Internet stock investors: Bambi on Google

If I were an active investor in internet stocks, I would read everything that Bambi Francisco has to say, especially about the large internet companies. She has amazing prescience. I’ve been reading her for columns for years. Today she has an excellent post at AlwaysOn.

She has so many connections and so often has the inside story; but it’s her analysis that I like the most. Something she can do because she has been covering the industry for so long. She’s the Mary Meeker of internet journalism. If Mary blogged, I’d read her religiously too. (Mary was the #1 rated investment banking analyst of internet stocks for several years running. She wrote a report two weeks ago about the future of online advertising and how Google will benefit from the purchase of YouTube.) On Oct. 13th, the Wall Street Journal said Meeker values Google at $500 per share.

So back to Bambi. In her post today, Bambi explains how revenue follows eyeballs–even now, even years after the bubble burst.

Audiences and ad dollars always meet. I recall years ago, when search was considered a commodity.

Companies like Inktomi moved into the caching business, while others — Yahoo (YHOO), Lycos, Excite, AltaVista, etc. –quickly morphed into portals or were buried in other entities. The ad dollars would flow abundantly to portals, and transaction fees to online retailers, so most believed. Back in 2000, nearly $3.8 billion went into display ads vs. $109 million in paid search in the U.S., according to eMarketer.

Last week Google’s stock went on a tear. It hit a 52-week high this week. The market cap today is $145 billion. Compare that with Yahoo’s $33 billion and eBay’s $44 billion.

Bambi told 8,000 investors last Wednesday that she had turned bullish on Google only after it bought YouTube, because now it would be a leader in the social networking and video space, which has huge traffic share online but a very small percentage of advertising revenue so far. Like search back in 2000.

Social networks are estimated to attract $280 million in ad dollars this year, according to eMarketer. Online video-sharing sites are estimated to attract about $385 million. EMarketer estimates that $15.9 billion will be spent in online advertisements in the U.S. this year. That means social networks and video-sharing sites only attract about 1.8% to 2.5% of total online ad spending.

Investors who paid attention to Mary Meeker’s report two weeks ago or Bambi Francisco’s comments last Wednesday might have gotten into Google before the recent run.

But more importantly, since I’m a firm believer in the Warren Buffett, Charlie Munger approach to investing (make only a few bets in your entire life after reading and studying all you can and getting to know the company as if you were its owner, and then stick with those bets over a long period of time), I would keep an eye on Google for the next 5-10 years. I believe it will be worth more than Microsoft within a few more years.

In May 2004 I predicted Google would be worth more than Microsoft within 10-15 years.

In February 2005 I updated my forecast and listed 7 reasons why it wouldn’t even take 10 years.

Today I would guess that it will take less than 5 years and perhaps even only 2-3 years before Google is worth more than Microsoft. Acquisitions may play a role; but more importantly, each project that Google has launched (and has often been criticized for because they don’t become #1 overnight with them) is maturing. The pace of innovation at Google still exceeds all the other internet companies combined.

For the last decade, PC owners have found hardware prices plummeting but the cost of Windows and Office staying rather steady. It isn’t uncommon to pay as much or more for software than for hardware when you purchase a new PC.

But with Google’s recent moves in the spreadsheet and word processing space (when are they going to offer a free Powerpoint killer?), it won’t be long before we can buy a $300-500 PC without any Microsoft software on it and be as productive or more productive than ever before.

I’m not necessarily down on Microsoft. It will reinvent itself. Think about it. IBM is still worth $137 billion. It’s just a totally different business than it was 20 years ago. Microsoft will find its place in the post-Windows world, but it just won’t be making all the rules like it has for the last 10-20 years.

How many of you can live without Microsoft products today? And how many can see the time coming soon when Google will provide the OS as well as the free software applications that you and your team need to succeed? (And it will all be monetized through their most-efficient advertising engine.)

What do you think? And does it matter or not?

Since I write primarily to entrepreneurs, I’m especially eager to hear what Google’s strategy and success means to you as you make investment and business plan decisions.

