Venture investing in Germany

Deutsche Bank recently commented on the new venture grants available in Germany. No doubt, Germany is way behind the s-curve when it comes to venture investing. But what do you expect from an economy and society that is known for its conservative approach to…everything?

To be clear, we are in favour of venture investing as a means of creating new companies that have the potential to be big, one day. We agree with the authors of the Deutsche Bank report that it is not necessarily a question of How Many but rather a question of Quality. Having said that we advocate that there also needs to be a critical mass of start-ups in general before the How Many questions makes a difference. An market equilibrium overall needs to be established that can also absorb failures without stigmatising failing teams.

The US venture market has dealt with that under a ‘contingent contract’ basis. That is, teams get together to work on an idea and only if they manage to attract investment they will fully form. If not the team members move on. It is not unusual to see different teams iterating on a number of ideas, de facto having failed with a prior idea, to see a new company and team emerging.

The US model allows for energetic entrepreneurs to test the market without being held absolutely accountable for ideas that failed to attract funding at that time in history. It often does not mean that the idea was not valid (agreed, sometimes that is the case!), but it may be that the idea was too early for the market and other variables had to come into focus first before an idea has enough substance and a network that enables a faster adaption rate (Think of creating Apps before the iPhone even existed).

It is that clustering of capabilities on the one hand and the network effect (+ structure/regulation) of the local market on the other that allows for ideas and people to come together. Regrettably the latter too often walk away too early and do not give it enough time and chances to see the fruition of their own ideas. But who can truly afford waiting? It is that ‘idle’ time that appears to bug investors. It appears that the question that is forming in investors/society’s mind is “What, you still have not secured funding?” therefore you must be a failure. Regrettably that is utter nonsense. In fact, Germany would do good to overcome that attitude to venture investing as the venture market is required to create exactly that, the next big thing. The benefits of only company making it and the impact it has on people in that region or country is difficult to price in terms of future market capitalization. But surely we can agree that the position momentum may inspire other aspiring entrepreneurs to try too?

We suggest that Venture Investing is the only way to capture the potential upside when good ideas take off. Not every company can be the next Google or Youtube. Even smaller start-ups value as part of the value chain may make a difference later on when other things may fall into their place.

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Robertson’s Tiger Funds – From Asia to Pacific…and back?

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The Hedge Fund business is littered with interesting anecdotes, success stories and subsequent humble pie by some of the perceived greatest minds on the street. What makes Julian Robertson’s investment story fascinating is that he is, by most peoples and investor standards, one of the most prominent and successful (hedge fund) investors and incubator. What went wrong then?

The story starts with Bill Hwang who ran Tiger Asia successfully for many years. The story ends with a firm now called Tiger Pacific. You ask what is the difference between ‘Asia’ and ‘Pacific’? And the answer is, we do not know.

At this stage what is apparent, Tiger Asia closed since it was never able to end rumors, allegations and accusations by the Hong Kong SFC regarding some form of insider trading. The case has been going on for years. Earlier in 2012, Julian Robertson probably decided that the asset drain on the one hand and the potential reputational consequences on the other, may have a significant impact on his legacy. In fact, in the New York Times DealBook article, Mr Robertson is quoted by saying “I am saddened by the news but certainly understand Bill’s decision. …I have worked side-by-side with Bill for 20 years. I have enormous respect for him as an individual and an investor. He has always been a great partner, a great person and a great friend. I continue to hold him in the highest regards.” We do not doubt that these words are sincere, quite the opposite in fact. However, these words sound awkward once the launch of Tiger Pacific was announced. Why?

The new team at Tiger Pacific is, well, not new. It is essentially the old team of Tiger Asia bar Bill Hwang. We ask the following questions:

  • What can investors do, do prevent old teams posting as new? And, should they? Is it not time to move on or is legitimate to run a quasi successor fund with essentially the same variables?
  • How do investors rate ethics, sustainability, corporate governance with regards to a Funds life cycle? Should a Fund be declared defunct for good? Is the re-launch under a new name simply false advertising?
  • What reputational concerns are there? Why couldn’t Tiger Asia simply retire Mr Hwang and nominate a new management team as we would expect from any corporate? Hewlett Packard et al wont close down shop after some news a la Autonomy and later re-emerge as Hewlett-Whatever.

Although we do not possess all the answers to the above questions, we do suggest that the hedge fund industry still struggles in defining its own business model. It still appears that hedge funds life-and-die by the fact that the portfolio manager is the product. If that is true, there is no accrued goodwill in the brand per se. Is it not time to create hedge fund firms that can survive irrespective of its founders malaise? Or is this simply not possible given the Fund terms and offering memorandum structures that contain key man clauses and other restricting provisions.

At CITE, we suggest that a (hedge) fund Product is defined by more than just its portfolio manager and its performance history. From an asset allocators perspective, we suggest to focus entirely on total value creation. Value creation is not simply a function of total return but very often takes shape in form of other elements too, including

  • access to local market knowledge, insight and expertise
  • access to a diverse viewpoint from other smart investors
  • sharing and debating global newsflow, investor trends and sentiments
  • networking benefits: access to local firms, analysts, experts
  • investor communication: up-to-date news flow with added manager editorial and comment; reality is, some news may be missed and/or the media may clout the intricacies of the news/event

Our view concerns the ubiquity of available funds yet very few actually deliver value beyond capital return, if that. In our mind, sharing of information and thus acting in a transparent manner, creates equal value to the asset allocators. From the fund managers perspective, creating some form of investor intimacy may lead to a reduced risk of redemptions when times are tough with regards to performance.

The cost of switching one fund for another simply because short term performance results are out of sync with peer group funds, are already high. Once the investor adds the costs of losing access to the aforementioned variables of network, information flow, exchange of ideas etc, a redemption notice may potentially be delayed by a months, quarter or even a year. This should be enough time to prove that performance follows insight and also demonstrate to the investor that trading (hedge) funds is for amateurs.