Sequoia Capital has funneled millions of dollars to scores of well-connected entrepreneurs and academics, who invest and look for ideas
Startup investor Jason Calacanis took a $25,000 gamble five years ago on a company almost no one had heard of called UberCab. That investment in what is now Uber Technologies Inc. has ballooned to roughly $110 million.
Mr. Calacanis has never said publicly where the money came from: Sequoia Capital, one of Silicon Valley’s biggest venture-capital firms. Since 2009, Sequoia has funneled millions of dollars to scores of well-connected entrepreneurs, academics and other people known as scouts.
Scouts invest the money in startups and keep their eyes and ears open for ideas that Sequoia might like. Mr. Calacanis introduced Thumbtack Inc.’s founder to a partner at Sequoia, which bought a stake in the local-services website that has since surged 50-fold, research firm VCExperts estimates.
Thumbtack’s founders now steer tips to Sequoia, too. “Sequoia had been great to us, so we were happy to send other high-quality entrepreneurs their way,” says Marco Zappacosta, chief executive of Thumbtack. He has made a few startup investments of his own using Sequoia’s money.
The secretive ecosystem of cash and connections is an unusually powerful example of how venture-capital firms try to gain an edge in the never-ending hunt for the next blockbuster. That search has gotten trickier now that some startups with sky-high valuations are hitting turbulence.
Most of Sequoia’s scouts are entrepreneurs whose startups were funded by the firm. That means they know a lot about what Sequoia is looking for and will recommend the firm to other entrepreneurs.
Forging tight relationships that generate new deals for venture-capital firms is more important than ever as the cost of creating startups falls. The resulting acceleration in company launches has made it harder for venture-capital firms to identify the best opportunities as startups emerge. And competition is growing as new investors who are flush with capital invade the technology world.
Sequoia has been a mainstay of the venture-capital establishment for decades. Based in Menlo Park, Calif., on Sand Hill Road, the Main Street of Silicon Valley’s venture-capital industry, Sequoia made early bets on many of today’s tech titans, including Apple Inc., Google Inc. and Cisco Systems Inc.
It was the only venture firm that backed messaging company WhatsApp, sold to Facebook Inc. last year for $22 billion. Sequoia invested about $60 million for a stake valued at $3.5 billion in the deal. Sequoia now owns stakes in 33 private,venture-capital-backed companies valued at more than $1 billion apiece, more than any other venture-capital firm.
THE question of when interest rates will rise gets frequent attention. Less energy is spent wondering where they will end up in the long-run. But for companies thinking about long-term investment projects, and savers planning for retirement—who will need to contribute more to their pension pots should rates stay low—the second question is at least as important as the first. Two new papers from the Brookings Institution, presented at a conference on October 30th, seek to answer it.
In the long-term, interest rates are beyond the control of central banks like America’s Federal Reserve. If the Fed sets rates too high or too low, inflation will veer off-course. Where rates must eventually settle to keep inflation stable depends on economic circumstances. In particular, it depends on what “real” interest rate—the return to saving, adjusted for inflation—balances the economy’s demand with what it can supply. This elusive sweet spot is called the “equilibrium real rate”.
A long list of factors should, in theory, affect the equilibrium real rate. Top of the list is economic growth. If the economy is expanding quickly, people will expect higher incomes in future, causing them to spend more and save less today. That pushes up the equilibrium real rate. Similarly, weak growth should depress the equilibrium real rate.
But James Hamilton of the University of California at San Diego and three co-authors put this relationship to the test using data stretching back to the 19th century, and argue that it is, in fact, quite weak. For instance, in the early 1980s real rates hovered around 6% while growth was a little over 1%, but in the 1990s both growth and real rates were around 3%.
A whole lot of other stuff matters for the real rate too, such as productivity, demographics, and conditions in financial markets. The authors say that this creates much uncertainty as to where the equilibrium rate is today; their best guess is that it lies somewhere between 0% and 2%. This uncertainty, they argue, should make policy more inert. Often, rate-setters assess whether policy is tight or loose by comparing real interest rates to the equilibrium real rate. But when they do not know what the equilibrium real rate is, their next best option is to make changes in rates respond to the data. Rates should rise when the economy looks too hot, and fall when it looks too cold.
