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谁知道Don Valentine 说“赌赛手，不如赌赛道”，这句话的英文原话是什么？谢谢 -- 安普若 - (0 Byte) 2006-11-05 周日, 14:13 (629 reads) |
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Horse or Jockey?
There is much discussion in the venture business about whether you back the horse or the jockey. Some, like Don Valentine at Sequoia, state they look for large growing markets and find the team later. More frequently, you hear VC's saying that the business is about people, people, people. In the end, I would argue (conveniently) that it is both. Market readiness makes heroes and fools out of investors (right concept, wrong decade). If the market/customer ba<x>se is not ready to adopt a technology or solution, for whatever reason, even the best management team will be unable to win. That said, management teams are critical to success in the race. Often, when the market is ready, the trophy normally goes to the team that out-executes the rest. Just look at Google versus Alta Vista, Ask Jeeves and Inktomi. Of these two, market (horse) has the greatest macro impact but management (jockey) has the greatest micro impact.
Warren Buffett, the largest cheerleader for backing good managers, once said however:
“When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
Along this line, Prof Steve Kaplan, from the University of Chicago, recently gave a great presentation at the IVCA annual lunch about Horse vs. Jockey, including some fascinating statistics and analysis. He clearly comes down on the Horse side of the arguement. I highly recommend reading the attached PPT file of it. Download kaplan_horse_jockey_april_2006.pdf https://www.vcconfidential.com/files/kaplan_horse_jockey_april_2006.pdf
Tracked on May 02, 2006 at 06:24 AM
Comments
Your post appeared in The May Report today. Ron has another comment on Steve's POV from 2/10/06.
----A recent study from U of C points out that when choosing to bet on the
horse (business model) or the jockey (managers), one should bet on the horse first, as Jockeys can be found and replaced ----
Entrepreneurs *AREN'T* "managers". Entrepreneurs are the *ARTISTS* of the business world. The manager of The Art Institute can be replaced seamlessly; "Nighthawks" by Edward Hopper cannot and neither can he.
It is a *SERIOUS* error to think of entrepreneurs as being a fungible commodity!
An entrepreneur is someone who creates an idea out of thin air and then -- unlike 99% of the other people who say "what if" -- implements the idea, turning nothing into something real. That is art and sorcery -- nothing short thereof, make no mistake.
An entrepreneur isn't some jamoke who has $400K to buy into a Krispy Kreme franchise; he's the guy who said let's make and sell a premium donut.
An entrepreneur isn't some guy with financing who buys and then runs an existing business (unless he then uses it as a platform for radical change/growth).
An entrepreneur isn't a guy who leaves his law firm and hangs out his own shingle.
A MANAGER is someone who manages that which was at some point in the near or distant past conceived and implemented by an entrepreneur. A manager can be someone with a HS diploma running a White Hen, or an MBA running something slightly more challenging. The job of the manager in both of these cases -- from one extreme to the other -- is to manage.
There are bad managers (who really shouldn't be called "managers" because if they're bad they're not managing). There are good managers. And then there are great managers.
Great managers aren't jockeys either. They aren't fungible. Great managers get paid *VERY* well.
A *GOOD* entrepreneur is even more rare than a *GREAT* manager. It therefore follows that we should place an even higher premium on the talents of decent to great entrepreneurs, so -- NO! -- I *DON'T* think this point is being overemphasized.
Maybe the question needs to be reframed however: Is it really that there is a dearth of entrepreneurial talent here in Chicago?
Or is it that the Chicago establishment (a) wants to think of entrepreneurs as fungible jockeys; (b) hasn't yet learned to identify entrepreneurial talent until after the fact; (c) doesn't want to pay entrepreneurial talent the financial premium it justly deserves.
Posted by: Ron May | April 10, 2006 at 09:46 AM
This is a great way to look at the debate. My thinking is as follows and, I think, is where Steve was going with his analysis. If the market is either a) not large enough or b) not ready to adapt, it doesn't matter who is running the business. As they say, you are rearranging deckchairs on the Titanic. So, the horse is the precursor. I would argue that we get burned more often in the venture business from missing the timing or readiness of the market than anything else.
However, as Jim Clark said, great companies are willed into existence. Assuming the market is ready, it is the best connected, most responsive and most determined management teams that take the spoils in the end. You know when you are around a great entrepreneur because they excel at execution.
I also don't think there is a complete dearth of talent here...they are harder to see as they keep a low profile. They are here, but you need to look hard to find them.
Posted by: mbmccall | April 10, 2006 at 10:22 PM
April 7, 2006
The May Report: 04/07/2006: A heretofore unpublished academic paper by Steve Kaplan, Berk Sensoy, and Per Stromberg: "Should You Bet on the Jockey or the Horse? Or What are Firms? Evolution from Early Business Plan to Public Company" / The IVCA luncheon, the Sudan issue and a preview of the venture confeence in November / MIT-EF to announce alliance with NSF and Kauffman Foundation
Editor and publisher: [email protected], [email protected], 773-525-3944
________________________
TABLE OF CONTENTS
The Scoop section:
-- Briefly noted, by Ron May
-- A heretofore unpublished paper by Steve Kaplan, Berk Sensoy, and Per Stromberg enti<x>tled: "Should You Bet on the Jockey or the Horse? Or What are Firms? Evolution from Early Business Plan to Public Company"
-- Directions to Bernie Ostrowsky Memorial and NWITimes Article
_______________________
The Scoop section:
____________
Briefly noted, by Ron May
* The IVCA luncheon drew a crowd of about eighty by my estimate.
