ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

A Useful Funding Tool for Less Segregated and Diverse Communities

Oct
26

Communities with a mixed ethnic background and more diversity are likely to come up with new ideas. According to a study by the Yale School of Management, having people in a community with different backgrounds is beneficial for Venture Capital (VC) firms as it leads to economic development and innovation.

In various countries around the globe, communities, universities, and businesses are pursuing diversification. Apart from the immediate benefit of getting fairness, having multiple points of view and diversity of experience is very useful for the overall performance of these sectors.

 

Effect of VC on Integrated Communities

The study also revealed that VC investment is more beneficial for ethnically integrated communities as compared to segregated communities. The effect of VC on the integrated communities was 30 percent higher as compared to segregated ones, especially in terms of creating more wealth, jobs, entrepreneurship opportunities, and facilitating innovative activities. The startup businesses create more value and job opportunities that eventually lead to economic growth.

In a diverse community, you get to interact with people having diverse backgrounds, which leads to getting access to more resources and information as compared to segregated communities. In the past, studies have shown that economic vitality is enhanced as a result of social interaction within a community.

 

Implications of Social Interaction for Venture Capital

The purpose of the study in question was to identify whether a social structure is vital for economic development or not. The VC was the focus of this study, given the fact that it is a useful financial tool for high growth businesses.

It was revealed that such relationships have significant implications when it comes to VC investments. VC investors put their money in new businesses that are in the close vicinity. They tend to rely on professional relationships and friendships for leads and information that cannot be received via cold calls or internet search.

VC investments were compared to aggregate income, employment, new businesses, and a number of patents. It was found that VC performed much better in less segregated and diverse areas, resulting in more patents, more jobs, and created more value.

Social interaction has benefited various communities. One of the many factors that led to high level of innovation in the United States is the increasing number of immigrants that bring diverse culture. When they interact with one another, it creates room for transferring valuable information and ideas, which leads to better economic outcomes. Besides, when people from different ethnic backgrounds live close to one another, it brings about healthy relationships and effective interactions that is favorable for the wider economy.

 

Diversity Leads to Innovative Thinking

Diversity is also very useful to promote innovative thinking that leads to success in the venture capital market. Any sector that does not have diversity or mixed race is very limited in innovative mindset and thought process. This results in similar thinking with not many innovative ideas. In addition to that, there is gender bias in the VC sector that restricts the overall growth prospects. It is a widely known fact that female founders represent the rapidly growing entrepreneurial group in the United States and their firm’s experience growth 1.5 times faster than the average growth rate in the market.

 

Providing Solution to Promote Innovative Decision Making

Despite the lack of diversity, it is quite likely that change is taking place gradually. An increasing number of entrepreneurs with diverse background are entering into the market. They are focused on providing a solution to the problem and make a profit in the process.

It has become really important to promote diversity in the communities and in societies at large so as to promote economic development and prosperity. Not only will it be beneficial for the venture capital industry, but it is also going to help the masses in getting equal opportunities in every sector.

 

The venture capital market has also derived benefits from diverse communities in terms of innovative thinking and plethora of useful information. To continue moving in the right direction, countries around the globe should embrace diversity in order to have successful businesses and create more job opportunities that will eventually bring economic prosperity in the long run.

Interest Rates and Venture Capital

Oct
02

The Venture Capital market has experienced a massive growth in the last two decades. Startups prefer to get venture capital funding instead of raising debt. However, when it comes to economic growth, interest rates and Venture Capital (VC) go hand in hand. VC boost entrepreneurial activities and interest rates are helpful when it comes to risk-taking activities for the wellbeing of the economy.

If the interest rate is low, it serves as a fuel for VC investment, but at the same time, it discourages venture capitalists to put their money in riskier startups that are young, in other countries and in less popular industries.

Typically, VC firms invest their money after comparing the profits they achieve with profits that are available to the investors somewhere else. However, the relationship between interest rate and risk-taking can change based on which investor’s point of view is considered.

 

Effect of Interest Rate on non-traditional Capital

When we talk about short to medium term variations in the interest rate, it usually affects non-traditional capital source, including hedge funds and mutual funds. Unlike conventional Venture Capital investors, who keep their money invested for 10 years or so, unconventional investors can put their cash in different baskets and spread it across different assets classes. They can quickly decide where they should put their money in order to reduce the impact of interest rate variation.

