Archive for the ‘Uncategorized’ Category

Tesla Model S Test Ride Review

IMG_0837I am addicted to performance vehicles, and I am also environmentally conscious.  Yes, it’s been a long and tough battle to wage against myself.  So you can imagine my relief as I accelerated from 0-60 in less than 5 seconds in a completely silent, all electric vehicle: the tour de force Tesla Model S.  As a former Mini Cooper owner (two of them) and one of the first people to buy a Smart Car when it came to California, I am definitely an early adopter.

The Model S does not disappoint.  The Tesla Roadster didn’t do it for me, as it is too small for my needs, and I’ve been patiently waiting for the Model S. I was fortunate to be able to join three other friends to ride in the beta prototypes at the former Toyota NUMI factory in Fremont, California.  About 1,000 people were invited yesterday, and the event is being duplicated today.  The amazing thing is that Tesla is only using maybe 10% of the total plant’s 5 million square feet (please correct me if I am wrong on utilization).  According to a Tesla engineer that we spoke with, the current robotic assembly line (also very cool) can produce 20,000 cars per year one on shift– so total current annual capacity is about 40,000 – 50,000 cars.  We were told that the cars will start being delivered summer 2012.  Let’s hope so!  My only disappointment at the event, which definitely had a hip, L.A. feel to it, was not being able to drive the Model S myself, but I understand it’s still in beta.

IMG_0825

Not only is it roomy and well appointed (alcantara leather headliners, leather upholstery, superb digital touch screens, great sound system), the Model S is a silent missile.  The torque of the electric engine is amazing: click HERE for video link.  I’ve been trying to reserve mine online today, but the Tesla site keeps crashing.  Guess I’m not the only one who appreciates the breakthrough innovation that Tesla has achieved.  Bravo!

For more info on the Model S go to: TESLA

IMG_0834

Introducing Leaf + Twig

In 2000, my wife, Belinda, and I replanted a small vineyard in St. Helena, California and have overseen its evolution into Leaf + Twig.  While the vineyard itself can yield close to 10 tons of  grapes, translating into approximately 500 cases of wine, we have only made about 25 cases of the Leaf + Twig each year.  The balance of the Leaf + Twig Vineyard grapes are sold to Vineyard 29 and blended into the highly regarded Cru label.   Since 2004 we have released six vintages of this super premium cabernet sauvignon wine.  Philippe Melka made our 2004, and Keith Emerson, the Director of Winemaking at Vineyard 29 since 2005, has made every subsequent vintage to date.  We are delighted with our early tasting of the 2009, which will bottle age for 12 months prior to its release in June 2012.

101396a_09CabS_F

Beginning with 2006, we selected a unique label for Leaf + Twig that captures the essence of our vision for this wine: a refined nose, elegant fruit on the palate, and subtle complexity through its long finish. Designed by David Hughes, who is well known for his work for Thomas Keller,  the label itself is all white with embossed leaf and twig impressions.   The image above shows the design in black and white in order to highlight the impressions of actual leaves and twigs from the vineyard that frame the upper and lower borders of the front label.

There is an important double meaning to the name Leaf + Twig, as those were the names of our two loyal canine companions. both of whom pre-dated the vineyard.  Sadly, Leaf + Twig both passed on in 2010.

To visit the site and learn more about Leaf + Twig, please click HERE

<script type=”text/javascript”>
var _gaq = _gaq || [];
_gaq.push([‘_setAccount’, ‘UA-27318873-1’]);
_gaq.push([‘_trackPageview’]);
(function() {
var ga = document.createElement(‘script’); ga.type = ‘text/javascript’; ga.async = true;
ga.src = (‘https:’ == document.location.protocol ? ‘https://ssl’ : ‘http://www’) + ‘.google-analytics.com/ga.js’;
var s = document.getElementsByTagName(‘script’)[0]; s.parentNode.insertBefore(ga, s);
})();
</script>

Leaf+Twig

It’s Nature’s Way of Telling You, Something’s Wrong…

washington-monument-addressI just saw the announcement that the Washington Monument will remain closed indefinitely due to the damage from the recent earthquake, and, in addition to feeling generally uneasy with that concept, now I can’t stop singing the lyrics to Spirit’s 1971 song, Nature’s Way, so I’ve gone ahead and downloaded it from iTunes.  The Washington Monument needs to be open; it can’t have cracks.  What’s going on here?  Is this “the new normal” in America?