I saw a number of familiar faces: Craig McCrohon, Craig Bradley, Frank Ballantine, Jeff Schumacher, Michael Rosenthal, Dan DiCaro, Bob Zieserl, Chris Girgenti, Scott Glickson, Danny Rosenberg, Ed Condon, Matt McCall, Keith Crandell, Michael Krauss, Jason Jacobsohn, Laura Pearl, Donna Williamson, Robert Finkel, Scott McGarvey, Ryan Hayman, Jeffrey Lyons, Mark Glennon, Dan O'Connoll, and Brad Spirrison come to mind off the top of my head. I will give you a more complete list later. There were several VCs from Adams Street Partners and Prism whom I did not know until yesterday.
One person I have heard of but had not met was Bon French of Adams Street Partners. We had a good chat about the state legislation that the IVCA is trying to get amended. More on that later.
I did pick up some tidbits which you might call "news" such as the fact that Laura Pearl has left Frontenac after twenty years to join Ceres Venture Partners along with Sona Wang and Donna Williamson. Frontenac, according to Crain's, has been having some problems with their latest fund. Both Donna Williamson and Laura Pearl said that they are trying to raise a $25MM to $X fund, but that it is not completed yet. They refused to say how much money has been committed thus far.
Another person who has "changed" jobs is Lisa Flashner of New World Ventures. Actually, she is still with them, but she moved to California because her husband got a job with TicketMaster, I think Chris Girgenti said.
Maura O'Hara previewed the upcoming venture capital conference. It will be held in November this year, not May. That means that we have a full year and a half between conferences.
Maura said that they will continue the entrepreneurial or seed track in coordination with the CEC. "We will be adding this year a business plan competition where IVCA will partner with a number of Illinois universities" and the prize is expected to be a substantial one, she said.
She then turned her attention to the Sudan issue. I guess that the IVCA is now going public with a stance against the law as it stands and in favor of an amendment.
"Unfortunately, last fall the legislature passed and the governor signed into law an act...." she said. She added that the IVCA appreciates the sentiment behind the law, they are concerned that it has unintended consequences and the IVCA is lobbying to get an amendment to the law passed.
Penny Cate, the Government Affairs Liaison for the IVCA, said that (and don't hold me to this since I am looking for it on the tape) fifteen venture funds have turned down money from the Illinois Retirement Fund (is that right?) because of this law. The liability issue is too great. And the lawyers are the ones who usually kill the deal, I gathered.
Both Maura O'Hara and Penny Cate were careful to say that the act has good intentions, "well intentioned" they called it, but unfortunately it has unintended consequences.
The problem is the legal liability issues associated with compliance. It is not enough to do due diligence or make a best effort to ensure that a fund is free of Sudan connected investments. The law is written in such a way that an unintended infraction can cause big problems.
Penny said that the law has already had a chilling effect. "The unintended consequences are such that public pension funds in the state of Illinois are going to be radically restricted in their ability to access private equity investments, particularly the top performing funds."
The GPs are required to provide sworn affidavits to the public pension fund that neither the firm nor any of its portfolio companies, nor any of the related suppliers do any business with the Sudan. The law is written very broadly, so it may be possible to violate it without intending to.
Penny Cate, spoke both at the meeting and to me afterwards. She said that Jackie Collins is the legislator who was behind the bill. Penny said the IVCA knew about the bill before it passed, but Collins had the votes and "this was very near and dear to her heart," Penny said. "It came out of the track fast and she had the votes to pass it..." Penny named Collins in her conversation with me, but in her talk to the group, she just referred to her as "one exception to getting it changed."
No one has been prosecuted violating the federal law which prohibits doing business in Sudan, Penny said. But that is not the issue. The issue is legal liability and compliance. And that is a key point. It is not the violation of the law that matters so much or the possibility of fines or prosecution. It is the difficulty in getting the GPs off the hook in legal terms. It may be theory to most of us, but for VCs, these things matter.
Let's say you are fund of fund and you have your money distributed all over the place and as far as you know, your investment portfolio is "Sudan free" but one of your funds has a portfolio company that goes to a conference in South Africa and ends up using a paper subcontractor from Sudan, then you are liable.
