Archive for the ‘Fund Administration’ Category

One Dollor Man

June 25, 2010

You may recall old TV show called “6 million dollar man.” This is like a half human and half robot being that does incredible stuffs whenever there is a trouble.

But, guess what? there is one dollar man in the corporate world who is so entrepreneurial and withholds immediate personal interests for a while until he proves himself. Steve Jobs has got his fame taking very nominal salary (like $1) and also Kim Jung-Tae who led Kookmin Bank, the largest bank conglomerates in Korea out of trouble also collected zero paycheck for his incredibly challenging mission. Though, what made them to be really paid off at the end for their hard work were their stock-options or existing shares. In that case, their interests were totally aligned with other shareholders. If these entrepreneurial CEOs were really turning around the company, then they can be rewarded with roaring stock prices and they can eventually cash out.

This “one dollar man mind-set” maybe something we often expect from venture founders. Especially, when there are unproductive valuation or compensation battle between founders and institutional investors, we always hope that founders minimize or put off their expectation for immediate personal gain (like sales of founder shares or lucrative compensation package) for a while.

I saw two different cases. One of co-founders wanted to cut her paycheck at $350K while she was ok with her share position to be low. Initial funding wasn’t that great, but the board approved her package because she was a so called “high flier” who had great track-record.

The other case was that a founder already made some fortune from his previous venture. He was willing to cut a nominal salary like $1 for him to act as an entrepreneurial CEO until company hit certain milestone. It took longer than expected but he was totally fine with the fact that he was not rewarded immediately. He thought that other investors were also taking enormous risks, too. So, he thought that it was a good gesture and motivational factor for him to focus more on earliest moment of his new venture and to have a more efficient P&L until it started generating sufficient profit to create huge upside.

We definitely had more successful result from the second case. Though, in reality, we don’t see too many brave one dollar men. As investors, we also suggest more balanced approach. Though, we still try to disregard extremely personal-gain-oriented founders who have very lavish life style. We’d better working with someone who is humble and caring. As an investor, we don’t want to distress hard-working venture management team. However, we always hope that founders can really have forward-looking thoughts that they know what they are getting into and allocate resource to the most needed place.

What’s your business that makes you feel brave enough to take a short-term risk but yield huge outcome at the end of day?

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Emotional impact on venture valuation

June 18, 2010

It’s a brief post before wrapping up this week. It’s a World Cup week. Ever since Korea co-hosted World Cup in 2002, soccer has become a sports that brings in national attention. Last night, I saw a huge crowd near the Seoul City Hall cheering up the Korean team playing against Argentina, a strong winning candidate. Korean team unfortunately lost. This morning, it was quite interesting to see that ad sponsors that leveraged the World Cup effect on their commercial campaign also lost. Their stock values went down quite a bit. It’s one of good examples of emotional impact. It could have not happened if Korea won last night.

Venture valuation often creates controversy. If products are much ahead of the market curve, it’s hard to find a right pricing point for the products. Financial modeling often contains too many ‘if’s’ and it does not give a bullet proof base for a newly-created startup company’s valuation. Technology itself won’t just simply justify venture’s roaring valuation until products or services become more visible. At any rate, early stage venture valuation is still widely driven by founding members’ entrepreneurial contribution, level of capital supply, and emotional expectation.

Entrepreneurial contribution is something you hardly capture as tangible asset base for a new venture. Though, experience, expertise, network, and intellectual properties that entrepreneurial management team brings in is something that venture capitalists always wrestle with to find a right middle point of their own and entrepreneurs’ contribution and risk-reward levels.

Availability of capital in the market often drives venture valuation, too. Supply and demand applies to almost every venture valuation these days when we try to find price equilibrium or capital injection point. No one wants to take a hassle buying at over-priced ticket value too early. Though, if there is competition from capital participants, valuation often surpasses everyone’s justification level. This rule works same if there are limited supplies of capital, but there are too many similar venture businesses. If there are too many to shop, then, price point significantly declines or sometime companies can’t raise sufficient level of funding to build a business. This supply and demand rules works all the way to the public market. Many times, venture backed IPO in Korea is not received too well. I suspect that is mainly because Korea has relatively smaller capital market but there is a quite number of companies seeking attention from investors.

