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Time To Take Semaphore's Annual Confidence Survey

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Do you expect to make more personal compensation next year than this year?  Feeling more confident or less confident in the President’s Economic team as we left government shutdown and the most recent Fiscal Cliff behind? Thoughts on your boss and competitors?  Annually we ask our readers to weigh in and share their level of confidence in themselves, the economy and their businesses.  Last year we heard mixed levels of confidence – did it prove to be so? Especially as the stock market soared and reported PE values were up – albeit not as high as the Dow.

Semaphore is conducting its sixth annual survey of Private Equity and Venture Capital partners, principals and professionals supporting the industry. The purpose of this survey is to gather anonymous input from our industry friends and clients with the results fully reported to all. It will stay live until mid-January.

By participating you'll get to gauge your expectations with your peers, competitors and industry colleagues. The survey will take 2-3 minutes and respondent identity will not be reported to us.  Results will be published in Term Sheet and on our websitewww.sema4usa.com.  Dive in.

Click here  to take the survey.

Click here  to see last year's results.

Semaphore (www.sema4usa.com), is a leading global professional services provider of Private Equity and Venture Capital funds under management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: Venture Capital, troubled funds, Semaphore, technology

Zombie Funds

 Apocalyptic Future or Salvation?

A few days ago Luisa Beltran of PE Hub asked whether and what we should call the now popular appellation “Zombie Funds”.  I responded to her with the following:

“Here at Semaphore we call them “clients”.  No need for a pejorative characterization. It’s rather matter of fact.   Often it’s because GPs and LPs become mutually misaligned (for instance, when a carry hurdle may never be met it just makes sense for everyone to move on – the GPs to other career interests and the LPs knowingly recognizing that a better more attuned option exists to manage out the fund).

Yes, in some high profile cases it’s because of fraud or malfeasance of a GP that we find ourselves stepping into General Partnerships at the request of the LP.  Certainly those are the notorious examples.  Funny in that the GPs we replace become our best references.  Notwithstanding, generally it’s just good business judgment to let an entity such as Semaphore step in to “refresh” the relationships and more easily get the fund portfolio to perform until appropriate liquidation of the fund. The former GP moves on to other more potentially lucrative experiences, the LPs gets a more profitable eventual liquidation and everyone’s reputation is salvaged.  So let’s commonly drive a stake into the heart of the Zombie mischaracterization and understand that end of fund life sometimes requires good and compassionate hospice care.“ 

Here is the link to some other responses - PEHub.  Take a look.  If you want to discuss this or have a challenging fund situation please write me at mdisalvo@sema4usa.com.

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Semaphore (www.sema4usa.com), is a leading global professional services provider of Private Equity and Venture Capital funds under management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: troubled funds, equity, private equity funds, Semaphore, funds under management, general partners, limited partners, turnaround, LP

Beach Blanket Bingo?

Semaphore Has a New Markets Tax Credits Summer Project

Spring has finally made an appearance to New England after a long winter.  Hot summer days spent languishing at the beach; margaritas by the pool or skimming on the lake in a new boat are moving their way to the front of everyone’s minds.  No one thinks of stifling days surrounded by paperwork with the sun shining through the office window…you know, the one with the broken air conditioner. While summer is a time for relaxing and rejuvenating, the Semaphore staff is going to be reviewing projects, diligently negotiating contracts, finalizing deals and closing multi-party agreements in order to fulfill our latest allocation of New Markets Tax Credits funding.  

Semaphore has been operating Pacesetter CDE since 2010 and last year entered into an agreement with its majority shareholders, Wells Fargo and Bank of America, to acquire 100% of the stock of the firm.  We are pleased to announce that a $30 Million New Markets Tax Credit Allocation has been awarded to us in the latest round from the U.S. Treasury Department's Community Development Financial Institution (CDFI) Fund.  Semaphore is one of just 85 Community Development Entities (CDEs) throughout the nation that has received an award this year.

The New Markets Tax Credit allocations have assisted hundreds of low-income communities with the help of private investment capital.  We are excited that our good fortune allows us to actively continue to participate in revitalizing communities and creating jobs to improve distressed areas around the nation. So…while you are enjoying your sun filled activities, keep us in mind if your beach towel discussions turn to equity investments in low income communities; we would love to hear about any projects in which you think we can assist. 

Have a safe and profitable summer!

