Venture capital firms in VC hubs such as Northern California tend to deliver superior performance, but that does not appear to derive from locally-based investments, according to a new working paper published by Harvard Business School.
More than half of the 1,000 venture capital offices listed in Pratt’s Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas – San Francisco, Boston, and New York, the paper notes. More than 49% of the U.S.-based companies financed by venture capital firms are located in these same three cities.
“Surprisingly, much of the VC outperformance in these venture capital centers arises from their non-local investments. This finding is counterintuitive, since venture capitalists might be expected to be the most involved and add the most value to the geographically closest companies. We observe this outperformance of non-local companies in both early- and latestage investments. ”
“One potential explanation for this higher return to non-local deals is that venture capitalists have a higher hurdle rate (i.e., require a higher expected rate of return) for investments that have a higher monitoring cost. This higher hurdle rate may reflect the imputed (personal) cost of traveling to remote locations.”
Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion
Henry Chen, Paul Gompers, Anna Kovner, Josh Lerner
Technorati Tags: venture-capital
Financial news has truly hit the mainstream now that iTunes is promoting podcasts from a variety of providers, including Planet Money, Marketplace, The World, The Big Money, TheStreet.com, The Economist, Business Week, The Wall Street Journal, BBC, Marketplace and Wharton. Plenty of good free stuff here (iTunes required.)
Technorati Tags: BBC, business-week, Economic Research, Marketplace, Planet Money, podcasts, The Big Money, The Economist, The Wall Street Journal, TheStreet.com, Wharton
Paul Kedrosky, wearing his Kauffman Foundation hat, argues that the venture capital industry needs to shrink to about half its current size.
In a short new paper, he notes that “venture capital returns have deteriorated immensely, predating the current economic downturn and traceable to the rapid expansion in venture capital assets under management in the United States in the late 1990s, a figure that has fallen less speedily than one would expect, in part because of the long duration of funds and the general illiquidity of venture capital investments.”
“It seems inevitable that venture capital must shrink considerably,” Kedrosky concludes.”While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset”
While any estimate is subject to much uncertainty, it seems reasonable—based on returns, GDP, and exits—to expect the pace of investing to shrink by half in the coming years.
“We should also expect a continuing sharp decline in the amount of money invested ininformation technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.”
Technorati Tags: venture-capital
Oxford Analytica expects the pace at which jobs are outsourced from the United States to increase in the near future, as the economic downturn drives companies to cut costs and as new technologies permit an expanding array of goods and services to be produced internationally with minimal loss of quality.
Yet outsourcing remains politically contentious, especially at the local and state level, OxAn says in State-level protectionism is danger. “Politicians cater to concerns about job loss through legislation to slow or reverse the offshoring of jobs (especially in high-profile industries such as call centres). The ‘buy American’ provision in Obama’s stimulus package must be situated in relation to this growing grassroots movement.”
However:
“Increasing litigation will occur over the constitutionality of anti-offshoring measures; courts will strike down those measures deemed to be inconsistent with free-trade principles.”
As such, although protectionism may appear to be on the rise, implementing effective protectionist measures is constrained.
Technorati Tags: offshoring, protectionism, trade
A new working paper* published by Harvard Business School argues that the negative effects of file sharing on the financial health of the entertainment industry and on artistic productivity have been overstated.
The advent of file sharing has considerably weakened effective copyright protection. Today, more than 60% of Internet traffic consists of consumers sharing music, movies, books, and games. Yet, despite the popularity of the new technology, file sharing has not undermined the incentives of authors to produce new works, the paper finds:
We argue that the effect of file sharing has been muted for three reasons:
- First, the cannibalization of sales that is due to file sharing is more modest than many observers assume.
Empirical work suggests that in music, no more than 20% of the recent decline in sales is due to sharing.
- Second, file sharing increases the demand for complements to protected works, raising, for instance, the demand for concerts and concert prices. The sale of more expensive complements has added to artists’ incomes.
