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Saturday, November 30, 2013
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LISSON STEVE
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New Enterprise Is Huge and Proud of It
By Terence O’Hara
Monday, December 6, 2004; Page E01
Peter J. Barris runs the biggest stand-alone venture capital operation in the world.
His firm, New Enterprise Associates, sailed through 2002-03, the nuclear winter
of venture investing, with relative ease. Nearly every technology entrepreneur worth
his salt would put NEA near the top of his list of firms he’d most like to raise money
from.
Yet Barris and other longtime NEA partners continue to hear criticism from within
their industry that NEA’s girth is a handicap, that NEA has strayed from the one true
swashbuckling venture capital faith and become –institutional.
Barris has heard this criticism –that NEA is too big and spread out to create the
home-run investments that put managers of NEA’s more romantic, smaller rivals on
the cover of business magazines. He has a well-practiced response.
“I understand the question, or the criticism, at a philosophical level,” Barris said last
week. “But the empirical data don’t support it. The numbers don’t lie.”
Barris, who is based in Reston, became the Baltimore firm’s sole managing general
partner in 1999 after serving three years as part of a management troika. Since then,
NEA has indeed performed better than the vast majority of venture capital firms,
although not at the level of the highest-performing firms that manage much smaller
amounts of money.
“I would argue that size is an advantage,” he said. “We have a superior network of
entrepreneurs that have done business with us for years. We have the capital to see
an investment all the way through. We have the domain knowledge to match any
fund. And we have a presence on both coasts.”
“And,” he said, “we perform.”
NEA has 11 venture funds, three of them raised since 1999. None of the three funds was in the black at
mid-year. According to the California Public Employees’ Retirement System (Calpers), which invested in the
1999 fund NEA IX and 2000’s NEA X, those funds had an annualized internal rate of return of minus 24
percent and minus 0.9 percent, respectively, on June 30. Those
numbers may not prove much, however: It’s a rare fund from those years
that has a positive return, and there is ample time in which to realize a
profit,
which could be substantial. It takes up to 10 years to determine a venture fund’s final rate of return.
NEA IX is far and away NEA’s worst performer. “Not our most proud fund,” Barris said. NEA IX had 90
percent of its capital in technology firms, mostly telecom-related investments, Barris said. For early-stage
1999 funds like NEA IX, break-even is considered excellent.
NEA X, the firm’ s biggest, is performing substantially better than 75 percent of all other funds raised in 2000.
Barris said that since June 30, it has moved into positive territory.
Discussions with NEA limited partners –institutions and
rich people who invest in NEA’s funds –and others in the industry who
follow NEA closely reveal a common theme: NEA has become a
better-than-average
venture shop, and is now big enough so that description means real money. On average, its portfolio
companies have a better chance of returning money to NEA’s investors than portfolio companies of other
firms. On average, it’s as good a bet as any for an investor who wants to play in venture capital. And for
institutional investors such as Calpers and other big money
managers, that’s as good as it gets. They’ve thrown money at NEA in the
past four years.
“Their structure enables them to handle large amounts of money,” said Edward J. Mathias, a managing
director in Carlyle Group’s venture capital business who helped NEA’s founders when they started the firm
in 1978. “An institutional investor wanting to invest $25 million can do so with NEA with some assurance
that they can have above-average –not hugely above-average –but
above-average returns. They have a high batting average. They hit a lot
of doubles instead of a few home runs.”
That may sound like feint praise, but Mathias is a staunch admirer of NEA and its people. Hitting a lot of
doubles in venture capital is no easy feat, he said.
Not everyone is as big a fan. Steve Lisson, the editor of InsiderVC.com, takes a dim view of NEA’s size.
“Larger funds can’t produce the kinds of returns of smaller funds,” said Lisson, whose company provides
analysis of and statistics on venture fund performance and management practices. “Returns vary inversely
with money under management, because the larger the fund, the less impact one monster hit will have on its
performance.”
