MICROSOFT for Investors and Users

MICROSOFT for Investors and Users

  • Microsoft performance in 2015 is mirroring that of IBM.
  • Windows 10 is an effort to make Microsoft’s ecosystem run more like Apple’s.
  • If it works, and Microsoft succeeds in becoming its own OEM, the stock could rocket upward.

A funny thing happened on the way to Windows 10.

Microsoft (NASDAQ:MSFT) became IBM (NYSE:IBM).

During 2015 action in the two stocks has increasingly mirrored one another. It’s a hamster wheel to nowhere, with IBM up less than 1% so far and Microsoft down less than 1%.

The companies aren’t identical, of course. Microsoft is still selling at four times sales while IBM is at about 1.5 times. Microsoft’s soft earnings have sent its Price/Earnings multiple skyrocketing to 36 while IBM is at barely 10. But to investors, their prospects for growth appear to be the same.

What this tells me is that CEO Satya Nadella is getting no credit for Microsoft’s growing strength in the cloud, no credit for the success of Xbox, and no hope of making Windows 10 into a growth catalyst.

What if the analyst capitulation is wrong?

The point of Windows 10 is not to make Microsoft big in mobile. It’s to make PCs, which we think of as deskbound, into products that work, and feel, more like mobile devices. Currently PCs come in two flavors, big boxes that sit under desks (hereinafter called servers) and laptops that may or may not be mobile. The point of Windows 10 is to encourage an upgrade cycle, to get those laptops off desks and into the field. That’s the whole idea of the Microsoft Surface design, to separate processing and display from storage the way a detachable keyboard is folded under a tablet base.

Under Nadella, Microsoft is increasingly its own OEM. That’s working for the XBox, and the Surface is turning the corner toward profitability. Being your own OEM doesn’t necessarily doom you to low profits. Apple (NASDAQ:AAPL) is doing fine. But it should mean a fatter top line over time.

A lot depends on how secure Windows 10 turns out to be. What Apple has, and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android lacks, is tight integration in this area. If there’s insecurity in iOS a patch can be delivered quickly, even transparently. Android, which is now suffering from discovery of yet-another flaw through which text messages can deliver a malware payload, upgrades much more slowly because of a welter of business arrangements among OEMs and carriers that Google has yet to control.

To the extent that Microsoft wants to be Apple, this security issue will be key. And it’s important because Microsoft has a reputation for software that lets malware thrive. Taking control, which includes taking responsibility, changes the game.

Right now, investors are discounting all of this. They say, “Same old Microsoft, another version of Windows.” But this isn’t your father’s Windows. It’s Microsoft’s first attempt to truly emulate Apple in the way its product ecosystem runs.

You’re right to be skeptical. Betting that Microsoft can get it right is pure speculation. But if Windows 10 can get it right the client business is a new ballgame, and Microsoft could start looking more like a FANG stock over the next year.


Private equity is finally getting ready to cash in (kkr)

Private equity is finally getting ready to cash in (kkr)

n July, three companies that were targets of some of the largest ever leveraged buyouts — Univision, the Spanish-language broadcaster; technology company First Data; and supermarket Albertsons — filed to go public.

The companies are also notable because they’ve been owned by private-equity funds for much longer than anticipated — as much as a decade in Albertsons’ case.

An IPO filing is still a long way away from a clean exit: Even with a public listing it can take years for private-equity investors to sell down their shares and be done with an investment.

In the wake of the financial crisis, so-called “hold times” at private-equity firms increased to an average of five to nine years for a North American company compared to an average time of 4.2 years before markets crashed, data from Preqin shows.

Hold times are the duration a private-equity-backed company sits in its owner’s portfolio. Hold times have also irked some private-equity investors like state pensions after revelations of fee abuse at some of the industry’s top firms.

For private-equity firms, that’s meant having to run businesses for much longer than they planned. In some cases, they’ve used the time to sell off pieces to manage a smaller business as they push toward an IPO.