Better than Rocketboom!

I heard about Rocketboom last year, a simple, short-format daily news video broadcast that has attracted millions of views. They have a growing archive, of course, and they use a simple web 2.0 tagging system to identify the topics that are covered in each broadcast. (See the Rocketboom Alexa chart.

When you visit Rocketboom, your first reaction is, anyone could do this. But the fact is, they did it, and they did it early in the online video revolution, and they are still doing it. Unfortunately, Amanda Congdon, the original Rocketboom news anchor left the site earlier this year. Now the anchor is Joanne Colan.

I swear that when I originally saw Rocketboom I thought about my friend Lindsay Campbell, an actress in New York with a degree from Stanford University. She was my assistant at “Infobase Ventures” (the predecessor to Provo Labs). After graduating from Stanford she got an MFA from a very fine acting school in Colorado.

I actually thought she would make a better news anchor than Rocketboom’s. I tried to figure out something that worldhistory.com or one of my other companies could do that might put Lindsay in front of a daily online video news broadcast. But I didn’t figure anything out and never approached her about it.

So imagine my surprise yesteday when I got an email from Lindsay saying that she is quitting her day job to become the news anchor for a new online video news site called WallStrip.com.

It’s a better concept than Rocketboom because it has a more narrow focus, but it will appeal to millions of people who owns stocks and who want to know how changing trends will affect the companies they have invested in.

It’s about the stock market. It’s about highlighting one stock each day that is close to a 52-week high and then going behind the scenes to figure out what is powering the growth of that stock. They will interview people, figure out what is going on in pop culture that is fueling each company’s growth. Then, on all the Wallstrip blogs, professional investors and others will debate the company’s prospects.

Today’s Wallstrip news story is on Apple Computer, whose growth is fueled by the iPod as well as the retail stores that Apple is opening.

So the bottom line is: better concept than Rocketboom. Better anchor than Rocketboom.

I’ve never hired a news anchor before, but I can tell good ones when I see them. I was a huge fan of Soledad O’Brien early on, back when I watched MSNBC’s The Site, one of the programs that fueled the internet revolution.

I am extremely happy for Lindsay and the founding team of Wallstrip.com, and I wish them well. I think their format is excellent. I think Lindsay is perfect for this job. Her career is going to take off. I always knew she would go places!

Howard Lindzon, the founder of Wallstrip outlines one of his goals on a recent blog post:

One of my goals out of Wallstrip is to create a deeper conversation, a better MEME for stock bloggers, market investors and enthusiasts.

The tech nerds have MEME

Company and Product Launch Events

Startup companies with finished products need publicity, media and blogger coverage, and analysts and reviewers to take note of what they are doing. They also often need investor interest. Since investors often flock to the same hot deals, it can be good to have a large number of investors exposed to your deal at the same time.

Some launch events give startups a chance to reach all these audiences at the same time.

DEMO is a semi-annual event that has featured pitches from some of the remarkable technology companies of our time. Investors and the media pay a lot of attention to the companies that get selected to present at DEMO. At every DEMO, conference organizer Chris Shipley chooses a number of DEMOgods that are worthy of special attention.

Yesterday and today, about 70 hot companies have been introducing their products at DEMOfall 2006, including Pluggd, a Seattle startup with a podcast search engine that I am very interested in, whose video presentation you can watch here.

At Demo, your presentation will be recorded and stored in the Demo Video Archives permanently. So there will be a long tail of publicity and potential interest in your company.

I wish I were at DEMO, but at least I get to watch videos on all the companies that I’m interested in.

Besides DEMO, what other launch events are possible for high tech startups?

Someone ought to do a directory or Wiki of launch events, if one doesn’t exist already. I know of a few.

FundingUniverse.com offers speedpitching events in several states. They aren’t so much a public launch event, but they are a great way to reach local angel investors.

Where can you find a way to reach a group of early stage VCs all at once, rather than making the trek to Sandhill Road in the heart of Silicon Valley or hanging out at Buck’s Woodside Restaurant, where more venture deals have been done than anywhere else on earth?

