The beginning of a year often spurs us to look back at what we have learned over the last twelve months. In this newsletter, lead analyst Dr Simon Radford looks back at some of the books and articles that most influenced his thinking in 2018, in terms of analysing investments and fund managers.
A Super-Fast Overview and History of Tech
VC
Neil Devani and Michael Ramos-Lynch
With the rule changes in the tax-advantaged investment world pushing more EIS and VCT managers towards early-stage, and tech investing, it is wise to remember the history of venture capital and the lessons of the past. In this five-part blog series, the authors use data and interviews with major players in the industry in the U.S. to provide a broad understanding of the evolution of the industry, to contribute context to conversations regarding the future of tech/VC, and to spark a thoughtful dialogue about the industry. I have found this a useful resource in helping to explain the need for a certain lens when evaluating venture capital managers and venture capital as an asset class.
Click here to read full article.
Mastering the Market Cycle: Getting the Odds on
Your Side
Howard Marks
Howard Marks, co-chairman of Oaktree Capital Management, was named as "Wall Street's Favourite Guru" by Barron's magazine, and with a new book containing endorsements from Warren Buffet, Ray Dalio and other investment gurus, expectations were set quite high! However, for a book on how to get a feel for the changing moods of market cycles, its publication could not have been better timed. The ten-year bull market from 2008-2018 seems on shakier ground in 2019 when taking the recent stock market correction into account, the move from quantitative easing to quantitative tightening seems to be draining liquidity which had kept markets buoyant, and the once-indestructible FAANG stocks suddenly seem to have feet of clay. Marks takes the reader through various market cycles- from real estate to the economic and market cycles- demonstrating their dynamics and the tell-tale signs of when excess can quickly turn to panic.
Click here to find out more about this book.
Why VCs "Almost Blindly" Invest in
Founders with Previous Exits
Andrew Vasylyk
This blog post looks at why founders of start-up companies with previous exits find it so much easier to raise money than those who are first-time entrepreneurs (or those who started a company and failed). Looking at an array of different research on the topic, Vasylyk finds that experienced entrepreneurs find it easier to raise money, are more likely to be successful (including founding 'unicorns'), and that founders' later successes are more successful than earlier exits (although lots of very successful entrepreneurs have past failures under their belt too). However, does the market price in this experience with more competition and, therefore, higher prices for investors and venture capital firms? Vasylyk finds both that the quality of venture capital firm matters little when partnering with an experienced founder (they do their thing regardless of who is funding them), but also that venture capital firms who invest in experienced founders tend to generate higher returns, even when taking into account the premium that these founders command. Growing a company from scratch is quite an undertaking- it turns out that experience really does count.
Click here to read full article.
The
Myth of Capitalism: Monopolies and the Death of
Competition
Johnathan Tepper and Denise Hearn
In 2018 much ink was spilled about populism and the effects of the widespread anger fuelling these political movements. Rather less careful analysis was done on what is causing stagnant wages and rising inequality and what can be done about it at the root cause level, rather than simply treating its political symptoms. In this critically lauded book, the authors examine the corporate dynamics that have led to concentrations of monopoly power across a variety of industries. Rather than blaming an excess of capitalism, the authors claim that only freer, more competitive markets can spur innovation and raise living standards. Just as Theodore Roosevelt broke up the trusts and stopped companies like Standard Oil using its dominant market position to gouge consumers, so too are legal scholars, politicians and central bankers targeting the likes of Amazon and other "platform monopolies" today. With establishment voices such as the Financial Times calling for similar action in the U.K., surely this underlines the need for continued Government support for the incentives for investors to support the disruptive companies that seek to inject competition into these markets and create value for consumers?
Click here to find out more about this book.
The Outsiders: Eight Unconventional CEOs and Their Radically
Rational Blueprint for Success
William N. Thorndike Jr.
When most investors think of iconic, successful CEOs the mind tends to turn to General Electric's legendary CEO, Jack Welch. However, Thorndike's study of which CEOs had most outperformed their peer group in terms of generating earnings per share profiles eight CEOs whose records leave Welch's in the dust. Looking at the eight as a group shows certain commonalities: a willingness to trust smart managers to run their operating units as they see best in order to generate return on investment, rather than hiring a legion of MBAs at central office, and, after generating profits, allocating capital rationally. There are a litany of books on how to run enterprises. However most tend to implicitly advocate a command-and-control model of running businesses, rather than hiring, allocating budgets, and trusting managers. The second part of the art of being an effective CEO- capital allocation- has traditionally been much undervalued. Whilst Apple's stock buybacks has been calculated at destroying an eye-popping $9 billion in shareholder value, Thorndike's CEOs were quick to buy their own company's stock only when it was trading at unconscionably low prices (and then aggressively). Rather than believe the adage that "bigger is better", the eight CEOs emphasised value at the expense of size. They chose to divest underperforming or non-core businesses, while using debt (rather than issuing additional shares) to make large aggressive purchases when a possible target was on sale at a cheap prices and could be quickly brought under the same financial discipline as the rest of the organisation. Thorndike's book has been widely hailed by hedge fund managers and private equity gurus, and is guaranteed to make the reader think.
Click here to find out more about this book.
Internet Trends
Mary Meeker
The launch of Mary Meeker's yearly Internet Trends report has become a much-anticipated event in Silicon Valley and across the world of venture capital. In her 2018 edition, Meeker looks at issues and emerging dynamics surrounding personalisation and data, the relatively high levels of tech company R&D and capital expenditure, e-commerce innovation, and China's rise and role in internet markets. While Meeker's powerpoint deck gets passed around among all of us interested in the world of venture capital and technology investing, she also presents a summary of her findings at the Re-Code conference. Meeker has recently left Kleiner Perkins and parlayed her experience and fame into the launch of a fundraising drive for a growth fund of over $1 billion. Fans will hope that this does not mean that 2018's Internet Trends is her last.
Click here to read full article.
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