Multiple Choice Question: Which of the Following Fiduciary Duties Did the Hewlett Packard Board Violate? (There May Be Multiple Right Answers)

law bookIn the article. “Voting to Hire a Chief Without Meeting Him, written by James B. Stewart, The New York Times reported on September 22 that the CEO search committee of Hewlett Packard’s board of directors, consisting of four HP directors, did not require all 12 of the board members to interview the committee’s choice of Léo Apotheker to replace Mark Hurd before the board acted to hire Apotheker as CEO.

Scarcely 12 months since Apotheker joined HP, the value of the company’s equity has declined by approximately 50%. Recriminations about the board’s flawed selection process are now emerging, and Apotheker’s short tenure ended later on Thursday, the 22nd, with the formal announcement that HP director Meg Whitman will become the new HP CEO.  Ms. Whitman has been an HP director for less than one year and therefore was not a member of the board involved in the Apotheker search and selection.

Even if we try to forget the widely publicized (and criticized) circumstances of the board’s handling of Hurd’s dismissal, ignore the boardroom drama associated with the end of the Fiorina period, and generally dismiss the extraordinarily poor record of corporate governance notched by the HP board across the tumultuous reigns of three CEO’s since 2005, this latest revelation is stunning.

According to the New York Times article:

Interviews with several current and former directors and people close to them involved in the search that resulted in the hiring of Mr. Apotheker reveal a board that, while composed of many accomplished individuals, as a group was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional.

Among their revelations: when the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor to the recently ousted chief executive, Mark Hurd, most board members had never met Mr. Apotheker.

Considering the statements above, please answer the following question:

By not requiring that each member of the board of directors, to whom the CEO reports, personally interview the CEO candidate recommended by the CEO search committee, all of the members of the Hewlett Packard board violated the following fiduciary duties:

A. Duty of Care:  requires a director to act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.  This duty requires directors to

  • Make informed decisions;
  • Obtain information they believe is reasonably necessary to make a decision;
  • Make due inquiry.

B. Duty of Loyalty: requires a director to act in the best interests of the corporation and not in the interest of the director or a related party

Issues often arise where the director has a conflict of interest:

    • Where the director or a related party has a personal financial interest in a transaction with the company
    • Where the director usurps a “corporate opportunity” that properly belongs to the company

C. Duty of Good Faith: A separate duty of good faith has emerged in some jurisdictions such as Delaware where a director has engaged in such egregious behavior as to not have acted in good faith.

Examples of not acting in good faith:

  • Consciously or recklessly not devoting sufficient time to required duties
  • Disregarding known risks
  • Failing to exercise oversight on a sustained basis.
  • Failure to meet the duty of good faith can have serious adverse consequences to a director, such as being exposed to personal liability for breaches of the duty of care or losing coverage under indemnification or insurance policies.

D. All of the Above: The HP board allowed personal agendas, dysfunctional behavior, personal animosity, process fatigue, and emotionality to undermine what is arguably the single most important duty of the board: to oversee, hire, and fire the CEO.  If this reporting of the facts is correct, there is no doubt that the entire HP board serving at the time of this decision bears some measure of responsibility for the economic value lost by the HP shareholders.  This lack of oversight, especially when considered in the context of the board history of this this company, is an injurious insult to the shareholders and a slap in the face to corporate governance best practices.