In other cases, big private-equity firms like TPG Capital and KKR found themselves facing problems they couldn’t strategize past. Deals like Harrah’s Entertainment and Energy Future Holdings went belly-up, costing sponsors billions in the process and making it harder for them to raise new funds in the aftermath.


Inflation: how much is too much?

Inflation: how much is too much?

The last few years have seen central banks using monetary policy to fight deflation and grow the economy. Over the next few years, the risk of those banks overshooting their inflation target rates is a very real possibility.

Here’s why central banks may welcome that outcome.

global inflation will accelerate gradually from the current very low levels toward central bank targets of around 2% over the next few years, with the US economy leading the way.
While there is always two-way risk around the base case, we think inflation is more likely to surprise to the upside, overshooting central bank targets. This is a very real possibility over the secular horizon in the US, less so in Europe or Japan. Note that the Federal Reserve, with its massive balance sheet and its extraordinary monetary policies, still has not generated sufficient inflation. But as the economy has healed and the amount of slack has reduced, we might see the old definition of inflation reappear: too much money chasing too few goods. Frankly, many central banks would probably welcome a modest overshoot.
We don’t think the downside risk—deflation—is likely in the next several years. Back when the economy was just coming out of the global financial crisis, we were constantly flirting with the possibility of deflation. A combination of lack of global aggregate demand as well as the correction in commodity prices (too much supply) contributed to this. Unprecedented policy actions by major central banks, including the Fed, the European Central Bank and the Bank of Japan, have largely contributed to this diminished likelihood of deflation. While we are calling for a modest overshoot of the Fed’s 2% target, not runaway

Emerging market rapids v calm US waters

Emerging market rapids v calm US waters

There is also the circumstantial evidence that the US market only entered this financial Sargasso once the Fed had administered its final injection of QE bond purchases at the end of last year. That might imply that the second wave of normalising monetary policy — raising rates — could cause problems. It remains deeply worrying to see the US market become quite so becalmed.
Timing can be a mug’s game. At the turn of the year, I suggested that anyone who could afford to put away their money for a decade, should gently shift money from the US to emerging equities. That remains a good idea.
Those prepared to play the dangerous game of waiting for the bottom should wait a little longer. Events could well create a cathartic fall quite soon.


…what is more alarming: drama, or the absence of it? Or put more relevantly to current circumstances: should we spy opportunity in the dramatic and co-ordinated sell-off in commodities and emerging market securities, or should we rather fear the next step after the world’s stock market, in the US, has been ironing-board flat all year long?
Let us start with commodities and emerging markets. They are linked. Strong commodities help the emerging world both because they generate income for many countries, and because demand for raw materials shows that others are strong. Commodities over more than a century, and emerging markets over the three decades or so that they have been treated as an asset class, have both shown a propensity to move in long cycles.
The commodity-emerging market complex rallied spectacularly in the years before the 2008 crisis, and then after a brief spasm set new highs as huge Chinese stimulus (sucking in commodity imports), led the world out of the Great Recession. For the past three years it has been downhill all the way.
This is easy to explain. First, many saw that the rally was overdone, and prices too high. Second, easy monetary policy failed to create inflation in the west. Third, China lost steam. Fourth, the 2013 “taper tantrum”, as many emerging currencies shot downwards in response to hints of tighter policy from the Federal Reserve, revealed vulnerabilities. With this week’s Fed meeting leaving open the option of a September rate rise, dealers are taking evasive action. Fifth, last year’s oil price collapse hit exporters, led by Russia. Finally, several big emerging countries have alarming politics, led by Brazil.
Buying when all hope has been abandoned can make huge money, and such moments are generally created by politics. The most spectacular buying opportunity in recent history came in Brazil when investors treated the election of Luiz Inácio Lula da Silva as president in 2002 as though the country had moved over to communism. Brazilian stocks gained almost 2,000 per cent over the next six years. Have we reached such a moment?
The falls have been dramatic, but if the complex is to end up as undervalued as it was at the bottom of the last cycle, they have a long way to go. Since the peak, emerging markets have dropped 47 per cent relative to the developed markets, according to MSCI: but would need to fall another 33 per cent from here to drop back to their Lula low. Gold has to drop another 78 per cent to hit the $250 low from 1999. Industrial metals need a similarly big fall.