Louise Martineau is the Director of Operations at Semaphore. Semaphore (www.sema4usa.com ) is a leading global professional services provider of Private Equity and Venture Capital funds-under-management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit provider and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: private equity funds, Semaphore, investment, new markets tax credits, Announcements

Results of Annual Semaphore PE Industry Confidence Survey

 Self-Confident PE v Congressional Follies

By Mark S. DiSalvo

 

The Semaphore Confidence Survey respondents are truly prescient.  If America had only listened to our results last year it would have saved the American people over a Billion dollars in advertisements and political machinations in the just concluded presidential campaign.  Exactly twelve months ago some 47% of our respondents had confidence in Mitt Romney (funny, that number).  Game over.  Then again, only 39% were confident in President Obama.   Let’s see what Nate Silver can do with this year’s results!

While Romney is off the political grid and despite the big re-election, only 33% of respondents expressed confidence in the President with 37% stating a lack of confidence in him. That is decidedly better than his principal newest political foe, Speaker John Boehner, who “enjoys” a 3% favorable v 64% unfavorable rating. Those abysmal ratings are only superseded by Congress as a whole with nearly 80% expressing no or little confidence in our elected officials laboring under the Capitol Dome with not a single expression of confidence by any respondent.

In contrast some 78% of our respondents are confident in themselves and 43% remain confident in the PE/VC Industry with only 18% expressing some lack of confidence in how they earn a living. Personal confidence slipped a bit from last year’s results of 81%. Confidence in the US economy has slipped from last year, 37% to 46% and degraded even more with the International economy as the preponderance of those with little or no confidence grew from 47% last year to 57% today.  This seems a bit counterintuitive in that the number and size of expected deals appear significantly up by those self-reporting their expected investment objectives.  Further proofed by the fact that 65% earned more income last year than in 2011 and fully 57% expect to earn yet again more income than in 2012 - they’re going to need it to pay higher taxes.

Continuing the reversal of a trend prior to last year, my industry colleagues continue to see the prospect of more income, more deal flow and high confidence in themselves, their peers, and industry. This clear read comparing the raw highlight data from the 5th annual Semaphore Confidence Survey with last year’s results affords some fascinating insight across business and politics.

And in what is the group investing?  Enterprise Software replaced Social/Community Technology for the top spot with the latter moving down to third and Financial Services moving from eighth to 2nd this year.  Health Care Services moved from third to 4th with Digital Media rounding out the top five.  For the second year in a row, Sustainable Energy/Cleantech (for the first three years of our survey in the top five) failed to make the top ten.  On-line Consumer Retail and Gaming went from 4th and 5th to 9th and 10th.

The distribution of respondents in the US stayed remarkably the same from past years - the top six were CA, MA, NJ, NY, CT, TX, with only NY and NJ swapping places. Our US respondents had reasonable confidence in their state governments with 28% expressing confidence - that must look like heaven to the US Congress even though it is down from 37% last year.   

International responses were quite different.  We had our widest ever distribution of respondents with only the UK remaining on top with 27% of all international survey-takers with  Canada, China and France rounding-out the top four.  Russia, Japan, Switzerland and Germany were knocked out of last year’s top five. International respondents had crushingly poor opinions of their governments with the same 74% having no or little confidence in their countries leaders, up 3% from the 2011 survey and more than double the 31% of three years ago. 

The over 470 who did reply this year, up slightly from last year, were weighted a bit differently than  prior years’ mix of VC (39%  this year v 28% last year), Buy-out pros (24% v 33%), Limited Partners (13% v 11%) operating executives (6% v 19%) and third party professional 18% v 12%).

Comments this year were generally policy oriented and in a serious vein.  Some can be viewed on the raw data highlight link below.  There was one comment I’ll share in full from either a jokester or savant – or both:

“I met a fairy who said she would grant me one wish.  Immediately I said, "I want to live forever." "Sorry," said the fairy, "I'm not allowed to grant eternal life." "OK," I said, "Then, I want to die after Congress gets its head out of its ass!" The fairy replied, "You crafty bastard."  12/26/2012 2:14 PM

Maybe this individual should run for Congress.

See you next year.

To see the highlights of the results of the 2013 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2012 Semaphore Confidence Survey results are here.

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Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity and Venture Capital funds under management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York, London and Dallas.

