Venture Capital and Private Equity Around the Glorious Roundtable

I get invited to the most mind-blowing events.  My definition of "mind-blowing" is highly intellectual and does not involve anything illegal or unethical, so most human beings probably won't want to hang out with me.  That's okay.  They'd cramp my style anyway.  Check out how I roll.  Yo!  I attended a Silicon Valley roundtable event last Friday that must remain nameless because it was organized by private parties who do not seek publicity.  There wasn't even a round table in the room.  Several entrepreneurs and investors attended by invitation only and the organizer allowed me to attend as a guest.  Wonderful topics lined the agenda and I shall discuss them in oblique terms.  Prepare to be entertained.

Flying cars have been on the dream list of inventors since the Jetsons were on TV.  I got to examine real working prototypes of flying cars at the US Army Transportation Museum in 1995.  None of them ever had serious capabilities.  Entrepreneurs are now developing flying cars that convert from ground mode to airborne capability.  Modern contraptions remind me of the Bell-Boeing V-22 Osprey program with propellers to switch from VTOL to horizontal flight.  Rotary wing aircraft can autorotate into the ground in the event of a mechanical failure, which saves lives but isn't pretty to experience.  Twin-rotor aircraft have no such option if something fails while hovering during a VTOL event.  A ballistic parachute that deploys automatically upon engine failure may solve the problem.

I no longer believe the bull story for further miraculous economic growth in China.  Many others still do and that's okay.  Someone needs to be long in case I ever go short.  China joined the WTO in 2001 and is now inextricably linked to the world market.  Its role as the world's factory is ending because its increasing wages have priced it out of low-cost manufacturing.  China needs to pay more attention to WIPO if it wants credibility.  San Francisco may become the first renminbi trading hub in North America once China makes its currency fully convertible.  Western investment banks are opening offices in Shanghai and that city is the first in mainland China to have a free trade zone.  My MBA alma mater USF has a strong interest in China and it is hosting a conference on China's financial reform in a couple of weeks.  I have already registered to attend because I love learning stuff.  The conference is free to USF-affiliated people.  Stolen Valor frauds who prey on veterans will not be allowed to enter the event.  You know who you are, and so do I.

There are such things as credentials in business valuation.  NAVCA offers certification in business valuation and appraisal.  This knowledge comes in handy for business brokers who buy and sell privately owned businesses.  I think it also comes in handy for fraud investigators.  I'm not saying there's any fraud in Silicon Valley.  No sir-ee-bub, not me.

Santa Clara University has a Global Social Benefit Incubator (GSBI) that launches non-profits.  One such non-profit is Literacy Bridge.  They distribute single-touch audio books loaded with knowledge of agribusiness and sanitation in developing countries with low literacy levels.  The device is meant to be shared via a local subscription.  Literacy Bridge collects use case data on the number of activations, volume level, and playback times from each audio book.  This proves that big Data can reach rural areas that do not have WiFi or landline telecom infrastructure.  Societies with oral traditions have different connectivity speeds.

Executives from large publicly-traded companies will share their growth lessons with pre-revenue stage startups.  Non-dilutive financing options include licensing and royalties, but my readers have heard me mention that in other blog posts.  The caveat is that non-dilutive financing takes longer to grow a company.  The IPO must have a good rationale; it can't be just to return capital to early investors.  Entrepreneurs must tell early investors that growth takes a long time, to set their expectations for a realistic timeline.

Freedom House near San Francisco provides a refuge for victims of human trafficking.  Poverty is a supply-side problem driving women into servitude and exploitation.  California law now recognizes underage solicitors as victims rather than criminals.  Freedom House's aftercare referrals come from law enforcement.  They do important work.  I believe Somaly Mam would approve.

Space . . . the final frontier.  It won't be that way for long.  Space Tango is an incubator for space-oriented startups, although it's quite a ways from where I hang out in NorCal.  The Silicon Valley Space Center is hosting a conference on "Launching Commercial Space Enterprises" this coming weekend.  I can't attend due to prior commitments and I don't normally pay entrance costs higher than zero.  It's probably worth the time of some VCs.

