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Greetings,

Sorry for the radio silence – I have been working on a new book with a top-tier hedge fund manager and I wanted to give you a sneak preview.

Brief Synopsis:

Imagine telling your grandchildren you bought shares of Google (GOOG) when the company first went public. That would explain the Lamboghini, the house on the Riviera, and the 40-foot yacht. But for every Google millionaire, there are dozens of other investors who’ve lost money buying hot new issues, or IPOs.

Venture-backed companies that successfully enter the public markets represent a critical job-creation engine for the economy.  One key to making investment decisions is to watch what the top-tier venture capitalists are doing to their portfolio companies and — better yet — to anticipate their moves. Their decisions will move markets, and you want to profit from these moves. Case in point is Google, backed by Sequoia Capital and Kleiner Perkins. Post-IPO, the price of Google increased almost 4000% from $100 per share to more than $450 per share. Some of these venture-backed stocks could make a major move upward post-IPO; We show you how to spot the ones that could take off.

However, wisdom breeds caution. It is important for the savvy investor to take note of caveats: Many have issues with the fundamental concept of marrying VC fund management with mutual fund management. The knowledge and skills required may have some overlap, but the key areas of expertise that determine success or failure are very different. This is why, as a standard practice, LPs (Limited Partners) put in a standard clause into Limited Partnership Agreements (LPAs) that require GPs to completely sell all their shares in companies that have gone IPO within 18 months of the IPO. LPs do not want GPs to indulge in stock market speculation as that is not their expertise. So how do you punt on venture-backed investments?

Case Study: Qihoo

Chinese Internet company Qihoo 360 went public with a bang on March 30th on the New York Stock Exchange, with shares immediately doubling at the start of trading. The Internet software company sells antivirus software and security services.

Should you buy the Qihoo IPO? We introduce you to the concept of U P D I V E (which will be further discussed in detail in Chapter 2-7 of the book).Let’s examine the Qihoo via the lens of UPDIVE.

The U is Underwriter. The pedigree of the underwriters matters. Qihoo’s underwriter was UBS AG and Citigroup Global Markets Inc. One would ideally like the major firms (e.g. Goldman Sachs) to be the underwriter as these firms carry reputational risk in bringing a firm public, and do not merely want to collect fees.

P stands for Products i.e. New Products. Other than Qihoo’s flagship product, 360 Anti-Virus, an anti-virus application to protect user’s computers against trojan horses, viruses, worms, adware, and other forms of malware; Qihoo has a suite of new products at its timeof IPO. This included 360 Mobile Safe, a security program for the Google Android, Apple iOS, and Nokia Symbian smartphone operating systems.

D stands for Direction of Macro Market – First and foremost, the market direction should be bullish. At March 30^th, the Dow Jones was facing one of the strongest bull market since the 2008 recession.

I– Industry Leader. Qihoo also develops Web-based games and makes the second-most used Internet browser in China, behind Microsoft’s (MSFT, Fortune 500) Internet Explorer. With 300 million Internet users in China — a number that’s rapidly rising – (though not a industry leader) second place is an attractive position to be in.

The V signifies Venture Capital. Qihoo attracted significant interest from U.S. venture capital firms, receiving backing from big-name VCs such as Sequoia Capital and Highland Capital Partners.

The E is Executive Team. Qihoo 360 is led by a seasoned and visionary management team with extensive industry experience and proven track record in China’s Internet industry.  Most noteworthy is the cofounder, Mr. Zhou Hong Yi who has over ten years of managerial and operational experience in China’s Internet industry. Prior to founding our company, Mr. Zhou was a partner at IDG Ventures Capital since September 2005, a global network of venture capital funds, where he assisted small- to medium-sized software companies in sourcing funding to support their growth. Mr. Zhou was the chief executive officer of Yahoo! China from January 2004 to August 2005.

The roots of Qihoo 360 reach back to 3721, Yahoo China, and Alibaba. In October 1998, Hongyi Zhou launched 3721 and its flagship product, 3721 Assistant. 3721 was a browser plug-in that enabled web users to submit Chinese characters instead of alphabetic letters in the browser’s URL bar.

But 3721 Assistant was also a controversial piece of plug-in, sometimes called “malware”, as it would install itself without asking for permission and was difficult to uninstall. Chinese netizens gave Hongyi Zhou the nickname, “The Father of Malware.” By 2003, 3721 Assistant reached 70 million users and over 80% market share.

On November 21, 2003, Yahoo China acquired 3721 at which point 3721 was renamed Yahoo Assistant. In December 2004, Hongyi Zhou became the Chairman of Yahoo China and Xiangdong Qi became Yahoo China Vice-Chairman as well as CEO of 3721. At that point Zhou said he would take one to two years to develop innovative new products and methods. But the new attempts were not very successful and it was instead a competitor, Baidu, that went public in August of 2005.

In July 2005, Hongyi Zhou suddenly resigned from Yahoo China and the next month Xiangdong Qi left too. This was right when Alibaba purchased Yahoo China and in an interview Mr. Qi said, “If Yahoo China hadn’t been acquired by [Alibaba CEO] Jack Ma, I’d still be there as I have big ambitions for Yahoo China… but now I can only start anew.”

The end result:

Qihoo 360 (QIHU) priced its stock at $14.50 a share, but shares opened at $27 and quickly soared as high as $33.40. The company raised more than $175 million in its IPO. Disclosure: I purchased 500 lots of stock at an average price of $28 and sold for an average of $33.

Coming up next week:

LinkedIn, the social network for professionals, has set a target price of $32 to $35 a share for its IPO, expected next week, according to the Securities and Exchange Commission.

LinkedIn hopes to raise as much as $274 million, and if the IPO is successful, the company should be worth over $3 billion after the offering. Trading will commence on the New York Stock Exchange under the ticker symbol LNKD.

LinkedIn is just the latest internet startup to go public this year amid an increasingly frothy IPO market.

LinkedIn Corp. increased its planned initial public offering, valuing the largest professional social-networking website at more than $3 billion. The company now plans to sell as much as $315.6 million of shares to expand the business, according to SEC reports.

To find out what I think of the LinkedIn IPO, let’s continue the conversation online (click like to see the discussion) or in person here.

To wisdom and beyond,

Way Of The VC Team

(Pls also check out our new and improved website)

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