Quote of the Day

"Buffett once told me there are three 'I's in every cycle. The 'innovator,' that's the first 'I.' After the innovator comes the 'imitator.' And after the imitator in the cycle comes the idiot." -Theodore Forstmann, quoting Warren Buffett

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Ownership vs markets - Stumbling and Mumbling

Summary:
Chris Dillow argues that the traditional capitalist ownership structure is responsible for the credit crunch, not free markets as others have argued. Banks lost money on mortgage derivatives because of principal-agent failings, i.e. bosses (principals) don't know what the traders (agents) are doing. Traders have an incentive to take risk: life-changing bonus; gains exceeds benefits of prudence. Also, little pressure upon banks' executives to be prudent because when shareholding is dispersed, no individual shareholder has much incentive to rein in management. There has been more "bad" financial innovation that good ones. With good financial innovation it is very difficult for anyone to own its beneficial effects, it's a public good. Gains from “bad” financial innovation are more appropriable, hence we get more of it. Finally, banks' reluctance to lend to each other stems from the inability of management of such complex organisations to know everything. Banks should become more like venture capitalists, i.e. using an internal market, allocating capital to semi-independent divisions, which put in their own capital. (Published: 12/09/08)

Notes:

• Samuel Brittan and Anatole Kaletsky: credit crunch is undermining the case for free market capitalism
• but: crucial distinction between free markets and traditional capitalist ownership structures
• credit crunch does more to highlight the failing of the latter than of free markets
• Four reasons
• Banks lost money on mortgage derivatives because of principal-agent failings
• principals (banks’ bosses) didn’t understand what agents (traders) were doing,
  
• traders had incentives to take on excessive risk
• because the gains from doing so - a life-changing bonus - exceeded the benefits of prudence.
• Banks have been reluctant to lend to each other
  
• not so much because each bank fears its counterparty will not repay the money
• but: because they fear they’ll need the money themselves
• because banks just don’t know what sort of losses they are sitting on
• it’s impossible for managers of such complex organizations to know everything
• Banks are under-capitalized because chief executives have traditionally had incentives to maximize earnings by using leverage
• pressure upon them to be more prudent has been absent partly
  
• because when shareholding is dispersed, no individual shareholder has much incentive to rein in management
• [note: is shareholding too dispersed? 70% of all stock in America is now owned by financial institutions; as John Bogle said, in relation to Enron-type scandals, "the problem is that shareholders aren't owners anymore, they're agents of owners, and they do not actively engage in corporate governance, making sure that companies are managed for their shareholders etc.; instead they are more actively engaged in trading pieces of paper back and forth and they don't seem to care much about anything except whether the CEO meets the earnings expectations he's promised or doesn't; sometimes these expectations are met by fair means, but sometimes by foul ones" - like Dillow, Bogle also focuses on the ownership, but he blames it on the traditional owners capitalism having been replaced by managers capitalism]
  
• Good financial innovation has been lacking
  
• because it’s very difficult for anyone to own its beneficial effects;
  
• it’s a public good
• gains from “bad” financial innovation are more appropriable.
  
• so we get more of it
• e.g. overly complex mortgage derivatives
• solution
• not nationalization
  
• bad way of solving principal agent problems
• perhaps instead, banks should make more use of internal markets
• i.e. should become more like venture capitalists
• allocating capital to semi-independent divisions, which put in their own capital
• would restrain traders’ risk-taking
• as they can not so easily hide behind the fact that losses are spread over the whole firm
• would reduce the problem of asymmetric information between banks’ senior managers and trading desks
• as there’s a simpler test of how well the latter do: whether they can hand over enough hard cash to cover their required returns

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Quote of the Day

“When the facts change, I change my mind – what do you do, sir?” - John Maynard Keynes

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Quote of the Day

“God created the bulk but the Devil created the surface.” - Wolfgang Pauli

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There is hope yet for science park toilers - FT.com