 

Changing Effect of Interest Rate on VC Investments

Over the last three decades, federal rates have changed from as high as 16% in the early 80s to as low as 0.09%. However, VC has evolved from a small industry into a $100 billion per year asset class. Venture capitalists are investing a massive amount of money every year. Therefore, it is important to understand the changing effect of interest rate on VC investments.

Between the year 2000 and 2009, the federal fund rates and VC investments were parallel to each other. When the technology bubble was burst, the Federal Reserve adopted the strategy of decreasing interest rates so as to promote the economic growth. For venture capitalists, the environment was not as attractive as it was before and limited partners invested less in venture capital. The VC decreased with the decline in interest rates.

After the introduction of quantitative easing, this relationship between VC and interest rates ceased to exist and they became inversely proportional to each other.

 

Moreover, after the credit crunch, near-zero interest rate policy enabled financial institutions and brokerages to renew their balance sheets, settle their toxic assets, and revitalize their financial health. It also allowed the U.S. economy to recover from the after-effects of the crisis and enabled businesses to borrow capital at reasonable rates. During this phase of cheap money, technology sector, VC firms, and startups took advantage of the friendly valuation environment.

 

Federal Reserve’s Decision to Raise Interest Rates

By the end of this year, Fed plans to raise the interest rates. If the plan materializes, it will be  the first time in the past nine years that the U.S. will experience the increase in rates, which will bring the era of zero interest rate to an end.

Chairman of the Federal Reserve, Janet Yellen, indicated that the increase in interest rates will not be rapid.

It will be a gradual increase, which will not change the valuation environment of a startup and technology sector instantly. However, it will change along with a valuation environment of the stock market. The reason is simple; valuation multiples are indirectly correlated to interest rates, where in, the multiples decrease with the increase in rates.

 

It is important to observe the next move of the Fed and market reaction to changing interest rates, because it may affect the Venture Capital market.

Venture Capital Ecosystem – Now

Aug
17

The current Venture Capital ecosystem has begun to revive and experienced growth in the last two-quarters. Let’s take a look at the situation of the venture capital ecosystem to evaluate the liquidity and investment position in the market.

 

Overview

In the first and second quarter of 2017, VC sector continued to grow despite the rolling financial market in China, Euro crisis, UK’s exit from the EU, controversial election in the U.S. and obstructed technology IPO market. Although, new uncertainties have surfaced, investors have learned to adapt and adjust. Whereas, the profits made in the first quarter further increased in the second quarter.

 

Funding Activity at a Global Level

The number of deals around the world has also increased. Equity funding rounds in the second quarter of this year increased by 5.7% as compared to the first quarter, adding about 300 rounds. This change took place as a result of angel investment and seed stage investment.

If you compare it with the second quarter of 2016, the overall growth in the funding rounds was about 8.8%, which came about as a result of early stage firms.

 

Dollar Volume

According to a report by CrunchBase, the overall investment increased by 16% in dollar terms, which is an increase of about $6.6 billion in the deployed capital. There was a fair distribution of gain. Late stage startups, early stage startups, startups at the seed stage and angels received about 20% funding in the current quarter as compared to the previous one. The only thing that faced a downturn was a technology growth rounds.

However, the global VC market is not yet restored. In the second quarter of last year, the total investment amount was $51.5 billion, but this year it was $47,8 billion, i.e., 7.2% less than the previous year. On the other hand, technology and seed sector experienced growth by 10.75% and 16.5% respectively.

 

Leading Investors

In a CrunchBase report, a total of 3200 VC rounds was analyzed during the second quarter of this year. During the first quarter, it was Tencent Holdings, Sequoia Capital and Accel Partners that secured the first position, wherein, each had a total of 9 rounds. In the current quarter, however, Tencent led 11 rounds, whereas, Sequoia and Accel led 14 and 20 rounds respectively.

In this quarter, some newcomers were also in the leading position, including Samsara, Grammarly, and General Catalyst. SoftBank also formed part of this list in the second quarter of 2017 along with True Ventures. Some firms dropped down from a leading position, while other newcomers made it to the top.

 

Technology Growth

Growth capital in the technology sector is also known as a growth equity in the business. Technology growth rounds have been defined as private equity rounds in the CrunchBase report. In these rounds, some VC investors from the previous rounds also participated as a continuation.

The dollar and deal volume also increased in this quarter compared with a volume of the same period last year. The overall increase was about 32%. The increase in dollar volume was of $160 million. Although, the deals in the current quarter were two times more than the deals in the previous quarter, the total value of funds was 45% less than the last quarter. This downfall represents the decline in round sizes over time.

