PureVC

Diamond Castle Sells Catamount Energy

I wanted to take a few moments to congratulate the team at Diamond Castle on their sale of Catamount Energy to Duke Energy. It's the first major sale in their portfolio. The team led by Larry Schloss has done a great job of getting their first fund off the ground and finding solid investments. Schloss has assembled a top notch team at Diamond Castle and it looks like they are continuing their winning ways from DLJ Merchant Banking Partners and Credit Suisse. Great work guys!

Starting Your Hedge Fund - Where to Start? Part I

I received a nice comment from a reader who continues to want information on the hedge fund space and how to seed your hedge fund. Thus I will put together a series of posts on the topic for my reader's interest.

Indeed there are hundreds if not thousands of prospective hedge fund managers that are looking to get their fund seeded and get some investors. And most if not all will not have the pedigree or connections to get big dollars from a select few investors.

I continue to believe that there are generally two or three paths to starting your hedge fund. The first is having that pedigree and/or being in a lift-out situation with a strong track record and connections to investors in your old fund or even sponsorship from your old manager. The second is starting small and building that track record over time. The third is treating your fund as a startup company and actually going out and raising funds and selling equity in the underlying manager.

I'm not going to talk about the first method since I've addressed that in previous posts. The second and third paths are the interesting ones. They are the ones that are less glamorous. They are the ones that take time. They are the ones that depend on manager persistence.

The economics of a hedge fund really only start to make sense at the $50 mm and above level. At that level you can start to hire ancillary fundraising staff and really start to get a machine going. Under that amount you are bootstrapping and anybody involved in the fund is going to have to do a little bit of everything. Thus, how do you get to that level of assets under management that is scaleable?

Well, if you can't put together a few hundred thousand or even a million bucks then you probably have no business trying to be in the hedge fund business. When people say "the rich get richer" it is sad but true. Even in a true merit-based fundraising system, it would be unlikely to find someone with adequate financial experience and trading experience to be able to run a fund without having the economic ability to put together a million dollars either from friends, family, co-workers, or investors. As I've said before, running a hedge fund is really running a business. All business is based on sales. In the hedge fund business you need to be able to sell yourself and your fund to investors. If you can't sell the promise and hope of great returns then you definitely should not try to run a hedge fund.

Icahn vs Yang - Watch Your Back

Today I read with interest Carl Icahn's letter to Jerry Yang of Yahoo. I haven't kept that close of tabs on the possible Microsoft-Yahoo deal other than the fact that Yang turned down several offers. Apparently, he also implemented a poison pill allowing employees to leave the company in the case of a hostile takeover. Icahn's scathing letter is a clear example of how professional investors and money managers work. They will rock you if you try to mess with them.

Icahn owns a ton of shares and has enlisted the who's who of activist investors to buy in. These guys own a chunk of Yahoo now and want Yang out. Yang has no clue what and who he is up against. Now there is blood in the water and the sharks are circling. This is looking like it will likely go down badly for Yang and could potentially mar his legacy as the founder of Yahoo but also the one who was too stubborn to give in to Big Brother. Kind of reminds me of Hillary Clinton at this point.

This is also another example of what may happen when a founder stays on board or comes back as CEO. He or she is so in love with their little child that is all grown up. They fail to realize that when you are a publicly listed company it is not about changing the world anymore - it is about profits and money and that is what shareholders want. They do not want promises.

How Does It Feel To Be Owned?

I'm not sure if any of you saw the news, but Congress voted today to sue OPEC for conspiring to restrict supplies and manipulate the oil market. What a total joke.

The continued oil spike is really starting to pinch us and cause pain. Whether these crude oil prices are caused by hedge fund speculators or supply and demand does not matter. What matters is that OPEC and other oil producing countries OWN US and all net importing oil countries. They have the supply of goods that we need to run our economy and get from place to place.

