As for secondary markets in buyout funds?  Again, I persist in my view here, anything that shortens the investment horizon term is counter-productive to buyout endeavors.  Want liquidity?  You have many options.  Just don't expect the same returns.

Saturday, April 29, 2006

Dumb Movie Money

dumb and dumber money The Wall Street Journal reports (subscription required) on the increasing role of hedge funds in the movie business.  It is not immeidately clear if they picked Ryan Kavanaugh, famous primarily for having made a series of missteps in the dot-bomb venture capital business that got him sued more than once, because he is a likely rags-to-riches story, or to gently remind the reader of the meaning of "dumb money."  Either way, it makes for outstanding "Vegetable Captial" material here.

Certainly, funding films must feel a lot like the venture business.  Reading the Journal article it becomes clear that all the people in line in front of an equity investor when it comes time to pay out, including exhibitors, the studio distribution fees, payback for production and marketing costs, actors and directors, make up for a pretty large black hole that has to be filled before investors see a dime.  It must feel quite like being a later stage investor coming in behind a massive wall of pre-existing preferences.  (That sounds redundant).  The Journal gives "Batman Begins" as an example.  $150 million in budgeted costs, $372 million in worldwide ticket sales and Kavanaugh's investment entity, "Legendary Pictures LLC," is still in the red by "several million dollars."

Considering that Legendary put up 50% of the budget for the film (the standing arrangement) and that even if a film has is a pretty big hit in the box office Legendary has to make their money back on notoriously fickle DVD sales, even a slight downturn in the film world could be pretty lethal.

And that's not all.  Studios seem to be smart enough to keep the good stuff for themselves, either funding the "sure things," (Harry Potter is the Journal's example) internally, or using debt rather than parsing out equity.  This locks in the upside for studios, who don't have to share a percentage of the take on these big franchise hits.  Instead they are looking to outside money to fund their riskier capital needs.

Nope, that's not even all.  Even McBusiness Week has figured out that the trend today is away from the box office.  The industry has been pushing up ticket prices and dumbing down theater size and the experience of going to the cinema for years.  Consumers are beginning to grow annoyed.  Luckily for us we have Mark Cuban to tell us that the studios should just release for DVD, Video on Demand and theaters on the same day.  As if the compression of the "lag time" between theater release and DVD release wasn't already headed that way on its own.  Less time to work off those preferences before investors get their take.  As a percentage of revenue for a film the box office has gone down to 17.5%.  Robust DVD sales might buoy the stakes of the likes of Legendary.  We'll see.

So how does Legendary intend to add value and pick winners?  Monte Carlo simulations.

Monday, May 01, 2006

Total Lack of Surprise

woops Loudeye, the firm run by a Microsoft "prodigy" that threw a entire block party for a self-congratulatory fest when it raised $72 million, before getting another $48 million from Microsoft, and then $25 million from a 2004 stock sale and then another $8.5 million from a recent stock sale, and who knows what other fundings inbetween that I've missed, meets all our expectations this week.  That is, it sells substantially all its assets for $11 million to Muze, Inc. 

I'm going to use this occasion to introduce a new concept.  The "Cuban Overlap Failure Index."  (COFI).  The COFI number for a failed firm is the number of Google hits that firm's name produces when "Mark Cuban" is added to the search term.  Loudeye's COFI: 221.  I'm currently testing the "Kawasaki Overlap Failure Index" (KOFI), but no one spells Guy's name right so it is probably less effective.  Still, Loudeye's KOFI: 83.


concentrate and ask again So can being connected to Mark Cuban or Guy Kawasaki be a strong indicator of impending financial doom?  I'm not sure, but it is a lot of fun to speculate.  So I ran some regressions of the Cuban Overlap Failure Index and the Kawasaki Overlap Failure Index.  (COFI v. KOFI).  Results?  It is better to be in Google searches next to Mark Cuban than next to Guy Kawasaki.  KOFI numbers have an R-Squared of .626 against the losses of some famous dot-bombs.  (,,, Webvan, Flooz, eToys,, Kibu).  COFI numbers don't show very good R-Squared numbers (.199).  Regression graphs below.  I wonder if these have predictive ability?  If so then Losses in $ millions at Failure = 1.296 x KOFI number.  Predictive losses for Google?  $814 billion.