- Third, in many creative industries, monetary incentives play a reduced role in motivating authors to remain creative. Data on the supply of new works are consistent with the argument that file sharing did not discourage authors and publishers. Since the advent of file sharing, the production of music, books, and movies has increased sharply.
*File-Sharing and Copyright
Authors: Felix Oberholzer-Gee and Koleman Strumpf
Technorati Tags: copyright, digital-business, digital-music, file sharing, movies, Music-and-Entertainment, music-industry, publishing
New modeling carried out by MIT on the likelihood of how much hotter the Earth’s climate will get in this century shows that without rapid and massive action, the problem will be about twice as severe as previously estimated six years ago - and could be even worse than that.
The new projections, published this month in the American Meteorological Society’s Journal of Climate, indicate a median probability of surface warming of 5.2 degrees Celsius by 2100, with a 90% probability range of 3.5 to 7.4 degrees. This compares with a median projected increase in the 2003 study of just 2.4 degrees.
MIT says the difference is caused by several factors rather than any single big change. Among these are improved economic modeling and newer economic data showing less chance of low emissions than had been projected in the earlier scenarios. Other changes include accounting for the past masking of underlying warming by the cooling induced by 20th century volcanoes, and for emissions of soot, which can add to the warming effect. In addition, measurements of deep ocean temperature rises, which enable estimates of how fast heat and carbon dioxide are removed from the atmosphere and transferred to the ocean depths, imply lower transfer rates than previously estimated.
The least-cost option to lower the risk is to start now and steadily transform the global energy system over the coming decades to low or zero greenhouse gas-emitting technologies.
The study uses the MIT Integrated Global Systems Model, a detailed computer simulation of global economic activity and climate processes that has been developed and refined by the Joint Program on the Science and Policy of Global Change since the early 1990s.
While the projected outcomes where there are no policies in place that specifically induce reductions in greenhouse gas emissions now look much worse than before, there is less change from previous work in the projected outcomes if strong policies are put in place now to drastically curb greenhouse gas emissions.
Technorati Tags: climate-change, global-warming, greenhouse-gases
Moody’s says the outlook for US apparel companies remains negative, with the luxury sector the hardest hit. In contrast, several apparel companies have maintained their franchise strength by consistently expanding their portfolios of brand-name clothing, Moody’s says.
Companies that have a stronger presence in the market for basic apparel, such as socks and intimates, which tend to be more-stable categories, will likely see greater operating and ratings stability.
Wal-Mart (NYSE: WMT) has been increasing its focus on brand-name apparel and promoting brands such as l.e.i. (owned by Jones Apparel NYSE: JNS) and Ocean Pacific (owned by Iconix Brand Group NASDAQ: ICON).
Key points from Moody’s Industry Outlook for the next 12-18 months:
- Retailers are scaling back inventory plans and marking down prices in response to weaker consumer demand amid the recession. This will pressure apparel-maker revenue and profit margins this year.
- Retailers’ more-conservative inventory plans mean that the apparel industry’s gross margins could improve in late 2009 over the prior-year period; however, lower sales and lost operating leverage mean operating margin expansion will be modest at best.
- Luxury retailers are showing the largest sales declines, debunking the theory that higher-end consumers would continue to spend in a troubled economy.
- Consumers are trading down to moderately priced goods and private-label designers, although these brands are still susceptible to inventory reductions by retailers.
- The global recession is hurting sales outside the U.S., and a strengthening U.S. dollar will reduce the value of international earnings.
Technorati Tags: (ICON), (JNS), (WMT), apparel, Iconix, Jones Apparel, luxury retailers, retailers, Wal-Mart
A new Working Paper from Harvard Business School has relevance for all of us, but should be required reading in the financial services industry. It sheds more light on when and why we engage in dishonest acts without feeling guilty, and concludes that codes of conduct do make a difference in curbing dishonest behavior, especially if they are signed and reinforced.
While the studies involved students, the experiments were relevant to the financial workplace in that they gave some students the opportunity to cheat by taking more money than they should and then to cover up their cheating by shredding documents.
A few excerpts:
Across four studies, we demonstrated that the decision to behave dishonestly changes levels of moral disengagement and that awareness of ethical standards affects the decision to engage in unethical behavior.