Are hedge funds a bad bet ? Evolution is for ACTIVE ETF…no cap weighted and with short positions as well

Are hedge funds a bad bet ? Evolution is for ACTIVE ETF…no cap weighted and with short positions as well

No wonder that plain-vanilla exchange-traded funds now manage more money than hedge funds: they are cheaper and offer better average returns

IT IS a victory for the humble—for the investment equivalent of a puttering hatchback over a gleaming Porsche. The exchange-traded-fund (ETF) industry is now bigger than the more established business of hedge funds. Assets in the global ETF industry were $2.971 trillion at the end of June, according to ETFGI, a research firm, $2 billion ahead of the hedgies’ $2.969 trillion, as calculated by Hedge Fund Research (see chart 1). In 1999 the ETF industry was less than a tenth the size of its ritzier rival.

ETFs are pooled funds, quoted on stockmarkets, that are designed to replicate the performance of an asset class. They usually do so by tracking a benchmark such as the S&P 500 (for American equities). Once the fund is set up, portfolio changes are mechanical, responding to changes in the underlying benchmark. Funds can track almost anything from the gold price to commercial property. Some have extremely low expenses: Vanguard’s S&P 500 index tracker charges only a twentieth of a percentage point a year.

Although hedge funds also invest across a wide range of assets, they take a quite different approach. Using far more complicated strategies, they aim to offer investors a superior service: either a higher return than achieved by the benchmark or a better balance of risk and reward. Because they can sell short (bet on falling prices), they claim to prosper in all kinds of market conditions. In return for this sophistication, they demand higher fees: an annual charge of 2% or so and a performance fee of 15-20%, making their founders very rich indeed. Hedge funds aim to attract “the best and the brightest” managers to their industry; ETFs merely aim to be average.

ETFs target the mass market: the humblest retail investors can participate and could in theory put all their savings in ETFs. The hedge-fund industry has a narrower clientele: it targets the wealthy and big institutions such as pension funds and university endowments. It aims to manage just a small proportion of their portfolios.

Both ETFs and hedge funds have been growing at the expense of a much larger rival—the conventional fund-management industry made up of mutual funds and specialist investors that pursue so-called “active” strategies in an attempt to beat the index. In the late 1990s, when Wall Street was surging thanks to the dotcom boom, conventional managers could generate impressive returns. Since 2000 there have been two bear markets in equities and bond yields have sunk to record lows; conventional managers have struggled.

In a world of reduced returns, the low costs of ETFs are more attractive. For the hedge-fund industry, in contrast, low returns are a problem. Most managers have to invest in the same equity and bond markets as everyone else. In the 1990s hedge funds enjoyed seven years of double-digit average returns. In the first decade of the 2000s, they managed three such years. In this decade, there has been just one.

Even when it comes to avoiding losses, the industry’s record has deteriorated. There were no years of negative returns in the 1990s, but three since 2000. Hedge funds’ reputation took a hit in 2008, when they lost a lot of money. On a rolling five-year basis, their returns have been disappointing (see chart 2).

The deteriorating performance is probably not a coincidence. Hedge funds sold themselves as clever and flexible enough to take advantage of opportunities that conventional fund managers neglected. But there may not be enough such opportunities for an industry with nearly $3 trillion of assets to exploit.

As a result, hedge funds market themselves rather differently from the way they used to. In the 1990s, the heyday of managers like George Soros, the industry sold itself on its ability to generate outsize returns. Nowadays it talks of the ability to generate “risk-adjusted returns”—steadier profits with less volatility. Where once they appealed largely to the rich, hedge funds now target institutions. A recent survey found that a majority of managers expect the bulk of their new money to come from pension funds over the next few years. Some pension funds use a “core-satellite model” in which the bulk of their money is in ETFs (and other low-cost funds that track indices) with the rest in specialist vehicles, including hedge funds and private equity.