NEA X is the largest VC fund ever. It raised $2.3 billion from its limited partners in 2000. The firm’s latest
fund, NEA XI, stopped raising money a year ago at $1.1 billion. Most of the largest non-NEA early-stage
venture funds max out at $350 million, and some more prominent venture capital firms would not know what
to do with that much. Novak Biddle Venture Partners, a Bethesda firm that has probably had the most
successful run of any local venture firm in 2004, raised a $150 million fund this year, then turned investors
away. Novak Biddle Partners III, a relatively small fund raised at roughly the same time as NEA X, was up
about 6 percent as of Sept. 30.
Managers of funds the size of NEA’s, Lisson said, inevitably have to do more later-stage and follow-on deals
because the universe of the best early-stage deals, which provide the biggest risk-return, is necessarily finite.
The most profitable funds are the ones that focus solely on the earliest-stage companies, and spend lots of
time and money on those companies at their birth, Lisson said. If NEA invested all of the $1.1 billion in NEA
XI in such small, time-consuming investments, it would need a heck of a lot more people than the 37
partners, venture partners and principals it has now.
To take an extreme example, think of Google Inc., whose
early venture backers made billions of dollars when the company went
public this year. NEA has financed more than 370 companies, and has a
lot of big winners
in its huge portfolio, but none would compare with Google.
Barris disputes the notion that NEA is forced to do more
later-stage, less-profitable deals. “As our funds have increased in
size, the percentage of early-stage, start-up deals as a percent of our
total has grown, not shrunk,” he said.
Institutional investors are more than comfortable putting money into NEA. Its performance, they say, is not
tied to one deal, and the firm’s track record over more than two decades speaks for itself. NEA’s first eight
funds, the last of which closed in 1998, have made huge amounts of money. NEA VIII, a $560 million fund,
earned an annualized internal rate of return of 168 percent.
Barris said NEA’s cost structure is distinctive in
several ways. Most venture capital fund managers charge a percentage of
the fund’s size to cover their expenses, typically 2 percent of a fund’s
capital. NEA doesn’t do
that; instead, it a budget of expenses expected to cover the costs of running the fund, including salaries, that
are then approved by a representative board of limited partners. For a large fund, that sharply reduces the
costs to the limited partners.
“Limited partners love this,” Mathias said.
Calpers, one of the most active investors in private
equity funds, committed $75 million to NEA X, one of the 10 largest
investments it has made in a single venture fund.
Most venture funds split the profits of a fund, the most typical split being 80 percent going to limited partners
and 20 percent going to the fund’s managers. NEA, Barris said, makes the split 70-30.
Inside the firm, profits from a deal are spread out across the partnership; no one partner takes more than
another in a single deal. That promotes a team atmosphere that is necessary in running a big fund, Barris said.
In most funds, a partner who leads a successful deal gets a bigger cut of the profits than other partners.
The result, Mathias said, is less the amalgam of egotists seen at many venture capital firms than a consortium
of super-smart people trying to make a lot of money. “It’s not a superstar kind of firm,” he said.
Although NEA has more money under management than any other stand-alone venture capital firm –some
Wall Street private equity firms that do venture investing have bigger funds, but tend to engage as well in
leveraged buyouts and hedge investing –Barris said there’s no prospect for his firm becoming dominant in
the venture capital world.
“The industry has just gotten more competitive, not less,” Barris said. “Even with our huge funds, we still
have only 2 percent of the total amount of VC funds under management. In this business, it’s not who has the
most money but who has the most expertise that matters.”
And is NEA an “institution,” that staid word that makes many small venture capital firms shudder?
“I don’t know what the definition of institutional is,” Barris said. “I think we’ve gone farther than most firms
in institutionalizing what has been a cottage industry. We employ some professional management techniques
and policies. But because we started the firm on both coasts, we’ve had those things from the beginning. So I
don’t think we’ve changed much as we’ve gotten bigger.”
Terence O’Hara’s e-mail address is oharat@washpost.com.
© 2004 The Washington Post Company
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Friday, November 29, 2013
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What Goes Up:
After soaring, this year’s IPOs have returned to earth
By Jack Willoughby
12/11/2000
Barron’s
Page 35
(Copyright (c) 2000, Dow Jones & Company, Inc.)