<script type=”text/javascript”>
var _gaq = _gaq || [];
_gaq.push([‘_setAccount’, ‘UA-27318873-1’]);
_gaq.push([‘_trackPageview’]);
(function() {
var ga = document.createElement(‘script’); ga.type = ‘text/javascript’; ga.async = true;
ga.src = (‘https:’ == document.location.protocol ? ‘https://ssl’ : ‘http://www’) + ‘.google-analytics.com/ga.js’;
var s = document.getElementsByTagName(‘script’)[0]; s.parentNode.insertBefore(ga, s);
})();
</script>

Is There a Valuation Bubble for Social Media Companies (and if so, is it Bursting)?

bubble poppingWelcome to the latest passionate debate over the ‘valuation bubble or not?’ question in venture capital.  This time, the debate centers on the “favored few” Social Media venture backed companies that have brought tremendous windfalls to a select group of venture funds and management teams, both pre- and post-IPO.  Does the primary and secondary capital raising prowess of companies such as Facebook, Linked In, Pandora, Twitter, Groupon, Zynga, and others, mean that we have finally crossed the threshold and reached a sustainable new valuation paradigm (it’s different this time, really), or is this another accident now happening in real time?

Capital Markets Advisory Partners cleaves the demand for pre-public VC-backed equities into two worlds: “Demand Pull (Buzz) and Supply Push (No Buzz) companies. The former includes the Twitters, Facebooks, Linkedins, Tesla Motors of the World and the latter is the 95% of companies (B2B SaaS, Semiconductors, Cap Equipment, Biotech, MedTech, etc) that need to be marketed (Supply Push) by legions of brokers. … We have a stock market that works for one kind of buzzy (Demand Pull) stock but is a disaster for the rest of the economy. The problem is, that it is the capital intensive stocks in manufacturing that create most of the jobs and these companies are overwhelmingly “Supply Push.” While this post is about the Demand Pull companies, we should all be focused on the Supply Push companies if we want to move the needle on job creation, risk taking, and new venture formation in America.

In April 2011, just prior to the Linked In, Pandora, and RenRen IPO’s, Fred Wilson reaffirmed his belief on his blog that we were not in a bubble in this sector: “In all the posts over the past year or so outlining my thoughts on the financing and valuation environment in the internet sector, I’ve avoided using the word Bubble. It is intentional. For me Bubble will always be inexorably linked to what went down in 1999 and 2000 in the internet sector. And I agree with Mike Arrington that what is going on now is different. I do not think we are in a Bubble per se.”

On August 11, 2011 Dan Primack wrote on this topic in Term Sheet and concluded differently: “I believe that the current Internet bubble is economic. Specifically, too much money has gone into VC-backed Internet companies at too high a valuation. It has been a private market phenomenon much more than a public market one”.

I agree with Dan Primack’s conclusion, largely because the overvaluation omelette has been scrambled in illiquid, non-public grey markets for both primary and secondary capital.  These markets are not yet well developed and remain asymmetric.  Consequently, values for “hot” companies have a greater likelihood of being inflated because the basic nature of the process brings out more buyers than sellers, and it only offers access to a small subset of high profile companies.

Subsequently, the IPO underwriters for these companies that won the business did so by successfully setting IPO premiums to these private valuations and telling a story that the public IPO buyers bought.  Because over 70% of daily trading activity is driven by rapid turnover funds, public market valuations at any given point in time are even less indicative of fundamental enterprise value than they ever have been. David Weild of Capital Markets Advisory Partners and former Vice Chairman of NASDAQ concludes that, beginning in 1999 The self-directed market, gratis of the Internet itself, took the IPO market from one intermediated exclusively by professionals to one frequently dominated by unpredictable gunslingers.”