Summary:
Jonathan Guthrie sees evidence that the level of innovation in the UK appears to be declining. Not much coming out of universities anymore. We're living through a fallow period for innovation, fundamental innovation is slowing up after a remarkable 40 year boom. Internet investment bubble, Schumpeterian explanation: copycats to pile in on the upswing of an innovation wave. Was a fiasco for VC investment in UK. Returns negative for average fund set up after 1996 over 5 to 10 year periods. Confidence has weakened further with the credit crunch, which has closed the market for flotations. Less money was invested in European technology start-ups last quarter than at any time since 2001. Venture capital is more fragile this side of the Atlantic than in the US. Technology investment in UK will probably recover. VCs need to market themselves, focus on the lofty top decile, not the mediocre median. Early stage technology investment is attractive as a way to lay small bets on risky, glamorous propositions. Also need a handful of breakthroughs that are immensely remunerative. Biotech lost cost. Renewable energy and power savings big hope. (Published: 30/07/08)

Notes:

• little backing from City for fledgling tech companies on UK's science parks
• Jon Moulton, a private equity investor who backs technology start-ups as a hobby
• “In the UK the level of innovation appears to be declining. Universities are being picked over very hard for ideas, but not a lot is coming out of them.”
• likens UK early stage technology investors to ufologists
• instead of joining hands and imploring Martians to land, they hope, equally fruitlessly, for a worthwhile return on investment
• living through a fallow period for innovation
  
• Walter Herriot of the St John’s Innovation Centre
• “There is a slowing up in fundamental invention, though not in the creation of niche applications.”
• reflecting on the advent in the past 40 years of personal computers, the internet and mobile phones, he says: “I cannot see an equivalent explosion in the near term.”
• similar to Schumpeter's view
• proposed that innovation progresses in waves
• profitable breakthroughs occurrs in the troughs of economic cycles
• encourages copycats to pile in on the upswing, feeding economic instability
• cfr internet investment bubble
• now looks more like a belated dash into a maturing technology rather than the new era it was billed as at the time
• fiasco has constrained any advertising claims for venture capital based on recent performance
• funds set up after 1996 have typically lost 1.4 per cent a year over five years and 1.8 per cent over 10 years
• according to the British Private Equity and Venture Capital Association
• Confidence has weakened further with the credit crunch, which has closed the market for flotations
• less money was invested in European technology start-ups last quarter – €950m (£747m) – than at any time since 2001
• Apax, progenitor of European venture capital, launched a fund last spring with no venture capital component
• Braveheart is concentrating on follow-on financings;
  
• 3i has pulled out of early stage investment altogether
• Venture capital is a more fragile flower on the eastern shores of the Atlantic than in the US
• Sir Ronald Cohen, founder of Apax,
• “The perception is that the early stage is tougher, you raise less money when you float, and there is less liquidity afterwards.”
• is technology investment is doomed to dwindle away to nothing in the UK?
• will probably recover
• dotbomb losses will drop out of short-term performance statistics during the next few years.
• returns need not then be spectacular – a long-term average is 4.5 per cent – to lure investors back
• trade bodies such as the BVCA, meanwhile, can do their bit by quoting returns exclusive of “exceptional losses” chalked up on internet plays
• marketing emphasis should be on the lofty top decile, not the mediocre median
• early stage technology investment is attractive as a way to lay small bets on risky, glamorous propositions
• absorbs just more than £1bn a year in the UK
• no backers stake money they cannot afford to lose
• in some respects it resembles alternative investments, such as art or wine, more than big buy-outs or quoted shares
• task that science park toilers face is to produce a handful of breakthroughs that are immensely remunerative
• little can be hoped for from biotech
• stricken by unprofitability as persistent as a hypochondriac’s bad back
• materials scientists have engineered a UK nanotechnology sector so tiny it is virtually invisible
• most to go for in renewable energy and power saving systems
• "scope for technological leaps equivalent to the shift from mainframes to PCs” (Sir Ronald Moulton)

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Quote of the Day

"It is much easier to be critical than to be correct." - Benjamin Franklin

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Quote of the Day

"Spreadsheets are easy; science is hard." - Shaywitz and Taleb

Shaywitz and Taleb in answer to the question "Why do pharmaceutical companies, which spend billions of dollars each year trying to turn advances into treatments, have so little to show for their efforts?"

