Thursday, August 26, 2010

Venture Capital industry looks like it is dead?

Interesting article: Pension Funds back in the early 2000's allocated a percentage of their funds to VC and Quant funds. Both areas of investing seem to have too many dollars chasing outsize returns that are not there any more, creating bubbles.

Aivars Lode

O'Brien: Grim numbers point to the end of the venture capital era
By Chris O'Brien

Mercury News Columnist
Posted: 08/25/2010 04:09:06 PM PDT
Updated: 08/26/2010 12:10:56 AM PDT

More Chris O'Brien
• His columns
• Silicon Beat blog
Silicon Valley has passed an important milestone that may mark the end of one era and the beginning of another.
This dividing line in history was revealed this summer in the latest report from the National Venture Capital Association, which showed that 10-year returns on venture capital investments had turned negative at the end of 2009, and nose-dived during the first quarter of 2010. Let me translate what might sound like some insider mumbo jumbo: Venture capital investing, the lifeblood of the valley's innovation economy, has become a sucker's bet.
In the game of venture capital, the 10-year return on investments is one of the most closely watched benchmarks of performance. Everyone can have a bad year here or there. And in the short run, there's always going to be sluggishness from an economic downturn or two. But none of those excuses can explain away a whole decade of failure.
No, there's something bigger going on. The venture industry is in free fall. And that has big implications for the Silicon Valley economy, especially when it comes to job creation.
"It's harder to get venture money," said Mark Heesen, president of the NVCA. "That leads to fewer innovative companies being formed."
Until now, venture capitalists have occupied sacred ground in Silicon Valley. They grow startups by providing advice and precious financing. But that influence is waning.
According to the most recent NVCA numbers, venture capital funds returned 25.8 percent over 10 years for the quarter ending March 2009. For the quarter ending March 2010, that return had fallen to minus 3.9 percent. That spectacular dip is due to the outsize gains of the dot-com boom finally washing out of the official 10-year benchmark.
But the larger problems plaguing the venture industry are really about how the world has changed since the dot-com bust. The venture industry's financial model was built on having a significant number of their portfolio companies hold initial public offerings of stock. Venture firms depend on windfalls from these IPOs to overcome failed investments and to deliver healthy returns to investors. But except for a couple of years, the IPO market has been comatose this past decade.
Venture capitalists were hoping against hope that this year might finally be the year that the IPO made a comeback. But once again, that hasn't happened. According to Renaissance Capital, the Bay Area has had nine venture-backed companies go public this year, up from two last year. The most notable of those was Tesla Motors, the electric carmaker that represents the highest of high-risk bets.
What little momentum these IPOs generated has been offset by companies like Solyndra, a cleantech success story that filed and then withdrew its IPO plans. And worse for venture capital firms, companies that might provide a true home-run IPO, such as Facebook, LinkedIn and Zynga, have been doing everything in their power to avoid an IPO. These companies say they don't need the money enough to give up the control that comes with being a public company.
How gloomy is this picture for venture capital firms? According to an NVCA survey, 90 percent of venture capitalists who responded expect their industry to contract through 2015.
That trend is well under way. While firms have not started collapsing en masse, they have been quietly shrinking. The number of principals at U.S. venture firms fell from 8,892 in 2007 to 6,828 in 2008. As firms raise smaller funds, they need fewer people to invest.
Some will argue that at least in the area of Web startups, companies can be launched on the cheap, and growing numbers of angel investors -- those wealthy individuals who invest at the earliest stages -- are stepping in to give these companies a boost. True, but that kind of funding doesn't work as well for biotechnology, medical devices or cleantech. And these angel-backed companies are small and lean, and don't create large numbers of jobs.
It's not just fewer startups, though. When companies don't go public, they don't generate the same number of jobs in their later stages. Heesen said the cash raised from an IPO usually triggers an explosion in hiring.
"The real job creation starts far down the road, after they go public," Heesen said.
Instead of going public, the companies that do show potential now get gobbled up by the Googles and Facebooks of the world. At the same time, valley giants like Hewlett-Packard, Oracle, Intel and Cisco Systems continue their acquisitions of larger tech companies, a consolidation trend that more often than not is accompanied by big job cuts.
So we're seeing fewer startups and sweeping consolidation. Tie those trends together, and you've got a drag on job creation that could weigh down the valley for years to come.
With venture capital in retreat, we must look elsewhere for a new model for startup funding to kick-start the valley's next era of innovation and the kind of job creation we desperately need.