The issue is that knowing with absolute certainly in a private equity market that you are clean is very tough, if not impossible. Even in public markets it is tough, but at least there you have auditing, etc. And if you can't know with certainty, you can't be held to an absolute standard. The IVCA is lobbying quietly behind the scenes, without wanting to make a big fuss, but still quite determined to see the law changed, for an amendment which would loosen the requirements somewhat. It would still call for venture firms to be free of investments in Sudan, but it would hold them to a standard of "best efforts." As long as they have done reasonable due diligence and can show that, then the VC firms should not be squirming too much. But the law has not been changed and in the meantime, the VC firms must be fully divested by July 2007.
I have to get you his name, but the guy from the national venture organization spoke and he said a few things. One of the problems with IPOs is Sarbanes Oxley, he said. Congressman Kirk is very helpful to the venture community and he understands that it is "small" businesses that are getting venture funding. Congressman Manzullo (spelling?) is just the opposite. He does not get it, yet at least, and they are working to educate him. He addressed a few other things like FOIA and the reporting requirements put into effect by a number of states. he made the point that the IVCA is one of the few state organizations that systematically monitors legislation coming out of the state capitol. That does appear to be true. Maura O'Hara and Penny Cate are on top of what is going on in Springfield. BTW, I spoke to Ed Condon and he said that at the appropriate time, he expects that Judy Barr Topinka will bring up her technology policies and the funding that took place through the office of the treasurer.
The guy from the national organization did say to the audience yesterday to watch what goes on in California. They are a trend leader, he told the VCs.
I am not going to repeat Steve Kaplan's talk here, since I had all the slides typed up last night. My two 8th grade friends, Anna and her friend Sofia or Zofia since her father is a Polish Consul did a great job typing it up. We left out the tables which are hard to read, but I will get you the tables as well.
To massively oversimplify, Kaplan maintains that it is the horse, not the jockey.
After Steve Kaplan's talk, he took questions.
Matt McCall wanted to know whether anyone has studied firms in the same space, in other words, the same horses at the starting gate, and compared their success ba<x>sed on the management team. Does the best management team in a given space end up winning? Another question from the audience: Why did you define success as going public? Kaplan's answer: The data are much better with an IPO for tracking the long term success of the firm, something you don't get with acquisitions generally.
I asked Steve how he defines the line of business in such a way that is consistent. What I had in mind was companies like Amazon, and eBay that have evolved. And also, what I would call the GE problem. Remember that Jack wanted to jettison any business unit that was not number one or number two in its market, so what did the GE managers do? They redefined their business by narrowing the category so that they would be #1 or #2.
Kaplan's point was that firms have evolved such as Amazon, but their core business is still the same.
Danny Rosenberg had a question about the "relay race" I believe. A handoff is allowable. Management does not have to be fixed, but what does that do to the horse vs. jockey question. I guess that if you allow handoffs from the founder to the new CEO, that still counts as management, even if it is a different team.
And that is the core point. You can change teams much easier than you can change businesses and still win.
To put this in slightly more academic terms. what Kaplan is claiming he has found is that after studying 49 businesses that went public for which he had an original business plan (usually about two years out from the formation of the business), only one, I repeat, only one, had changed its line of business! That was a surprising result for Kaplan and it flies in the face of the conventional wisdom. The conclusion may be that the conventioal wisdom needs to change. Most of Kaplan's data dates back to the 1998 time frame, and he also compared his data with a narrowed down group of IPOs from 2004. Of the 107 IPOs that they looked at, after eliminating IPOs that were not a clean business plan to IPO scenario, only eight had changed business lines. The reason that he studied the IPOs, aside from having access to the data, was partly that the 49 firms were all venture backed if I am not mistaken, and the 107 IPOs they looked at were 70% plus venture backed, but not entirely. The IPOs were a control set of sorts.
By contrast to that, a high rate of turnover exists for founders and CEOs. Take a look at Kaplan's data presented below. At the IPO, about 50% of the founders have been replaced. To quote from Kaplan's paper: "Overall, turnover is substantial. From business plan to the annual report, exactly 50% of the CEO's and only 25% of the other top five executives remain the same."
Look carefully at the data Kaplan presents on management. Founders get 12% to 19% equity, whereas CEOs get about 5%. But the more interesting finding that Kaplan just threw out is that founders tend to join other firms and go on to work at other firms, rather than found other firms. He may be debunking the myth of the serial entrepreneur.
ba<x>sed on timeframes, I would also suggest to Steve that he consider that in his study the time from business plan to IPO was much shorter than it probably is these days.
But as Danny Rosenberg suggested in the Q&A with his questions about hand off and relay, changing management along the way does not invalidate the importance of management in the success of the firm. The conundrum here may give the answer.
You can change management and still succeed, but can you change business lines? Kaplan concluded that "the initial business is a core attribute of the firm."
Steve, I must tell you that intuitively, I have an issue with this. How many times do we see a software firm that starts off with one purpose, let's say to sell something, or to use the software to conduct a business of their own, and what do they find out? That their data and tools are a product unto themselves and they switch "horses." I think a lot depends on how you define a line of business. Is Amazon in the same business that it started with in 1995 or so? What would you do with Apple? I dare not bring up AT&T or GE, but clearly things change over time. Kaplan is looking at a more restricted period, of course, and he is not claiming that what he is discovering is a universal truth, just that it is good for the era he is examining. But Kaplan's essential point was that a bad business cannot be overcome by good management, but bad or mediocre management can succeed in spite of itself if the business market and idea is good.
