In-Cog-Nito

Good for them

by

Talk about rising from the dead. Nortel (NT) smoked estimates and reported its first full year profit since 1997 and the stock is on fire. I didn’t think they would make it, but lo and behold they did.

I do not hold any positions in NT stock.

Offshoring jobs part 2

by

Lex sent me an excellent article yesterday about the effects of offshoring U.S. IT jobs.

It’s very readable and compelling. I like the analogy the author uses with movies and the portrayal of computers at the work place:

“The growing détente was reflected in 40 years of Hollywood films. Desk Set, from 1957, was about a research department head who keeps her job only after a battle of wits with a computer (the machine blows up). By 1988, the computer had moved from threat to weapon: In Working Girl, Melanie Griffith has both a stock market terminal and a PC on her desk and uses her skills and knowledge to move from secretary to private office. By the time Mike Judge made Office Space in 1999, the PC had faded into just another bit of cubicle furniture.”

I found another good article that makes a similar argument albeit slower to read and more numbers oriented.

I like the analogy this article makes comparing the rise of IT India to the proliferation of the desktop computer. There’s no catchy line, so I’ll try to spell it out. When computers first started, the money was in making stuff like DRAM and chips. But chips were expensive to make, so computers were expensive to buy. With the offshoring of chip production, computers became a cheap commodity, and we have mass proliferation of the desktop PC. With a PC on every office desk, productivity soared.

Like PC’s, the money now is in writing code and trying to make sense of all that computing power. By extension, the final product is prohibitively expensive, such as an integrated SAP or Oracle system. It’s expensive, so only the richest companies can use it to boost productivity. So if you can offshore and decrease the cost of technology by magnitudes, you make technology more accessible to more people. And as this previously expensive technology proliferates, you get another jump in productivity.

Creative destruction has been the rule for centuries, and it’s still the rule now. I probably should have picked up on it earlier, but it’s the most compelling argument I’ve heard for offshoring service jobs to India. I’m liking this offshore idea more and more now.

Reminiscing ’bout the days of old

by

So one of my clients is a venture capital fund in Silly Valley (my name for Silicon Valley). And being that I use to be in the high tech investing game, it’s a nice trip down memory lane.

Remember back in the day when they said it was a good idea to buy a basket of stocks in a hot sector, and needing only one of them to become the next Microsoft for the whole investment to pay off? Well, boy did these guys ever – they’re the real deal. The fund began with $100 million, and one of their first investments was an early round investment in ABC Networks for $5 million. Five years later, at the height of the tech bull market, they distributed shares in ABC Networks to their partners (cashing out in VC speak) with a gain of over $625 million.

Think about it for a minute. It’s the same as buying shares at $1 and selling it at $126 for a gain of $125. That’s a 125x return on the original investment. In percentage terms that’s a 12,500% return over 5 years, or roughly a compounded return of 265% per year over 5 years for their investment in ABC Networks. Overall, the original $100 million fund made over $850 million in capital gains for its investors. Or to put it simply, they turned $100 million into almost $1 billion. Takes your breath away doesn’t it?

Capitalism at its finest.

Note: Names and figures have been changed due to the information being privy to the fund and its investors. The figures used are fictional. However, I’ve maintained the magnitude of the figures for illustration purposes.

As a side note, there’s plenty one could critique – i.e. the market was a euphoric bubble, the investors may not have sold once they received the shares and rode it down, we’ll never see a market like that again, etc, etc. I wanted to give an inside peak at a VC, what can go right, and a reason why people invest in venture capital funds. Hope you enjoy.

Update: I forgot to mention, the standard fees the GP would charge to manage a fund is in the ballpark of 2.5% of capital committed per year and 20% of profits.

Update2: Here’s a good article about Google and its relation to the IPO/VC world.