neither one of them looks good

Monday, August 07, 2006

A Room At The PE Hotel (5:28)

i am an important decision maker within the firm- no really

DealBreaker, first with a John Weisenthal "Opening Bell" spot and then via its indespensible, daily Reader's Digest DealBook feature (thanks to John Carney who also has the good taste to link to me on occasion), that points us via witty link titled "Bono = Corporate Tool" to a DealBook entry, which then channels a David Carr missive that puff-pieces Elevation Partners (a.k.a. Bono's Press Release and Private Equity Playground, LLC) while purporting to cover that firm's acquisition of a minority stake in Forbes Magazine parent Forbes Media.  Harder to find a better example for my "Bono" catagory.

Selective reading is required to give you the real story though, which, when seasoned with my gratuitous speculation and a garnish of Hollywood hypocracy, is actually pretty juicy.  To wit:

This is the third deal for the fund, after investments in a video gaming partnership and a real estate Web business.

No one in the group has any significant experience in print properties....

Forbes’s competitors have significant corporate backing — Fortune is owned by Time Warner, BusinessWeek by McGraw-Hill, and Condé Nast will soon introduce a magazine to be called Portfolio.

For the last 25 years, Bono has stayed atop a fickle business by embracing the latest technology in order to build global reach, constantly renewing the creative product and engaging in public stewardship along the way, including work on trade issues and global poverty.

(Read: Debt Forgiveness).

Mr. McNamee said the stake in Forbes did not necessarily clash with his politics and his rhetoric, saying, “The way you solve poverty is giving people the tools to overcome it.” Bono could not be reached for comment.

"Bono could not be reached for comment."  Bono?  Could not be reached for comment?  Are you kidding me?  Attempting to separate that guy from a microphone is akin to a demonstration of the nuclear residual strong force.  One wonders if the honeymoon with private equity is actually over for Bono and, having already extracted value from his brand- as evidenced by the fact that every acquisition Elevation makes, no matter how silly, will result in a shower of "Bono buys Greenland ice cube producer" press releases- the other partners have now taken over the reigns.  "Thanks, we'll take it from here.  Loved your Chicago show.  Call me for squash next week."  I just can't see Bo"world economic forum"no voting "yes" in an investment committee meeting on "Project Flat-Tax-Magazine."

...Steve Forbes, whose hobbies run more toward flat-tax advocacy, said that “One” is his favorite U2 song. It begins somewhat portentously with a plaintive pair of questions: “Is it getting better, or do you feel the same? Will it make it easier on you, now you got someone to blame?”

...Mr. McNamee said that Elevation — the word is a U2 song, the name of one of its tours and an equity fund — was Bono’s idea.

Steve Forbes: “This is a natural step for the company with right people. Forbes as always been about entrepreneurial capitalists.”

So remind me why Bono is involved again?

From where I stand
I can see through you
From where youre sitting, pretty one
I know it got to you

I see the stars in your eyes
You want the truth, but you need the lies....

Oh, yeah.

Thursday, August 10, 2006

COFI's Return

cubanism Certain dynamics in the world truly inspire me.  It is often difficult to express, even in the infinitely expansive vocabulary I enjoy within the cereberal confines of my own inner monologue, the glee that overcomes me when I discover a subtle and theretofore unnoticed connection in cause and effect that suddenly opens to me a wider understanding of the world around me.

