Thursday, November 29, 2007

Allen and competitive advantages

Sports Illustrated and Seattle-PI columnist John Cook, both talk about Microsoft founder Paul Allen's investment and passion for sports teams - (Seattle Seahawks and Portland Trailblazers) he owns. For those questioning the wisdom of his investments, that rationale behind many of his investment decisions become clearer if you understand complementary products and competitive advantages that his asset management company, Vulcan, has over other more traditional venture investment firms.

Sports Teams As Complements - Real Estate is the Product

The Blazers are the only major league team in Portland, and the Seahawks were kept in Seattle after Paul Allen bought the franchise in '97. Sports teams, things to do - like museums, shopping and convention centers are all factors in attracting visitors and inhabitants to a city, and this increases the value of real estate. Also, investments in EMP, the Seattle Center are all really investments in Vulcan's South Lake Union project.

Vulcan Competitive Advantages - Timeframe.

Asparagus typically takes 3 years to harvest, so only farmers who can sustain a negative cash flow for 3 years can make the investment. However, it provides a higher return over 3 years than crops with shorter harvest cycles. Many fruit trees take longer, but again yield higher values over a long period than asparagus.

Vulcan, unlike private equity or venture capital firms that have an investment lifecycle, does not have a restricted timeframe. They can therefore invest a part of their assets in "fruit trees" when even the best venture firms cannot.

So investments that look less than stellar in a 5-10 year timeframe may make sense when looking at a 25 year timeframe.

Philosophy - Create Value before Capturing it

The lack of short term pressures like fund-raising and track records also means that venture fund managers  is likely to be more supportive of entrepreneurs and portfolio companies, and not succumb to monetization pressures too early. 

Of course this philosophy may not work for all startups, since it is not ideal to have no monetization pressures, nor is it great for entrepreneurs looking for an early liquidity event if the investor likes to add more value before a liquidity event, but it is good to know that there is an investment firm that offers capital under different terms than most funds.

Diversification - and an eclectic portfolio

Wall Street had a laugh at the eccentric "accidental zillionaire," noting that had he simply held on to his Microsoft stock -- that is, had he adopted no investment strategy whatsoever -- his net worth would have exceeded $80 billion. - Sports Illustrated

Hindsight is 20/20, and diversification is a smart investment management strategy. There are more cases of people who lost through putting all their nest eggs in one basket, than of people who have gained through lack of strategy.

Vulcan's portfolio seems well-diversified - both in sectors and time to maturity, and its technology startup portfolio is eclectic - consisting of Semantic Web startups (, Radar Networks), energy efficiency/alternate energy companies (Ember, Imerium) and disruptive models ( 

The only thing I couldn't find is international investments, which are probably made through public securities or other instruments. Given that growth rates in emerging markets are much higher than the domestic market, it is an opportunity worth considering since it fits well into the gaps in Vulcan's current investment strategy.

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