A number of people wondered why he restricted himself to venture and to IPOs. He said that human capital is more valued in an IPO than in an acquisition and one memmber of the audience challenged him on that. He said that Kaplan should talk to people who actually sell companies.
How one words Kaplan's conclusions is important. He is not saying that management does not count. He repeated that several times. But a good business (idea and market) can survive a mediocre management team more than a bad business can succeed even with a good management team.
Robert Finkel told me that anything that challenges the conventional wisdom is good, and that Kaplan's argument is to think twice before you fund a mediocre company or idea with a great team.
Matt McCall said that in twenty seven years of doing business, his firm has always lost money whenever they had a rough transition from founder to CEO.
Ed Condon said that ten years ago he would not have agreed with Kaplan, and he said that he has changed his mind because of the last half dozen years.
Kaplan is not the first person to suggest that it is the horse. I read an article in the Harvard Business Review several years ago that suggested just that. But the data have been lacking, and Kaplan is trying to systematize the study of the issue.
Ed Condon said that he likes the idea of a relay team which was suggested by Danny Rosenberg.
This brings me to an issue I raised with Steve Kaplan. Years ago, I had a course with Charles Plott, who was in the field of experimental economics. He was visiting at Chicago for a year, but his school is Cal Tech. We did some market simulations and that is when I first learned about Dutch auctions, etc. His studies were funded by the NSF. We looked at things like the allocation of runway slots. Plott made it clear to the small class that he was an outsider in the august halls of Rosenwald (which housed the business school). Experimental what? Never mind that Vernon Smith later won the Nobel Prize in Economics. Chicago had invented modern finance theory and the economics department did not view Plott's work as worthy since the data he was working with was too flimsy and it was experimental, observational, and ba<x>sed on actual human behavior, not quanitative theory.
Fast forward fifeen years. I am having lunch sitting next to Paul Gompers at an NVCA luncheon (circa 1995?) who teaches venture economics at Chicago in the business school. Same conversation. Do you, Paul Gompers, get respect from the finance guys? Answer, basically no.
The field is just now coming into its own and gaining acceptance. Hey, as I tell my podiatrist, Doug Diekevers, even foot doctors are getting respeonct these days. Gompers left and went to Harvard. His papers are cited by Kaplan who told me that Gompers is a friend. Kaplan feels that he is not looked down upon, largely because venture capital is now being recognized as important -- remember the days of VenRock are not so long ago and venture is a relatively young field -- and because the available data are now starting to be there. He told me that Fama does not turn up his nose when passing him in the hallway. Gompers pointed out that the lack of good data was a big problem, but that was a decade ago. Kaplan started off in traditional corporate finance and he filled the vacant spot that was left when Gompers left. That is when he started to make venture economics and finance his niche.
So, when I asked Steve why his field has gained respect at Chicago, a school known for theory and quant analysis, his answer was that it is for two reasons. Number one is availability of data, and if you look at technological change, it has been venture backed and the issues are interesting academically.
BTW, I asked Kaplan about his rep for being a bit of a j**k. He said that he is tough and that he does call students out in class, but that's what he's supposed to do, right?
Matt McCall wanted Kaplan to look up a quote by Buffett who said that give a great man a poor business model, the business model will always maintain its reputation. I like that quote for its wit.
Don Valentine's other quote that Matt mentioned to Kaplan was "I am 100% behind my CEOs right up till the day I fire them."
Read the Kaplan talk carefully. There is a lot of interesting information in it.
* There is a global MIT-EF chapter leadership meeting today and tomorrow (I believe in Chicago) and tomorrow they will announce a new initiative. It is essentially an alliance with the NSF, the Kauffman foundation and the MIT-EF chapters nationally. BTW, the MIT-EF is in Beirut, Japan, and Israel, and may be opening chapters in China and UAE next year.
The purpose of the alliance is to leverage the MIT-EF global network as a resource to provide mentoring and technology commercializsaton support to over 200 NSF funded innovation ventures. One of the primary purposes is to provide connections between small start-ups and Fortune 1000 corporations as customers, channel partners, and to open innovation. It is an outgrowth and a nationalized version of the Chicago Chapter Cornerstone program. Chicago will play a major role in this program.
How did this happen? It was actually the NSF that approached the Cambridge office to say that MIT-EF needs to leverage the potential of the chapter fora. NSF is not satisfied with the help and direction of many small firms that receive SBIR money, for example. They believe at the NSF that the MIT-EF and Kauffman can help. There is power in bringing the chapters together.
The goal is to make their network function as a resource where the SBIR companies can get connections and alliances. So, the purpose is really connections, alliances, and assistance in dedicating the funds to the growth of the businesses. That is not happening now to a degree that satisfies the NSF.
Ultimately the purpose is to accelerate innovation in the U.S.
