Explaining Southern California's economy

Reportings: College isn't worth it; Silicon Valley is doing great!; Digital Domain goes bankrupt

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Toshifumi Kitamura/AFP/Getty Images

Autobot 'Bumblebee' is shown during the 'Transformers - Revenge of the Fallen' world premiere in Tokyo, on June 8, 2009. The company that did the visual effects has declared bankruptcy after a precipitous stock slide.

Megan McArdle considers the exploding cost of college. "The price of a McDonald’s hamburger has risen from 85 cents in 1995 to about a dollar today. The average price of all goods and services has risen about 50 percent. But the price of a college education has nearly doubled in that time. Is the education that today’s students are getting twice as good? Are new workers twice as smart? Have they become somehow massively more expensive to educate?" (Newsweek/The Daily Beast)

Facebook aside, Silicon Valley is standing out as the place to send your venture capital dollars. "Silicon Valley startups raised $3.2 billion from venture capitalists during the April-June quarter, far more than in any other part of the U.S as tracked by the National Venture Capital Association. Venture capital flowing into Silicon Valley increased by 4 percent from the same time last year, while it dropped 12 percent nationwide." (Businessweek/AP)

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CalPERS just struck fear in the hearts of venture capitalists everywhere

Max Whittaker/Getty Images

The California Public Employees' Retirement System in Sacramento, California. The fund may severely cut back its venture capital investments.

CalPERS, the gigantic California public workers' pension fund, has announced that it's going to to review the venture-capital component of alternative investments in its $230-billion overall portfolio. This follows on the heels of a much-discussed paper put out by the Kauffman Foundation earlier this year, in which the organization — which is devoted to promoting entrepreneurship — revealed that its VC investments has seriously underperformed in the past decade.

I wrote a feature about this in May. In January, CalPERS announced that it made only a 1.1-percent return on its investments, missing its target return of 7.75 percent by a wide margin. One of the reasons it in alternative asset classes like VC in the first place is that it can't meet its return objectives otherwise.

The fundraising aspect of being a VC has gotten pretty challenging. Some VCs seem to be adapting to this "new normal," while others appear content to live at the top of the pile and uses their brand-name status to vacuum up most of the available money. But they all rely on large funds like CalPERS to fuel their efforts to find the next Google or Facebook.

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Venture capital isn't over — it's trifurcating!

TechCrunch Disrupt SF 2011 - Day 3

Araya Diaz/Getty Images for TechCrunch

Venture capitalists and founders at a recent TechCrunch Disrupt conference. Are the those who disrupt about to get disrupted?

Scott Anthony, who runs venture investing for Innosight — a consulting firm founded by the founder of "disruptive innovation," Clayton Christensen — has applied the master's lessons to the venture capital space at Harvard Business Review's blog. Like a lot of folks, myself included, he takes a recent Kauffman Foundation report as his starting point. 

And then he effectively deploys Christensen's best-known concept to explain why venture capital — and particularly big VC funds — isn't performing as well as an investment class as it has in the past. The way disruptive innovation works is that in an established industry, a new player will enter at the low end and wind up disrupting the major players.

A good example might be Japanese carmakers attacking first small motorcycles and later small cars, then moving up the food chain to make plenty of trouble for Ford and General Motors. More recently, you could argue that Instagram did this to Facebook by creating a lightweight mobile photo-sharing app that was so easy to use that it acquired 50 million users practically overnight. 

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The possibly meaningless LA startup map that everyone is talking about

Represent-LA

Welcome to Los Angeles! The land of startups!

The interactive map above, which lives at represent.la, has been the talk of the Twitters and the L.A. startup community for a week now. One of the companies on the map, Ebyline, actually generated a blog post about what it all means. Peter Beller was the author, and I thought his take was pretty fresh.

So I checked in with him. I should have known that a former Forbes writer who did a presitigious Knight-Bagehot Fellowship at Columbia University and then stuck around Morningside Heights to get his MBA would go the extra mile: he cranked out a spreadsheet on VC funding in Silicon Valley, New York, and L.A.

When he isn't doing this type of thing, Beller is the Director of Content at Ebyline, an L.A. startup that has built a platform to provide primarily daily newspapers with a steady stream of high-caliber freelance journalists. It is not a content farm. (I've actually worked for a content farm, and Ebyline definitely isn't one, although in fairness not all so-called content farms deserve all the bad press they've received.)

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Good money after bad: CalPERS and the crisis in venture capital

Max Whittaker/Getty Images

The California Public Employees' Retirement System (CalPERS) building in Sacramento. The fund has billions invested in venture capital and other alternative asset classes.

VC-Returns-Kauffman

The performance of VC has been poor sine the the mid-1990s.

Smaller-VC-Kauffman

In VC, smaller funds outperform larger ones.

VC-Big-Kauffman

Big VC doesn't meet outsized return expectations.

N-J-Curve-Kauffman

The "N-curve" is in blue and red. The "J-curve" is in green. In VC, you expect J, but you actually get N, with most returns coming early, rather than late.

Institutionalization-VC-Kauffman

A healthy VC ecosystem? Not really. Most of the money is going to fewer funds.

VC-Fees-Kauffman

Are VCs really all about raising money and charging fees? The Kauffman Foundation blames itself for creating this compensation structure.


Pretend, for a moment, that you’re a computer science student at Stanford University. Chances are good that you’ve thought about taking your degree — or even not waiting to get your degree — and starting a technology company.

It’s the new American Dream. It attracts the most talented international students to our major research universities. It’s made the likes of Jerry Yang, Sergey Brin, Larry Page and, more recently, Facebook’s Mark Zuckerberg and Instagram’s Kevin Systrom (both under 30) multi-millionaires if not multi-billionaires nearly overnight.

Technology. The Internet. Mobile. Innovation. Disruption. Entrepreneurship.

These are the things that make America great in the early 21st century. Many of these new businesses are located in California. And they all have one thing in common: They live and die based on the investment decisions of venture capitalists, arguably the most important reallocators of wealth in the global economy.

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