If you've ever traded the oil markets, you know that it's based on emotions and "data" on supply and demand. But if you've traded oil you also know that there is not accurate data on supply and demand. Oil producing countries are extremely secretive about their production capabilities and their oil stocks. Some random comment by some leader in an OPEC country about oil will cause a spike. Some shooting near an oil pipeline will cause a spike.

It is going to continue to be painful while this all gets sorted out.

However, we in the United States have no control of it. We are owned by OPEC and other oil producing countries. They have it and we want it. We can try as much as we want to strong arm them or use geopolitical or other economic forces to threaten or appease them. At the end of the day we can't change one key fact - they own us.

They can grind our economy to a screeching halt. It is going to be painful to see all of those businesses that depend on oil go bankrupt - airlines, transportation, etc. It is virtually guaranteed that a lot of them will go out of business.

The flip side is that it is finally a great time to start developing alternative energy and a new way of life. I can remember only a few years ago that people thought the concept of a hybrid vehicle was ridiculous and not worth the price. Now a days it is all the rage.

Those companies and entrepreneurs that have been waiting on the sidelines to make their move should take advantage of this great opportunity. Where there is pain there is opportunity.

SkyBridge Seeds Capital Returns

The guys at SkyBridge have seeded another fund - Capital Returns, a NY based global long/short equity fund focused on the insurance industry. Capital Returns is run by Ron Bobman, previously of Bedford Oak Advisors and Sam Zell's Capsure Holdings. It's the final fund to be seeded by SkyBridge's first fund. Word is that SkyBridge is out pounding the pavement raising its second seeder fund and will no doubt have success in this endeavor. I look forward to seeing the Capital Returns of Capital Returns.

When Your Partner Acquires You

Adify announced yesterday that it was acquired by Cox Enterprises for $300 million. It's a great acquisition by Cox because it allows them to control technology that allows clients to create their own vertical ad networks. More importantly it highlights the strategy of partnering with a potential acquirer. Apparently Adify was in discussions to do a partnership deal with Cox for some time. Then Cox decided to lead an investment round and then changed its mind to go ahead and acquire the company. Reportedly, the early backers such as USVP and Venrock have made a nice exit in their 3 year investment.

I've previously mentioned how important it is to choose your investors wisely. It's also important to watch who you partner with. A good investor or partner may just become your big ticket to liquidity. If you align yourself with the right partner or investor you open yourself up to be a nice target to the sphere of influence of that company. On the other hand, choosing the wrong partnership might draw a line in the sand with that partner's competitors.

An example of this is Jajah's recent deal with Yahoo to provide VOIP to the Yahoo network. It's a huge win for Jajah and potentially opens up the door for Yahoo to acquire them. However, aligning with Yahoo can virtually guarantee that Jajah won't be getting business from Google. Interestingly, the Yahoo deal was apparently inked with the help of Jajah's main backer Deutsch Telekom, who Yahoo already has a relationship with.

Seeding Your Hedge Fund

We've been getting all sort of emails and notes from people who are looking to seed their hedge fund. Some of them are lift-outs from other firms, others are first time funds from people with some prior experience, and others are from people with no industry experience. I've previously written about hedge fund seeders and what they typically look for. The truth is that most hedge fund managers will not qualify with a traditional seeder who is looking for the pedigree, track record, and the connections.

So what to do if you are in that other 99% of fund managers that want to start a fund? To put it simply, you have to view launching your hedge fund the same as you would launching any other startup. It takes hard work, salesmanship, persistence, and skill. Nobody really cares that you returned 100% last year based on a back-tested simulated model in ten different markets. Nobody really cares that your system is invincible and that you have worked at various firms in the industry. What really matters is that you know how to start and run a business and have great products.

In the hedge fund industry the business is managing other people's money and "institutionalizing" the business with analysts, traders, and capital raising specialists. The product is a good fund with good returns. How many traders do you know that can do both things well?

Thus, in this industry you tend to find people that are good at one or the other but not that great at both.