The combination of hype and the fact that, at least initially, there were more buyers than sellers for these “hot” IPO’s, is how these deals got done.  Short-term trading patterns even allowed some people to make money from the IPO’s themselves—most likely the public market winners circle is largely comprised of those short-term high velocity traders that pay most of the commissions to the underwriting firms…

An important point that Fred Wilson did make in his April post is that investors should recognize that the current valuation environment will not exist at some point in the future. The companies we invest in will need to grow into these valuations or we will face writedowns and writeoffs. We should not let the greed emotions cloud our judgement. Yes, that hot deal sure looks damn good right now. But deals are actually companies and most venture investments are held for five to seven years.”  I would add, however, that, in my view, the valuations at which VCs invested in these “hot” social media companies are precisely the product of “greed emotions”.  It is also now evident that these inflated valuations have not proven to be sustainable in the public markets.  I will post separately on valuation metrics and the implications of the dichotomy between recent public company valuations and merger & acquisition statistics.

One collateral effect of inflated valuations in hot sectors has been an increase in pre-money values across the board, which is not a good thing for whoever is the “last one in” when the music stops.  This is similar in effect to the epic 1996-2000 Internet Bubble cycle but for the expansion of the players in the pre-IPO inner bubble circle.

As Primack points out in his post: “Law firm Fenwick & West reports that valuations for Silicon Valley venture financings rose 61% in Q4 2010. This was the sixth straight quarter in which their barometer showed an average valuation increase, including a 28% bump the prior quarter. Thomson Reuters data indicates that pre-money valuations for VC deals in the U.S. tech sector have more than doubled since 2007. MoneyTree reports that “Internet-specific” companies raised more first-round VC dollars in Q2 2011 than in any other quarter since Q4 2000.”

Company valuations cannot defy gravity indefinitely, and I roundly reject the notion that a new valuation paradigm has been defined for Social Media companies or anything else (including Gold). The music has now paused, though it may not have stopped, for the favored few.  For the other companies that comprise 95% of the venture-backed universe, the music never started.

Leadership Downgrade: Sacrificing the Public Trust in America

Unintended consequences will result from S&P’s downgrade of the United States’ credit rating.  One that we should encourage is developing a frank and constructive discussion of the root causes for the failure of leadership by our elected officials. Is the fabric of our political institutions now sufficiently frayed to catalyze long-term thinking and coherent policy planning that will actually outlive any single election cycle?  Sadly, as long as strident partisanship, personal disrespect, and polarization continue to define the U.S. political process, we are unlikely to do better than continue to lurch from one crisis to the next.

America’s debt downgrade is only the latest manifestation of our country’s slipping global competitiveness.  In my view, two important words should be at the forefront of any constructive discussions about America’s way forward: “posterity” and “stewardship.”

While there is little debate over the fact that the lack of U.S. economic growth must be resolved by creating new jobs, there is little agreement over how to remove the structural obstacles preventing a return to robust growth.  While it may be an oversimplification, in my view the U.S. economic engine can only be re-energized if risk takers are encouraged to take economic risk through the formation of new enterprises.  The Congress and the Administration should view prospective changes to the tax code, government spending, and the U.S. capital markets with two primary objectives: First, to empower and re-invigorate the American entrepreneur; and, second, to attract the foreign entrepreneur to the U.S.  By now it should be apparent that we will be unable to tax or cut our way to prosperity without promoting the long-term growth of new enterprises that create new jobs in America.

American political institutions, the machinery of democracy, have increasingly become ossified because it is not in the interests of our elected leaders to lead.  Many of our elected officials confuse leadership with dogmatic obstinacy while others equate achieving compromise with success, regardless of the quality of the result.  Lost in the shuffle is the concept of acting in the broader public interest, a noble idea that has been trampled by partisans who are uncompromising about their narrowly interpreted constituencies’ immediate needs.  All but short-term thinking is absent from the behavior of the vast majority of our leaders.

Can we expect more from the legislative body of the House of Representatives when each member serves a two-year term?  Can we expect long-term thinking from our leaders in a society that is all about instant gratification?  Can we expect gradualist behavior in our capital markets when over 70% of daily trading volume comes from high velocity pools of capital that are engineered to profit from the short-term?

