Came across Venture Beat’s post on why VCs win in a rising rate environment. It’s a follow up on a story by a VC, Keith Benjamin.
Net-net, venture capitalists are very happy about rising rates, for a few reasons.
For one, it makes debt financing much more expensive. When I was a high-paid executive, I set up numerous lines of credit for a rainy day. When I made up my mind to start a company, I knew that I could eventually tap those credit facilities at any moment and basically avoid a cash flow problem. That, in a nutshell, allowed me to focus on building a company that I thought would be valuable over time and not focus too much time trying to find investors and pitch them the latest trend or buzzword they were chasing. Today, with the company’s client list growing, the redesign and relaunch a reality, and “scale propostion” crystal clear, I can bide my time and choose the best VC and action plan.
Thankfully, I’ve not needed to tap into those credit lines, but this financing strategy made a lot of sense because debt was cheap. Today, with interest rates much higher than they were a few quarters ago, I’m not sure the idea of (or even considering) using debt to finance a project would be much risker.
Mainly, I could avoid VC altogether and flip the company, whereas raising financing gives VC final say on when and to whom and for how much I can sell…
More reason to come, but I have a call to jump on at 5:30 that I actually need to focus on… Back with more.
All right, waiting for folks to jump on the call…
Reason #2 why VCs love rising rates: it becomes harder for private equity firms to raise money. We’ve seen how angels are squeezing VCs from the bottom and private equity firms are applying pressure from the top. If it the cost of capital rises, then PE firms can’t raise as much, as easily, because much of what they do is in the form of debt financing.
Reason #3 is that angel investors suddenly get attracted to safer, higher yielding investments that in low-rate environments simply offered little investment return. Say you are an angel who made $20M and current interest rates are at 5%. At that rate, the return on bonds are low, so you will be more prone to allocate more capital to high-risk, higher-yield investments that historically VCs only considered at. But now say the prime rate goes to 7.5%, and the rate a bank pays you is, for example, 12.5%. On a $5M or $10M account, that’s starting to look like a decent return given the much lower risk profile, no?
The fourth and most important reason is the flight to quality that ensues when the cost of capital rises amongst VCs. Let’s face it, there are some great VCs who know what they’re doing, then there are some pretty lousy ones (like with every segment and subset of a sample population). By making it harder for VCs too to raise money, guess what, Darwin’s survival of the fittest kicks in and the wheat gets separated from the chaff.
Wow, I actually used that in a sentence.
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WatchMojo NewsletterWhat I’d love to see in Gmail is having the ability to find someone’s email by simply typing @acmecorp.com in the To: field.
So often, I find myself looking for say, Jack Smith of Acme Corp. Problem is I know he works at Acme but his name escapes me. Right now, I have to search for Acme Corp. or, if it’s a popular company, @acmecorp.com which is, well, a whole extra step.
Why now simply be able to generate every employees’ email at a given company (that you have in your address book) simply by starting to type their @acmecorp.com address?
Right now, this feature only works when you write people’s first or last names…
Just a suggestion. File under “Advice you didn’t ask for” or “Assuming you care”.
Judging by the title, you’d think I’d be writing on Rupert Murdoch and the WSJ journalists, right?
Wrong. Well, sort of.
Reading that Murdoch is reaching out to journalists (namely: health reporter Tara Parker-Pope, who is joining NYT to start a health blog there, securities reporter Kate Kelly - also considering NYT - and money and investment reporter Henny Sender, considering FT) who are leaving the recently acquired WSJ led me to think just how much things would have fared differently had someone at News Corp., anyone in fact, tried to get me to stay at Fox Interactive Media in December 2005. News Corp. bought the company that bought my company. After I helped integrate my company into FIM, the writing was on the wall.
There was an exit sign and it flashed for me.
When we were talking about my departure and the separation, someone mentioned (in hindsight I realized it was pure BS):
—– Original Message —–
From: xxxxxxxxxxxxxxxxxx
To: Ashkan Karbasfrooshan
Sent: Monday, December 05, 2005 7:10 PM
Subject: RE: ThanksYou beat me to it, Ash. Thank you for everything, including your professionalism. And, I’m sincere about the other stuff we talked about–let me know if you are working on stuff in the future that you’d like us to talk about.
My best you to you, Ash
Of course, things turned out much, much differently.
To this day, I wonder if I would have built Mojo Supreme and WatchMojo.com in particular within News Corp. Today WatchMojo.com is arguably the largest producer, publisher and syndicator of web video. Go to any web destination and see how ubiquitous our content has become. That, my friends, is just the beginning.
Anyway, would I have built this company as an intrapreneur instead of as an entrepreneur? I don’t think I would have been all that against doing some kind of joint venture with News Corp.’s FIM unit… but the honest answer today is probably not. I had no contact with anyone at News Corp., mind you, but at IGN, the company that bought my company, I’d never felt so discriminated against in such a short time as I did after IGN bought my old company… ironic mind you since the bulk of the discrimination came from someone you’d think would be the target of prejudice, but I digress.
Point is, like I say, things happen for a reason.
Instead of worrying about what could have been, I’m focusing more on what the future holds for our company.
But over the next few weeks, a couple of months tops, a few people over there will be asking themselves what could have been…
We’re horrible. We really are. My generation (I’m 29) has all but given up on print, radio and TV, we live for the Web. The next generation does not even know what those three media are. But we all share one very, very bad trait:
We want everything for free. And we’re becoming less and less tolerant:
- Newsletter subscribers of the Freakonomics blog are p’d-off (the Update in this post off PaidContent), get this, because now you can only read an excerpt in the newsletter feed and must actually, sit down folks, click through and go to the NYTimes (who partners with the blog) to read the whole article… for free! In other words, it’s not enough for the article to be free in the newsletter, it must be complete. Right…
The horror! The horror!
- And what to say about ad-blocking software that robs publishers of ad revenue (disclaimer: I’m naturally biased as a publisher myself). Some people have gone as far as blocking Mozilla users (since a Mozilla plug-in allows users to block ads). Mind you, I agree with Michael Arrington that this makes the bloke’s blog dead on arrival because there is plenty-o-content elsewhere.
And of course, this a few days after Google had the audacity (the balls they have, you know?) to - da-da-da - serve ads in YouTube videos.
Sarcasm aside, I think we all need to calm the you-know-what down. We’re getting so much free content, did I mention, for free, that living with ads is a necessary evil. Publishers shouldn’t sugarcoat the fact that ads are a necessarily evil, they should find creative ways to introduce them in the publisher-consumer ecosystem, recognizing that no sane user welcomes ads. Nick Carr had some comments on this earlier this week.
It’s a balancing act folks: if as a publisher you rape your users, they’ll go elsewhere. But, indeed getting all fired up because publishers need to offset the costs of producing free content is plain wrong, and bad for the Web.
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