I was aglow for days after finding the inventory calculation error in management's financial disclosures that vastly understated assets and permitted us to outbid everyone in the otherwise brutal auction we claimed victory in last quarter.  I could have walked on air after correctly identifying, through careful examination of their existing portfolio companies, the financial partner that would take a minority co-investment position with us in a recent acquisition.  My pattern of requiring of my analysts an automatic 2.5% increase in the discount rate for firms on the West Coast or with more than one Stanford graduate in senior management has earned us hundreds of thousands of dollars and me personally any number of free drinks.  And then there was the highlight of my pattern recognition joy; my highly focused take-over from Sinister, LLC's head of IT of the three week old witch hunt that uncovered in a matter of days the notorious and much sought after Sinister, LLC overhead projector thief (who even now languishes in the midst of a criminal prosecution for grand theft).

So it is equally difficult to express my pleasure at the wild success of my Cuban Overlap Failure Index, which old Going Private readers will recognize from back in May; an endeavor that seems almost prescient given recent developments.

Recent victories for the COFI score system?

COFI of Burger King: 18,700

Interesting new COFI analysis?

COFI of Xethanol: 61
COFI of Comverse: 375
COFI of ShareSleuth: 10,400

ShareSleuth is in trouble.  Big trouble.  COFI can feel it.  Xethanol?  Not so much.

Tuesday, August 22, 2006

Unstable Isotopes

also related via their chemical similarity to lead Jeff Jarvis' "Buzz Machine" takes on a topic dear to my own heart, specifically, how much of a scumbag is Mark Cuban really?  My opinion varies by day.  Presently, Cuban reminds me of Ununpentium.  Both are entirely synthetic, highly dense elements that shouldn't really exist in the natural world, created almost by accident and only recently via the fusion of a series of other dense elements (isotopes of Calcium and Americium for Ununpentium, the shareholders and management at AOL and Yahoo for Cuban) through the judicious use of spin (a cyclotron, for instance- or perhaps a bloodless public relations firm and a penchant for controversy), require large amounts of expensive equipment to feed and maintain and that still have no use whatsoever other than for basic scientific research (chemistry or forensic psychology, depending which side of the metaphor you want to use) and to keep various wing-nuts chattering.  So far no one has created a particularly stable isotope of Ununpentium (or Mark Cuban).  The half-life of its most stable known isotope is 87 milliseconds or so, and without a massive research budget, it tends to degrade into less sophisticated (but more stable and less prone to decay) elements like Ununtrium (similar to Guy Kawasaki).

As for "ShareSleuth," I don't quite know what to say other than anyone with a high enough mass to volume ratio to believe that "altruism" or "helping the poor schmuck" should be found on the same page as "shorting capital markets for profit" deserves to have Mark Cuban as a recurring dinner guest.

Thursday, August 24, 2006

8 + 2 = 12

working hard outside jordan hall Revel in Stanford math: The twelve ten things to learn in school this year.  Learning to count is apparently not among them.

Monday, January 29, 2007

Dude at Work

i don't buy it My spies tell me that this is a profile of an experience with Guy ("Let the Good Times Roll") Kawasaki.  I don't doubt it for a half-second.  (Via "The Curse of Guy Kawasaki," on Valleywag).

Wednesday, June 06, 2007

Elevated Dividend Recapitalizations

expensive revamp The pickings must be getting slim for Bono-populated Elevation "We aim to help media and entertainment businesses create and market great content and insure it reaches the widest audience possible" Partners.  It is hard to find any other viable way to explain their minority PIPE transaction resulting in a 25% stake in Palm, Inc. (hardly a media or entertainment business), particularly given that the use of funds "plus $400 million in borrowed money" is "to pay shareholders a $9 per share dividend."  (Around $940 million).

Of course, the dividend recap is a regular feature of corporate finance, but for Palm's part, doing it with such a large chunk of equity seems unduly expensive.  Elevation actually permitting this kind of use of funds in a company that is about to face a burning R&D need in the face of the availability of the iPhone and the competitive reactions of other smartphone makers thereto, is just daft.

But then, Elevation can probably compel Forbes to write nice articles about their newly "revamped" Treos.