On Friday, the United Nations released a survey of the plans laid out by more than 100 countries to fight climate change. Its report uncovered some interesting trends, including that most countries are planning to invest in renewable energy and that global adaptation efforts focus first and foremost on protecting the food and water supply.
But the survey also affirmed that all this collective global action doesn’t add up to keeping global warming below 2 degrees Celsius (3.6 degrees Fahrenheit), the internationally agreed-upon goal. That brought to mind the great interview with Bill Gates that The Atlantic, one of our Climate Desk partners, recently released. In the above video, Gates points out another key flaw in the international negotiating process: Most countries’ goals focus on the progress to be made by 2030—phase one of the global push to slash greenhouse gas emissions. The United States’ goal, for example, calls for cutting emissions by about a third by that time.
If we’re really serious about keeping global warming in check, Gates argues, we need to start thinking more concretely about what comes after 2030. The Obama administration has promised that the short-term goal will get us on track to cut emissions 80 percent by 2050. But Gates cautions that that second phase will much more difficult to achieve than the first.
You, your mom, or that random guy down your block will all soon be able to join the ranks of startup investors.
The Securities and Exchange Commission voted this past week to approve so-called equity crowdfunding rules for investors, an effort spawned by the passage of the JOBS Act way back in 2012. What that means is that startups or small businesses looking for investors can go through brokers or online platforms to find them—and those investors can now be, well, anyone.
This is a pretty big deal. It marks a shift in the kinds of capital that startups and small businesses can raise. Startups today often turn to venture capitalists, angel investors, bankers, and other accredited investors, but access can require the right connections, which are often hard to come by outside major financial hubs like New York, San Francisco, and Boston.
‘Even if you’re truly invested in investing in a startup, the odds are against you.’
Now, entrepreneurs can turn to the crowd. And if you’ve part of the crowd that’s always wanted to invest in a startup, you may soon be able to in ways that you couldn’t before. But there are some things you need to know. Since the passage of the JOBS Act, experts have worried about putting safeguards in place to protect unsophisticated investors, as well as protections for startups to minimize fraud. The SEC is hoping that its new rules will address those concerns. Here’s what you need to know.
So, You Want to Invest
In the past, only so-called accredited investors have been able to invest in startups. Here’s what that meant in a nutshell: If you made less than $200,000 a year, and you didn’t have a million bucks in assets, you couldn’t invest. Now, starting sometime next year, even if you aren’t that well off, you’ll be able to buy into companies you like.
Former Fidelity chief Edward ‘Ned’ Johnson III had the idea for Luminex. Photo: Brian Snyder/Reuters
BOSTON—The most exclusive new club on Wall Street opens for business next week and there are a few things you won’t find: members with under a billion dollars or high-frequency traders.
Those are among the rules laid out by the founding members of Luminex, a private trading platform designed to give the world’s largest asset managers a new place to buy and sell large blocks of stock.
Large asset managers have complained in recent years that exchanges are now rife with high-speed traders who rapidly change the prices of their bids and offers to take advantage of heightened interest in a stock, cutting into profits of the firms that place them. “Dark pools,” a type of private trading venue originally designed to help institutions anonymously trade, have had their own problems with keeping client orders secret.
In response, last year a group of firms led by Fidelity Investments began work on a trading platform that would provide what it calls a cheap and secure solution. In addition to Fidelity, other Luminex owners include BlackRock Inc., the largest money manager in the world by assets, Invesco Ltd. and Capital Group Cos.
Luminex is looking to potentially win market share from other dark pool operators that focus on block trading, such as Bids Trading LP, Liquidnet Holdings Inc. and Investment Technology Group Inc. Those venues account for more than 200 million shares traded every week, according to the latest data from the Financial Industry Regulatory Authority.
In interviews at the Boston offices of Luminex Trading & Analytics LLC, executives detailed for the first time how the platform will operate. Luminex is technically a dark pool, too. But it stands apart from the other roughly 40 dark pools because of strict membership requirements, a low-cost structure, and rules that encourage trading large amounts of stock in each transaction, analysts said.
Here is how it works:
Luminex only allows institutions with a billion dollars or more under management and a “long-term investment strategy,” so that means no high-frequency traders or quantitative hedge funds.