The VC Forum brings a number of Silicon Valley venture firms to cities around the country to meet local entrepreneurs and look at potential deals. One Provo Labs company is actually presenting on September 28th at VC Forum in Salt Lake City.

Another option is the Silcon Valley Association of Startup Entrepreneurs. I received an email yesterday from Jennifer, who represents SVASE, and she asked me to publicize one of their upcoming events. So here it is:

SVASE is hosting an event called Launch: Silicon Valley (www.launchsiliconvalley.org) occurring on November 8, 2006 at the Microsoft Campus in Mountain View, CA. The event will bring together the Top 30 best and brightest A and B round startups and will provide these start ups with a chance to showcase their products in front of an audience of leading Silicon Valley VCs looking for their next investment, and companies seeking to leverage business models and technologies as customers, strategic partnerships and potentially acquirers.

As an advocate for entrepreneurs I was hoping you could spread the word about this great opportunity that many of your readers might appreciate. If so here

Omniture vs. Web Side Story

So if Yahoo Finance is correct, Omniture has a market cap of $106 million on trailing twelve months revenue of $51.2 million. Their quarterly revenue growth rate (year over year) is 104.4%.

Compare that to Web Side Story, another web analytics company. WSSI’s market cap is $237 million, more than twice as high as Omniture’s. Their revenue is lower, with TTM revenue of $45.94 million and their quarterly revenue growth rate (yoy) is lower, at 93.2%. WSSI does have a positive EBITDA of $9.9 million, while Omniture’s is negative. But with a higher revenue base and a higher revenue growth rate, it could be just a matter of time before Omniture is worth significantly more than Web Side Story.

I think it is also significant than both companies growth rates are near 100% even with Google Analytics in the picture. I’ve tried Google Analytics and find it lacking in some critical features. So my companies continue to rely on Omniture, as do many of the largest and most profitable internet companies in the world.

I own a very small stake in Omniture. As a customer and shareholder, I think it will be interesting to see if the market cap gap between Omniture and Web Site Story narrows in the coming months. I think it probably will, one way or another. There were 2 million short shares on Web Side Story as of June 12th, and it will be interesting to see how that plays out.

Contingent Value Rights

When a company is publicly traded and has a high daily trading volume,
the market continually prices the shares, and buyers and sellers can
trade the shares at any time.

But when a company is privately held, there is usually little or no
market for shares, even though the shares have some value. It is
difficult to find buyers of privately held shares, precisely because
there is no ready market for the shares if the buyer decides later to
sell them.

And pricing shares in a privately held company is also extremely
tricky. I have heard of people overpaying wildly for privately held
shares because their value was misrepresented. But I have also heard of
shareholders having to sell shares in a fire-sale, for pennies on the
dollar, because they had to sell and couldn’t find a reasonable market
for the shares.

There are a few private equity firms like Millennium Technology Value Partners in NYC who specialize in providing liquidity for holders of generally illiquid assets.

But I have recently come across a financial instrument that I think
could be very useful for holders of illiquid assets who want to create
a fair transaction with a buyer, where the buyer is protected in case
the assets aren’t worth as much as was hoped, and the seller is
protected in case the assets are worth more than was assumed.

I think it could be deemed a “Two Way Contingent Value Rights Agreement.”

I have found many references to “contingent value rights” such as this
reference in the book “Expontential Functionals of Brownian Motion and
Related Processes” which I found on Google Print (an unbelievably valuable and little known resource) today. The book was published in 2001.

