Venture Blog

You know that something is about to be over-hyped when the VCs jump on the bandwagon. A friend recently pointed me at Venture Blog. When Google bought Blogger I'm sure VCs up and down Sand Hill road were scratching their heads wondering what a blog was and trying to figure out why they didn't have one in their portfolio.

While poking fun at the venture folks is always entertaining, Venture Blog and the ones that will surely follow are wonderful, wonderful things.

When raising money for a start-up, one of the hardest problems is finding the right people in the venture community to work with. If you've done it before you'll have web of trust to tap in to. If you're doing it for the first time it is much harder to figure out who can really help you and who can only talk about helping you. Every VC you meet will claim to be able to do three things:

1. Open doors to business partners and customers
2. Recruit senior management
3. Help raise more money

I don't know if they are lying, delusional, or are merely indulging in garden variety exaggeration, but most VCs will not produce measurable results on any of these fronts. So how do you know who will deliver the goods and who will just come up with excuses about why they can't serve on the audit committee?

The best way to find out is to get your venture partner to make the introductions before closing the deal. Have the VC bring in a prospective business partner or customer as part of the due diligence process. This is a great way for the VC to learn more about your company and a great way for you to find out if the VC's rolodex is as good as he claims it is. If the CIO of GE shows up for the meeting, you've got a winner. Do the same thing with executives and other VCs your venture capitalist has worked with before. Both sides can learn a lot in this process.

The next best thing you can do is to check references. Call entrepreneurs that the VC has backed previously. Take the time to meet with folks who have served with them on company boards. Do not skip this step under any circumstances.

Now that I've seen Venture Blog, I need to add one more step to my VC due dilligence list: Read their blog.

More Analyst Conflict News

The New York Times is running a story today about the oversize pay package for an analyst hired away from CSFB by UBS Warburg. Even if banks erect a so-called Chinese Wall between the bankers and analysts, everyone still knows how the firm makes money. Action at a distance may be disallowed by general relativity, but it can't be avoided by investment banks.

New Startup Idea

In December the New York Attorney General along with a bunch of government regulators announced a "global settlement" to fix some inherent conflicts in the investment banking business. One part of the settlement is:

An obligation to furnish independent research. For a five-year period, each of the brokerage firms will be required to contract with no less than three independent research firms that will provide research to the brokerage firm's customers. An independent consultant ("monitor") for each firm, with final authority to procure independent research from independent providers, will be chosen by regulators. This will ensure that individual investors get access to objective investment advice.

The press release for the settlement can be found on the New York Office of the Attorney General web site.

Here is the startup idea: I want to start a new independent research firm that writes very positive reports about the biggest clients of the biggest investment banks. If I need to, I'll also write negative reports about the clients of banks that don't buy my research. In aggregate it'll look like I'm fair and balanced.

Unfortunately, there are lots of independent research firms already doing this. Independence means nothing when the economic incentives automatically align the interests of bankers and analysts.

Too bad the NY AG missed an opportunity to do the right thing. As an investor, what I really want is transparency. I would much rather the regulators required analysts to disclose the financial links between them and the companies they cover. This is the only way for me to judge how independent the research might actually be. It's sad when it's easier to learn what goes in to a cereal box than what goes in to a research report.