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February 9, 2007
Two Cows and Venture Capital
Some very funny stuff in a Mark Gilbert column today on Bloomberg wherein he explains most of modern finance using "two cows" metaphors. Maybe you have to be a finance geek, but he had me laughing hard:Leveraged BuyoutsHmmm, what would a "two cows" model of venture capital look like? Maybe like this:You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.
Bond Market
You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.
Derivatives
You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.
Hedge Funds
You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.
Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.
Pension-Fund Management
You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''
Interest-Rate Swaps
You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.
Commodities
You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.
Gold
You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.
Venture Capital
You have two cows. One is male, and one is female. Mike Moritz says he loves both cows and will buy 35% of the pair for $100. After the deal is signed he tells you to kill your female cow, and then says your male cow must produce a baby cow within three months or you're fired. Three months and one day later he fires you, takes your remaining cow, and transfers it into a milking machine company which then goes public on Nasdaq, earning him $10,000,000. Citing a lactation preference in the term sheet, however, he keeps all but $0.10 of the proceeds. "No hard feelings," he says, "and be sure to come back the next time you have cows."
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Additions to the list:
Venture Capital
You have no cows, but an idea of owning 2 cows. You approach a VC firm, they say that 2 is too small a deal-size for them and therefore, you must buy 10 cows. You agree and get money at "standard" terms & conditions. They replace you with a 'professional' CEO, create a huge marketing organisation and great MIS structures and systems. Over time, it emerges that the actual market is only for 2 cows. They wind up the company and invite you to join one of their other portfolio companies inolved in pig business as CEO.
Investment Banking
You have two cows. Two guys in Armani suits wearing Rolex watches appear out of nowhere and promise to multiply your networth by leveraging the cows and getting 3 more cows, then inviting a PE firm to participate in the growth of the 5 cows, then going public and getting enough money to buy 20 cows. You agree and actually see your notional money multiply in valuation. 1 of your original cow is taken away by the Ibanker as fees, the other one dies. The lenders take away the rest (being one of their fine-print conditions if a cow dies), the stock price crashes to 0, the PE firm files a civil suit against you and the public market regulator files a criminal suit against you.
Infrastructure finance
The government invites private funding in owning and operating cows for milk. You set up a company with help of infrastructure funds and project debt, promising 100 litres of milk everyday to be sold to the government at Rs.10/litre for the next 10 years with stiff conditions in case you achieve less than 90 litres. After a long gestation period, you begin commercial operations. The government buys all the milk but defaults on payments. You look for additional funding and take more debt. Your firm goes sick due to the additional debt and you exit business. The government takes over the company and invites private participation to operate the company promising Rs.20/litre as purchase price.
See my blog at http://multipleideas.blogspot.com
Addendum to the Venture Capital Definition:
Mike Moritz is destroyed by waves of class action lawsuits by disgruntled investors devastated by the fact that there is not (and never was) any such thing as a male cow, if it were it would be a bull, and that would not be much good for the milking. Investors claim they were misled, and join leading Wall Street Analysts as co-defendants for recommending the bogus stock to their investors. Moritz is further undermined by allegations of misreported financial statements, and back-dated self-awarded options. Moritz is doing 3-5 as part of a plea-bargain in an open prison in upstate new york, and the original farmer writes a blog warning people about Venture Capitalists.
Do you keep the patent on the male cow?