- …we find that once people behave dishonestly, they are able to morally disengage, setting off a downward spiral of future bad behavior and ever more lenient moral codes.
- …we also provide evidence that this slippery slope can be forestalled with simple measures, such as honor codes, that increase people’s awareness of ethical standards.
As a result, making morality salient not only reduces unethical behavior, but also makes individuals’ judgments more scrupulous.
- When bad behavior precedes moral questioning, people bend their moral beliefs to match the preceding action.
- When moral saliency precedes the temptation to act dishonestly, people adjust their actions to align with the established moral code.
*Dishonest Deed, Clear Conscience: Self-Preservation through Moral Disengagement and Motivated Forgetting
Lisa L. Shu, Francesca Gino, Max H. Bazerman
Technorati Tags: corporate-governance, financial-fraud
Despite increasing scepticism surrounding sophisticated financial products, their use is unlikely to wane massively, according to Oxford Analytica. But not because they are needed:
“There is little financial need for most of these innovations, since financial risks are most conveniently and cheaply hedged by holding liquid assets or government bonds (ie, liquidity preference). ”
The reason why financial derivatives have proliferated is because financial intermediaries are using them to profit from financial instability (rather than just to eliminate the risks attendant upon that instability), or are obtaining fee income from selling such instruments to their customers.
Noting that financial innovation dates back to the Roman Empire, OxAn suggests politics will keep them around. “Political leaders, while claiming the need for stronger financial regulations, are likely to resume a minimalist approach to financial regulation as market conditions improve and governments divest themselves of financial assets acquired during the recession.”
For the full analysis, see “Financial innovation to continue.”
Technorati Tags: derivatives, financial innovation, financial-regulation
A new Working Paper* published by Harvard Business School tries to answer the question of whether friends influence purchasing activity in social networks such as Facebook and comes up with a mixed answer.
Moderately connected users show a 5% increase in revenue due to social influence. However, high status, heavily connected users’ revenue declines by almost 14% due to these social effects.
This is consistent with the typical fashion cycle wherein opinion leaders or the elite in the fashion industry tend to abandon one type of fashion and adopt the next in order to differentiate themselves from the masses.
The paper’s results show three distinct user groups: a) Low status members (48% in the sample), who are not well connected to other members, experience little or no social effect and hence do not change their purchase patterns due to friends’ purchase behavior, b) Middle status members (40% in the sample), who are moderately connected, and show a strong positive effect when their
friends buy items and c) High status members (12% in our sample), who are the most well connected, but show a negative social effect.
“To understand how members strive for differentiation, we linked the purchase related activity of members with their non-purchase related activity. The group with negligible contagion effect contained members who are not well connected to other members as well as show little non-purchase related activity. The group with positive contagion effect constitutes members who exhibit a moderate level of non-purchase activity. They try to maintain their status by primarily making purchases as they fear that not doing so might undo their status. This is the typical ‘keeping up with the Joneses’ effect.”
“Finally, the group with negative effect contains well connected, high status members. These members show a very high level of non-purchase activity and their probability of purchase is lowered if other members around them are purchasing. This is consistent with the typical fashion cycle wherein opinion leaders or the elite in the fashion industry tend to abandon one type of fashion and adopt the next in order to differentiate themselves from the masses. As other members around them imitate their purchases to gain status, these high status members further differentiate themselves by pursuing non-purchase related activity.”
We also quantify the social influence in terms of changes in purchase probability and revenues. Our results show that middle-status users show, on average, a 5% increase in revenue due to social influence. In contrast, the high status group’s revenue declines by almost 14% due to these social effects.
“Our findings are relevant for social networking sites and large advertisers. The members in high status group have an influence on those in the middle status group for the diffusion of a new product. However, a successful diffusion in the middle status segment may make high status members lose interest in the new product.”
Do Friends Influence Purchases in a Social Network?
Raghuram Iyengar, Sangman Han, Sunil Gupta
Technorati Tags: advertizing, Facebook, purchasing, social-networks
