Having Your Cake & Eating It Too

http://dealbook.nytimes.com/2011/04/07/founders-now-take-the-money-and-maintain-control/

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"Always believe what a person does, not what he says." (Fred Smith)

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One of the reasons why I put a private equity section into my honors international business classes during this school year was that, during the recent worldwide financial crisis, that money went overseas. So, the question became where did it go and when was it coming back?

In the case of the Carlyle Group, it went to China. For David Rubenstein (Carlyle C0-Founder), his perspective was a question: why invest in the U.S. where the regulatory and tax environment is unpredictable when one can invest in China where there is consistent growth in a much more controlled economy? This is a perspective that was shared by many of the (U.S.) Top 500 CEOs who were not rushing to spend their capital money here in America.

If you feel, as I do, that private equity tends to lead (good or bad) into the hot markets, then watching where it goes becomes an economic indicator.

While the folks at JP Morgan Chase would tell us that they're lending again, I'm not sure that, unless your name is Donald Trump, a lot of that has been happening for the person looking to get a mortgage to buy a home or the small business owner. But, cheap corporate debt is back and available to private equity here in the U.S. So, while corporate America still has some of the highest numbers ever for cash-on-hand, private equity is jumping in to markets here.

The fact that money is flowing again, even in one sector of the U.S. market, is a good sign for future spending here. It facilitates founder/owners of next generation Internet and social network companies staying in their CEO positions without going public. That's not just a Facebook story. According to the National Venture Capital Association, 2010 was the start of a comeback with a 19% increase in investments (to $21.8 billion).

This is "having your cake and eating it too." Instead of monetizing your ownership shares by going public and getting more capital to grow, secondary offerings are getting easier to sell and angel investors are looking for places to invest (according to Travis Kalanick in the article we've attached, the boom in angel investing and the popularity of networking services like Angel List, a site that matches entrepreneurs with investors, have made financing significantly more accessible).

All of this smells like a boom leading to a "bubble." One of the good things about this article is the video it includes on what happens if it is a sector bubble. A key difference between what's going on right now and the Dot.com Boom/Bust is that much of the investing is happening on the secondary markets where many of these young companies are still private. So venture capitalists are coming in to spend more money on "good ideas" and keeping the original CEOs in their jobs.

We'll see. Check the graphic for a "fuller picture of the Silicon Valley money network." It's good.

More on the overall economy in the next post.