Topics: entrepreneurs, equity, private equity funds, Semaphore, funds under management, general partners, limited partners, VC, investment, Business Operations

Cash Trumps Politics

Cash Trumps Politics

Results of Annual Semaphore PE Industry Confidence Survey

 

By Mark S. DiSalvo

It’s all about the cash.  Reversing a trend, my industry colleagues seem to have the wind at their backs when it comes to their personal income and business expectations - this despite a decided lack of confidence in government, most especially Congress. This clear read comparing the raw data from the 4th annual Semaphore Confidence Survey with last year’s results affords some fascinating insight across business and politics.

Let’s start with pay.  At the start of last year 74% of the over 400 respondents to the 2010 Confidence Survey believed they would earn more money than the prior year. Fully 61% did. And this is over 5 times as many who earned more income in the then prior year. 18% earned the same as the prior year and only 21% earned less, halving the number whose compensation was less the prior year.   Not only are the respondents richer but they also expect to get more so.  57% believe they will earn yet more money than last year, 31% the same amount and only 12% less. We don’t know the sources of this increased comp but for the 61% of our respondents who were PE or VC professionals it’s a fair bet that, like Mitt Romney, they had a much smaller tax rate than our other respondents who presumably paid ordinary income tax rather than the 15% carried interest tax rate.  Perhaps we should ask that specific question next year.

Speaking of Mitt: 47% express they are somewhat confident or confident in Romney against the 11% who express somewhat confidence in Gingrich while, significantly, 0% are confident in Newt. Romney even beats the President by 8% in a head to head match on confidence.

On the negative side, in this particularly contentious Presidential election year,

72% are not confident or not very confident in Gingrich while the numbers are 27% for Romney. Romney again laps the President with 49% expressing a lack of confidence.

Clearly Romney is the favorite in this crowd as one might expect him to best Obama here.  Nonetheless, the small gap in confidence between them suggests that Obama may be in better shape than one could generally predict although he is significantly weighted down by the large non-confidence opinion expressed.  Surely, Gingrich would be the preferred opponent for the current resident of 1600 Pennsylvania Avenue. Surprising still is that Obama does not receive more credit for the growth in actual income and trend of continued growth expressed by respondents.  

There is no wondering or skillful analysis needed when you talk about Congress. Last years lowest ever number of 7% confidence was more than halved to 3%!  Even state legislatures grew in confidence from 27% to 32% (you should know that the top states replying were CA, MA, NY, NJ, CT, TX, WA, NC and then IL).   This does not bode well for any member of Congress running for reelection.  Their jobs may be more at risk than a GP who has made negative returns for, say, two straight funds (in and of itself an all too common experience).

International respondents had crushingly poor opinions of their governments with fully 74% having no or little confidence in their countries leaders, up 4% from last year and still more than double the 31% of two years ago.  The preponderance of our international respondents were from the UK with most replies coming, in order, from France, Switzerland, Japan, German and China. 

Our peers expect to be busy this year. In the beginning of 2011, fully 100% thought they would make up to six investments – and they did. 81% completed up to three deals and almost the same numbers intend to complete up to three deals. Further, those deals were as large as expected with 63% self reporting that their deals were in excess of $25 Million in each discrete investment. 

And in what is the group investing?  The industry stayed rather consistent. Social/Community Technology took the top spot for the first time, moving up from second, swapping places with Enterprise Technology and Health Care remaining third. Sustainable Energy/Cleantech dropped out of the top five (it dropped out of the top ten!) with On-line consumer retail claiming 4th and Gaming staying in 5th.

The over 400 who did reply this year, down slightly from last year, were similar to last year’s mix of VC, Buy-out pros, operating executives and third party professionals. One thing for sure is that this year’s mix of survey takers continued to be very high on themselves believing that 71% (78% last year) were confident in their business and 81% (84% last year) confident in themselves.  Confidence in their bosses dropped to 63%, from 75% expressing that view last year, but still – that is 13 points higher than two years ago and nearly triple the year before.

As always, there was insight and entertainment offered by our contributors.  Channeling Lady Macbeth, one offered “Out out damned Newt” balanced by “Obama's wealth redistribution agenda is destroying the economy of this country”.  An optimist suggested, “Even 9% unemployment still means 91% employment”. Another bemoaned that “I should have gone to law school” - hope that was not one of our attorney respondents.  