Yet the steady return claimed by hedge funds can be replicated, or indeed beaten, with ETFs. S&P, an index provider, calculated the return over the past five years from a portfolio comprising 50% American bonds and 50% global equities. This portfolio easily outperformed the average return from hedge funds. S&P then deducted hedge-fund-style fees from the model portfolio; the result tracks hedge-fund returns very closely. It looks, in other words, as if hedge funds are a very expensive way of buying widely available assets. Last year CalPERS, California’s public-sector pension fund, announced it was selling off its investments in hedge funds, citing both complexity and costs.

ETFs have also faced criticism. Jack Bogle, the founder of Vanguard, an index-tracking firm, has argued that the ease of dealing in the funds may cause retail investors to trade too much, switching in and out of asset classes in a vain attempt to time the markets. A more widespread concern relates to liquidity. All ETFs allow investors to redeem their holdings instantly, but some of the assets they own, such as corporate bonds, trade infrequently. They thus face a potential problem if prices fall sharply and a lot of investors want to sell at once. That might force them to delay or limit redemptions (imposing “gates”, in the jargon). Some see this as the trigger for the next market crisis.

The industry’s defenders argue that the sector got through the 2008 downturn without a problem. Alan Miller, who used to run a hedge fund but now manages assets for individuals at SCM Direct, which specialises in ETFs, points out that “ETFs have been tested in a lot of market environments and not a single one has failed.”

Short of a calamitous collapse at an individual fund, the ETF industry is likely to keep on growing. Ten years from now, it may be double or treble the size of the hedge-fund sector. The race is not always to the cheap, but that’s the way to bet.|hig|30-07-2015|


10 Lessons Learned from 10 Years of Investing

10 Lessons Learned from 10 Years of Investing

Venture capitalists are constantly telling the entrepreneurs they invest in to make data-driven decisions. But as an industry, we haven’t been very good at doing it ourselves. Now that we have the analytics and numbers to take a closer look at ourselves and our business, we decided to give it a try. We were able to sit down with 10 years worth of our proprietary investing data in front of us — since we’ve been capturing data about founding teams in our community since we made our very first investment in January 2005

It’s amazing what a decade’s worth of data can show. While these findings won’t dictate how we choose to invest from now on, we’re intrigued by what they say about the shifting direction of our industry. In far fewer than 10 years, venture capital and tech will probably look entirely different than they do today. That’s why we wanted to share — to provide a glimpse into the future — and how we all might play a role in creating an ecosystem that is increasingly vibrant, inclusive, and equal opportunity.

What does data-driven action mean to us? It means innovating and experimenting as fast as a startup to constantly provide a higher caliber of service. It means bringing diverse, remarkable people into the First Round community. And, as leaders in seed stage investing, it means acting on the proof that amazing ideas can come from anywhere by giving all entrepreneurs new ways to be heard. We’ll let you know how it goes.

– One –


Female Founders Outperform Their Male Peers


We’ve been fortunate to back many companies with female founders (and women-founded companies represent a greater percentage of our investments than the national VC average). That’s why were so excited to learn that our investments in companies with at least one female founder were meaningfully outperforming our investments in all-male teams. Indeed, companies with a female founder performed 63% better than our investments with all-male founding teams. And, if you look at First Round’s top 10 investments of all time based on value created for investors, three of those teams have at least one female founder — far outpacing the percentage of female tech founders in general.



– Two –


Startup Fortune Favors the Young


Founding teams with an average age under 25 (when we invested) perform nearly 30% above average. And while the average age of all our founders is 34.5, for our top 10 investments the average age was 31.9.