We can and we must.

Our leaders need to be re-educated about the obligations of leadership, of what it means to serve as representatives of the people who elect them.  Leadership in government entails carrying a sacred public trust, and it requires making decisions that may not be in your own immediate self interest but are in the long-term best interests of your society.  Being a fiduciary requires you to make the best decisions for all of your constituents, not just for yourself or for those that you represent in the narrowest of terms.  At times it requires self-sacrifice, and at times it will make you unpopular. Stewards are ready to take on the responsibilities of taking care of something that belongs to someone else.  America needs leaders who understand that they are the stewards of our society, not just for this election cycle or the next one, but for future generations of Americans.

As a signal to the world, the downgrade of our sovereign debt risk implies that the full faith and credit of the United States Government isn’t worth what it used to be.  That should not be the legacy that our generation leaves to posterity.

The Rise of the Secondary Market for Emerging Growth Equities– Necessary But Insufficient

On Tuesday, May 10 I joined Sandy Robertson, Ian Sobieski, Lee Hower, and Scott Painter as a panelist at the SharesPost Executive Forum held at the Rosewood Hotel on Sand Hill Road.  Below are excerpts from some of my comments with some additional explanation that time constraints didn’t allow me to include in my remarks:

Our moderator, David Weir (CEO of SharesPost), opened the panel by framing the liquidity problem for VC-backed companies as follows:

  1. Framing the Issue
    1. Amount of venture capital raised has exploded
      1. i.     Pre bubble period 1991-1996 totals $28 billion
      2. ii.     Bubble period 1996-2000 totals $243.6 billion
      3. iii.     Post bubble period 2001-2009 totals $218.2 billion
    2. Number of IPO’s has shrunk while average size has increased
      1. i.     Pre-bubble average 520 IPO’s per year
        1. 80% of IPO’s <$50MM
      2. ii.     Bubble period IPO’s average 539 per year
      3. iii.     Post bubble average IPO’s 129 per year
        1. Less than 20% of IPO’s <$50MM
    3. Median age of a venture backed company hits 8.7 years in 2007- the longest gestation period since 1991:

      What has driven these changes to the capital markets and are they permanent or temporary?

My full answer to this question follows:

Public companies with equity market capitalizations of less than $1 billion have been negatively impacted by these market changes—and within this group, companies with capitalizations of $500 million or less have suffered the most.

I strongly disagree with the argument that these are cyclical changes driven by macro-economic forces.  In the U.S. these are very clearly structural changes.

Whether or not they will be permanent depends on our legislators and the securities regulators—before anything can change to establish a positive trend, both of these groups must first recognize that the problem we have today is the result of the convergence of two different but related forces: a series of technology driven structural changes in the equities marketplace combined with unintended consequences of well-meaning but poorly conceived securities regulations applied to that marketplace between 1996 and 2003.

A longer exposition of the factors listed briefly below can be found in extensive research on this topic developed by Grant Thornton (David Weild and Edward Kim):

1996: The rise of online discount brokerage led to the loss of retail commissions supporting small cap stocks (this was a technology driven change in the market);

1997: The implementation of the New Order Handling Rules, passed in September 1996, which had the effect of reducing the economics to provide support for stocks by market makers as they became bystanders and the bulk of the trading action moved off-exchange to electronic execution. (This is a good example of technology driven market change being accelerated by new securities regulations).

1999: Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.  This enabled consolidation among the brokerage houses and banks, which led to the loss of multiple distribution channels for securities and reduced the ability for small players to survive.

2000: Regulation FD was passed to create a “level playing field”, reacting against whisper numbers, favored research analysts, and the “hedge fund information advantage”—all in the name of giving everyone simultaneous access to the same corporate disclosures—which absolutely did not happen.