“To give an example very relevant in
corporate finance, we can also mention the so-called contingent value
rights: suppose a firm A wants to acquire a firm B. A is not willing to
pay too high a price for the shares of company B but knows that this
may lead to a failure of the takeover. Hence firm A will offer the
shareholders of company B a share of the new firm AB accompanied by a
contingent-value right on firm AB, maturing at time T (say two years
later). This contingent-value rights is nothing but an Asian put
option. The put provides the classical protection of portfolio
insurance; the Asian feature protects firm A for an exceptionally low
market price of the share AB on day T, as well as the shareholders B in
the case of a very high market price that day. These contingent-value
rights were used when Dow Chemical acquired Marion Laboratory, when the
French firm Rhone-Poulenc acquired the American firm Rorer and more
recently, when the insurance company Axa merged with Union des
Assurances de Paris to form the second largest insurance company in the
world (in the last case, the corresponding contingent value rights are
still trading today).

I can envision a time where illiquid assets can be bought and sold more
easily if sellers and buyers entered into a Two Way Contingent Rights
Agreement, where the future value of the assets (once they are more
liquid and the market determines pricing) leads to a modifying payment
to the buyer or seller so that the original deal turns out to be fair
for both parties.

This would be ideal, for example, to help shareholders of privately
held companies that are venture backed, where an exit is almost certain
to occur through an IPO or acquisition.

A silicon valley friend once told me he thought this was called a
“waverly loan.” Has anyone heard of pre-IPO shareholders using a
“waverly loan” or a “contingent value rights agreement” in selling
shares?

Google Maps and Venture Capital

Ben Kou (a former Utah guy) from socalTECH sent me two great links yesterday:

  • I thought you might be interested in a Google Maps API implementation that intersects with your interests. This graphs Southern California venture investments against Google Maps: http://www.socaltech.com/intelligence/map/
  • You also might be interested in an unrelated page which graphs restaurant reviews in major U.S. cities (including Salt Lake): http://www.realeats.com/Salt_Lake/

Powering Businesses with Float

I never had much interest in banking or insurance until reading The
Warren Buffett Way last year and realizing how Buffett made his fortune
by investing the “float” from his insurance companies. Now I think
about this concept all the time and wonder how it might be applied to
my internet companies.

From the 2004 Berkshire Hathaway Annual report:

“… Berkshire has access to two
low-cost, non-perilous sources of leverage that allow us to safely own
far more assets than our equity capital alone would permit: deferred
taxes and “float”, the funds of others that our insurance business
holds because it receives premiums before needing to pay out losses.
Both of these funding sources have grown rapidly and now total about
$55 billion.

“Better yet, this funding to date has often been cost-free. Deferred
tax liabilities bear no interest. And as long as we can break even in
our insurance underwriting the cost of the float developed from that
operation is zero. Neither item, of course, is equity; these are real
liabilities. But they are liabilities without covenants or dates
attached to them. In effect, they give us the benefit of debt — an ability to have more assets working for us — but saddle us with none of its drawbacks.”

I have a friend who ranks in the top 5 on major search engines for
insurance related terms. I figure that if I ever establish an online
insurance company, that he’ll be my partner in generating major traffic
to my site. The big question I need to answer before going down this
path is: what regulations govern how insurance funds — the float —
can be invested? I know government regulations would likely not permit
any high-risk investments. But how did Buffett do what he did? I
suppose he bought companies with high book value, so the investments
seemed safe because the companies owned physical assets. I don’t know.
I’m sure you can’t fund high-risk startups with insurance float.

Another options might be industrial banks, which exist in six states,
including Utah. Again, regulations would not permit a high-risk use of
these funds. But I recently read a great article (Wired magazine I
think) about a taxi company that set up an Industrial Bank in Utah
(instead of borrowing money from other banks) and in a couple of years
it was able to greatly increase its net profits because it was able to
finance its own growth.

I’ll keep noodling on this concept. All start up companies need some
cash. And I’m thinking there ought to be a way to fund them using
float, without violating government regulations. (I wonder if
regulations permit say 5% of float to be invested in high risk
investments, as long as the portfolio overall is 95% safe???)

Any ideas from all the brilliant readers out there?

Notes to Myself from Berkshire Hathaway Shareholder Meeting

The Berkshire Hathaway shareholder meeting was fabulous. A great experience to sit at the feet of Warren Buffett and Charlie Munger. (Thanks Darren, for making this trip possible!)

