Bad Money?

There was an interesting article on Forbes.com from Martin Zwilling last week regarding the types of angel investors entrepreneurs should avoid. His list includes control freaks, has-beens, and numb skulls to name a few.

The article got me thinking around this idea of "bad money" from angels, or even investors in general. Is there such a thing as bad money? -- no question. There has been and always will be predatory investors motivated by greed, malice, and self-interest. These are the investors that companies should be avoiding at all costs. The question entrepreneurs need to be asking themselves is "Where do I draw line?".

When money is tight and desperation to keep a dream alive sets in, I'd argue that any idea of bad money flies right out the window, which I don't necessarily believe is a bad thing. There are different levels of "bad" investors, many of which entrepreneurs, the Kings of Perseverance, should be able to overcome. If an angel investor becomes a nuisance, entrepreneurs should focus on growing their business to a point where they can pick and choose their investors, pushing any bad money further and further down the cap table.

Sign of Life?

The Wall Street Journal had a nice article about Stanford University's private equity portfolio in yesterday's paper. Stanford put part of their portfolio on the auction block due to the liquidity crisis they faced as a result of the Great Recession. However, the Stanford Management Company, who is responsible for the school's endowment investing, recently withdrew their private equity partnership stakes from the auction block.

This move by Stanford is most likely due to the rebound the public equity markets have seen over the last 6 months, boosting the school's liquidity, but I look at this as vote of confidence for the private equity/venture capital markets moving forward. With M&A on the rebound with mega deals like Comcast's purchase of NBC and Exxon Mobil's acquisition of XTO, signs of life in IPO market, and an increased interest in private company markets like SharesPost, I'm hopeful that there are better days ahead in 2010 for PE & VC.

Are there still challenges ahead? No question -- but its nice to signs of life among an asset class that was left for dead by many industry experts and columnists during the recession. All we can do is wait and see what 2010 has in store -- but I remain confidently optimistic as always!

I recently read The Greatest Trade Ever by Gregory Zuckerman, which gives a nice look at the rise of the housing bubble and John Paulson's trade that reaped billions for his hedge fund. I've since moved onto Snowball: Warren Buffet & the Business of Life and I wanted to reflect on simple, yet important lessons I've taken away from both books.

John Paulson and Warren Buffet never allowed self-doubt or frustration to radically shift their investment philosophies. As the housing boom was moving along at full throttle on Wall Street, Paulson was surrounded by colleagues in hedge fund industry posting record returns while his fund sputtered along. For many, the housing boom was the trade of lifetime -- everyone was winning. From the average American homeowner to the Wall Street firms, everyone along the mortgage chain was happy as could be. Yet, Paulson sat on the sidelines. How many people can actually say they would have sat on the sidelines as their hedge fund was sputtering along when there was plenty of easy money to be made?

The same can be said for Warren Buffet, who is undeniably the King of Consistency when it comes to his investment principles. Even in the 1980s as Leveraged Buyouts became front page news, Buffet refused to get sucked into the culture of easy money. As firms like KKR piled high levels of debt onto companies without much of their own cash, such actions only solidified his commitment to long term growth versus financial engineering.

As simplistic as it may be, Paulson and Buffet stuck to what they believed in. Both men did not allow outside influences -- whether it was friends, colleagues, or the broader economic environment -- to alter their investment principles. As the herd was running in one direction, but both Paulson and Buffet simply asked "Why is this happening?" and allowed their experience and research to guide their decision making.

The Beginning

This blog is something I've wanted to do for a long now, but never actually made the commitment. I'm glad I've made the leap now and I sincerely hope it is something that anyone with an interest in venture capital, start ups, or simply investing in general will enjoy. Since my college graduation, I've spent the last year and half learning everything I can about business & venture capital investing. This blog is not only meant to help others with a passion for investing, but also help myself continue to learn and absorb as much as possible. I'm a firm believer in being a life long learner, and I hope this blog will be an avenue for that.

So why the name "Cautious Capital?" First off, coming up with a blog name was probably the biggest barrier for me to make this jump into the blogosphere. The title is not only descriptive of my stance on venture capital, but also my outlook on the current economic recovery. Venture capital and early stage companies are one of the riskiest, if not the riskiest, investment vehicles available. An investment in an early stage company will test the investors' devotion, business acumen, and sanity, sometimes all within one week. The hurdles an early stage start up must endure are endless, but the good ones always seem to find a way to battle through problems week after week.

With this in mind, I always like to stay cautiously optimistic. Venture investments, and the asset class in general, are too risky to proceed any other way. Proceeding with caution allows me properly assess each company with a level head, never getting too excited by a business plan, milestone, or whatever it may be. Yet, I like to remain optimistic (I tend to be "happy go lucky" so I guess it shouldn't be a surprise optimism has found a way into my investment philosophy) that early stage companies will figure out a way to solve problem after problem, and at the end of road there will be a lot more good than bad.

I sincerely hope readers enjoy this blog and take something of value away from it. If nothing more, I'm confident my entrance into the blogosphere will serve as a valuable learning tool for myself as I continue to progress through the early stages of my career.

I am truly passionate about business and investing, and I hope it shows through this blog.