2001: Decimalization (further loss of economics to provide market support for small companies), by reducing minimum commissions from 12.5 cents or 6.25 cents to 1 penny or 2 pennies per share, had the unintended consequence of making it unprofitable to make markets in emerging companies that are not well known, relegating them to being thinly traded and ignored by most investors.

2002: Sarbanes-Oxley creates more friction for companies that want to go public, but likely much less of a factor than people think, by imposing accounting and compliance costs for small companies that easily exceed $2 million per year.

2003: Spitzer’s Global Research Analyst Settlement, which had the unintended effect of depriving small companies from getting research coverage.  The Spitzer settlement further gutted the economics for underwriters to provide company research in the aftermarket since research cannot be paid for with underwriting fees.

To be clear, the sum of all these parts means that, in the US, the public marketplace for companies with less than $500 million in market cap is a Ghost Town.

We should all be concerned about this because small companies are the engines for job growth and new job creation in America.  The NVCA has developed research going back forty years showing that over 90% of the job growth created by venture-backed companies occurs AFTER their IPO.  So it should be no surprise to our government and to economists that we aren’t getting the job growth that we need in our tentative recovery from 2008—we need IPOs to create jobs.

It’s nice to point to the few favored companies in the media right now that are attracting all the attention—such as Facebook, Twitter, Linked In, Zynga, Groupon, and a few others—but there are over 20,000 other venture-backed companies that are in purgatory—even if only 10% of those companies could go public as small cap companies, that could be transformational in terms of job creation and also materially improve the liquidity cycle for the US VC industry overall.

Some critics argue that the market is telling us that these companies aren’t ready to go public, using the bursting of the dot.com bubble in 2001-2002   as the prime example of what happens when companies that should not go public come to market.  In my view, this is a myopic analysis for one simple reason.  Success in business rarely happens in a straight line.  Many very successful companies go through “near-death” experiences in their evolution, and successfully executing an IPO raising less than $100 million in capital should remain an option for young companies.  The market may have a taste for $100 million initial public offerings today, but that’s because there is a liquidity problem, not because there is something inherently wrong with raising $50 million or less in an IPO.

Consider the following companies that all raised $50 mm or less when they went public: ADOBE, AMAT, EA SPORTS, YAHOO, XILINX, INTEL , ORACLE, EMC, DELL SYMANTEC, COMPUTER ASSOCIATES, INTUIT, NETAPP, AND PAYCHEX, to name a few.  And let’s remember that, at the time of these IPO’s, few if any of these companies were household names.  How many of the next generation of future category leaders will be stillborn or lapse into obscurity through acquisition because they could not access the public markets to stay independent or viable?

When you boil it all down, the fundamental reason for the lack of small US IPO’s has to do with the absence of liquidity in the aftermarket for small cap public stocks.  The emergence of a more liquid secondary market, facilitated by market makers such as SharesPost and SecondMarket, is a necessary and important answer to the structural dysfunction of the primary public equity markets for emerging growth companies in America.  But it is not enough.

A Call to Action: Why Venture Capitalists Must Pay Attention to the National Strategy for Trusted Identities in Cyberspace (NSTIC)

Today the White House announced the National Strategy for Trusted Identities in Cyberspace (NSTIC), a bold initiative designed to resolve the identification, authentication, and authorization problems that haunt all online transactions.  Venture capitalists have an opportunity to impact the implementation and standards of this grand plan, but they must engage in a pragmatic dialogue with the White House leadership responsible for cybersecurity now, before this agenda falls into the quicksand of the Beltway and gathers dust like so many that have come before it.

Privacy advocates should find more reasons to cheer for the NSTIC than to fear it.  Why? Because the principles behind the vision of creating a trusted Identity Ecosystem are sensibly “rooted in the United States Department of Health, Education and Welfare’s seminal 1973 report, ―Records, Computers and the Rights of Citizens.”   This report established a set of Fair Information Practice Principles (FIPPs), and the NSTIC wisely asserts that, “to truly enhance privacy in the conduct of online transactions, these FIPPs “must be universally and consistently adopted and applied in the Identity Ecosystem. …These principles are at the core of the Privacy Act of 1974 and are mirrored in the laws of many U.S. states, as well as in those of many foreign nations and international organizations.”