Wednesday, August 25, 2010

Wind power generation maybe a whole lot of hot air?

Interesting based upon the articles I posted some time ago that basically said the same thing. Aivars

Wind Power Won't Cool Down the Planet

Often enough it leads to higher carbon emissions.


The wind industry has achieved remarkable growth largely due to the claim that it will provide major reductions in carbon dioxide emissions. There's just one problem: It's not true. A slew of recent studies show that wind-generated electricity likely won't result in any reduction in carbon emissions—or that they'll be so small as to be almost meaningless.
This issue is especially important now that states are mandating that utilities produce arbitrary amounts of their electricity from renewable sources. By 2020, for example, California will require utilities to obtain 33% of their electricity from renewables. About 30 states, including Connecticut, Minnesota and Hawaii, are requiring major increases in the production of renewable electricity over the coming years.
Wind—not solar or geothermal sources—must provide most of this electricity. It's the only renewable source that can rapidly scale up to meet the requirements of the mandates. This means billions more in taxpayer subsidies for the wind industry and higher electricity costs for consumers.
None of it will lead to major cuts in carbon emissions, for two reasons. First, wind blows only intermittently and variably. Second, wind-generated electricity largely displaces power produced by natural gas-fired generators, rather than that from plants burning more carbon-intensive coal.
Because wind blows intermittently, electric utilities must either keep their conventional power plants running all the time to make sure the lights don't go dark, or continually ramp up and down the output from conventional coal- or gas-fired generators (called "cycling"). But coal-fired and gas-fired generators are designed to run continuously, and if they don't, fuel consumption and emissions generally increase. A car analogy helps explain: An automobile that operates at a constant speed—say, 55 miles per hour—will have better fuel efficiency, and emit less pollution per mile traveled, than one that is stuck in stop-and-go traffic.
Recent research strongly suggests how this problem defeats the alleged carbon-reducing virtues of wind power. In April, Bentek Energy, a Colorado-based energy analytics firm, looked at power plant records in Colorado and Texas. (It was commissioned by the Independent Petroleum Association of the Mountain States.) Bentek concluded that despite huge investments, wind-generated electricity "has had minimal, if any, impact on carbon dioxide" emissions.
Bentek found that thanks to the cycling of Colorado's coal-fired plants in 2009, at least 94,000 more pounds of carbon dioxide were generated because of the repeated cycling. In Texas, Bentek estimated that the cycling of power plants due to increased use of wind energy resulted in a slight savings of carbon dioxide (about 600 tons) in 2008 and a slight increase (of about 1,000 tons) in 2009.
The U.S. Energy Information Administration (EIA) has estimated the potential savings from a nationwide 25% renewable electricity standard, a goal included in the Waxman-Markey energy bill that narrowly passed the House last year. Best-case scenario: about 306 million tons less CO2 by 2030. Given that the agency expects annual U.S. carbon emissions to be about 6.2 billion tons in 2030, that expected reduction will only equal about 4.9% of emissions nationwide. That's not much when you consider that the Obama administration wants to cut CO2 emissions 80% by 2050.
Earlier this year, another arm of the Department of Energy, the National Renewable Energy Laboratory, released a report whose conclusions were remarkably similar to those of the EIA. This report focused on integrating wind energy into the electric grid in the Eastern U.S., which has about two-thirds of the country's electric load. If wind energy were to meet 20% of electric needs in this region by 2024, according to the report, the likely reduction in carbon emissions would be less than 200 million tons per year. All the scenarios it considered will cost at least $140 billion to implement. And the issue of cycling conventional power plants is only mentioned in passing.
Coal emits about twice as much CO2 during combustion as natural gas. But wind generation mostly displaces natural gas, because natural gas-fired generators are often the most costly form of conventional electricity production. Yet if regulators are truly concerned about reducing carbon emissions and air pollution, they should be encouraging gas-fired generation at the expense of coal. And they should be doing so because U.S. natural gas resources are now likely large enough to meet all of America's natural gas needs for a century.
Meanwhile, the wind industry is pocketing subsidies that dwarf those garnered by the oil and gas sector. The federal government provides a production tax credit of $0.022 for each kilowatt-hour of electricity produced by wind. That amounts to $6.44 per million BTU of energy produced. In 2008, however, the EIA reported subsidies to oil and gas totaled $1.9 billion per year, or about $0.03 per million BTU of energy produced. Wind subsidies are more than 200 times as great as those given to oil and gas on the basis of per-unit-of-energy produced.
Perhaps it comes down to what Kevin Forbes, the director of the Center for the Study of Energy and Environmental Stewardship at Catholic University, told me: "Wind energy gives people a nice warm fuzzy feeling that we're taking action on climate change." Yet when it comes to CO2 emissions, "the reality is that it's not doing much of anything."
Mr. Bryce, a senior fellow at the Manhattan Institute, recently published his fourth book, "Power Hungry: The Myths of 'Green' Energy and the Real Fuels of the Future" (PublicAffairs).