I love my blackberry. I was able to take a lot of notes during the Q&A session which lasted about five hours. I am not a trained reporter, and my notes may contain a few mistakes (I’ve caught and corrected a few already), so please don’t accept this as an accurate transcript. Like my post says, these are notes to myself, and in places they are rather cryptic.

Here goes:

WB. Catastrophe insurance is seasonal: 50% of hurricane’s are in September. Later this year P&G may buy Gillette giving them billions in capital gains, but that’s just for reporting, it means nothing to them, since they will hold P&G for a long time. They will announce an acquisition soon in insurance, just under a billion. We’d love to buy something for $5-10 billion, our check would clear. We’ve got more money than brains.

Q. What are three most important criteria for selecting managers.?WB. 1. Passion for their business. We buy companies from people who are already rich, don’t want to sell or leave their business, but they need some liquidity. We hope they love their business, we try not to dampen that. Intelligence, energy, integrity. Do they love the money or love their business. We don’t have anyone to run their businesses.

CM. How well this has worked and how few people have copied it.

Q. How to decide abt Anheiser Busch, what was its intrinsic value?WB. Decision takes about 2 seconds. I bought 100 shares abt 25 years ago, of AB and lots of stocks, so I could get reports. I’ve been reading reports for 25 years. Beer sales are flat. Wine and spirits are gaining. Miller was rejuvenated.

CM. At our scale, if we’re going to buy well regarded companies we almost need a patch of poor performance.

WB. Ave person drinks 64 oz. Per day. 11 oz will be coco-cola, beer is about 10%. Coffee is going down.

CM. Some of you may remember Mets. National brands are replacing all the local ones. That is permanent.

Q. How you see Berkshire vs others, esp rise of private equity firms. Last year you said there were enough owners wanting to sell to BH. Rise of hedge funds, investing in everything. Are returns going down because of the increased competition.

WB. Far more money looking at deals now than five years ago, higher prices for mundane businesses. Private equity funds are bigger. Bidders line up for things. Many businesses being flipped. We are positioned poorly for acquisitions. Its amazing how fast things change. Three times he thought there was so much money that it would be hard to do intelligent things. 69 got out of partnership. 3-4 years later I saw the biggest opportunities.

We bought abt $7 b in junk bonds abt 3 years ago. We are positioned very badly, your stock won’t do as well. I don’t have any magic solutions.

CM. A lot of buying is fee motivated. I had a friend who tried to buy warehouses but he was always topped by professional managers who want fees. A few years ago he had a call from someone who was trying to spend clients money before he had to return it. We don’t get paid for spending money, but for making it.

CM. None of the companies sold to us over the years would have wanted to deal with a hedge fund.

Q. What sparked your interest in investing? What advice?WB. Got interested at 7. Wasted time before that. His Dad was in business. Read all the books on investing in Omaha. Bought 3 shares at 11. Read Graham’s book at 19. Advice: read every book in sight. Start young. If you start young and read a lot you are going to do well. There is no priesthood with scrolls that are available only in temples. You don’t need IQ, but temperament. I developed a simple framework by reading, didn’t come up with it myself. You can learn everyday but not act every day. If you enjoy the game, like bridge or baseball.

CM. My attitude is like Keynes that money managing is a low calling. Not like a surgeon. I don’t like percentage of GDP going to money management fees. Not good for the country. Managers would do better if they understood investments.

WB. I’ll have some CEO friends who don’t manage their own money. But they take advice on huge acquisitions with shareholder money.

CM. Present Era has no comp. Higher percentage of intelligent classes in buying pieces of paper trying to get rich. No past era had a similar concentration.

CM. A lot of what I see reminds me of Sodom and Gomorrah.

WB. We weren’t there by the way.

CM. But there is a published account. Bad things happened after greed and envy.