Emotional impact is probably something we won’t or don’t want to agree. Though, blind expectation for a new technology XXX had a previous case that created over billion dollor expectation for a young startup company that only had 2-3 years of history. Early champion in the market can command rightful price point for its own product selling and also its corporate valuation can fly high as long as the company keeps its status as “one-and-only” in the market. However, when competition starts sizzling and lots of me-too businesses run into the market, its margin ratio won’t guarantee high level of profitability too long. As an example, if luxury fashion business can hold its original designer label goods from imitation market for a week, it can sustain and enjoy current level of glory. Otherwise, it will fail. Often times, those black market shops bring out new season’s line-up on their windows before original designer hits the door of its retails.

As a venture investor, it’s great to gain knowledge ‘how not to lose’ in emotional expectation when you invest and also ‘how to win’ this emotional play when you harvest. Ultimately, you want to invest and grow “one and only” business that will sustain its high level of glory for long-time. At the same time, you hope to avoid any sort of unnecessary competition (I.e. either investment-wise or business-wise) to stay sane when you chip in.

Anyhow, where can I find this highly profitable but widely untapped business opportunity?

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Talents equity fund

June 14, 2010

Recent news article on Charles Firmin-Didot at the AXA, who has pioneered so-called “talents equity” investment philosophy caught my attention. This fund primarily invests in public companies operated by visionary entrepreneurs. It is easier to be said than done to create objective matrix to track and measure those high profile entrepreneurs and their track-records (I.e. long-term operating outcome.) Often times, we’re lost in quantitative measurements to gauge probability of success. Though, as always, people who are behind the scene, are most important when you look for a new investment. I totally agree with this talents equity’s idea as venture investment’s biggest asset on the balance sheet is not cutting edge technology itself, but sound management team crafting a new business with new ways of solving the problem. Oh well. We miss you, the rock-star entrepreneurs!

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Return of angels

June 11, 2010

This is another observation on recent angels and seed investment in Korea. Some of quite successful entrepreneurs has returned to the scene by setting up a new venture investment vehicle. As it has been short on early stage money in Korea, we’d like to welcome “return of angels.”

There are few notable entrepreneurs who successfully built a company and made meaningful exits in mid 2000s. Now, they are actively looking for a next big thing. Interestingly, many of them were in online game industry but are now widening their interests to more diversified interactive media space or even more traditional off-line business.

To name a few, Mr. Kim Bumsoo, a founder of Hangame (No. 1 online game portal acquired by NHN, the largest internet business in Korea), is working on his venture studio called IWILAB. Mr. Bang JunHyuk, a founder of NetMarble (acquired by CJ Group, largest entertainment conglomerate in Korea), also works on his private investment office holding a dozen of business portfolio by actively adding a value as a major shareholder. Mr. Chang Byung-Gyu, a co-founder of Neowiz (publicly traded and EA holds a chunk of shares) and Chut-noon (aka First Snow acquired by NHN), is currently turning his angel investment platform called BonnAngels to a venture capital vehicle.

It’s quite meaningful to see them to return to this early stage scene. Still there is controversy whether asset management style VC firm can really add value or entrepreneur-backed operational VC firm may do better. I’d say that it really depends on what stage a startup company raises capital for.

Though, it’s great to see them to return because not that many VC firms in Korea actively invested into idea stage companies and supplied capital to crop out of a business plan to become a real business. In fact, there are more policy money flowing into growth and mid market buyout market in Korea this year. However. when you think about there is a huge shortage in your seed and early stage pipeline, in 2-3 years, there wouldn’t be that many fundable businesses and competition would be brutal.

Like I spoke with one of BonnAngels partners yesterday, this is a great year for those entrepreneurs and early stage investors in Korea who know what to do and secure seed capital. If you have a compelling plan and passion to build a company that can change entire game rules of industry, please, come out and talk to us.

Ideal VC Partners’ Background

August 21, 2008

 

I want to make a short note on ”ideal VC partners’ background.”

  1. Serial entrepreneur, who has done before and gained successful X-multiple returns,
  2. Senior executive with two digit years experience at a world-class enterprise, who has successfully climbed corporate ladder and run large a business unit and had P&L responsibility.
  3. Experienced portfolio manager, who has gone through entire fund life cycle from the beginning to the end and made a visible top quartile return with heavy involvement with portfolio companies,
  4. Experienced equity sales manager, who has gained his knowledge in finance and equity sales and relationship from past I-banking experience; and
  5. Others such as journalist, product designer (or marketer), business development specialist, technologist, professors, head hunter, lawyer, etc. who have done extensive work around venture development.

I wouldn’t say which skill-set or background is more relevant to make a strong VC firm, but in a nutshell, operational experience (unless partner wants to get involved with a LBO type of deal) is a key to succeed. That’s something what entrepreneur and investor have to bear in mind to select a right firm to partner with.