Quarterly Newsletter: July 2005

Valuing information
According to Reuters, Google, Inc. took over the top spot as the most highly valued “media” company last week, surpassing Time Warner Inc. in just 10 months of trading as a public company. With a current stock market capitalization of more that $80 billion, Google is now worth more than any other “media” company in the world. Google’s total sales last year were $3.2 billion. Google began as collaboration within a university.

Valuing government contracts
According to a Washington Post article, Science Applications International Corp., one of the larger Federal contractors, is considering an initial public offering. Last year’s revenues were $7 billion with 90% of their revenue coming from Government clients. The 2008 revenue goal is $12 billion.

V C’s provide intangibles too
According to a recent article in Wharton Finance and Investment, entrepreneurs are no longer taking the highest “pre-money” valuation as a matter of course. Today’s entrepreneurs are looking deep into the venture capital firm and what they have to offer besides hard cash. Of increasing importance are the intangibles that a firm brings to the table such as experience in their sector and contacts that will help propel the venture to success. In seeking venture capital investment, a company is hungry not just for cash but also for the venture firm’s reputation and access to a network of customers, suppliers, investment bankers and other important constituents that the entrepreneur cares about. The reasoning is simple: affiliating with the “right” venture capital partner can certify the merits of the company to other parties, such as other investors. Although outsiders may not know the entrepreneur, they probably know the venture capital firm through its prior deals.

V C hedge funds?
It’s the venture capital investor’s rule of thumb: nine of every ten investments will not make money. If all goes well, the 10th will make enough to exceed all the losses. Given these odds, investors are always looking for ways to increase returns from their winners. Bill Hilliard and Charles Baden-Fuller have developed a new theory on increasing such returns: Successful venture capital-backed companies act as disruptive forces in their industries. The freshly conceived products or services they promise to bring to the market threaten the entrenched position of an established competitor causing any publicly traded stock price to decline. In this situation they recommend securing a “put option” with the established competitor. (A put option is the right to sell stock at a fixed price by a specific date on the competitor’s stock.) Doing so would be an effective way to capture profits from the established competitor in addition to obtaining profits from the new investment.

Hilliard is an entrepreneur turned venture capitalist and Baden-Fuller is a professor of strategy at Cass Business School of City University in London, England.

Financial catastrophes abound
We’ve all heard about the Enron/WorldCom/Adelphia debacles. It seems major market forces are prone to financial scheming and rip-offs by some very talented and highly creative people. One of the most creative schemes was Enron. They would form offshore Corporations, transfer “intellectual assets” to those companies and borrow money (hundreds of millions of dollars) against those intangible assets. Since the apparent strength of the parent company was so strong, obtaining the loans was a fairly simple process. The true “genius” of Enron was to declare the loans as revenue, which, of course, helped to inflate the company’s value.

According to a recent article in the New York Times, these situations happen everyday. We usually don’t hear about them simply because they are not on the grand scale of the Enron’s of the world. The business world itself is a microcosm, an underbelly of the investing and corporate worlds where hokey deals and mysterious webs of linked investors are all part of the workaday business.

Fuel cells are coming!
General Motors Corp. has signed an $88 million deal with the U.S. Department of Energy to build a fleet of 40 hydrogen fuel cell vehicles and further develop the technology. Demonstration vehicles are planned for New York, Washington, California and Michigan. In a separate commercial agreement, Shell Hydrogen, LLC will support GM by setting up five hydrogen-refueling stations around the country.

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