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Drug research needs serendipity - FT.com

Summary:
David Shaywitz and Nassim Taleb write that the pharma industry is suffering as a result from a mismeasure of uncertainty. Despite promise of molecular revolution and drugs by design, pipelines are dwindling. Pharma companies seek to identify the largest markets they can find, develop products for these customers and boost efficiency of development process. Wrong approach, for two reasons: drug sales notoriously hard to foresee (yields more false precision than true insight), and drug development process is also very difficult to predict. This strategy fails to reduce exposure to negative uncertainty (all the bad things that can happen during drug development), and eliminates much of the exposure to positive uncertainty (serendipity). Pharma's trend of outsourcing may open up possibility for innovators with a greater appreciation of the nuances of science to do a lot better. (Published: 30/07/08)

Notes:

• molecular revolution: was supposed to enable drug discovery to evolve from chance observation into rational design
• yet dwindling pipelines threaten the survival of the pharmaceutical industry
• what went wrong?
• answer: the mismeasure of uncertainty
• academic researchers underestimated the fragility of their scientific knowledge
• we still do not understand what causes most disease
• scarcity of good animal models for most human disease
• academic science tends to focus on the "bits and pieces" of life - DNA, proteins, cultured cells - rather than on the integrative analysis of entire organisms, which can be more difficult to study
• yet: real scientific progress has occurred
  
• pharmaceuticals executives overestimated their ability to domesticate scientific research: spreadsheets are easy; science is hard
• pharma companies seek to identify the largest markets they can find and develop products for these customers
• sensible in theory, but less so in practice, for two reasons:
  
1. drug sales are notoriously difficult to foresee
   
• even at the time the medicine hits the market
• i.e. predicting sales a decade or more ahead of registration, when the research and development process typically begins, is generally a fool's errand
• yields more false precision than true insight.
  
• yet: much of contemporary pharma R&D is driven by this sort of rigid planning.
2. drug development process is also very difficult to predict
• because of both our limited understanding of disease and our inevitably imperfect understanding of the effect any new compound will have on the body
• most modern medications were discovered in the old-fashioned way: by accident
• e.g. Viagra, originally developed as treatment for chest pain
  
• pharma companies have been trying to boost output by increasing efficiency
• narrowing focus to a handful of disease areas
• shelving safe but ineffective compounds without fully exploring their scientific potential
• trying to ensure that each project the company is working on is carried out with a clearly defined market segment in mind
• this strategy often fails significantly to reduce exposure to negative uncertainty - all the bad things that can happen during drug development - and eliminates much of the exposure to positive uncertainty (serendipity) that remains so vital
• managers so intent on maintaining focus that important opportunities for novel discovery are lost
• as is the intellectual space for tinkering and capitalising on the chance observations and unexpected directions so important in medical research
• pharma executives are creating an ever-more-rigid environment
  
• and then wondering why their productivity is going down
• and why they have such difficulty attracting and retaining talent

• diruptive innovation
  
• pharmaceutical industry is ripe for disruptive innovation
• but: the barriers to entry have been far too high for anyone new to break through
• however: pharma companies trying to cut costs by outsourcing large parts of their operations
• in response service providers have sprung up around the world to fulfil these functions
• if the trend to outsourcing continues and if the main competence of pharma companies becomes (as some have suggested) simply their ability to orchestrate the entire process, it is not difficult to imagine that an innovator - particularly an innovator with a greater appreciation of the nuances of science - might be able to do this a lot better
  

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Quote of the Day

“If I had asked my customers what they wanted, they would have said a faster horse.” - Henry Ford

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When to start - Seth Godin

"The best time to start was last year. The second best time to start is right now." - Seth Godin

Notes:

When to start

• The best time to start is when you've got enough money in the bank to support all contingencies.
• The best time to start is when the competition is far behind in technology, sophistication and market acceptance.
• The best time to start is when the competition isn't too far behind, because then you'll spend too long educating the market.
• The best time to start is when everything at home is stable and you can really focus.
• The best time to start is when you're out of debt.
• The best time to start is when no one is already working on your idea.
• The best time to start is when your patent comes through.
• The best time to start is after you've got all your VC funding.
• The best time to start is when the political environment is more friendly than it is now.
• The best time to start is after you've got your degree.
• The best time to start is after you've worked all the kinks out of your plan.
• The best time to start is when you're sure it's going to work.
• The best time to start is after you've hired the key marketing person for the new division.
• The best time to start was last year. The best opportunities are already gone.
• The best time to start is before some pundit declares your segment passe. Too late.
• The best time to start is when the new generation of processors is shipping.
• The best time to start is when the geopolitical environment settles down.

Actually, as you've probably guessed, the best time to start was last year. The second best time to start is right now.

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Quote of the Day

"We shape our buildings, and afterwards our buildings shape us." - Churchill

Notes:

• Buffet uses this quote in reference to organizations apparently becoming slow-thinking, resistant to change, and smug as they grow bigger
  

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Nano-machine captures zinc in protein-like jaws - R&D Magazine

Summary:
A team from Berkely Lab generates a protein-like function from a synthetic polymer: two helical peptoids with functional groups at the end, linked together using an unstructured segment. The two-helix bundle can fold in half and bind a zinc ion. Perhaps anitial step toward developing nanostructures that combine the precision of proteins with the ruggedness of non-natural materials. Such foldable polymer bundles could lead to highly accurate sensors capable of operating in harsh environments, or disease-targeting pharmaceuticals that last much longer than today's therapies. (Published: 22/07/08)

Notes:

• proteins
• unmatched molecular recognition and catalysis capabilities
• have the ability to selectively bind with one—and only one—type of molecule
• also initiate incredibly precise chemical transformations
• e.g. cutting a DNA strand in just the right place
• hitch: lack ruggedness and stability
• limited to narrow temperature and acidity ranges
• require a watery solution
• degrade over time
• drawbacks limit their utility
• proteins to target pathologies at the molecular scale degrade over time, curbing their effectiveness
• protein-based sensor would be unsurpassed at sniffing out harmful contaminants, but it wouldn't be able to operate in hot, cold, or dry conditions
• Ron Zuckermann
• Facility Director of the Biological Nanostructures Facility in Berkeley Lab's Molecular Foundry
• goal: take proteins' catalysis and molecular-recognition capabilities, and add them to a material that is more rugged and less prone to degradation
• peptoids
  
• proteins are precisely folded linear polymer chains of amino acids
• made similar polymer chain by linking together non-natural amino acids
• peptoid: synthetic structures that mimic peptides
• use peptoids to build synthetic structures that behave like proteins
• binding zinc
• zinc: drives many fundamental biological processes
• e.g. DNA recognition
• developed helical peptoids with zinc-binding residues positioned at both ends
• also added fluorescent tags at both end: allowed measuring when the bundles fold in half, trapping zinc in place

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Buffett on the Stock Market (1999) - Fortune Magazine

Summary:
Buffet looking back in 1999 at the preceding 34 years and looking at the prospects for the stockmarket over the next 17 years. Preceding 34 years consisted of two contrasting 17 year periods. In first period, DJIA hardly moved; in second period, up nearly 10x. Main difference: interest rates and corporate profits. Interest rates down significantly in after 1982, and healthy corporate profits for period. Superimposed was market psychology. Many investors think next 17y will be more of the same. Buffett says this is unlikely: would require lowering of interest rates, and corporate profits after tax as a percentage of GDP to remain in excess of 6%. Profits cannot grow faster than GDP. Returns over next 17y more likely to be around 6%/year (4% reall return). Buffett on the chances of succesfully riding a wave of innovation: just look what happened to the automobile and aviation industries. Much easier to pick losers than to pick winners. However, key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. (Published: 22/11/1999)