We had an infamous commentator from our inaugural survey who said “PE is dead and I wish my boss were too.”   I can’t tell you how many people still ask me about that guy. All have waited for him to resurface.  I can’t say definitively it was the same person but someone this year noted, “PE is not dead. Still wish my boss was.”  That, at least, was a confession that he was wrong a few years ago about the industry, and a comfort that he did not murder his boss.  Whew.

See you next year.

To see the highlights of the results of the 2012 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2011 Semaphore Confidence Survey results are here.

 

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Venture Capital, Venture Capital, Semaphore, general partners, limited partners, VC, investment, venture funds

Semaphore Forms Joint Venture with Topline Strategy

Semaphore Forms Joint Venture with Topline Strategy

to Provide Technology Due Diligence

 

As you may have read in our last S4 Reporter, Cris Miller, the founding director of our Technology Due Diligence Practice retired last Friday September 30th. With Cris’ departure, we decided to form a Joint Venture with Topline Strategy, a Boston-based provider of strategy consulting services to technology companies, in which Topline will take over day-to-day management of the practice.  It will operate under the name The Semaphore Technology Diligence Practice.

Over the last 5 years, we have formed a close partnership with Topline Strategy, working on dozens of engagements together. Together we’ve been able to provide our clients more complete answers to questions about their technologies and the markets for those technologies. 

With the retirement of Cris Miller, who was the driving force behind our Technology Due Diligence practice, we thought the best way to continue our commitment to clients as well as grow the practice was through a Joint Venture with Topline Strategy. Through our long partnership, the Topline team has demonstrated a true understanding of Technology Due Diligence as well as built strong relationships with our principal technologists and major clients. Having them take the business forward was a natural.  We have been working together on the creation of, and transition to this, Joint Venture for the last three months.

As part of the agreement Cris Miller will be joining Topline Strategy as an advisor and Topline Strategy will continue to work closely with our Private Equity Advisory group, providing both strategy consulting and technology due diligence services to Semaphore’s clients and portfolio companies.

As Topline Strategy will be the operating partner in our Joint Venture, going forward, please feel free to contact Jon Klein (jon@toplinestrategy.com) with any questions about Technology Diligence or visit its website www.toplinestrategy.com. Of course, you can also reach me (mdisalvo@sema4usa.com) if you have any questions.  I know you join us in wishing Cris well in his retirement as Topline and Semaphore  continue to fulfill our common promise and commitment to aiding investors and the M&A community with the right knowledge and correct solutions to ensure success.

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management. Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Technology Assessment, due diligence, private equity funds, Semaphore, technology diligence, business advisory, technology, diligence

Semaphore's Annual PE Industry Confidence Survey results

Posted by Mark DiSalvo on Tuesday, January 25, 2011 @ 12:30PM

Is 2011 a Wasteland or Playground?

By Mark S. DiSalvo

It seems my industry colleagues have continued to be wrongly optimistic about their personal income against a backdrop of continued and decided lack of confidence in the economy and their national governments.  That appears to be the clear read comparing the raw data from the 3rd annual Semaphore Confidence Survey with last year’s results. 

Let’s start with pay.  At the start of last year 78% of the over 500 respondents to the 2010 Confidence Survey believed they would earn more money than the prior year.  The truth was that only 36% of this year’s respondents reported they did in fact earn more than the prior year.  Importantly though is that only 11% of respondents earned more money two years ago against that prior year baseline, clearly signaling at least a change in how some shops are valuing their talent. This must be counterweighted by the realization that 45% earned less than last year – carry not being what it used to be.  Nonetheless, not unlike last year, my colleagues firmly believe that the next year will provide the big score as nearly 75% of this year’s respondents believe they will earn more money than last year.  If they are right, then next year the national deficit will be on the decline despite no increase in upper tier taxes or capital gains and the real estate market will be certain to see significant rebound.

Our peers demonstrated their personal income optimism with their LPs pocketbooks too. In the beginning of 2010, fully 98% thought they would make up to six investments.  The year did not go as strong as hoped with only 11% doing six deals or more, but 76% closed 1-3 deals. Further, those deals were as large as expected with 73% self reporting their deals were in excess of $25 Million in each discrete investment when they anticipated 76% of their deals would be above $25 Million in size at the time of last year’s survey. 