Tuesday, August 24, 2010

This article talks about cities selling stuff to be able to balance the budgets

Also refers to this being done before in Australia and other places. It does not comment that this was done as the Aussie economy went through a massive recession in the 90's. See my previous posts for the prediction that this would occur in the States

Facing Budget Gaps, Cities Sell Parking, Airports, Zoo

Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.
California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs.

About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland's RBS Global Banking & Markets. Those assets have a market value of about $45 billion—more than ten times the $4 billion or so two years ago, estimates Dana Levenson, head of infrastructure banking at RBS. Hundreds more deals are being considered, analysts say.
The deals illustrate the increasingly tight financial squeeze gripping communities. Many are using asset sales to balance budgets ravaged by declines in tax revenues and unfunded pensions. In recent congressional testimony, billionaire investor Warren Buffett said he worried about how municipalities will pay for public workers' retirement and health benefits and suggested that the federal government may ultimately be compelled to bail out states.

"Privatization"—selling government-owned property to private corporations and other entities—has been popular for years in Europe, Canada and Australia, where government once owned big chunks of the economy.
In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations. On a toll road, for example, a private operator may have more money to pump into repairs and would bear the brunt of losses if drivers used the road less.
While asset sales can create efficiencies, critics say the way these current sales are being handled could hurt communities over the long run. Some properties are being sold at fire-sale prices into a weak market. The deals mean cities are giving up long-term, recurring income streams in exchange for lump-sum payments to plug one-time budget gaps.
The deals are threatening credit ratings in some cases and affecting the quality and cost of basic utilities such as electricity and water. Critics say many of the moves are akin to individuals using their retirement plans to pay for immediate needs, instead of planning for the future.
"The deals are part of a broader restructuring of our economy that carries big risks because of revenue losses over time," says Michael Likosky, a professor at New York University who specializes in public finance law.
Municipalities argue that the money they raise could help build more long-term assets, boost efficiency and avoid raising taxes. "The City of Los Angeles shouldn't be in the parking business," says Mike Mullen, senior adviser to L.A.'s mayor. Mr. Mullen was hired from Bank of Montreal to study selling some of the city's assets, including parking spaces, which bring in about $20 million annually.
In the U.S., selling public buildings and leasing them back got some attention in the 1980s, but those deals were largely done for tax benefits and the asset generally stayed in public hands.
The current deals are fundamentally different because control of the asset transfers to private hands. In such deals, "the private investor takes on operating risk," Mr. Likosky says.
In New York's Nassau County, officials last week began seeking buyers for the rights to rent on a former military base called Mitchel Field. The county would still own the 200-acre site, but would get an upfront payment from an investor who would collect the rent payments for up to 30 years—estimated at about $113 million. The county hopes to raise about $20 million to help fill a budget gap.
The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.