* Lundin tells me that Dr. Karl Reich from Independent Forensics was on Nancy Grace having to do with the Duke rape case. Another feather in the Lundin cap. His website is up now, www.bigfrontier.com
Below are the slides from Steve Kaplan's talk. The paper he is writing and revising ba<x>sed on the study he and his colleagues did has not been published and it is subject to revision. As you know, getting papers published in the Journal of Finance or the American Economic Review takes a long time. Berk Sensoy is one of Kaplan's doctoral students who will be teaching next year at UCLA, I believe he said.
I have plenty more email that I am leaving out of today's report. At least ten or twelve more notices on BIO.
__________________________
A heretofore unpublished paper by Steve Kaplan, Berk Sensoy, and Per Stromberg enti<x>tled: "Should You Bet on the Jockey or the Horse? Or What are Firms? Evolution from Early Business Plan to Public Company"
Should You Bet on the Jockey or the Horse?
Or
What are Firms?
Evolution from Early Business Plan to Public Company
Steven Kaplan*, Berk Sensoy* and Per Stromberg*.**
*University of Chicago Graduate School of Business and **SIFR
MOTIVATION- Practical
* Teach Entrepreneurial Finance and Private Equity
* Important component of course is a framework to evaluate VC investments.
-OUTSIDE-IMPACTS
* Two key components are:
-VCs want a strong opportunity- O; and
-VCs want a strong management team- T.
* Students ask which is more important?
-It is like asking does good hitting beat good pitching? Or vice versa?
* A very old debate among VCs:
-- Some VCs believe company's product and market are key.
-- Bet on the horse
-- Others believe that VC investment is about management, management, management.
-- Bet on the jockey
* "The Money of Invention" Gompers and Lerner (2001) and "Confessions of a VC" Quindien (2000). Several successful approaches:
-- Tom Perkins of Kleiner Perkins looked at a company's technological position. Was the technology superior to alternatives and propriety?
-- Don Valentine of Sequioa, investor in Cisco, assessed the market for the product or service. Is the market large and growing? Is it well-defined?
-- Cisco was turned down by many other VCs because the team was considered weak.
-- Valentine invested in Cisco anyway. He saw a huge market.
-- Arthur Rock, investor in Fairchild and Apple, emphasized the quality, integrity and commitment of the management team.
-- "A great management team will find a good opportunity even if they have to make a huge leap from the market they currently occupy."
* Gladstone, Handbook of Private Equity:
-- VCs first look for what is special/unique about the product.
-- Then VCs look at management team. "They place more emphasis here. There is an old saying:"
-- "You can have a good idea and poor management and lose every time."
-- "You can have a poor idea and good management and win every time."
* In this research, we try to answer the jockey versus horse question.
MOTIVATION- Academic
* Since Coase (1937), economists have attempted to understand why firms exist and what constitutes firms.
* Despite long history of theory and empirical work, little systematic evidence concerning:
-What constitutes a firm when it is very young; and
-How a firm evolves to a mature company.
* Interesting because:
-- Useful to understand what firms are.
-- Can help shed light on questions concerning the nature and stability of firm assets and businesses.
* Jockey versus is related to economic theories of the firm. The theories emphasize the difference between human and non-human assets. This paper attempts to inform those theories.
-- Hart (1995): "A firm's non-human assets, then, simply represent the glue that keeps the firm together, whatever this may be? Control over non-human assets leads to control over human assets?If non-human assets do not exist, then it is not clear what keeps the firm together."
* We address these theories in two ways:
-- Identify the "glue" that holds firms together and determine the extent to which the glue derives from non-human or human assets.
-Identify when the glue emerges or "sticks" and how the "glue" evolves over a firm's life cycle.
* Also relate our results to theories of the firm that emphasize the existence of specific assets or resources that are critical to the firm's evolution and growth. "Critical resource theories".
-- Wernerfelt (1984) and Rajan and Zingales (2001b) focus on critical resources which may be "an idea, good customer relationship, a new tool, or superior management technique." Such resources may include specific human capital. I.e., specific people.
-- According to these theories, a "firm is a web of specific investments built around a critical resource becomes the web of specific investment itself." [Zingales (2000)].
-- By examining firms'non-human and human assets early in their lives and over time, we shed light on the nature of critical resources and the periods in which they are critical.
-- For how long are specific people crucial?
-- How quickly does the web develop?
* Also, a question in the sociology literature:
-- Do populations of firms evolve by adapting or by creation and replacement?
-- Adaptation = organizational / strategic change in response to environmental change.
-- Creation and replacement = natural selection. Firms do not change, but more efficient organizations survive.
* Hannan and Freeman (1984) argue that
-- Selection favors firms with reliable / repeatable activities.
-- As a result, inertial pressures are strong and increase with time and size.
-- Creation and replacement more important / prevalent than adaptation.
HUMAN CAPITAL AND RENTS
* Rajan and Zingales (2001a) and Zingales (2000) argue that today, "new" firms are different, more human capital reliant than firms have been historically.