Wait, The Lock Up Period is HOW Long? (Part II)

devilish Faithful Going Private reader, the "Inscrutable Chicken" reports that Elevation Partners just changed their website such that it now includes "consumer related businesses" in its investment criteria description.  (Perhaps the Elevation "investment team" reads Going Private?)  Of course, they seem to have done a rush job on the change as the supporting pages still don't contain any reference to "consumer related businesses."  (Oops).

If I were a limited partner I might be a little ticked off at the wide divergence from their original investment model.  Making PIPEs in PDA manufacturers seems a bit wide of their original mark, but then, I don't have their PPM so I have no idea what their original mark was (aside, of course, from "Hey, Bono, wanna be in our private equity firm?")

Don't change your brand Gimme what you got
Don't listen to the band
Don't gape Gimme what I don't get
Don't ape
Don't change your shape Gimme some more
Have another grape
Too much is not enough
I feel numb
I feel numb

Elevated Lowered Expectations

spare us Reader mail has been on fire today.  Perhaps it is a consequence of the new draconian white list policy I was forced to institute.  Perhaps not.  Whatever the cause, I am basking in reader mail goodness.  Most recently, loyal reader "JN" points me to the blog of an alleged associate at Elevation Partners.  (One more example in the rather full quiver of reasons I post anonymously).  The peek into his world is a fascinating tour of rudderless and inept piloting through the narrow straits of the pacific ocean with all the pointless intoxication you'd expect from a sailor.  But then, what did we expect from a blog named in part for a popular, foreign vodka?  This, I suspect:

"Myspace's best use has got to be for checking how drunk you were the night before."

Or perhaps, this:

Tales of Fattiness

This weekend was a complete disaster. Friday night I was partying with some friends at Vessel and we ended up getting bottle service, which is never a good idea for me. I remember eating at Yuet Lee afterwards but not much else beyond that point. The next day when I was hanging out with some of the same people, one of them mentioned how a friend might have left their camera at the pho place.

As if your taste buds had not already been literally burned off, in between the descriptions of the guilty pleasures of business class travel- awkwardly made "California Appropriate"(tm) via the addition of class warfare themes in which the airlines are segregating villains- and puzzling over the meaning of happiness (related to gambling in Vegas it seems) any number of topics are obliquely addressed with strangely intoxicating misdirection.  The gems of wisdom that can be harvested therefrom include:

The author on the dangerous nature of expectations:

When you come to expect things, it becomes more difficult to exceed those expectations and create happiness.

The author on the relationship between financial model size and social skills:

Size of excel model says nothing about technical competence of's really about how you use the model. If anything, there is a positive correlation between model size and creator's lack of social life.

Of course, I violently disagree.  Large unwieldy models are almost universally produced by financial "professionals" who have no clue whatsoever about their predictive value (hint: it is vanishingly small) and therefore the size of the model is, in my view, inversely proportional to the technical competence of the employee.  And what does this say about the author?  Let's see:

Usually I work with models that have file sizes around 1-2 mb. Well this one particular deal I am working on requires an unusually large model. Each version I save is a little larger and I'm up to about 250 mb. To give you an idea, I've saved 52 versions which implies total hard drive space of 13 gigs (not completely accurate since previous versions smaller). I'm sure the company keeps multiple instances on various days, which means this could easily require over 100 gigs of storage.

More on the danger of expectations and the purposeless of hope:

Hope leads to high expectations, which thus far seems to be a non-constructive emotion. I've mentioned how it slows down the healing process and can create dispair [sic] if the expectations are not met. This is what I have thought for quite some time now.

On the genius that is his fund (Elevation Partners?):

I was sitting there the other day thinking...I work at a media fund. I see the future. The future is online. Every part of my life is moving online. So why don't we ever hear about online dating?

Before long you'll be able to consummate the relationship without leaving home or missing a WoW session.

Who hires these people?  Who invests in these funds?  Oh, yeah wait....

If I just got a job, learned to be a street sweeper
I dance to the beat, shuffle my feet
Wear a shirt and tie and run with the creeps
Cause it’s all about money, ain’t a damn thing
You got to have a con in this land of milk and

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