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Unions: We’re Better Off Without Them

Add comment July 8th, 2009

The Triumph of Crony Capitalism

First President Bush, then President Obama poured billions into General Motors and Chrysler to keep the companies alive but barely breathing. That was just for starters. Next came Obama’s creation of an Auto Task Force to oversee the auto companies. To head the task force, the president picked Steve Rattner, a Wall Street investor with no experience in automaking but lots in raising campaign money for Obama and Democrats.

GM and Chrysler were quickly restructured, mostly to the benefit of the United Auto Workers, the union which spent millions in 2008 to elect Obama and Democrats. The UAW now owns 17.5 percent of GM and 55 percent of Chrysler–quite a return on an investment of zero dollars. Obama said all parties should “sacrifice,” but only bondholders did. They got a fraction of what they were legally entitled to receive. UAW retirees, in contrast, got a gift of $9.5 billion at GM and $14.2 billion at Chrysler.

There’s an epilogue. Delphi, the auto parts manufacturer once owned by GM and still its biggest supplier, has been in bankruptcy for four years. To acquire its assets and run the company, Delphi and Obama’s Auto Task Force picked an affiliate of the private equity firm Platinum Equity. There was no auction or competitive bidding, though Platinum stands to make millions in the deal. Why Platinum? The UAW favored it, sources said.

There’s a name for all this: crony capitalism. Obama insists he believes in capitalism, but it’s not the free market variety that he’s been promoting since he became president. Obamanomics is a different strain entirely.

To Rise In Business, Make Friends In D.C. – Fred Barnes, Weekly Standard

Add comment July 8th, 2009

The Great American Bubble Machine

n Rolling Stone Issue 1082-83, Matt Taibbi takes on “the Wall Street Bubble Mafia” — investment bank Goldman Sachs. The piece has generated controversy, with Goldman Sachs firing back that Taibbi’s piece is “an hysterical compilation of conspiracy theories” and a spokesman adding, “We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good.” Taibbi shot back: “Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it.” Here, now, are excerpts from Matt Taibbi’s piece and video of Taibbi exploring the key issues.

Matt Taibbi On Goldman Sachs’ Big Scam

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Bonuses from bubbles

It took an epic economic and financial death-spiral to make believers out of everyone, but the event you’ve been waiting for has finally happened — the Goldman Sachs conspiracy is sharing the spotlight with the Jonas Brothers.

Is It a GS Conspiracy If Everyone’s In On It? – David Weidner, MarketWatch

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Who Killed California’s Economy?

There are five suspects, from the governor to the constituents themselves.

Who Killed California’s Economy? Five Suspects – Joel Kotkin, Forbes

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Venture Capitalists Look for a Return to the A B C’s

For a group accustomed to looking outward for the next big thing, Silicon Valley’s venture capitalists are getting very introspective these days.

Much of the soul searching along Sand Hill Road in Menlo Park, where many of the venture capitalists have offices, is leading to the same conclusion: venture capital needs to go back to basics. The biggest names in the industry are concerned about low returns and are blaming several factors: funds that have grown too large, the M.B.A.’s that have invaded the industry and older partners who have lost touch with what is new in technology.

“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” said Alan Patricof, an investor for 40 years who backed America Online and Apple, at a recent venture investing conference in San Francisco. “Our biggest challenge today for venture capital is to think smaller.”

Mr. Patricof is part of a growing chorus of voices calling for the amount of money in venture funds to shrink drastically to levels last seen two decades ago. His firm, Greycroft Partners, is taking a retro approach with a $75 million fund that makes smaller investments.

Many in the industry predict that a third to a half of the 882 active venture capital firms could disappear, if only because poor returns will force underperforming firms to shut down. It is already happening: Investment in venture capital funds shrank to $4.3 billion in the first quarter, from $7.1 billion in the same quarter a year ago.

There will be “a ton of venture capitalists who disappear over the next 18 to 20 months, and it’s going to be painful for a while,” said Bryan Roberts, a partner at Venrock. “But the best thing that could have happened to V.C. is this economic crisis, because it’s lowering the flow of capital into these funds.”