Q. Poem from 11 year old. Petro China?WB. We bought Petro China a few years ago after reading the annual report. At $400 m. It produces 3% of worlds oil. Last year it earned $12 b. So it’s a major company. Total market value was $35 b. In the report they say they will pay out 45% percent of what they earn. Chinese govt owns 90% of the company, we own 1.8%. If we vote together we control it. We had to reveal our stake. We would have bought more but the price jumped. Employs almost 500,000 people. Anyone can read the report. We bought. We didn’t go there and meet anyone. We just sit and read. At the time Yukos was far better known. I compared them at the time. PetroChina was far cheaper and China had better prospects.

Q. Rising costs on fuels, metals, wood. Unable to pass on costs. Will profits be compromised in the future?WB. Carpet business we’ve been hit over and over. Lagged on passing costs along. Corp profits as percentage of GDP are at an all-time high, will probably go down over 5 years. Corp taxes as percentage of total taxes are near all-time low.

Likes untapped pricing power, like Sees Candy. If you raise prices $0.10 would sales go down.? You can almost measure the strength of a business by how much agony they go through when they contemplate a price increase. Years ago newspapers did annual price and ad rate increases. It worked. Fat margins. But now publishes agonize over rate increases because they are worried about losing circulation or advertisers. You can learn a lot about the durability of an industry by getting in the mind of a manager relative to pricing.

Q. You are our heroes.WB. We have lowest turnover, most knowledgeable shareholders.Q. What about a dividend? With 15% rate.WB. If there were no tax on dividends, we would have done the same things. We retain earnings when we can increase the present value. So far our retained dollars have produced more than a dollar in present value. We’ll discuss this at next week’s directors mtg.

Q. How could current account deficit come down?WB. $618 b current account deficit, can’t last, something will happen. Most observers think a soft landing is likely.April 10 oped piece by Paul Volker about soft landing. With so much of worlds assets on hair trigger, some event could happen overnight that could cause them to want to change their position in a day–electronic herd is at an all-time high. Some exogenous event could cause a stampede by the electronic herd. People can’t get rid of dollars quickly…

In economics you can know what is going to happen, but not timing. You can see bubbles for example.

CM. I’m more repelled by the lack of virtue in consumer credit and public finances. Eventually a lack of virtue will hurt us.WB. What do you think the end will be? CM. Bad.WB. We consume a little more every day than we produce. We mortgage our farm or sell off pieces every day. More and more the rest of the world is owning part of us. The world will eventually own a good bit of us. Our children will pay for the fact that we overconsumed. World has demonstrated a diminishing enthusiasm for dollars. We are flooding with them.CM. Counter argument is: what does it matter if foreigners own 10% of the country if our real wealth is 30% higher than now. Some say if we manufactured nothing but just ran hedge funds we could have a great lifestyle. WB. The idea of us paying tribute to the rest of the world because of overconsumption of previous generations.

Q. Decline in housing, how would affect carpet?WB. We’d make up for it in other areas. Well being is tied up in housing. If there is a bubble that was pricked, we’d feel it, but the net effect could be good for us. We’re not into macro economics. We had people fleeing from cash (because of inflation) into farm land. In 1980 a farm here sold for $2,000 an acre. I bought it later for $600. People go crazy. Resolution Trust was formed. Many banks failed. Because people live in houses, the behavior might be different than other markets. CM. In Omaha, there’s not a bubble. You have a real asset price bubble in CA, Virginia suburbs. WB. I sold house in CA for $3.5 m, first day, probably sold it to cheap. 2000 sq ft. About $60 m per acre. CM. Friend sold a modest oceanfront house in CA for $27 m.WB. I

Google: Take Me to Omaha

The annual Berkshire Hathaway shareholder meeting will be in Omaha, Nebraska on Saturday, April 30th. There is a chance I will be able to attend. There are a few tickets available on eBay in case the one I’m hoping for has already been given away.

A few months ago I read an amazing book about Warren Buffett and blogged about wanting to attend his annual meeting. He may be the greatest investor of all time, will soon pass Bill Gates as the richest man in the world, and his annual meeting is only 900+ miles away. I have to do this.

