Summary of business news and analysis

Project Syndicate: Why China Won’t Rule, by Robert Skidelsky, May 21, 2012

Is China poised to become the world’s next superpower? This question is increasingly asked as China’s economic growth surges ahead at more than 8% a year, while the developed world remains mired in recession or near-recession. China is already the world’s second largest economy, and will be the largest in 2017. And its military spending is racing ahead of its GDP growth. read more

Keywords: China, Chinese Economy

Valerie A. Ramey, Government Spending an Private Activity, University of California San Diego and NBER, Jan. 2012

"This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity."

Keywords: Government Spending, Private Activity

I also like this: "If you have to spend all your time as a speculator you do not have time for anything else"

2010

Kewords: Monetary Policy, Speculation

The Economist: Rival versions of capitalism; The endangered public company; The rise and fall of a great invention, and why it matters, May 19, 2012

.."public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM."..

read in The Economist why we should worry about the low number of IPOs

Keywords: IPOs, Public Companies

Brad Feld explains that it is very difficult to grow a venture capital firm. It might be better not to grow the subsequent funds and to focus on being really excellent in what you do, finding great companies and supporting them.

Keywords: Venture Capital, Fund Raising, Fund Life Cycle

Related:

MarketObservation: Kauffman paper about the VC business triggered a heavy public debate, May 18, 2012

Robert E. Hall Susan E. Woodward, The incentive to start new companies, evidence from venture capital, Working Paper 13056,NBER, Cambridge, Massachusetts, April 2007

"The standard venture-capital contract rewards entrepreneurs only for creating successful companies that go public or are acquired on favorable terms. As a result, entrepreneurs receive no help from venture capital in avoiding the huge idiosyncratic risk of the typical venture- acked startup. Entrepreneurs earned an average of $9 million from each company that succeeded in attracting venture funding. But entrepreneurs are generally specialized in their own companies and bear the burden of the idiosyncratic risk. Entrepreneurs with a coefficient of relative risk aversion of two would be willing to sell their interests for less than $1 million at the outset rather than face that risk. The standard financial contract provides entrepreneurs capital supplied by passive investors and rewards entrepreneurs for successful outcomes. We track the division of value for a sample of the great majority of U.S. venture-funded companies over the period form 1987 through 2005. Venture capitalists received an average of $5 million in fee revenue from each company they backed. The out, Tside investors in venture capital received a financial return substantially above that of publicly traded companies, but that the excess is mostly a reward for bearing risk. The pure excess return measured by the alpha of the Capital Asset Pricing Model is positive but may reflect only random variation."

Keywords: Venture Capital, Idiosyncratic Risk, Risk Adjusted Returns

Looking at the poor performance of venture capital firms in many European countries, policy makers might be better off to attract the most experienced firms from abroad rather than try to boost activity with local firms which have limited experience.

Henry Chen, Paul Gompers, Anna Kovner, and Josh Lerner, Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion, Harvard University and Federal Reserve Board, June 2009

"We document geographic concentration by both venture capital firms and venture capitalfinanced companies in three cities – San Francisco, Boston, and New York. We find that firms open new satellite offices based on the success rate of venture capital-backed investments in an area. Geography is also significantly related to outcomes. Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment.
Ironically, this outperformance arises from outsized performance outside of the venture capital firms’ office locations, including in peripheral locations. Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms."

Keywords: Venture Capital, Entrepreneurial Clusters

Bernstein, Shai, Does Going Public Affect Innovation? (May 16, 2012). Available at SSRN: http://ssrn.com/abstract=2061441

"This paper investigates the effects of going public on innovation. Using a data set consisting of innovative firms that filed for an initial public offering (IPO), I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach, I find that going public affects firms' strategies in pursuing innovation. The quality of internal innovation declines by 50 percent relative to firms that remained private, measured by standard patent-based metrics. The decline in innovation is driven by both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions."

Keywords: Going Public, Innovation

Keywords: Mobile Megatrend, IT Technologies

Congratulation to M. Zuckerberg and his team for the great IPO performance. It will now be hard work to justify the valuation of the great company facebook.