Chicago received $1.16 billion in 2008 to allow a consortium to run metered parking spaces for 75 years.
After the deal, some drivers complained about price increases as well as meter malfunctions caused by the overwhelming number of quarters that suddenly were required.
Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion.
"The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.
Thomas Lanctot, head of public finance at William Blair & Co., which advised the city on the leasing, says Chicago got a good price. The deal protects the city from economic risks, he said, such as drivers moving to mass transit. "This is not the crown jewels," he says. "This is asphalt."
The city said it is investing $100 million of the $1.16 billion in human infrastructure programs like a low-income housing trust fund, ex-offender and other job and social programs. About $1 billion has already been spent on operational expenses such as salaries and sanitation—a fact that came into the equation when Fitch Ratings in early August downgraded Chicago's bond rating to "AA" from "AA-plus."
The downgrade, which could raise borrowing costs, was due partly to Chicago's "accelerated use of reserves to balance operations," Fitch said.
Around the country, at least a dozen public parking systems are up for bid, including in San Francisco and Las Vegas.
Proponents say private businesses are better at balancing parkers with spaces, advertising and matching prices with demand. Critics claim the sales are garnering too little money, are driving up parking rates and removing a valuable revenue stream.
Besides, if a city wants to use a parking lot property for something else years down the road, it can't—the city is typically locked into parking for the lease's life unless it compensates the new operator for the long term revenue loss.
In Pittsburgh, the mayor is proposing to lease out the parking system for an upfront sum of about $300 million over 50 years and funnel the money into the pension system.
Bill Peduto, a city councilman, is fighting the plan. The spaces generate $35 million annually, and considering that the concessionaires are proposing doubling rates, he says, the city will ultimately lose $3.5 billion over the life of the lease.
"Even with the money from a sale, we'll have to put another $17 million annually into the pension fund—and we don't have that," Mr. Peduto says. He prefers raising parking rates slightly and floating a bond to stabilize the pension fund.
A spokesman for Pittsburgh's mayor didn't return calls for comment.
The privatization trend is being spurred by a cottage industry of consultants, lawyers and bankers. Allen & Overy, a New York law firm, dubs it "rescue investing" and recently provided investors a booklet on "jurisdictions of opportunity"—municipalities whose laws, budget woes and credit ratings make them most likely to make deals.
"More public-private partnerships for public infrastructure in the U.S. have reached commercial and financial close than during any comparable period in U.S. history," the booklet says.
Many municipalities have long done a poor job of running their roads, parking spaces and bridges, contends David Horner, a lawyer at Allen & Overy. Maintenance contracts, for example, are highly political and with revenues shrinking, infrastructure is increasingly deteriorating. Critics say buyers are taking advantage of municipalities at a vulnerable time and lack the incentive that governments have to maintain quality.
Among assets on the block all over the country are state and city office buildings. Arizona received national attention in late 2009—including a skit on the "Daily Show"—when it announced plans to raise more than $1 billion turning over control of public buildings and leasing them back. Much of the money is being used to plug the state's budget hole.

Such "one-time budget maneuvers" were cited in a Moody's Investor Services report recently to downgrade Arizona a notch.
"We view these asset sales as 1-shots…that create structural budget imbalances in future years, but that may be necessary actions to bridge the time gap until revenue stabilization or growth returns," says Robert Kurtter, a managing director at Moody's.
The California legislature recently released a report by its analyst's office entitled "Should the State Sell its Office Buildings?" California originally bought office buildings to save money, the report says. The cost of leasing them back "would exceed sales revenue," it said, making the sales "poor fiscal policy."
But "in the current budget environment," it added, such deals are necessary to balance the budget.
Water supply also is being sold to private interests. In Milwaukee, a consumer advocate called a plan to sell the water system "mortgaging Milwaukee's future." The report, by Washington-based Food and Water Watch, says private water service in general costs 59% more as new owners seek to recoup their investment. It adds: "Water users cannot vote private managers or state-appointed regulators out of office."
City Comptroller W. Martin Morics argues that the plan, which is on the back burner, could bring in more than $500 million through a lease over 75 to 99 years.
Airports also are being privatized under a limited federal program. Deals under consideration for lease include airports in New Orleans and Puerto Rico. In Lawrenceville, Ga., residents last month protested against the privatization of Gwinnett County, Ga., airport.
Their main concerns were noise and pollution, as a private owner aims to expand it into a commercial airport. The county and a private operator have said that the plan would free up revenues, now reserved for airport use only, for other purposes and create jobs.
Dallas is selling prized outdoor spaces. After turning over operation of the zoo to a private firm, the city is now hawking the Farmers' Market and Fair Park.
"It would be part of budget solutions and streamlining operations," says city spokesman Frank Librio, who notes that the city is doing what it can to close a budget gap and replenish reserves.
Write to Ianthe Jeanne Dugan at