Notes:

• explanation of why investors in 1999 are expecting too much
• investing = laying out money now to get more money back in the future in real terms, i.e. after taking inflation into account
• 1965 - 1999: 34 years, 2 periods of 17 years very different
• 1965 - 1981
• DJIA: hardly changed
  
• 31/12/1964: 874.12
• 31/12/1981: 875.00
• GDP: up 370% (almost 5x)
  
• Fortune 500 sales: up >6x
• rates on long-term bonds: tremendous increase
  
• 1964: 4%
• 1981: 15%
• corporate profits after tax as percentage of GDP
• mostly between 4 - 6.5% (normalcy range)
  
• down to 3.5% by 1981
  
• 1982 - 1999
• DJIA:
• 1981: 875.00
• 1999: 9,818.00
  
• GDP: up <3x
• rates on long-term bonds: going down
• 5% in 1998
  
• corporate profits after tax as percentage of GDP
• close to 6% by late 1998
  
• reasons for difference
• INTEREST RATE
  
• act on financial valuations the way gravy acts on matter
• the higher the rate, the greater the downward pull
• if government rate rises, prices of all other investments must adjust downward, to a level that brings their expected rates of return into line
• conversely, if government interest rates fall, the move pushes the prices of all other investments upwards
• basic proposition: what an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free rate
• every time the risk-free rate moves by one basis point - by 0.01% - the value of every investment in the country changes
• easy to see this in case of bonds
• value of which is normally affect exclusively by interest rates
• in case of equities, real estate, farms, etc. other variables also at work
• usually obscuring effect of interest rate changes
• yet effect always there, like the invisible pull of gravity
• huge increase in long-term government bond rates between 65 and 81
• gravitational pull of interest rate more than tripled
  
• huge depressing effect on the value of all investments, including equities
• major explanation of why tremendous growth in economy was accompanied by stock market going nowhere
• 1981-1983: interest rate situation reversed itself (Paul Volcker)
• effect on bonds
• e.g. put $1m into 14% 30-year US bond issued Nov 16 1981
• reinvest coupons, buying more of same bond
  
• end of 1998:
  
• bond selling at 5%
• made ~$8m, annual return >13%
• better than stocks in most 17 year periods
• effect on equities
  
• also pushed up by falling interest rate (in addition to other factors)
  
• e.g. put $1m in the Dow on Nov 16 1981
• reinvest all dividends
• end of 1998:
• made ~$20m, annual return of ~19%
  
• beats anything you can find in history
• AFTER-TAX CORPORATE PROFITS
• as percentage of GDP: portion of GDP that ended up with the shareholders of American business
• from 1951 to ~1980: within 4-6.5% range
• 1981 - 1982: down to 3.5%
• i.e. profits were sub-par and interest rates sky-high
• 1998: up to ~6%
• i.e. profits in upper part of normalcy range and interest rates low
• PSYCHOLOGY
• "Once a bull market gets underway, and once you reach the point where everybody has made money no matter what system he/she followed, a crowd is attracted into the game that is responding not to interest rates and profits by simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these investors learn that when the bell rings - in this case the one that opens the New York Stock Exchange at 9:30am - they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich."
• prospect for the next 17 years
• investors today have rosy expectations
• staring fixedly back at the road they just traveled
• expect 12 - 20% returns on 5 - 20 year investments
• Buffett: won't come close even to 12%
  
• 3 things need to happen for next 17 years to be as good as 17 years just passed
  
1. INTEREST RATES MUST FALL FURTHER
   
• if interest rates fell from 6% (now) to 3%, would come close to doubling the value of common stocks
  
• if you think interest rates are going to fall to e.g. 1%, you should buy bond options
  
