PureVC

Become a student of S-1s

I am constantly approached and emailed by people interested in venture capital and private equity. Some want to know how to break into the industry. Some want to know how to better form an enterprise. Some want to know whether they should get an MBA. Some just like to read what I write.

If there is something that I can impart on my readers it is that at every step of the game you must always be a student. You must always read, you must always soak up as much as you can. You must always ask questions and seek answers. The day you stop doing this is the day your brain starts to literally whither away.

One thing that I love to read are S-1 filings of new companies. For those of you who don't know, when a company files to go public on the U.S. stock exchanges, it must file a report with the Securities and Exchange Commission (SEC). This is all public information, available at the SEC's website. You can click on "Search for Company Filings" and then on "Companies & Other Filers". Enter the company name in and you will see a host of filings. Click on the S-1 and the prospectus will appear, also known as the "red herring". Now you don't want to be always searching everyday for companies to snoop on, but if you go to any handful of sites that monitor IPO filings (such as IPO Home), you can periodically see who has filed. If one interests you, I encourage you to read its filing. All of the document is electronic and html enabled so if you click on "Table of Contents" you can go directly to the section of your interest.

From the S-1 you can learn far more about a company than it probably wants you to know. It can be overwhelming but there are four key things I look for when I have little time and I am browsing an S-1. First, I go straight to the "Principal Shareholders" section. This lists who owns at least 5% of stock. I want to know who is making money on this IPO and who owns the company. Sometimes in the immediately preceding section called "Certain Transactions" it will even say who invested what amount and at what price. Second, I go back to the beginning of the filing and look at the story. I want to know the brief story of how the thing came about. It doesn't have to be in detail but I like to know when it started, who put the company together, and who has been running it.

The third thing I like to do is go to the bio section of the CEO and people who are running the company. What is their background? How much are they getting paid? Is it run by an old guy or a young guy? What particularly impresses me is when there is someone in their 30s who is high up on the leadership list. The last thing I look for is the financials. I do not read them too closely but I like to at least scan them. I already know that they are probably strong if they are filing, but I like to have a rough number of their revenue and profit to get an idea of what kind of multiple the IPO is valuing the company.

Sound easy enough? If you are really curious about the industry you are getting into or really want to know how the competition got its start, you really should read the S-1 of all of your competitors. I am confident that most people don't do this, but that is probably why the rate of startup failure is so high.

Any questions? Feel free to ping me or post a comment.

Asset Management as a Business

If you thought that private equity was lucrative for partners because of management fees, you are correct. However, asset management is a business like any other and can also enrich partners by tapping the public markets. Today The Deal reported that Partners Group AG, a Swiss private equity and hedge fund-of-funds will go public, valued at around 1.8 billion Swiss francs ($1.4 billion). Partners Group was founded in 1996 and is reported to have around 10 billion Swiss francs in client assets. The revenue is reported as around 125 Swiss francs.

So this is another clear reason why I love private equity and asset management businesses. Not only can you realize outsized gains historical to other asset classes by investing in it, you can build value as a stand alone asset management business.

Asset management buinesses are great businesses because there are really two main metrics that you need to worry about. One is assets under mangement. The other is margin from those assets. If you are a brokerage, then the latter metric is very important. In this day of decimalization and low cost commissions, you need to increase your margin by any means necessary. In an asset class like private equity, assets under management is key. You already have a high margin set of products, so you need to grow that asset size. In private equity, another benefit is that product life cycles are long (most funds run ten years long).

Don't get me wrong, asset management is a terribly fickle business. When the markets crash, everybody wants out, and assets under management shrink. The key is to make sure your investors make money over a long cycle and then they will come back for more. If and when you get tired of running the business, prepare it for a sale or take it public, you will be rewarded.

One thing I didn't mention about asset management and private equity as a business is that not only are investors fickle, but partners are as well. Partners want to get well compensated and will jump ship to another firm if they don't get what they want. If they are uncomfortable with their situation, they won't think twice about spinning out to start their own firm AND taking a lot of strong partners with them. This is particularly true of a field such as investment banking, that tend to draw the "I control my own destiny" type of people. So talent retention is a major issue in asset management.

At any rate, I love asset management as a business. If any of my readers have experience and interest in starting asset management businesses, we love to invest in great talent to add to the industry. Please drop me a line.

Why did the Weisel IPO Soar?!?

The IPO of Thomas Weisel Partners took off yesterday, jumping over 30% in intraday trading. The Deal has reported that this was great news for bankers, but that it surprised most analysts. Apparently, a lukewarm welcome was expected for the IPO due to a large decline in revenue from 2000 to 2004 as most tech deals went into hibernation.

Why did the IPO soar? The Deal reports that the stock rise is likely due to fund clients at the firm who rallied together to support the IPO, despite the withdrawal of Goldman as an underwriter. Apparently, market sources say these were mostly institution tech-focused funds.

It's been a while since the "IPO Spinning" days of 1999 where major investment banks gave IPO shares to select clients of the firm in exchange for future business. This case with the Weisel IPO sounds like the exact opposite - that in exchange for buying shares in the IPO, the firm could potentially offer better pricing and service for those institutional clients. Now usually, there shouldn't be anything wrong with something like this happening. However, there are strict guidelines put out by the SEC about marketing your IPO on the IPO roadshow. A quiet period exists and investors in the offering are supposed to be convinced of participation by the prospectus and the roadshow, not by anything else. Something seems wrong with this picture...

Ironically, it is once again an investment bank at the center of it.

Thomas Weisel finalizes IPO terms

If you don't have the time to read every S-1 that comes across the tape, but you do have time to read this blog, then you aren't using your time wisely...

Thomas Weisel Partners, a relatively new and independent investment bank out of San Francisco, has finalized its IPO terms. I usually skim S-1's but I read this one very closely because this investment bank has significant asset management and private equity businesses. If you want to know your industry you need to stay on top of the competition.

Interestingly, for an investment bank, TWP derives a large chunk of its revenue from institutional brokerage services rather than M&A advisory fees. Also interestingly, TWP seems to have a pretty large asset management business for an investment bank that is only 8 years old. I'm not sure if this is solely "committed capital" or if is actual hard dollars in their coffers, but either way, it is impressive.

I expect the offering to be well received, even though they blatantly state in their S-1 that they are using funds to pay back shareholders and pay back their bankers for years of decreased salary. We will see.

You don't need a great idea to start a fabulous business

I am periodically pitched ideas for businesses. Some of the people who pitch me are seasoned entrepreneurs, some are considering venturing out on their first endeavor. One thing I usually tell people is that it does not take a great idea to start a fabulous business! The days of starting a business in your apartment or garage based on solving a simple problem are not long gone! Headlines of startups receiving millions of venture dollars can sure be daunting for the startup entrepreneur with passion but little source of capital.

Last week I saw a public filing by a company that provides an excellent example of what I am talking about - Under Armour. This company is run by an early 30-something year old guy with his brother. Apparently, he started it in college after he was a special teams guy on U Maryland's football team. He was frustrated at always having to change T-shirts several times a day during training, so he decided to do some research and create an undershirt that would be suitable for athletics and basically help manage excessive perspiration.

This is not a brilliant idea! However, it filled a simple problem that he was all too familiar with from his own experience. He followed this through by marketing it to college and professional teams and then to professional sports leagues. If you read through the financials, you will find that he has grown his company from nothing to a large enterprise in only a few years. If you look even more closely at his stated holdings you will see that he owns substantially more of his company than he would if he had taken early venture financing. This is an excellent example of how it can be done!