 

Initial Public Offerings

The second quarter of 2017 experienced a small increase in the technology initial public offerings (IPOs), both in the United States and the Europe. This toned down the speculative noise that IPO window was closed for everyone except the big firms.

No significant regulatory filings or announcements were made in the third quarter of this year. Redfin, a real estate brokerage, filed documents with the Security and Exchange Commission, showing its interest to raise $100 million. And so far, it has managed to raise over $167 million from investors like Tiger Global Management, Draper Fisher Jurvetson, and others.

 

Although, the global VC market experienced a severe decline at the end of last year, the second quarter of 2017 was relatively better. Growth was observed in the dollar and deal volume for two-quarters back to back. Rounds are also experiencing growth; some venture capitalists doubled the bet on their investing activities. If the upward trend continues, the third quarter will bring the market back to normal after full recovery.

Emotions and Smart Investments Decisions

Sep
22

How Emotions Keep You from Taking Smart Investment Decisions

Being an investor in a financial market, a person must be able to control his or her emotions, because buying low and selling high may not be possible if emotions get in the way and adversely affect the investment decision. Most people tend to underrate the effects of emotions, whereas, market downturn is one of the factors that increase hospitalization rates when emotions run high.

Getting emotional in a financial world distorts even the best planned strategies. This is the reason why investors are advised to use reason and not emotions when making a financial decision. According to 2013 Dalbar Quantitative Analysis of Investor Behavior, emotions and the behaviors triggered by those emotions were partly the cause why investors underperformed the S&P 500 by almost 4 points over the last 20 years. This was because the element of desire to grab a hot investment and to sell losers for the avoidance of further losses tends to create a pattern of buying high and selling low.

Investors are most vulnerable when there is high volatility in the markets. That’s where emotions trigger panic, depression, capitulation and fear. However, by taking control, investors can prevent their emotions from affecting their decisions.

  • How many times you regretted the investment decision that you made? If you come to think of it, there would probably be quite a few that come to mind.
  • What caused it?
  • Was it lack of knowledge about the market, bad timings, or did your emotions play the part?

Following are some of the behavioral finance concepts that reflect how emotions can have a real impact on an investor’s ability to a sound financial decision:

 

Having a Short-term Thinking Process

People tend to disregard and ignore future benefits as compared to the more immediate ones. So, oftentimes, it becomes harder to make long term financial plans a priority in everyday life decisions. For example, everyone understands the value of saving for retirement or college education of a child, yet, find it difficult not to spend lavishly on buying a new car or a vacation.

 

Fearing Losses more than Valuing Rewards

Considering the aspect of behavioral finance, i.e., fearing losses more than valuing rewards, which is mainly triggered by short term thinking, it can become very problematic for an investor to take the right decision. This phenomenon is normally called loss aversion, as it leads to a risk averse behavior that eventually exposes the investment to a greater risk. For example, although, investors rationally understand that the markets will bounce back from a downturn, yet, the emotions instigate them to overreact.

As the behavioral economist, Richard Thaler, said, “We think we will be smart enough to take the long view, but when markets actually drop we lose our courage and sell at the bottom.

 

Being Overconfident

Studies have shown that a large majority of investors consider themselves above average despite the fact that not everyone can be above average. According to the findings of a study conducted by Glaser and Weber (2007), investors overestimated their investment performance by 11.5 percent per year. Thaler said that people think they are better than everyone else, regardless of the evidence that most people fail to beat the market.

For example, in a rising market, investors might believe that it is their own performance that is causing them to succeed, which might cause them to ignore warning signals or the need to caution, eventually leading to unavoidable losses.

There are so many other emotional factors that can jeopardize the investing behavior and a well devised long-term financial plan of an investor, and these are as follows:

 

Hyperactivity

If an investor gets overwhelmed by a heavy stream of real-time information, he or she would start reacting to every twist and turn in the market, which might expose them to risky situations.

 

Greed

In any market, the greed to make more may tempt an investor to seek more growth in the value of his investment, but what they do not realize is that higher returns also mean higher risk.

 

Euphoria

The enchantment to see the stock going up day by day makes an investor falls into a trap of believing that success is self-perpetuating. He can easily get caught up in a bubble mentality.

So, even if we think we are being rational and analytical while making a move, deep down under the surface, emotions are always working in ways we cannot escape and may never entirely understand, which can keep us from taking smart investment decisions.