* Will examine this issue by looking at the size of the rents accruing to human capital providers.
-- Are they larger for "new" firms compared to "old"?
PREVIOUS WORK
* Bhide (2000) studies 100 companies from Inc. Magazine's list of 500 fastest growing companies in 1989. ba<x>sed on interviews with founders,
-- Over 70% of those companies are founded by people who replicated or modified an idea encountered in their previous employment.
-- Founders do little planning before starting the business.
-- Has been interpreted as saying business plan does not matter much.
WHAT DO WE DO?
* In this paper, we study 49 venture capital (VC)- financed firms from early business plan to initial public offering (IPO) to public company (three years after the IPO).
* We:
-- describe companies at birth and as they evolve.
-- Financial measures, business idea, point(s) of differentiation, assets and technology, growth strategy, customers, competitors, strategic alliances, management, ownership structure, and board of directors.
-- Useful for understanding how firms grow.
-consider the relative importance and stability of non-human capital vs. specific human capital assets.
-consider the division of rents.
* To consider generally of our findings, we also look at all firms that do an IPO in 2004.
SAMPLE
* 49 companies that went public and for which we have early business plan or desc<x>ription at the time of a VC financing.
- 31 cos. From VC financed companies in Kaplan and Stromberg (2003).
- Additional 18 companies by asking VCs to provide business plans of companies they had financed that had gone public.
- We have business plans from 10 different VCs.
-- Through syndication, represent over 100 different VCs.
SAMPLE (cont.)
* Desc<x>ription ? Table 1.
- Median company 24 months old at business plan.
- Just under 3 years to IPO, just under 3 years post- IPO
- Most sample business plans from 1995-1998.
- Over-weighted in biotech relative to VC-funded universe.
SAMPLE (cont.)
* Sample selection issues.
-- Companies VC-financed
-- Will this generalize to non-VC firms?
-- Not random VC-financed companies?
--31 companies from Kaplan and Stromberg (2003) likely to be random. Collected sample for other purposes.
--18 other companies obtained specifically for this paper.
* VCs gave us all business plans they could find.
* Oversampling of biotech.
-- No difference between two groups.
-- Majority of companies funded in tech boom?
SAMPLE (cont.)
* Only study firms that eventually go public
- Necessary for methodology- need documentation across life cycle.
- Bias in favor of more importance for specific human capital?
-- Specific human capital arguably less important in acquisitions.
* Some of the firms are older at the time of business plan:
-- May not be capturing the "DNA" for these firms.
- However,
--Main results robust to excluding those cos.
--IPO prospectuses and Lexi-Nexis do not find any changes pre-VC funding.
FINANCIAL INFORMATION
* Table 2 summarizes financial and employment info.
- Consistent with describing companies at an early stage, revenues, assets, and employees are small at the time of the business plans.
--Median revenues are 0.
--Median # employees is 22
- Company size increases by orders of magnitude between the business plan and the annual report.
--Assets and revenues increase more quickly than employees.
- Negative profits are the norm at the business plan. Despite increases in revenues, assets, employees, revenues per employee and market capitalization, median company does not become profitable through post-IPO annual report.
LINES OF BUSINESS
* For each company, we determine if the desc<x>ription of the business changes from one point in time to the next.
* Categorize changes in two ways.
- 1. Does firm change business desc<x>ription / line of business?
--Business changes if the firm sells to a different set of customers or if the firm markedly changes the products or services it offers.
- 2. Does firm broaden, narrow, or maintain initial line of business?
--Narrowing = doing some of the same things, but jettisoning others.
--Broadening = doing most of the same things, but adding others
- eBay. Began as web site to do online auctions- as the story goes to trade PEZ dispensers. Has broadened to many different product and geographic markets.
LINES OF BUSINESS 2
* While we see changes in business focus, only 1 of 49 companies changes its line of business.
- No unrelated acquisitions.
- No radical shifts.
-> This result suggests that initial business lines are core attribute of the sample firms.
* For the most part, companies tend to broaden or at least not reduce their offerings within markets. Roughly:
- 50% broaden.
- 40% stay the same.
- 10% narrow.
--Biotech more likely to narrow than non-biotech.
REACTIONS?
* "This must be true because the IPOs are only 3 years from the VC rounds. This is less likely to be true outside the '90s tech boom."
* "This is obvious. VCs only fund deals around the business, not people. You would not necessarily find this for non-VC deals." (from academics)
TO ADDRESS SELECTION ISSUES, STUDY ALL 2004 IPOs
* Total number of IPOs in SDC = 306
- 4 companies already listed on a foreign exchange.
- 122 REITs, closed-end funds, trusts, other financials.
- 21 holding companies (including companies formed solely to acquire other companies).
- 21 spinoffs (some of which had buyouts in their histories).
- 1 company formed as a joint venture.
- 30 buyouts
* IPOs of non-financial start-ups = 107
- VC Funded = 77 (or 72%)
- Non-VC Funded = 30
* An aside: Large % of IPOs of true start-ups are VC financed.