The source of concern is lower returns brought on in part by a dearth of public stock offerings. Five-year returns in the venture capital industry, which reached 48 percent in 2000 at the height of the dot-com bubble, were just 6 percent through 2008, according to the National Venture Capital Association.

Most venture capitalists say the trouble began amid the excesses of the dot-com era. Before then, most of the investors in venture capital were university endowments, foundations and wealthy families. But in the late 1990s, endowments sharply increased their stake in illiquid assets, including venture capital. Big pension funds saw how much money these investors were making and wanted in as well. The amount invested annually by venture capitalists swelled to $104 billion in 2000, from $2.7 billion in 1990, according to the venture capital association. Today it is about $30 billion.

The surge of money is in large part to blame for the recent poor performance, many in the industry say. “The big financiers of venture capital are force-feeding the industry, and it’s like force-feeding cows — it makes the industry sick,” said Paul Kedrosky, a senior fellow at the Ewing Marion Kauffman Foundation who recently called for the venture industry to contract by half. “It’s a returns-driven business, and the only way you can post better returns is by shrinking.”

Instead of figuring out how much start-ups actually need, too many firms calculate how much they have in their funds, divide it by the number of partners and the number of boards they can sit on, and come up with a sum to invest in each start-up, said Ben Horowitz, a partner in a new venture firm, Andreessen Horowitz. That often means forcing $3 million into a company that needs $300,000, he said.

Overfinancing results in too many firms backing too many start-ups that do the same thing, some critics say, and it inflates the valuation of companies so that investors get smaller returns when they eventually sell.

The good news is that Web start-ups do not need as much money today, said Dana Settle, a partner at Greycroft Partners. “You can actually make a nice venture return if you sell them for less than $100 million, you just have to go in at the right price,” she said.

Greycroft has a $75 million fund, invests $500,000 to $3 million in each start-up and does not always demand a board seat. Neither does Andreessen Horowitz, which will invest as little as $50,000 in a start-up from its $300 million fund.

“That is a much better model than putting a bunch of money in upfront,” said Marc Andreessen, Mr. Horowitz’s partner.

Mr. Andreessen and Mr. Horowitz also attribute the venture industry’s struggles in part to the business school graduates who now populate Sand Hill Road offices, taking the place of the entrepreneurs who first formed venture firms. (Mr. Andreessen is a founder of Netscape, and he and Mr. Horowitz founded Opsware, a software company bought by Hewlett-Packard.)

When too many venture capitalists serve on a start-up’s board with “no proper judgment, who have never built a company,” they tend to get too involved in running the company and, in high-pressure situations, imagine problems that do not exist, Mr. Horowitz said. “Their insecurity and own anxiety filters into the advice,” he said.

Franklin Pitcher Johnson, a veteran venture capitalist known as Pitch who founded Asset Management Company in 1965, agrees. He had this advice for would-be venture capitalists at a recent conference: “Get a real job in an operating company, because what we back is operating companies — until you understand that, you can’t be much of a venture capitalist.”

Still others blame the fact that money flows to firms with the biggest past successes, even though the venture field can be an industry of one-hit wonders.

“The people who were venture gods in the 1990s are 10 years older than they were,” said Judith Elsea, co-founder and managing director of Weathergage Capital, which invests in venture funds. Experience is an advantage in any industry, but venture might be different, Ms. Elsea said, because “technology is so dynamic.”

Despite all the calls for a return to the old-school model of venture capital, some new technologies, like those in clean energy, require huge amounts of money, so some firms will need to remain large.

And certain investors dispute that too much money is the problem. Timothy Draper, founder of Draper Fisher Jurvetson, thinks there should be more venture capitalists, not fewer. “I don’t think we have enough venture capitalists to spread the wealth to the seven billion creative minds out there,” he said.

Venture Capitalists Return to ABCs – Claire Cain Miller, New York Times

Add comment July 8th, 2009