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2008 Principal Investment Conference

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2008 Principal Investment Conference

The Volatility Will Continue; Fasten Your Financial Seatbelts, Barrack Says

Expect the volatility that has socked financial markets for the past several months to continue unabated, Thomas Barrack Jr., the founder, chairman, and chief executive office of Colony Capital, a private equity real estate company headquartered in Los Angeles, told the Principal Investment Conference at the Stanford Graduate School of Business.

"We're in the middle of a pendulum swing, and we're not exactly sure where it's going," said the keynote speaker at the February 13 conference. "It's still unfolding. Anybody who tells you they know what's going on, it's inaccurate. This is going to be a very volatile 2008."

But opportunities still exist for astute investors, Barrack said.

"People would like to tell you you can produce extraordinary returns without extraordinary risk. It doesn't work that way," he said. "In our business, the ingredients to producing extraordinary returns is be prepared and master how to take and find extraordinary risk."

In the midst of the sub-prime upheaval, "the general economy is actually quite good," with retailers including Wal-Mart reporting higher fourth-quarter sales. Still, Barrack concluded, "The bottom line is nobody has any idea what is going to happen. America is resilient. As long as there is volatility, there is tremendous opportunity."

The conference, organized by the MBA student Finance, Private Equity, Real Estate and Venture Capital Clubs, included eight panel discussions on varying topics and dozens of speakers from leading firms in the industry.

A panel exploring the Future of Venture Capital concluded that globalization, consolidation, and the world's appetite for new personal technology devices will propel growth of the venture capital industry during the next decade. As people have greater access to the internet from their mobile devices, that area is poised for dramatic growth during the next decade. But they also cautioned that the number of venture capital firms will shrink over the next decade.

"Mobility, specifically in the U.S., is a huge opportunity because the technology is already proven," even though few Americans access the internet from their mobile devices now, said Sanford Miller, MBA '75, general partner of Institutional Venture Partners. "All it takes is a better business model for working through complicated carrier relationships, and those aren't easy to do. Ten years from now, the PC will largely be a thing of the past; it'll all be done pretty much on Smartphones. That's already pretty much the case in other countries."

Citing the rising popularity of the iPhone and other sophisticated mobile communication devices, Ajit Nazre of Kleiner Perkins Caufield and Byers agreed that mobile internet will grow. "There's a whole shift to what you can do from your cell phone rather than from your personal computer," he said.

Figuring out how to replace the dowdy electronic mouse as the main way for humans to control their computers is another advance that venture capital companies want to see. "It's kind of trivial, but we've been stuck with the computer mouse for almost 20 years," said Nazre. "The gaming industry is moving that to a different level, and that is spawning a whole bunch of new ventures to change the way we interact with devices."

Demonstrating the trend of venture capital firms going global, Draper Fisher Jurvetson is based in Menlo Park and operates in 10 countries, including fast-growing China and India. And the company is also establishing affiliate relationships with business partners in Brazil, Korea, Vietnam, Israel, Russia, and Singapore, said Warren Packard, MBA '97, managing director of the firm.

In China, Packard said, his firm invested early, getting involved in companies including leading Chinese internet search engine Baidu and advertising firm Focus Media. "Those were risky propositions when we started, but of course in the end, they looked pretty good," said Packard. "Hopefully, the risk that we are taking in Vietnam, Brazil, Russia, and others will pay off."

Israel, widely considered a hub for technology innovation, was a natural choice for Battery Ventures, said Ken Lawler, general partner of the firm. Battery opened offices there to access the country's "phenomenal innovation." In addition, his firm was attracted by Israel's respect for contracts and intellectual property rights. And, he said, Israeli entrepreneurs "are very interested in getting access to European and U.S. markets because they have no market of their own."

Several panelists agreed that a decade from now, there will be fewer venture capital firms, with the survivors being large, global operators. That's because while the U.S. technology market is leveling off, the demand will be booming in places like India, which has a healthy supply of engineers and a growing population.

The panelists also had tips for students looking to land venture capital jobs.

"Don't send a resume," urged Rob Chandra, managing partner of Bessemer Venture Partners. "Think about a five slide presentation. I always find it interesting when somebody comes to us and says, 'I've looked at the investments that you are making; there is an area that I think you should pursue. Here's why, and here's five slides on it.'"

Taking jobs at other companies to gain specific skills crucial to a venture capital firm's success also could be valuable. "Parts of the venture capital business are very much financially driven; working in an investment bank first might not be all bad," said Miller. "Get experience at a private equity firm, with the view of taking those strong financial skills and moving them into venture capital. Think about your own skill set, the languages you speak, the interests you have. It's a matter of finding the piece of the business that fits your skill set and background."

The Principal Investment Conference has been held eight times since inception in 1998. This year's Principal Investment Conference drew 400 participants to hear over 45 speakers and panelists on topics ranging from real estate investment strategies to private equity trends.

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