* For the 107 IPOs of true start-ups in 2004,
- we:
--read the IPO prospectus.
--searched in Lexi-Nexis.
- Identified any change in business
* We repeated this methodology for the 49 firms in our sample.
- We identified the one business change that we found in our detailed data and only that one.
- Suggests methodology is sound.
- No evidence that businesses changed before VC funding.
RESULTS FOR 2004 IPO SAMPLE:
* 107 IPOs.
- 8 change line of business. (7%).
--For six changes we can date, median change occurred 6.5 years before IPO.
--Not one change was less than 5 years before IPO.
* 77 VC Funded IPOs
- 6 change line of business
--2 changed before or concurrent with VC fuding.
--4 change after VC funding.
* 1 of these changed through an acquisition.
* 77 VC Funded IPOs
- 6 change line of business. (8%).
--2 changed before or concurrent with VC funding.
--4 change after VC funding.
* 1 of these changed through an acquisition.
* 30 non-VC funded IPOs
- 2 change line of business (7%).
BUSINESS CHANGES IN 2004 START-UP IPOS
All- Over 100 Total Deals, under 20 Businesses Changed
VC-Funded- Just under 80 Total Deals, under 20 Businesses Changed
Non-VC-Funded- About 30 Total Deals, a little over 0 Businesses Changed
* Line of business changes greater than in our sample, however, occurrence of changes still infrequent.
* No difference between VC and non-VC funded IPOs.
- Suggests result in general.
POINTS OF DIFFERENTIATION
* Classify how sample firms differentiate themselves from their competitors over the sample period.
- Rely on company self- desc<x>riptions.
* Most important factor is belief that company offers a unique product and/or technology
- 100%, 98%, and 92% of companies.
* Customer service is increasingly important. Particularly, non-biotech.
* Expertise cited by almost 50% at the business plan. Drops of at IPO and annual report.
-> Overall, self-reported distinguishing characteristics suggest that non-human capital assets are more important than human capital assets initially, and that the relative importance increases over time.
ASSETS AND TECHNOLOGY
* We describe the types of assets owned by our companies.
- We note whether each company mentions patents, physical assets, and / or non-patented intellectual property as important or central to the business.
- We classify the patents and physical assets as alienable assets because they can potentially be sold or assigned to other companies.
* Patents and physical assets become increasingly important from the business plan to the IPO to the annual report.
- Patents / exclusive licenses: 29 % to 49% to 62%. Biotech more.
- Physical assets: 18% to 27% to 38%. Non-biotech more.
* Proprietary IP important for all and at all times.
- 84% to 86% to 82%
- Basically 100% for biotech.
GROWTH STRATEGIES:
HOW DO FIRMS GROW?
* We classify firm growth strategies.
* Firms strongly oriented towards internal growth.
- Produce new or updated products : 59%, 82% and 72% .
- Obtaining additional customers through increased market penetration or market leadership: 49%, 71%, and 56%.
- Geographical expansions: 20%, 43% and 21%.
- All three types of internal growth peak at the time of the IPO.
* External growth through alliances and partnerships or through acquisitions becomes relatively more important over time.
- Alliances :29%, 59%, and 51%
- Acquisitions: 2%, 22%, and 28%.
CUSTOMERS
* Characterize customers and the evolution of customers
* At bus. Plan, IPO, annual report, 47%, 90%, 95% have customers;
- At all stages, biotechnology less likely to have customers.
* Roughly 85% target businesses ; 15% target customers.
* Characterize the evolution of company customers ba<x>ses as broadening, narrowing, or staying abut the same.
- one- third of the firms broaden their customers ba<x>ses.
- small fraction narrow
-> Dramatic revenue increases in table 2 driven by selling more to an initial customer type either thought increased market penetration or by selling additional products.
- Revenue increases are likely driven secondarily by selling to new types of customers.
COMPETITORS
* Table 8 describes competition faced by the sample companies.
- At business plan, 84% of the companies note that they face competitions in their target market. Typically this competition includes other startups as well as established firms.
- Of the other 16% of companies , 10% do not mention competition while 6% claim that their product or market niche is so unusual that they face no real competition.
- All 49 companies note that they have competition by the IPO.
* Type of competition need remains fairly stable:
- 56% of firms claming to face similar competition over all 3 stages
- 40% see broadening in the types of companies they complete with while one company sees a narrowing.
-> Again, this result seems consistent with the stability of the business model found in table 3.
HUMAN CAPITAL (TABLE 10)
* Founders
- Heavily involved at the time of the business plan
--founder is CEO in 77% of 43 cos. With a CEO (33 of the 43)
--founder is top five manager or on the board of all 47 cos.
- Involvement of founders declines steadily over time. At IPO:
--57%of CEO's are founders
--92% of companies have founders as top exec. Or director.
- At annual report:
--46% of CEO's are founders
--72% of companies have founders as top exec. Or director.
MANAGEMENT-3
* Overall, turnover is substantial. From business plan to the annual report, exactly 50% of the CEO's and only 25% of the other top five executives remain the same.