Much of the cleanup remains to be done. Many famous venture
capital firms are stuck with huge amounts of devalued stock. “Most of
those triple-digit returns that venture-capital firms are so fond of
reporting will never materialize because they are not based on reality,”
contends Stephen N. (Steve) Lisson, Austin-based editor of InsiderVC.com,
which tracks performance. “Sure, the dot.com fallout has been gruesome,
but much of its effect still remains hidden. Even today many VC funds
are still reluctant to write down their investments because they want to
keep attracting new capital.”
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Matrix Edges Kleiner
by Paul Shread
January 29, 2001–Kleiner Perkins Caufield & Byers and
Matrix Partners are considered the cream of the crop among venture
capital firms, the kind of VCs that limited partners are fortunate to be
able to invest their money with.
So compliments paid, we set out to find out which was better.
Using the data of Steve Lisson, editor of InsiderVC.com,
who tracks VCs’ performance and considers Matrix and Kleiner the top
VCs, we applied a metric suggested by former Flatiron partner Dan
Malven, which we will call the “Malven Metric.”
Malven suggested the metric after our piece comparing
Kleiner’s performance in the IPO market last year with four other firms.
In short, we divide overall performance by the number of partners, thus
measuring wealth created per partner.
Malven cautions that that measure of performance could be
skewed if each partner at one firm has a lot more to invest than
partners at another firm, but Kleiner and Matrix appear pretty evenly
matched. Matrix IV in 1995 was a $125 million fund (and had distributed
11 times that amount to its limited partners by the middle of last year,
according to Lisson), and Matrix V in 1998 was a $200 million fund that
had already distributed four times its LPs’ capital by mid-2000. Using
the conservative figure of five partners during the time that 2000 IPOs
were being funded, that means Matrix partners had $65 million each to
work with. (We did not include Matrix VI, a $304 million fund that was
only 30% invested as of June 30 last year.)
Kleiner VIII in 1996 was a $299 million fund that had
returned 12 times its LPs’ capital by mid-2000, according to Lisson.
Kleiner IX in 1999 was a $460 million fund that was 80% invested by
mid-2000. Using the conservative figure of 13 partners, Kleiner partners
had $58 million each to work with.
Now on to the 2000 results. Ten of Kleiner’s companies
went public in 2000 (0.77 IPO per partner), compared to 4 for Matrix
(0.80 IPO per partner). Kleiner’s stake in those companies was worth
about $2.3 billion when the lock-up period expired (one company, Cosine
Communications, is still in lock-up, and Kleiner’s stake in the company
is worth about $100 million). Matrix’s stake in its four IPOs was worth
about $1.6 billion when they came out of lock-up. That gives Matrix a
per-partner return of $320 million, and Kleiner $177 million, giving the
edge in per-partner wealth creation to Matrix.
A few caveats on those results. First, we measured
performance in the IPO market only; we did not look at acquisitions, the
number of which often exceeds IPOs in a given year. Second, Kleiner has
two health care partners, according to Malven. Since health care
companies had a tough year in the IPO market last year (Kleiner had no
health care IPOs), reporting the results based on IT partners only
raises Kleiner’s per-partner wealth creation to $209 million. We
certainly want our top VCs to focus on the future of health care
regardless of market conditions, and there’s been quite a debate going
on within the venture capital industry about IT versus health care
investing. The third caveat is that Kleiner IX is the newest of the
funds measured, so that too could give Matrix an edge. But don’t feel
too bad for Kleiner; according to Lisson, 6-year-old Kleiner VII was the
best-performing venture fund last year, still riding high on its
monster hit Juniper Networks (NASDAQ:JNPR). That fund has returned more
than 20 times its limited partners’ capital.