In my view, when you distill the NSTIC grand strategy down to its core foundation, it rests on the solid bedrock of sensible tenets to promote privacy and security in an online environment:

“Transparency: Organizations should be transparent and notify individuals regarding collection, use, dissemination, and maintenance of personally identifiable information (PII).

Individual Participation: Organizations should involve the individual in the process of using PII and, to the extent practicable, seek individual consent for the collection, use, dissemination, and maintenance of PII. Organizations should also provide mechanisms for appropriate access, correction, and redress regarding use of PII.

Purpose Specification: Organizations should specifically articulate the authority that permits the collection of PII and specifically articulate the purpose or purposes for which the PII is intended to be used.

Data Minimization: Organizations should only collect PII that is directly relevant and necessary to accomplish the specified purpose(s) and only retain PII for as long as is necessary to fulfill the specified purpose(s).

Use Limitation: Organizations should use PII solely for the purpose(s) specified in the notice. Sharing PII should be for a purpose compatible with the purpose for which the PII was collected.

Data Quality and Integrity: Organizations should, to the extent practicable, ensure that PII is accurate, relevant, timely, and complete.

Security: Organizations should protect PII (in all media) through appropriate security safeguards against risks such as loss, unauthorized access or use, destruction, modification, or unintended or inappropriate disclosure.

Accountability and Auditing: Organizations should be accountable for complying with these principles, providing training to all employees and contractors who use PII, and auditing the actual use of PII to demonstrate compliance with these principles and all applicable privacy protection requirements.

Universal application of FIPPs provides the basis for confidence and trust in online transactions.”

In announcing the NSTIC, the Federal Government commits to being an early adopter and to using both its purchasing power and its authority to implement the NSTIC across government agencies.  Done right, proactive Government leadership could accelerate the proliferation of this new standard for trusted online transactions.  If NSTIC adoption reaches critical mass, it could become the dominant framework at the core of our nation’s common commercial cybersecurity standards (previously unspecified) over the next five to ten years.

At a minimum, venture capitalists active in the security space should (1) read the full document CLICK HERE; (2) pay very close attention to what will follow this announcement in terms of the formation of the steering group under the Commerce Department that will guide NSTIC’s implementation; and (3) evaluate specific opportunities to get involved.

As the NSTIC document notes: “The Strategy can only succeed if the private sector voluntarily implements the Identity Ecosystem and only if it makes business sense to do so.”  Let’s not waste this opportunity to prove the Government right, for a change.

Warren Buffett, David Sokol, and the Lubrizol Affair: Running Ahead and a Failure of Fiduciary Oversight

runningBased on my understanding of the facts as reported in the Wall Street Journal and the New York Times, any experienced Wall Street trader would immediately know how to describe David Sokol’s trading in Lubrizol with the following sentence: “He ran ahead.”

Running ahead is illegal. According to the Farlex Free dictionary on the Web,

Running Ahead is:

“An illegal act in which a broker or other representative, just before filling a large order on behalf of a client, conducts a transaction in the same security on his/her own account. A large order to buy or sell usually affects the price of a security; the broker conducts the transaction hoping to profit on the movement in price after he/she fills the client’s order. This is a form of insider trading, as the broker filling the order knows something about the market’s probable movement that other market participants do not know. It is also known as tape racing.”

In the classic Wall Street case, the sales trader or other person “in-the-know” would see that customer X had, for example, 1 million shares of a not-very-liquid name to buy before the order was widely known, and he knew that once the order was on the desk and people started making their calls, this would create a lift in the stock price.  So the savvy trader, armed with this little tidbit of tactical trading inside information, would slip in his own personal order for 10,000 shares ahead of the customer and trade in and out of the stock around the completion of the client’s order.