2. CORPORATE PROFITABILITY IN RELATION TO GDP MUST RISE
   
• growth of a component factor cannot forever outpace that of the aggregate
• wildly optimistic to believe that corporate profits as a % of GDP can, for any sustained period, hold much above 6%
• e.g. competition will keep the percentage down
• also public policy element: if corporate investors, in aggregate, are going to eat an ever-growing portion of the economic pie, some other group will have to settle for a smaller portion
  
• would raise political problems
• reasonable assumption for GDP growth: 5% per year
• 3% real growth ("pretty darn good"), 2% inflation
• unless serious help from interest rates, aggregate value of equities can't grow much more than that
• GDP growth is limiting factor in returns you're going to get
• cannot expect to forever realize a 12% annual increase in valuation of American business if its profitability is growing only at 5%
• inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do
• note: future returns are always affected by current valuations
• and: investors as a whole cannot get anything out of their business except what the businesses earn
• minus "frictional costs", i.e. transaction, advice, fees
  
• e.g. Fortune 500
• 1998 profits: $334b
• 1999 market value: ~$10tr
• i.e. investors were saying in 1999 that they would pay $10tr for $334b in profits
• frictional costs ~$100b/year
  
• i.e. less than $250b return on $10tr
• is "slim pickings"
• Buffett's most probable return over next 17y?
• assuming constant interest rates, 2% inflation and frictional costs: 6%
• minus inflation: 4%
• could just as easily be less than that as more
  
3. SUCCESSFULLY RIDING THE WAVE OF INNOVATION
   
• e.g. IT revolution
• Buffett cautions by using automobile and aviation industries as example
• both transformed the country much earlier in the century
• automobile
• early days of cars: at one time at least 2,000 car makes
• industry was having incredible impact on people's lives
• in hindsight, revolutionized society
• with such knowledge investor would have said: "Here is the road to riches."
• 1990s: only 3 US car companies left, in dire shape
• aviation
• industry with plainly brilliant future, would have caused investors to salivate
• 1919-1939: 300 aircraft manufacturers
  
• today: only handful
• 129 airlines filed for bankruptcy in last 20y
• 1992: since dawn of aviation, money made by all of country's airline companies: zero
• note: much easier in such transforming events to figure out the losers and short them
  
• e.g. possible to grasp importance of car when it came along but how to pick winners?
• better to turn things upside down: short losers, e.g. horses

• "key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage"
• "products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors"
  

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Quote of the Day

"Look for the ridiculous in everything and you will find it." - Jules Renard

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Manufacturers plan to outsource more R&D - Economist Intelligence Unit

Summary:
A survey reveals that an increasing number of manufacturers are keen to outsource R&D and innovation. The main motivation is skills shortage in design and engineering. To keep pace with the breathtaking pace of product innovation, outsourcing elements of research and development may be the only viable way forward. The biggest barrier to outsourcing innovation is trust, i.e. losing IP to partners or competitors. Better IT technology is needed to prevent this, as well as better communication and an open culture. (Published: 16/06/08)

Notes:

• new paper by EIU suggests manufacturers are increasingly keen to outsource R&D
• "Outsourcing innovation: A manufacturer's perspective"
• outsourcing was pioneered by manufacturing companies
• especially in automotive sector
• two top motives:
1. cut costs
2. focus on core competences
• survey:
• 22% of manufacturers use outsource-providers as a source of innovation
• product design or process improvement
• 41% admits that, in past three years, little or no innovation has been derived from external partners
• 37% says only about one quarter of innovation has been derived from external partners
• respondents clearly see a benefit in seeking innovation outside the organisation's R&D laboratory
• skills shortages in design and engineering
• 58% of the survey sample said that, in the past three years, it has become somewhat harder or much harder to hire talented employees who can deliver innovative ideas
• “With the war for talent intensifying, especially in the design and engineering arena, manufacturers can no longer rely on finding all the best ideas under their roof. To keep pace with the breathtaking pace of product innovation, outsourcing elements of research and development may be the only viable way forward.” (Robin Bew, EIU)
  