– Three –


Where You Went to School Matters


We also looked at whether the college a founder attended might impact company performance. Unsurprisingly, teams with at least one founder who went to a “top school” (unscientifically defined in our study as one of the Ivies plus Stanford, MIT and Caltech) tend to perform the best. Looking at our community, 38% of the companies we’ve invested in had one founder that went to one of those schools. And, generally speaking, those companies performed about 220% better than other teams!



– Four –


The Halo Effect of Former Employers is Real


Teams with at least one founder coming out of Amazon, Apple, Facebook, Google, Microsoft or Twitter, performed 160% better than other companies. And while school didn’t have any real impact on pre-money valuations, company alma maters did. Founding teams with experience at any of those marquee companies landed pre-money valuations nearly 50% larger than their peers. We have some theories about causation here: the impact of embedded networks, foundational skills these types of jobs provide. These factors clearly make a difference.



– Five –


Investors Pay More for Repeat Founders


While entrepreneurial experience is obviously valuable at the seed stage, we were surprised to see that our investments in repeat founders didn’t perform significantly better than our investments in first-timers — mainly because successful repeat founders’ initial valuations tended to be over 50% higher. It’s interesting to see how the market effectively prices repeat founders higher because they are known quantities.



– Six –


Solo Founders do Much Worse Than Teams


Taking a closer look at these founding teams, we wanted to know what size and shape did to performance. The results were stark: Teams with more than one founder outperformed solo founders by a whopping 163% and solo founders’ seed valuations were 25% less than teams with more than one founder. No wonder the average size of founding teams across the FRC community is two, which also happens to be the optimal number according to our data.



– Seven –


Technical Co-Founders are Critical to Enterprise, not so Much for Consumer


With all the industry chatter about the importance of technical co-founders, we wondered just how critical they are to success. It turns out, pretty critical — for enterprise companies. In fact, they’re doing so well in enterprise — performing a full 230% better than their non-technical colleagues — that they skew the data set to make it look like teams with a technical co-founder perform 23% better overall. But this isn’t the whole story. In fact, consumer companies with at least one technical co-founder underperform completely non-technical teams by 31%.



– Eight –


You Can Win Outside the Big Tech Hubs


We thought location might make an equally dramatic difference, but we were wrong. First Round companies founded outside New York and the Bay Area are performing just as well as their peers based in those epicenters. Of the 200 companies we looked at for this, 25% landed outside these cities and, on average, have performed a slim 1.3% better than companies in the Bay and NYC. Again, this could be because investors price companies in NY and SF meaningfully higher to start with — but it’s heartening nonetheless.



– Nine –


The Next Big Thing Can Come from Anywhere


Finally, and perhaps most importantly since it informs where we go looking for deals in the first place, we considered the source of our hundreds of investments over the last decade. We were fascinated to find that incredible investments can literally come from everywhere. For a long time, VC has been predicated on this idea that the best opportunities come through referrals, yet companies that we discovered through other channels — Twitter, Demo Day, etc. — outperformed referred companies by 58.4%. And founders that came directly to us with their ideas did about 23% better.



– Ten –


The Action is Moving from Sand Hill to San Francisco


As the Bay Area’s startup center of gravity shifts from the South Bay to San Francisco, VCs are moving in droves to the South of Market neighborhood. While we invest across the country, nearly half of founding teams started their companies in the Bay Area. For the first five years of First Round, 2005 to 2009, we invested nearly equally between San Francisco and the rest of the Bay Area. During the last five, the pendulum has swung decisively toward San Francisco with 75% of our Bay Area investees starting their companies in the city over that period.

Create a Conversation, Not a Presentation

Create a Conversation, Not a Presentation

When we created a perfect solution in isolation and made it “ours” to present, we ignored the fact that each individual needed to arrive at the conclusions independently to really understand it, to believe in it, and to be willing to work hard to execute it.
And frankly, relying entirely on the presentation made for boring meetings. No one wants to sit and listen to another person present for hours on end. People want to ask questions and to provide their own insights. They want to problem-solve and debate.