- Works out to CEO turnover of roughly 11% per year.
- Comparable to, maybe slightly lower that turnover of large public companies.
-> Specific human capital assets (i.e., people) appear less stable than non-human capital assets.
WHAT HAPPENS TO DEPARTING FOUNDERS / MGMT.?
ARE DEPENDING FOUNDERS STARTING OTHER COMPANIES?
* Panel D table 10 looks at what departing founders and executives do after leaving the sample companies.
- Search for subsequent job / founder history in the Capital Q, Venture Economics, and Venture One databa<x>ses.
--Can you identify activates for roughly ½ of departing fdrs & execs.
- Relatively few depending founders and execs found new cos.
--Only one founder, who departed between the business plan and the IPO, subsequently founded another company.
- A larger fraction, roughly one-third, of founder and non-founders become top executives of other young companies, potentially providing early critical resources.
OWNERSHIP (TABLE 11)
* We estimate hat founders extract 11.8% to 19.1% of pre-IPO net value for idea / non-incentive reasons. (I.e., ownership not related to ongoing management)
* Pre-IPO CEO ownership in our sample is lower that that in sample of IPO's between 1978 and 1887 studied by Baker and Gompers (1999) .
- On average , CEO?s of VC-backed firms own
--19.1% in Baker and Gompers' sample
--9.8% in our sample
* Clear that our founders (overall) own less (avg. 14.6%) than CEO?s in Baker and Gompers.
* Not consistent with ideas that human capital has become more important in recent years.
CROSS-SECTIONAL ANALYSIS:
RELATION OF NON-HUMAN AND HUMAN ASSETS
* Can interpret hatcheries as suggesting that founders and specific human capital less important or critical when a firm has built up its non-human capital. I.e., specific people may be particularly important in cretin situations or stages:
- when firm has few other assets, such as tangible assets.
- when the firm is reliant on intellectual property that has not yet been patented and therefore specific to the founder.
- when the firm is very young.
* We try to test this by looking at whether a founder remains CEO
- at the time of the IPO
- at the time of the first Annual Report after going public.
* Likelihood of keeping the founder as CEO:
- Negatively related to alienated assets at business plan.
--Negatively related to physical assets at business plan.
--Negatively related to patents at business plan.
- Negatively related to non-patentable IP at business plan.
* Specific people are more critical before alienable assets have formed, consistent with the critical resource and the Hart-Moore-Holstrom theories.
Summary of Results
* Companies grow dramatically, but lines of business are remarkably stable, suggesting that these are core attributes.
- Does not appear to be specific to sample.
- Seems to generalize to all 2004 IPOs.
* Non-human capital- lines of business, points of differentiation, alienable assets, customers, and competitors - remains relatively constant, while human capital changes more substantially.
- Human capital turnover related to the tangibility of the firms assets,
* The rents to specific human capital are 11-19% of value.
- Unrelated to the nature of the assets.
- No evidence that rents to human capital have increased in the ?new? economy.
Implications- Academic
* With regard to economic theories: core non-human capital assets form very early in a firm's life.
- Identifiable lines of business and important physical, patent, and IP assets exist by the time of the early business plan and do not change or disappear as specific human capital assets turn over.
- These arguably constitute the "glue" that holds firms together.
* The early emergence and stability of non-human assets are consistent with those assets being critical resources.
* Consistent with Hannan- Freeman structural inertia view.
- Firms evolve through natural selection.
Should you bet on the jockey or the horse? On the margin, bet on the horse.
* Recall the jockey arguments:
- ?You can have a poor idea and a good management and win every time.?
- ?A great management team will find a good opportunity even if they have to make a huge leap from the market they currently occupy.?
-> This rarely happens.
* On the other hand, you can have a good idea and a poor management team and still end up winning.
- VCs change management teams frequently.
* In other words,
- a bad management team does not necessarily kill a good idea, but
- a bad idea is rarely overcome by a good management team.
* Implications:
- The business plan / business matters a lot.
- Spend marginal due diligence time evaluating the business.
Does this mean good jockeys do not matter? No.
* Strong management is valuable and important.
- Non-founder CEOs get 4% to 5% of the company.
- They would not receive so much if they were not valuable.
* Point is that poor management is much more likely to be fixed by new management than a poor idea is likely to be fixed by a new idea.
* Also has been suggested that some jockeys are good at picking horses.
- I.e., certain founders may be particularly good at choosing good businesses.
Other implications
* What should you do if business is not succeeding with a good management team?
* Many VC s work hard to try to fix business:
- If at first you don't succeed, try, try again.
Other implications
* What should you do if business is not succeeding with a good management team?
* Many Vcs work hard to try to fix business:
- "If at first you don't succeed, try, try again."
* For VC s, maybe it ought to read,
- If at first you don't succeed, quit, quit at once.?
- If business is not materializing, unusual to see successful shifts into other markets / other businesses.
Thank you
* If you would like a copy of the slides / paper, please email me at:
- [email protected]
END OF REPORT
作者：安普若 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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