And in what are we investing?  Unlike the year before when our respondents chose three new investment areas in the top three, the industry stayed rather consistent. Enterprise Technology and Health Care were 1 and 3 and Social/Community Technology took the second spot in that list, breaking the top 5 for the first time.  Sustainable Energy/Cleantech and Gaming (not even top ten last year) were 4th and 5th.  Last year the survey indicated investors were apparently smelling money and opportunity in Obama-care. As one person noted, “…when you mess with 16% of the economy something’s got to break our way.” We’ve yet to see if that comment is correct or merely hopeful but investors intend to remain active, according to our survey, in that space.

The just over 500 who did reply this year were similar to last year’s mix of VC and Buy-out pros, with a slightly higher representation of operating executives responding.  One thing for sure is that this year’s mix of survey takers were very high on themselves believing that 78% (63% last year) were confident in their business and  84% (77% last year) confident in the person who sits down in front of their computer each morning. They even had increasing confidence in their bosses with 75% expressing that view - a full 25 points higher than last year and triple the year before.

This personal and professional confidence does not extend itself to America’s political leaders.  While respondents were hard on President Obama and his economic team with only 36% expressing confidence in the President; it was more that triple the 11% expressed last year.  His economic team did not fare as well with 49% (55% a year ago) dissing Larry Summers et al.  

A 7X return is spectacular in a year but when it comes to Congress it is de minimis as its favorability improved over last year’s 0% reply of confidence in Congress to 7% with 77% (65%) stating no confidence in the folks under the Capitol Dome.  Apparently it does not matter which party is in control of the Congress. State governments and state legislatures earned a doubling of confidence to 27% (you should know that the top states replying were MA, CA, NY, NJ, NC and IL).  While confidence has skyrocketed for the President and crept upward, however marginally, for other pols in America, international respondents had crushingly poor opinions of their governments with fully 71% having no or little confidence in their countries leaders, more than double the 31% of a year ago.  The preponderance of our international respondents were from the UK with most  replies coming, in order, from Germany, Switzerland, Japan, France and China. 

To see the highlights of the results of the 2011 Semaphore Confidence Survey please click here.  If you want to do your own comparison, the 2010 Semaphore Confidence Survey results are here.

As usual there was a bit of entertainment offered by our none-too-shy contributors. One offered that “This was a terribly written survey,”…alas.  There was the usual partisanship with strong comments about “not believing the positions the Republicans are taking” counterbalanced by charging that Obama “is a socialist with desire to make US a 3rd world country”.  While there is little danger of we becoming Sweden in a hurry there were many serious comments reflecting state budget shortfalls, pension liabilities, and a belief in significant New Year investment opportunity with many industry recommendations.  One notable recommendation offered was “I have never felt as strongly about the investment opportunity presented by vertical farming,” who knew? 

A cottage industry has grown about the infamous response in our inaugural survey “PE is dead and I wish my boss were too.”   Many wondered where “he” was and hoped he would surface. He didn’t.  One survey taker suggested that “he must be serving time without access to internet.”  Many have tried their hand at PE Killer’s NY Post style headline writing skills (maybe he got laid off from Wall Street in ‘08 and is now working for Murdoch?).  One offered that “VC is a wasteland. PE is a playground (unless your name is Guy Hands.)”  Ouch! We’ll check back next year to see what side of the seesaw we will actually experience in 2011.  

Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, is a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Venture Capital, Venture Capital, troubled funds, equity, Semaphore, general partners, business advisory, technology, diligence, VC, investment, venture funds

Board Knowledge and Perspective

Posted by Cris Miller on Thursday, September 23, 2010 @ 10:45PM 

I field calls from GPs and CEOs all the time.  Invariably they are doing a deal, whether investment or acquisition, and need either verification that the technology and/or markets targeted are real or a product exists and someone wishes to buy it in the future.  Less often we get calls from Board of Directors.  Those calls are less exact as to what the caller requires.  A lot of it is because the Board member making the call carefully ensures that they have not lost confidence in the CEO (even if that is not the case) and are fulfilling independent diligence on the company itself, the markets or an acquisition opportunity.  

A while ago we had a call for help from the Board of Directors of a growth stage technology company.   After discussion, it was evident there was agreement that the firm needed to conduct both technology and market due diligence for their company.  Initially the request was for a technology review to determine the viability of commercializing the core platform technology upon which two successful products had been built. 

The CEO was a technology wizard while the Board was comprised of non-technologists and retired business people.  After Semaphore’s chief technologist had reviewed the platform product’s architecture, patent and documentation, we had a review session with the CEO.  The discussion immediately dropped into techno-jargon only the brightest geeks could comprehend and appreciate.  The conclusion was that the product was adequate for internal use but was deficient in form and substance for outside consumption.