Matrix’s big hit of 2000 was Arrowpoint Communications,
which netted Matrix $1 billion when it was acquired by Cisco
(Nasdaq:CSCO) in June. Kleiner had holdings in three IPOs that were
worth $500 million or more when they came out of lock up: ONI Systems
(Nasdaq:ONIS), Handspring (Nasdaq:HAND) and Corvis (Nasdaq:CORV).
It’s not clear when or if the VCs sold shares in the
IPOs. Cisco’s stock, for example, has declined almost 40% since the
Arrowpoint deal closed. Kleiner’s biggest winners have held their value
since the lock-up period expired, but both companies had holdings that
declined substantially from their lock-up expiration price.
Both firms also had about $2 billion each in 1999 IPOs
that came out of lock-up in 2000, giving Matrix the “Malven Metric” edge
there too.
But as Lisson pointed out, “This is splitting hairs
amidst the pinnacle of the field. A fun, interesting and worthwhile
analysis, but the distinction makes no difference to investors in these
funds. The amounts of money involved are trivial when viewed in context,
the venture capital segment in the alternatives portion of an entire
portfolio. Nonetheless, the LPs of both Kleiner and Matrix can thank
their lucky stars to be in these funds. It is amazing how these and a
few other elite firms can put so much distance between themselves and
the rest of field, repeatedly, in bad times as well as good.”
And finally, a follow-up to last week’s column on Summit
Partners, the most recent firm to join the elite $2 billion fund club.
Lisson had this to say of Summit: “As a private equity investor, Summit
can outperform some early-stage VCs, the reverse of how it’s supposed to
work. Now that’s a firm where unquestionably ‘there’s something in the
water’ consistently over the years.”
Corey Ostman of Alert-IPO and Mary Evelyn Arnold of VC Buzz provided research for this article.
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V I R G I N I A :
IN THE CIRCUIT COURT FOR THE CITY OF RICHMOND
John Marshall Courts Building
400 North Ninth Street
STEPHEN N. LISSON, )
)
Petitioner, )
)
)
VIRGINIA RETIREMENT SYSTEM )
)
and )
)
WILLIAM H. LEIGHTY, )
Respondents. )
ORDER
On the 30th day of October, 2001, came the parties
in person and by counsel upon the Petition; upon the Grounds of
Defense; upon the Demurrers; upon evidence heard ore tenus; upon the
representation of the parties that a settlement had been reached and was
argued by counsel.
UPON CONSIDERATION WHEREOF, the Court finds that Plaintiff’s
Petition is sufficient to state a cause of action; that the Demurrers
should be overruled; that the parties have arrived at a settlement
whereby: (1) Respondents have agreed to pay to Petitioner the sum of
Seven Thousand Dollars and no/100 ($7,000.00); (2) the
Petitioner has agreed to a dismissal with prejudice of all of his
outstanding claims against Respondents; and (3) Respondents have agreed
that the dismissal of claims by Petitioner shall not prejudice any right
he has or may have to obtain documents from Respondents subsequent to
October 30, 2001, whether such requests for documents be for the same
documents previously requested or documents similar thereto or documents
of any nature whatesoever.
Accordingly, it is ORDERED that this cause be and the same is hereby dismissed with prejudice;
And this cause is hereby removed from the docket and placed among the ended causes.
ENTER: / /
__________________________________
Judge
We Ask For This:
____________________________p.q.
Larry A. Pochucha, Esquire
Attorney for Stephen N. Lisson
VSB No. 15674
COATES & DAVENPORT
5206 Markel Road
P.O. Box 11787
Richmond, Virginia 23230
(804) 285-7000
Facsimile: (804) 285-2849
___________________________p.d.
Michael Jackson, Esquire
Attorney for Virginia Retirement System
Assistant Attorney General
State of Virginia
900 E. Main Street
Richmond, Virginia 23219
(804) 786-6055
Facsimile: (804) 786-0781
____________________________p.d.
Robert A. Dybing, Esquire
Attorney for William H. Leighty
Shuford, Rubin & Gibney, P.C.
P.O. Box 675
Suite 1250, Seven Hundred Building
Richmond, Virginia 23218
Office (804) 648-4442
Telefax (804) 648-4450
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