• biggest barrier to outsourcing innovation: trust
• companies fear losing IP to partners and competitors
• most physical products start life as a blueprint on a computer
• is when they are most vulnerable
• 5 years worth of R&D can be loaded onto a memory stick in seconds
• IT security can go some way to preventing this from happening
• 51% of respondents feel their firms need to invest more in technology in order to facilitate the outsourcing of innovation from external partners
• more openness needed
• most respondents believe that establishing better communication channels with partners—both face-to-face and virtual—would make capitalising on their ability to innovate easier
• majority of companies believe that having an open culture in which knowledge is shared is essential to capitalising on innovation from external partners.
• note on measuring innovation:
• counting the new products and businesses they launch (64%)
• calculate the proportion of revenue growth that is attributable to these new products and businesses (54%)
• counting the number of patents filed comes in a distant third (32%)
• not measuring innovation at all (8%)
• related links:
• In the Pipeline: More on Outsourcing
  

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The Manhattan Project Is Underway - Energy Tribune

Summary:
Robert Bryce noting that a Manhatten Project appears to be underway, except that there are no government mandates: huge investments are made in renewable technologies by private investors. Two main difference between previous energy crisis (70s) and now: huge amount of venture capital available, and the amount of new technologies that are being brought to the market as a result. Far better that these risk be taken by the private sector. No government agency can react as quickly as the private sector can. Markets, not governments, are going to determine the pace of our transition to alternative and renewable fuels. (Published: 12/06/08)

Summary:

• Manhatten Project underway as a result of higher energy prices
• huge investments in renewable energy technologies
• but without government mandates
• New Energy Finance Ltd., London-based research firm:
• 2007: $148.4b invested globally in "clean energy technologies, companies and projects"
• four-fold increase over 2004 levels
• Mark Mills, Digital Power Capital (PE fund)
• two critical differences from the 1970s:
• huge amount of venture capital now available to energy entrepreneurs
• several thousand firms providing venture capital or private equity
  
• "the phenomenal new suite of technologies that are being brought to the market that can address the problem"
• from nanotechnology to high-bandwidth wireless communications
• energy technology companies booming with oil selling for more than $130
• First Solar Inc.
• makes thin-film solar panels
  
• best-performing stock in US in 2007
• up nearly 800% last year
  
• stock has increased some 12 fold in value since IPO in 2006
• trading at $300/share, P/E of about 124, market cap of $25b
• Broadwind Energy
  
• builds towers and other equipment for the wind energy
  
• June 2006: shares selling for about $1.30
• May 2008: $26/share
• whether current investment trend is a bubble remains to be seen
• but: far better that these risk be taken by the private sector
• no government agency can react as quickly as the private sector can
• Carlos Ghosn, Nissan CEO in New York Times: "the shifts coming from the markets are more powerful than what regulators are doing"
• central point: markets, not governments, are going to determine the pace of our transition to alternative and renewable fuels
• the length of that transition, which will likely last several decades, depends almost exclusively on how quickly those new sources can become cost-competitive with fossil fuels

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Quote of the Day

"It's such a fine line between stupid and clever." - David St. Hubbins (Spinal Tap)

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Quote of the Day

"Nothing is impossible. Some things are just less likely than others." - Jonathan Winters

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Quote of the Day

"The beginning of knowledge is the discovery of something we do not understand." - Frank Herbert

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Government Sponsored Versus Private Venture Capital: Canadian Evidence - NBER Working Paper

Summary:
Paper investigating the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. Results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation and innovation. Arises in part from a selection effect and in part from a treatment effect. Results cast doubt on the desirability of certain government interventions in the venture capital market. (Published: 05/08)


Notes:

• Only abstract; paper requires purchasing.
• Study focuses on a broader set of public policy objectives:
  
• value-creation, innovation, and competition
• Enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria:
• value-creation: as measured by the likelihood and size of IPOs and M&As
• innovation: as measured by patents
• Cause 1: selection effect
• private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists
• Cause 2: treatment effect
• subsidized venture capitalists crowd out private investment
• subsidized venture capitalists provide less effective mentoring and other value-added skills

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Summary only...