I used a travel site to find flights from Salt Lake City to Omaha. I don’t really like travel site interfaces, with calendars that pop up and throw you off as you try to check for flights. They always try to throw in hotels and car rentals as well.

Then I had a most amazing experience at Google Maps. I just decided to type in:

slc, ut to omaha, ne

to see what would happen.

The result was so cool

Think of the efficiency of my query, and how instantly I knew the route and the distance between these two cities. I didn’t have to wade through any interfaces or fill out any forms to get exactly what I was hoping to see.

Now, imagine if Google Maps provided this same query engine and interface with airline data overlaid on top of my query.

If I could type:

slc, ut to omaha, ne from apr 28 to may 1

Then I should get the same map as before, only this time, I should have several different lines showing different flights or routes between the two cities. Each different airline could be color-coded and pricing information could also be visible on the map.

Efficient query syntax is required by many power users, but more importantly, I predict that companies that enable efficient (concise) queries will dominate companies who rely on traditional software or web interfaces in the mobile content arena, where navigation through pages or filling out forms is a horrible user experience.

Mobile users who can learn this kind of syntax can have great power using a tiny mobile device without a keyboard. When Google Maps are combined with Google SMS (and then overlaid with travel agency type data), the raw power we’ll have through our cell phones will be phenomenal.

Idea Stage Investing: Hitting Singles, Not Home Runs

I keep puzzling over the fact that only 2% of venture capital flows into early stage companies when it is also reported as a fact that early stage investment funds provide the highest average returns. Maybe VCs like to swing for the fence and only invest in companies that have huge potential–admittedly, most seed stage companies don’t. Many small businesses want to grow a bit, but aren’t necessarily aiming to dominate a multi-billion dollar industry someday and therefore disqualify themselves from getting venture capital.

At an angel investing seminar recently I heard one angel who has done more than 30 deals say that the first thing he does when looking at a business plan is check the five year forecast. If it’s not over some number (I think he said $50 million) he throws the plan out. Even though he knows full well that all revenue forecasts are just dreams, he still has decided that if the dream isn’t big enough he isn’t going to look any further.

So everyone seems to be swinging for the fences.

So what if a venture fund decided to go for all singles? Here’s an interesting scenario:

What if a $10 million venture fund decided to invest $100,000 in 100 different early stage companies who had modest plans but a very low risk of failure? There are a lot of factors that can reduce the risk of failure: low startup costs, established partnerships, proven sales model, experienced management team, growth industry, use of technology, internet marketing skills, etc.

In fact, what if the venture fund focused energy on training key employees in each startup (group seminars, executive curriculum, required readings, etc.) so they could develop the skills they needed to be successful?

What if 50 of these companies fail, and the other 50 end up growing to $1 million in annual revenue over a 5-year period, and were either breakeven or slightly profitable?

What if the venture fund had the right to liquidate each company that didn’t achieve more than $2 million in annual revenues in a 5-year period, and it’s equity stake in companies under $2 million in revenue were automatically pushed to 50%? In other words, if the management team doesn’t hit the milestones of $2 million in revenue, not only does the venture fund have the right to sell the company, but the management team doesn’t get all the equity they originally hoped for.

So back to the scenario. If 50 companies doing $1 million in annual revenue were each sold for 1x revenues and the fund owned 50% of each company, then the fund would return $25 million to its investors.

The little calculator at youcalc.com says this would be a 20.1124% annual return over the 5 year life of the fund–higher than the average return for venture capital funds over the last 20 years.

Does anyone know of any venture capital firm that systematically goes for singles, and tries to help every company it invests in to eliminate the possibility of failure? I think that VCs often increase the chance of failure by investing too much money and asking management to spend it quickly so they can get big fast. The VCs still win if only 2 out of 10 portfolio companies hit a home run and the others all fail. But what about the entrepreneurs? 80% of them end up with nothing if 8 out of 10 companies fail.

Has anyone ever thought of something like this, or tried it? I’m curious to know if there is any academic literature on this or if anyone can point me to any articles that explore this concept.