If you are a new hedge fund starting up, treat your business like any other business - take risk and invest time and energy accordingly. VCs love to see entrepreneurs who have invested a ton of their own capital and time into a business. Similarly, a new fund manager should invest all or most of his net worth into his own fund. VCs like to see entrepreneurs who have raised an insider round from family and friends - this shows that the person  has invested a lot into the company and put relationships on the line. Similarly, a new fund manager should have some investors and have significant skin in the game.

The list can go on and on of things that are important for someone starting a new fund. I'm not going to spell everything out, but if anybody wants me to keep going on, let me know.

HowCast Launches Clever Advertising Model

I will be the first to admit that I am not a big fan of business models that rely on advertising. However, occasionally I run across a clever business model. AlwaysOn has a post on some Ex-Googlers and their new company HowCast.com. Their goal is to create a network of "How-To" videos online. Their content is provided by their own studio as well as other directors and freelancers. They are trying to revolutionize the concept of "How To" videos.

What I love about this business model is that they have created a very easy and desirable way for advertisers to jump on board. They have divided up their videos into tons of categories which makes it easy for advertisers to purchase ads. For example, JetBlue is their first big advertiser that shows up on all videos related to travel.

This model is in contrast to advertising clickthrough model that so many startups rely on yet never really materializes.

In addition to having a great business model, their site actually fills a huge void. Most people "search"for something. How many times have you searched for instructions or tips on how to do something? These guys have taken it a step further by actually providing clever instructional videos. Thus they have created a search destination as well as a "product".

I've never met the founders, but they are obviously very smart guys which I suspect will have lots of success with this model.

It's All About Trust

The recent events of the weekend and today remind me again that doing good business is all about trust. How can the head guy at Bear Stearns continuously tell the world that his institution has no liquidity problems then all of a sudden sell out for pennies on the dollar?

Crap like that makes all of us in American business look really really bad. A lot of trust has been lost and a lot of money has been lost. People have effectively lost their pensions, have lost (or will lose) their jobs, and a lot of people will be out on the street.

There is really only one way to gain back trust in this industry. And that is to police ourselves and hold ourselves to the utmost of ethics and standards. If you are sitting on the board of a company (such as Bear Stearns), you better step up to the plate and do your job and make sure that you are abiding by your fiduciary duty to your shareholders. If you know that there is some funny business going on, you are putting yourself on the line by allowing it to happen and not doing anything about it.

Now I really do not give a hoot if your company is doing poorly and your stock is getting crushed in a justifiable manner. I happen to agree that market forces are fair and just, even if that means some people lose. However, a company cannot undermine the whole system on which it exists - it can't simply lie to people and create false statements.

The Chairman of Bear Stearns is going to feel the pain soon. Whether it be lawsuits, time in prison, or absolute ridicule.

That's not going to change the fact trust in our financial system has eroded. Will Citigroup, Lehman, Morgan Stanley, or Goldman be worth pennies on the dollar tomorrow?

I am still waiting for an honest CEO to come forward in a time of crisis such as this and basically say that he swears on his life and that of his family that he is telling the truth - that he can be trusted and that his company is in good shape.

Guy Kawasaki's AllTop.com

I wanted to give Guy Kawasaki kudos for including me on his new aggregator site  www.alltop.com. He's collected a page of feeds of venture capital blogs at http://venturecapital.alltop.com. I really don't have the time to read any of the blogs but I think aggregators are great for those who want to skim lots of topics at once. The concept of a site full of aggregation of different topics is smart, especially for those efficient freak types out there such as myself.

I must admit that I've never really met Guy or interacted with him much. I have seen him around a few times and gone to hear some presentations over at Quadrus when Garage was in the business of raising money from angels. I have not always been a huge fan of some of his work. Some people think he is very self-serving. Others think he is all hype. What I do like about Guy is that he is fanatical about startups and can be a strong entrepreneurial evangelist. This is a great trait to have and this is something we need more of in this country. This is a business first of optimism and second of realism. Sometimes it is good to have more of the former than the latter.