I would like Venture Capital Journal to publish more stories on the unfulfilled promise of the mobile / Big Data / cloud trifecta.  If they don't, I certainly will.  My theory as of today is that the Holy Grail of Big Data remains unrealized because too few IT practitioners have applied ROI-type metrics to compare their investments in Big Iron and the cloud.  It's like my experience with portfolio managers in finance.  Almost all of them rely on folk wisdom, unguided guesswork, and rumor instead of applying the metrics I read in Buffettology books on Warren Buffett's deep value investing.  I think the IT crowd is the same way.  IT pros rely on their subjective preferences for technology instead of the hard metrics of Cloudonomics.  Buffettology and Cloudonomics are often cited, sometimes read, and rarely implemented.  That's why Wall Street holds as much unfulfilled promise as mobile Big Data in the cloud.  That's also why the few people who do read those books can win in life.

These topics appear to be unrelated.  Entrepreneurs and their investors can track them all and make sense out of unrelated matters.  That's just how we think.  Great minds are divergent and polyphasic.  Genius investors in venture capital and private equity discuss these things all the time, even when we're not around a glorious roundtable.  

Significance Of The Lubrizol Buyout

Today's big dealmaking news is Berkshire Hathaway's purchase of Lubrizol for $9B in cash.  The appeal of LZ's fundamentals is clear.  The 34% ROE and long term debt less than two times net income are hallmarks of the Warren Buffett criterion.  The less obvious attraction here is Lubrizol's sector.

LZ makes specialty lubricants with wide applications in petroleum drilling and refining.  Like BNSF's position astride desirable rail lines, LZ's position in a specialty sector is tough to dislodge.  Railroads and energy services are bulk carriers of the kinds of commodities that advanced economies use with abandon. 

Niche servicers of the energy production sector are long-term bets on the world economy's demand for energy.  If Mr. Buffett doesn't believe in commodity scarcity, he's certainly doing a darn good imitation of a Peak Oiler.

Full disclosure:  No positions in LZ or BRK-A at this time. 

Burlington Northern Santa Fe: A Special Situation

I haven't done much special situation investing lately, but today presents an opportunity that's too good to pass up. Rarely does one have the chance to ride the coattails of a master.

Warren Buffett has decided to go whole hog and buy BNI for $100 per share:

Warren Buffett's Berkshire Hathaway Inc. on Tuesday agreed to buy Burlington Northern Santa Fe Corp., making a $34 billion bet on the future of the U.S. economy.

The offer comprises both cash and Berkshire Hathaway stock. I'll have more to say about this tomorrow as I believe I've succeeded in deconstructing Uncle Warren's valuation methodology. I played this by selling Jan 11 puts at 95 on BNI. This is slightly under the $100/share acquisition price, with the transaction expected to close in about 3 months.

Thank you, Uncle Warren, and not just for this opportunity to make some quick cash. Thank you for discussing your investment philosophy in public over these many years, because I think I finally understand it.

Some Thoughts on Warren Buffett and Useful Lifetimes

Uncle Warren has been getting a lot of knocks in the press lately for the lackluster short-term performance of Berkshire Hathaway. This article is typical of the assault:

As I wrote almost a year ago, Warren Buffett is justifiably revered by investors around the world, and I consider myself one of those who have worshiped at his investing altar over the past three decades. Nevertheless, from my perch, Buffett's salad days seem to be over; the only question that remains is the timing and to what degree investors will abandon the Oracle of Omaha.

In defense of Uncle Warren, his entire investing lifetime has taken place in an era of rising corporate and government debt when Keynesian thought dominated economics in the OECD nations. Even with his aversion to buying debt-laden companies, he could not have expected the secondary effects on his portfolio of the implosion of a debt-laden economy.

Addressing an individual's investing lifespan is a useful heuristic. People in the modern era really only have about four decades to build wealth, starting in their early twenties when they enter the adult workforce and ending with their retirement in their sixties. Those four decades provide limited opportunities for learning when macroeconomic interventions try to smooth out troughs. Perhaps a few more sharp recessions in the port-WWII era would have done us all some good by discouraging recklessness.

I'm 35 years old. Uncle Warren started to make a name for himself as an analyst and portfolio manager at about the same age. He had access to great minds like his father and Benjamin Graham from a very early age. I have access to the wisdom he has offered since then, building upon what he learned from his masters. If I remain healthy and avoid traffic accidents I should have more than four decades remaining to accumulate wealth and apply whatever wisdom I possess.

School is in session, and I'm taking notes. They're on this blog in case you want to read them.