The CEO reviewed the findings with the Board who had market/business questions about the size of the market for such a product, the competition for such a product and the value of the product.  Our market research/strategy group took the baton and came back with some interesting results that were presented directly to the Board.  It was intuitively obvious to the casual observer that:

  1. The product in its current condition was a non-starter
  2. The market for the product if it were “cleaned up” would have 5 world class competitors and 10 mid-market competitors
  3. The product in its new state would be woefully deficient in features, so much so  that its value would be difficult to sell at any price
  4. The effort should be scuttled

The lesson learned here was in order to get the correct answers, the Board needed to be educated to the best of its understanding.  To accomplish that education, independent technical and market due diligence was necessary.  The readily available technical answer alone was not sufficient since the product could have been improved.  It took the market diligence, in concert with an agreed technology product plan, to make the business case not to proceed with the questioned direction. 

Crispin Miller is the head of the Diligence Practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Technology and Marketing diligence, and Private Equity funds-under-management services.  Semaphore currently holds fiduciary obligations as General Partner for seven Private Equity and Venture Capital funds, a New Markets Tax Credit lender and advises General and Limited Partners as well as corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Technology Assessment, due diligence, Semaphore, technology diligence, technology, diligence, investment, market diligence

WHAT CAN MASS DO?

Posted by Richard Gabriel on Thursday, July 29, 2010 @ 12:00PM 

By Richard Gabriel

I live in Massachusetts and let’s face it; we live in what is perceived to be a high tax state. Whether this belief is true or not we share that belief of high taxes with California, New York, New Jersey and Michigan. On the other hand Florida, Texas and North Carolina, among others share a different belief and it is reflected in each states approach to funding of Life Science companies. And each of those states would kill for the concentration of Life Science, technology and educational institution that we enjoy with California and the other so called high tax states.

Sure, taxes in Massachusetts and the overall business environment for start up companies are less than ideal. There is frankly, no comparison between the incentives being offered in Florida and Texas for start up companies to move to those states and start their businesses. Some entrepreneurs have moved to these states and have taken advantage of the help, financing and favorable state environments. Each time a technology leaves Massachusetts heading for more fertile pastures, we lose jobs, tax revenues and population, which in turn decreases our real estate values, creates more stress on our commonwealth to raise taxes even more, it’s a vicious cycle and yet we sit on one of the greatest natural intellectual resources in the world and have yet to figure out how to fully mine its fountain of bubbling opportunities.

However, in my last blog, we talked about a new funding model for biotech and the life sciences industry and we received hefty responses from VC’s that were interested in exploring a new way of funding. Some ideas that we kicked around included a new ‘fund’ that would have a longer time horizon, attract a more patient and less capricious group of investment partners that weren’t demanding a 5 year exit with double digit returns per annum, but rather a combination of long term debt, mixed with long term equity investment.

How would such a fund work? Well a possible appropriate debt to equity ratio should be 1 to 4. Every dollar in long term debt at a reasonable interest rate is backed by 4 dollars in equity. This ratio, provides the limited debt partner with the interest only coverage for the life of the debt, which in Life Sciences, should be no less than 10 years. Additionally, expecting a short term double digit return on a Life Science equity investment is, frankly, ridiculous. Not only does it place an unfair burden on the entity that is being formed and its management, it is an unfair hurdle and it’s artificial to the practical operations of starting and running this type of business.

Well then, what about the risk? How is a venture fund ever to make any money? All these choices have their pluses and minuses and are self evident. For the entrepreneur, think, Steven Jobs, Michael Dell, Bill Gates and not a veteran of multiple start up companies, all of whom have, by now, failed, been swallowed or otherwise disappeared and, if alive, are headquartered in another part of the country. Perhaps the alternative though of invest big, hold, pay dividends and interest or buy back the shares at an appreciated rate that reflects the true value of the business that was built has some merit today? Take a look at the valuation gaps between a pre-clinical candidate and the sums of money paid by Pharma for Phase 2 & 3 compounds, the gap is astronomical and it is that gap that tells us or should tell us that the current model is wrong

We should be looking more carefully at the broken institution of funding our start ups in our state and instead of letting Texas, Florida, North Carolina and California pirate our technologies and people away, find a way to fund them and keep them here. Build businesses and jobs and people will start coming back to Massachusetts or perhaps they won’t even leave after they graduate! Got any ideas? Write us. We’d love to hear from you.

