conversableeconomist

Venture Capital: Looking for the Big Ones

With the venture capital industry, you always hear about the big successes. But what about the failures? Thus, I give credit to Bessemer Venture Partners, a company with claim to being the oldest US venture capital firm with more than a century of experience, for publishing an \”anti-portfolio\” webpage–that is, the firms that they passed on which turned out to be big successes.  Here are some samples:

  • Apple: \”BVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP\’s Neill Brownstein called it \”outrageously expensive.\” 
  • eBay: \”Stamps? Coins? Comic books? You\’ve GOT to be kidding,\” thought Cowan. \”No-brainer pass.\” 
  • FedEx: \”Incredibly, BVP passed on Federal Express seven times.\” 
  • Google: \”Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?” 
Part of the lesson here, of course, is that picking successes is really hard, even for highly successful venture capitalists. A typical rule-of-thumb is even after the venture capitalist chooses investments with all due diligence, about one in ten are highly successful. Here\’s some industry data on the distribution of costs and returns from Adams Street Partners, another well-known venture capital firm. The blue bars show the proportion of total costs for venture capital firms and the red lines show the proportion of total realized value. Thus, the first to bars illustrate that about 45% of the investments of venture capital firms, by value, pay back less than half of what was invested, and in total represent only a couple of percentage points of the total value of the firm. Indeed, many of these investments end up being worth nothing at all. At the other end, about 10% of venture capital investments by cost end up providing a return that is more than 5 times the original investment, and these lead to about 60% of the ultimate value of the firm.

If you want a quick overview of the U.S. venture capital industry, the 2013 NVCA Yearbook is a useful starting point. Here\’s a figure showing the total capital under management by venture capital funds. Perhaps not unexpectedly, the total rose sharply during the dot-com boom in the late 1990s, then flattens out in the early 2000s, and drops with the  Great Recession. However, it still remains much higher than, say, the early or mid-1990s.

And here\’s a figure showing the new commitments of venture capital each year. Again, the pattern is a huge increase in the late 1990s, a drop-off in new capital in the early 2000s, but then a level of new commitments in the last few years that seems permanently higher than the early and mid-1990s.

Venture capital is obviously a relatively small part of the enormous US financial sector. For research and development projects that need to be very large in size right away, or where the commercial prospects are uncertain and distant, venture capital is unlikely to be a useful funding mechanism.

But for new possible ventures of the financially appropriate size, where it\’s possible to start small and scale up with success,venture capital does some things extremely well. It sets up a structure where everyone expects that failures will be common and expected–both the failures of choosing an investment that fails and the failure to spot a profitable investment in the first place. Because failure is expected and common, successful venture capital firms have to become good at cutting off the financing to companies that aren\’t developing as hoped. Big companies and organizations–including large banks and the government–often have a very hard time with the notion that they will invest in a high proportion of outright failures. Big organizations also typically have a hard time with the notion that it\’s foolish to throw good money after bad, and that if a project or company isn\’t going well, it should just be stopped so that resources can be allocated elsewhere. Thus, venture capital offers an alternative structure for funding projects that have on average a high failure rate, but with a possibility of being great successes–which is what makes the smallish venture capital sector a key part of the U.S. financial ecosystem.

conversableeconomist

Air Pollution: World\’s Biggest Health Hazard

The World Health Organization has just released estimates that 7 million people around the world died from air pollution in 2012, which is about one in eight of all deaths in the world that year, and \”confirms that air pollution is now the world’s largest single environmental health risk.\” Most of the deaths are from heart disease, stroke, lung cancer, and for children, acute lower respiratory infections. A fact sheet titled \”Burden of disease from Household Air Pollution for 2012\” offers some details by region. 

Perhaps surprisingly, more than half of the deaths from air pollution are from household air pollution (HAP), typically from low-income people who use solid fuels to cook indoors. Most of these deaths occur in poor areas of southeast Asia, the western Pacific,  and Africa.

An accompanying feature story from WHO, called \”Clean household energy can save people’s lives,\” offers some detail about cooking indoors in India:

\”Many women do not realize that the smoke emitted from the traditional clay or brick stoves called chulhas is putting their and their family members’ lives in danger. The solid fuels they use in these ovens include a mix of wood, coal, crop residue and cow-dung. Their smoke contains many dangerous pollutants such as fine particulate matter and carbon monoxide.

“Having an open fire in your kitchen is like burning 400 cigarettes an hour,” says Dr Kirk Smith, a Professor of Global Environmental Health from the University of California at Berkeley, who began to measure the air pollution exposure from cooking over open biomass cook stoves already in the 1970s. “Unfortunately, we have not made a lot of progress in the past decades and household air pollution is still the largest single health risk factor for Indian women and girls.”

An estimated 700 million people in India still rely on solid fuels and traditional cook stoves for domestic cooking despite their negative impact on peoples’ health. This figure has remained relatively constant over the last three decades despite efforts to improve access to cleaner energy sources such as gas and electricity also in rural areas.\”

The remaining 3.7 premature deaths caused by air pollution are from ambient air pollution–that is, in the outdoor air. Again, in terms of absolute numbers, most of these deaths occur in the western Pacific and south-east Asia regions, where both air pollution levels and populations are especially high. However, it\’s worth noting that even  in the high-income parts of the Americas, referring mainly to the United States and Canada, there are an estimated 94,000 deaths per year from outdoor air pollution.

Here\’s an earlier post that discusses research on \”Costs of Air Pollution in the U.S.\” And here\’s some discussion of the costs of soot and methane, two elements of air pollution that both have immediate health costs and also are potential contributors to increasing the risks of disruptive climate change.

I wouldn\’t mind it if some of the political and policy energy focused on how climate change can affect us all in a few decades was refocused on how current air  pollutants are killing millions of people per year right now.