The Sokol Variation is definitely unethical if not illegal.  What surprises me even more is that there was a very easy fix to this problem, one which Warren Buffett could have dealt with the instant that he decided to make the bid for the company and became aware that Sokol owned the stock.  Let’s leave aside Sokol’s trading history in the stock, which makes me extremely uncomfortable on a stand-alone basis given its timing and his senior position as an influencer at Berkshire Hathaway.

If you take the position that Sokol did not violate the Berkshire Hathaway stock trading policy, the simple fix would have been for Sokol to sell his personal position to Berkshire Hathaway at the lower of his cost or the market price at the time that Berkshire decided to make a bid for Lubrizol.  In this way, any losses would have been borne entirely by Sokol and any benefit would have flowed entirely to the Berkshire shareholders.  Sokol would have benefited less amply but still in proportion to his own shareholdings in Berkshire.

Why did they not do this and make a simultaneous disclosure of his holdings?  In my view, he should never have acquired the stock in the first place, and, if he did nothing wrong, his personal stock position should still have been transferred to the company at no gain to him as soon as it was discovered that he had bought the Lubrizol stock.  I see no justification for the personal trade and a serious lapse of fiduciary oversight in the corner office.


BoardSpring- A New Effort Promoting Board Governance Best Practices in Venture-Backed Companies


Russell Garland reported in today’s VentureWire that “Jarrett Collins, a managing director of NeoCarta Ventures, which is winding down, has launched BoardSpring to help directors of venture-backed companies learn about best practices.

“A venture-backed board has an opportunity to create or destroy a lot of value,” said Collins, who has spent some 20 years in the venture business. In his view, board practices generally in the venture industry are substandard and there are few organized resources to guide board members, outside of the work done by the National Venture Capital Association under the leadership of Pascal Levensohn of Levensohn Venture Partners.

BoardSpring is a members-only website for executives, investors and outside individuals who serve on the boards of venture-backed companies, or work closely with them, such as chief financial officers. The driving force, Collins said, was to create a place “where venture-backed-board members could really learn about best practices that could really drive their behavior.”

BoardSpring, set up under a holding company called Shipyard Venture Partners LLC, so far comprises Collins and a part-time graduate student. Collins is financing the project out-of-pocket. He has created some original content but mostly linked to blogs and other relevant subject matter on the Web, looking to present it in an organized manner.

Plans call for BoardSpring to eventually commission research on board governance for venture-backed companies as well as staging regional and perhaps national educational events. Collins said he quietly launched BoardSpring in October and has about 100 people on a weekly mailing list. He plans a formal rollout this summer. BoardSpring has so far organized one event, a meeting in Boston in February attended by about 50 people.

Collins said he would like to include a social-networking element, but would probably piggyback on existing networks such as Facebook and LinkedIn.

Collins launched the venture arm of Thomson Corp., now Thomson Reuters, and then in 1999 co-founded NeoCarta. The firm raised a lone $300 million fund in 1999 that it continues to manage via Collins and three other managing directors from offices in Wellesley, Mass., and San Mateo, Calif.

The firm has eight companies left in its portfolio, according to VentureWire records. One of them is Everyday Health Inc., a network of health websites that The Wall Street Journal recently ranked as one of the 50 most-promising venture-backed companies. Collins is on the Everyday Health board.

Collins, who is 49, said NeoCarta is not making new investments, has no plans to raise a second fund and is doing its best to manage its remaining assets through to liquidity. “For me, I’ve really found a passion in BoardSpring,” he said. “This is a chance to do something bigger than just personal enrichment.”

Jarrett reached out to me late last year, and we spoke and corresponded on his new venture. I shared with him the work that I have developed over the past 12 years on board governance best practices and am pleased to see someone else committing passion and personal resources to this important and underserved area of business.