Risk Ventures

Breakingviews.com, a leading international source of online financial commentary, printed an article on “Read the Risk Factors.” Far from empty boilerplate, IPO prospectuses lay out debutant firms’ red flags.  

By law, prospectuses for initial public offerings of stock must contain a section entitled “Risk Factors.” The prospectus contains nearly all aspects of a company’s business and game plan (prospectuses for all U.S. companies are available for free at U.S. Securities & Exchange Commission’s Web site).  

Take, as a recent example, Visa Inc. “Visa Inc. today filed a registration statement with the United States Securities and Exchange Commission (SEC) related to the series of transactions for the planned combination of Visa Canada, Visa International and Visa USA into a single private stock company, Visa Inc. Visa Europe will remain a membership association and will become a licensee of, and own a minority interest in, Visa Inc.”

According to the June 22 Form S-4 Registration Statement for Visa Inc, Risks Related to Our Business (Legal and Regulatory Risks; Business Risks; and Risks Related to the Restructuring). One example under Under Business Risks: “Global economic, political and other conditions may adversely affect trends in consumer spending and cross-border travel, which may materially and adversely impact our revenue and profitability.” The global payments industry depends heavily upon the overall level of consumer, business and government spending. For example, a sustained deterioration in general economic conditions, particularly in the Visa U.S.A. and Visa AP regions, where approximately 70% and 12%, respectively, of our pro forma revenue was generated for fiscal 2006, or increases in interest rates in key countries in which we operate, may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards carrying our brands. A significant portion of the revenue we earn outside the United States results from cross-border business and leisure travel, which may be adversely affected by world geopolitical, economic and other conditions, including the threat of terrorism and outbreak of diseases such as SARS and avian flu. In particular, revenue from processing foreign currency transactions for our members fluctuates with cross-border travel and our members’ need for transactions to be converted into their base currency. In addition, as we are principally domiciled in the United States, a negative perception of the United States could impact the perception of our company, which could adversely affect our business prospects and growth.” 

Note the section on “Risk Factors” is listed before “Cautionary Statement Regarding Forward-Looking Statements,” which are based on current expectations or projections about a company’s business, operations, industry, financial condition and liquidity.

“The Risk Library” is an excellent collection of books offered by Bill Luby at Vix and More. 

His first pick: “Against the Gods” (Peter Bernstein) – A high level survey of the history of risk from the perspective of the advance of civilization. A relatively quick read that should inspire the desire to take a closer look at risk vis-à-vis investments.”

Herb Greenberg (here’s a link to his Market Blog), in the May 27 Weekend Investor, “Making Sense of the Risks Posed by Government Issues,” writes that investors should consider governance as one risk factors, which involves market and competitor risks: “Well governed companies face the same kind of market and competitor risks as everyone else…but the chance of an implosion caused by an ineffective board or management is way less.”

Included in the article is a reference to GovernanceMetrics International’s overview, the world’s first global corporate governance ratings agency: “companies that emphasize corporate governance and transparency will, over time, generate superior returns and economic performance and lower their cost of capital. The opposite is also true: companies weak in corporate governance and transparency represent increased investment risks and result in a higher cost of capital.”

The Technology CEO’s Council’s June 13 report, “A Great Nation: How Americans Can Lead and Prosper in a Changing World”:

“From our economy to our educational system, from energy to national security and health care, our biggest challenges can be addressed by leveraging our strengths and learning from our past accomplishments.  

There are several recurrent and critical basic themes in the American economic story:

1. We thrive when economies are open and inclusive. The absence of barriers among our states enabled competition and economies of scale that gave the U.S. economy a huge advantage over all other nations, while trade with others powered explosive growth. Our openness to immigrants and beliefs ensured that the best, brightest and most ambitious came to our shores to create jobs, companies and wealth.

2. Innovation is the key to our prosperity. Our relentless pursuit of better ideas, new frontiers, new companies, new cures and new opportunities has ensured constant renewal, reinvention and improvement. Our propensity for innovation ensured economic leadership and national strength.

3. Entrepreneurs are best at leveraging change. By rewarding risk and facilitating competition, we cultivate a nation of entrepreneurs, giving us the talent to cope with changing geopolitics, technologies and global markets.”

Listed under Marc Andressen’s “The Pmarca Guide to Startups, part 2: When the VCs say “no“” is an entry on “What are the layers of risk for a high-tech startup?”. The risk categories include: founder; market; competition; timing; financing; marketing; distribution; technology; product; hiring; location. 

Links to some other instructive and inspired posts:  “The truth about venture capitalists, Part 1”; and “How to hire the best people you’ve ever worked with.” 

Here’s a great ”Library” source from Alsop Louie Partners (the Art and Science of Entrepreneurs).

Although Allianz, which was the main sponsor of the BMW ORACLE Racing team (which failed to win the bid for the 32nd America’s Cup), it had a brilliant ad campaign, illustrating the connection between high-performance sailing and a cutting-edged financial services firm:

“In America’s Cup sailing as well as in financial services, to be on the cutting edge it takes the right combination of strategy, teamwork, timing and knowledge, moment by moment.”

Print ad from the April 30 – May 6 Wachovia Championship:

“Players are made on 1-15.  Champions are made on 16, 17 and 18.”   

Barclays Global Investors has launched an “Think in Ideas” advertising campaign that focuses on using its iShares exchange-traded funds as a component of advisors’ investment ideas.

Barclays iShares ad campaign, tagline: “Think in Ideas”: Office is such a relative term: with pictures of a bar; leather couch; shower curtain; restroom… 

For other iShares commercials: rest; whiteboard; train; 4pm.

Venture Capital Definitions 101 

1. Some useful definitions, taken from Investorwords.com,

Venture Capital (once called risk capital) = funds made available for startup firms and small businesses with exceptional growth potential (managerial and technical expertise are often also provided).  Money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable.

2. Some related terms: Angel investor = an individual who provides capital to one or more startup companies; one who is usually affluent or has a personal stake in the success of the venture.  Add-on service = the non-monetary services provided by a venture capitalist, such as helping to assemble a management team and helping to prepare the company for an IPO. Adventure capitalist = an entrepreneur who helps other entrepreneurs financially, and often plays an active role in the company’s operations (such as by occupying a seat on the board of directors. Corporate venture capital = a subsidiary of a large corporation which makes venture capital investments. Mezzanine financing = late-stage venture capital, usually the final round of financing prior to an IPO. IPO (Initial Public Offering) = the first sale of stock by a company to the public.

3. Below is a general sequence of VC investing, taken from SearchSMB:

“Venture capital is the second or third stage of a traditional startup financing sequence, which starts with the entrepreneurs putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Generally an angel investor is someone with spare funds and some personal or industry-related interest - angels are sometimes said to invest “emotional money,” while venture capitalists are said to invest “logical money” - that is willing to help give the new enterprise a more solid footing. First-round venture capital funding involves a significant cash outlay and managerial assistance. Second-round venture capital involves a larger cash outlay and instructions to a stock or initial public offering (IPO) underwriter, who will sell stock in exchange for a percentage of what is sold. Finally, in the IPO stage, an investment bank is commissioned to sell shares to the public.”