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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Biotech, Venture Capital, entrepreneurs, equity, Semaphore, technology, Life Sciences, investment, venture funds

Reward Offered for Industry "Killers" - Results of Annual Semaphore PE Industry Confidence Survey

Posted by Mark DiSalvo on Thursday, Jan. 21, 2010 @ 3:15PM  

By Mark S. DiSalvo

It seems my industry colleagues have been wrongly optimistic and also hyper cynical. At least that is the bottom line of the read I get in comparing the analysis of the 2nd annual Semaphore Confidence Survey with last year's results.  And some people have very threatening ways.

Let's start with pay.  At the start of last year 51% of the nearly 500 respondents to the 2009 Confidence Survey believed they would earn more money than the prior year.  The truth was that only 11% of this year's respondents reported they did in fact earn more than the prior year and nearly 67% earned less than the prior year.  But hope springs eternal, just like every investor is certain that they will score a tens strike on the next investment, 78% of this year's respondents believe they will earn more money than last year.  Let's check back a year from now and see whether BMW dealers will be smiling.

My peers demonstrated their optimism with their pocketbooks too (well, their LP's dollars anyway). In the beginning of 2009 8% expected not to do any deals and fully 74% thought they would make up to six investments.  The year proofed strong with no respondents reporting the intent to do no deals and nearly 98% doing up to six deals with 73% closing 1-3 deals. Further, those deals were larger than expected with 62% self reporting their deals were in excess of $25 Million in each discrete investment when they anticipated less than 17% believed their deals would be above $25 Million in size at the time of last year's survey.  As one respondent commented "I smell irrational exuberance". 

And in what are we investing?  We may be either fickle or very nimble as a business class. This year's expected top three industries were not in the top three last year. Health Care, Enterprise Technology and Financial Services were win, place and show as compared to Digital Media, Sustainable Energy/Cleantech and Infrastructure at 1, 2 and 3 last year.   Health Care moved up from 4th last year.  People are apparently smelling money and opportunity in Obama-care. As one person noted, "...when you mess with 16% of the economy something's got to break our way."

The just under 400 who did reply this year were similar to last year's mix of VC and Buy-out pros, with a decidedly higher representation of operating executives responding.  This year's mix of survey takers were very high on themselves believing that 63% were confident in their business and 77% confident in the person they see in the mirror.  Both marked increases to last year's numbers.  They even had more confidence in their bosses with 50% expressing that view - nearly double last year.

This confidence however does not extend itself to America's political leaders.  Respondents were downright, well...down on President Obama and his economic team. Only 11% expressed any confidence in the president with 55% damning his economic team (compared to 37% disapproval for Obama).   The cynicism is markedly clear when literally no one - not a single person - expressed any confidence in Congress with 65% stating no confidence in the folks under the Capital dome. Even state governments and state legislatures earned 12% confidence. This is what happens when you threaten to screw with capital gains taxes, I guess. Interestingly, the survey closed on election eve of the Massachusetts vote to replace Ted Kennedy in the US Senate.  I think we know how the Bay State respondents voted!

Click the link to see the highlights of the results of the this year's Semaphore Confidence Survey results.  If you want to do your own comparison, click the link to see last year's Semaphore Confidence Survey results.

While some might think the survey results rather depressing in either fact or faultily hopeful there was more than a bit of entertainment. Several wondered after the wag who famously noted in the survey comment section last year that, "PE is dead and I wish my boss were too."   Commenter's this year frequently asked after that quote master, speculating if he or she were "on the lam", noting that "if he did murder his boss it would be justifiable homicide".  Our infamous predictor never surfaced - neither admitting to the crime or the prediction. However, a new would-be industry murderer surfaced stating with equal certainty, "‘PE Killer' was wrong. It is VC that is dead. And my boss is comatose..."  I doubt that either PE or VC conclusion reflects the true state of our industry.  That said, apparently at least two of our colleagues have either a morose sense of humor or deserve to be patted down before they go to an industry conference. Maybe we should post a reward to uncover their identity.  Wanna contribute? I'll put up the first half a buck.

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Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.

 

Topics: Venture Capital, troubled funds, private equity funds, Semaphore, general partners, limited partners, technology diligence, technology, VC, finance advice

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