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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Silicon Flatirons Roundtables

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I sponsor a roundtable series titled The Silicon Flatirons Roundtable on Entrepreneurship, Innovation, and Public Policy.  It is hosted four times a year by The Silicon Flatirons Program at CU Boulder and is modeled after the Union Square Ventures Sessions.   We pick a topic and then get 30 or so smart and diverse thinkers in a room to kick the topic around for two hours.  Phil Weiser (Professor of Law and Executive Director of Silicon Flatirons) moderates and someone always takes extensive notes and writes up a summary paper.

The paper from the first roundtable – The Unintended Consequences of Sarbanes-Oxley (2/26/07) - are up.  We did this early in the year when the private equity boom was cranking and there are some juicy gems buried in the summary, including this one that seems prescient (or obvious) in hindsight.

"The roundtable’s discussion on private equity focused on private equity’s ever-increasing growth and whether such growth is, in fact, sustainable. Feld noted the similarity between this increase in growth and that of the VC industry before the bubble burst.  Webroot’s Pace also addressed this point and noted that private equity deals are continuing to grow in both number and value. On this point, Feld noted there is a certain irony in these deals because the companies are traded from one firm to another, but the limited partners often remain the same. The discussion of private equity concluded with the point that, to some extent, the private equity market’s success is contingent on the credit markets. Thus, the concern, as Feld explained, is that if the credit markets tighten, private equity firms’ returns will decrease while cost of capital to these companies will increase, and overleveraged firms may see a sharp reduction in their equity value."

Our second roundtable was held in on 4/20/07 and the paper Rethinking Software Patents is also up on the web.  I thought this was a much more contentious session as there were several clearly different opinions represented in the room.  Pamela Samuelson – a professor at UC Berkeley School of Information and Boalt Hall School of Law – made the trip to Boulder and did an excellent job of kicking things off and getting the hornets buzzing around the "should there be software patents" nest.

The third roundtable – The Entrepreneurial University – was held a few months ago.  I’ll get a link up to the paper when it’s out. 

  • ispivey

    I think the simplest way to assess loose credit's impact on PE over the last few years is that it allowed sellers to sell high and forced buyers to buy high. The two risks to firms that bought in recent years are (1) refinancing risk (either having to inject equity because banks are not willing to lend as much as the original facility or simply seeing reduced returns because of bullish refi assumptions in the investment case) and (2) “terminal value” risk, or having made overly bullish exit assumptions (assuming asset values would remain inflated) in the investment case. The latter point is really the same as Brad's “eliminating equity value” point. Anyone who made appropriately conservative exit and refinancing assumptions, or were comfortable with their returns if multiples and debt terms reverted to historical averages, shouldn't have much to worry about. The other mitigant to refi risk is that loose credit markets led to longer-term debt and cheaper hedging, so many deals have five or seven years at fixed rates before they are faced with refinancing.

    Everyone knew credit markets were historically generous, so realizations over the next three to seven years will tell us who did their diligence and who was asleep at the switch. Most investors I know spent the last two years being scared silly about a reversion to historical debt pricing and valuations, and so made investments that could live through such a reversion. I'm sure plenty of firms didn't.

  • http://www.biz-doctor.com IPA-IBA

    Sounds like a fascinating roundtable! In particular, looking at the investment sector is especially interesting with some predicting a second internet bubble appearing.

  • IPA-IBA

    Sounds like a fascinating roundtable! In particular, looking at the investment sector is especially interesting with some predicting a second internet bubble appearing.

  • http://intensedebate.com/people/ispivey2706 ispivey2706

    I think the simplest way to assess loose credit's impact on PE over the last few years is that it allowed sellers to sell high and forced buyers to buy high. The two risks to firms that bought in recent years are (1) refinancing risk (either having to inject equity because banks are not willing to lend as much as the original facility or simply seeing reduced returns because of bullish refi assumptions in the investment case) and (2) "terminal value" risk, or having made overly bullish exit assumptions (assuming asset values would remain inflated) in the investment case. The latter point is really the same as Brad's "eliminating equity value" point. Anyone who made appropriately conservative exit and refinancing assumptions, or were comfortable with their returns if multiples and debt terms reverted to historical averages, shouldn't have much to worry about. The other mitigant to refi risk is that loose credit markets led to longer-term debt and cheaper hedging, so many deals have five or seven years at fixed rates before they are faced with refinancing.

    Everyone knew credit markets were historically generous, so realizations over the next three to seven years will tell us who did their diligence and who was asleep at the switch. Most investors I know spent the last two years being scared silly about a reversion to historical debt pricing and valuations, and so made investments that could live through such a reversion. I'm sure plenty of firms didn't.

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