Keywords: Facebook, Facebook Valuation

Gallup: Americans' Optimism About Their Financial Future Recovers, May 16, 2012

Americans' expectations for their personal financial situations have recovered from the low point of four years ago, with 63% now saying they expect to be better off a year from now, up from 52% in late May/early June 2008. The 18% who say they will be financially worse off in a year is by one percentage point the lowest since 2003. read more on Gallup Wellbeing

Keywords: US Economy, Expectations of US Citizens

A latest Kauffman Foundation publication stating that VC funds were not able to deliver the superior returns as many might have expected, created a lot of heat in the VC scene.

Here is one of the responses to the publication:

Good money after bad: CalPERS and the crisis in venture capital, by Matthew DeBord, May 15, 2012

There is a highly interesting observation by DeBord. He states that too many fund managers focus on the front end of a fund’s performance period because that performance drives a successful fundraising outcome in subsequent funds.

Maybe the VC business should become a niche business again, where highly skilled professional focus on finding "entrepreneurial pearls" rather than follow a strategy focusing on fund size in order to have strong growth in management fees.

Even though certain statements of the Kauffman report might be questionable (as the debate shows) it triggered a valuable public discussion. Maybe the "dumm pension fund money" becomes smarter money overall.

Keywords: Innovation, Regulation

WSJ: Rich Karlgaard: The Future Is More Than Facebook; Social media is already passé in Silicon Valley. America's innovation engine is now focused on transportation, energy and manufacturing, May 16, 2012

Question: If America could have only one of the following—Facebook, Twitter or horizontal drilling—which would be the smarter choice?

Happily, we don't have to make that choice. America remains the world's innovator, a country without limits. read more about America's fascinating innovation power in the WSJ

Keywords: Innovation, Free Market

Keywords: US Economy, Incentives for Enterprises

read Steven Horowitz' arguments on "Coordination Problem":

Coordination Problem: Krugman's Misreading of US Banking History, by Steven Horwitz, May 14, 2012

In his NY Times column Sunday, Paul Krugman tries, in vain, to construct a case for bank regulation in light of the problems at JP Morgan. As usual with Krugman, there’s much to disagree with, but I want to focus on his utterly ham-handed version of the history of US banking, which bears shockingly little resemblance to reality.

Krugman thinks he has the critics of regulation nailed with his take on US financial history: read more on Coordination Problem

Keywords: Banking, Banking Regulation, Free Market and Banking

What Peter Thiel, paypal founder and facebook investor, said about theories on the bubble and bust economy in 2008. (For Peter Thiel a big financial event is ahead - the facebook IPO).

Keywords: Asset Bubbles, Bubble Economics

Cumming, Douglas J. and Zambelli, Simona, Private Equity Performance Under Extreme Regulation (March 30, 2012). Journal of Banking and Finance, 2012, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2056786

Abstract:

"This study investigates the impact of excessive regulation on private equity (PE) returns and firm performance. History shows that extreme regulation and prohibition reduce the supply of capital and raise returns (e.g., as with drugs and diamonds). However, for value-added investors such as PE funds, extreme regulation also reduces the quality of capital and fund involvement. The net effect on returns is therefore ambiguous and heretofore not studied. With a new unique dataset, this paper empirically examines the performance of PE investments in Italy when leveraged buyouts are strictly regulated. The data show that extreme regulation reduces not only the supply of capital, but also PE returns and firm performance, as well as the likelihood of an IPO exit."

Keywords: Private Equity, Regulation, Performance

If two overconfident testosterone loaden banker dealers dance tango for a deal, things might not turn out right. Put them in a cold shower befort starting to negotiate. Values have to do with fundamentals of the business. Take testosterone guys out of the game.

It Takes Two to Tango: Overpayment and Value Destruction in M&A Deals, November 15, 2010

Keywords: Negotiation, Fundamental Business Value

Keywords: Technology, Economic Development, Economic Growth, Stagnation