Monday, August 20. 2012
Today the CEO of Yammer argues thus (after having sold to Microsoft for $1.2bn, oddly enough). In essence he argues that its hard to:
(1) Find an idea that the Big Guys haven't thought of
As you'd expect, some prominent SV VCs take issues with this, Marc Andreesen arguing that there is an infinite amount of creative talent out there and the big companies are ponderous and often not well run (this being the same Andreessen you recall who watched his own Netscape get crushed by a fairly inept Microsoft's Explorerer in the mid-nineties, of course....but then he made good on Skype. Maybe one forgets....)
We have wondered aloud about the End Of Silicon Valley in in the past, but have always noted its ability to resurrect itself. But today, as well as the above, three other different articles, on 3 different aspects of this issue, seem to be painting an emerging picture:
1. Firstly, the Old School VC's aren't making any money anymore - Business Insider
Last year, in an attempt to cash in on the late-stage "private IPO" investing frenzy, Kleiner startled the Valley by launching a $1 billion late-stage "Digital Growth Fund." Many saw this fund as Kleiner's attempt to play catch-up and associate the firm's name with hot companies it had missed. Some also saw the fund as a sign that Kleiner had lost not just its edge but its valuation discipline and predicted that the firm might get clobbered on some of its late-stage investments.
Twitter is unlikely to make up the numbers. Many of the older VC firms took big hits in the DotCom bust (I recall seeing a McKinsey report that said no investment after 1997 made money). KP has been widely felt to be off the pace for a few years, and this was seen by many observers as a last ditch attempt to get back in the game.
2. Secondly, even the New Boys are backing out of their new investments- WSJ
Some of the early backers of Groupon Inc, including Silicon Valley veteran Marc Andreessen, are heading for the exits, joining investors who have lost faith in companies that had been expected to drive a new Internet boom.
At least they got in earlier, but its not a viable model long term when the IPO money knows its going into an almost pump 'n dump scheme, so no surprises then that.....
3. Thirdly, the huge Californian Public Service pension fund (CalPERS), a stalwart VC funder over the decades, is considering pulling out of funding VCs - PE Hub.
Granted they only put about 6% of their c $240bn fund into VC, but that is a very big number for the VC community
Of course, if CalPers had just shorted the stocks of the companies their VC investments were funding, like the banks did, they would have made out like bandits - WSJ again:
Profits made by banks underwriting Facebook Inc.'s initial public offering as the stock fell were distributed this past week from a pool of about $100 million, say people with knowledge of the deal.
Thats on top of the c $175m they were paid to do the IPO. Easy when you know how.....but not good news for the whole VC ecosystem. Private profits, public (offering) debts....
Monday, August 16. 2010
Piece in TechCrunch on the shifts in the startup funding markets changin from the old pecking order:
In my view the main issue is that market re-structuring is all very interesting, but the big thing underlying this is that what is happening is that money is flooding in again, and that will lead to asset bubbles - as with the pre Crunch Private Equity markets, too much cash chasing to few opportunities pushes up the prices. To exacerbate this, it does cost less to get companies up and running (but probably more to make a market in a world full of many small companies0so the funding stages have to be changed as well.
But the one thing that caught my eye was a shift in the payback theory of the startup market - it would appear that the market is shifting to many smaller companies being sold for far lower prices, and this is impacting the traditional "1 in 10 is a home run" model:
I have always felt that the "home run" model's returns fitted better with the big VC fund business model rather than the individual entrepreneur. For most entrepreneurs I would argue that - as a game theory payoff - a reasonable probability of a few million dollars exit for a few years work is a more enticing prospect than an exceedingly small probability of a vey large exit.
In other words, would you prefer to count your chickens as they hatch or wait for a very rare Black Swan to show up?
I suspect this shift in the rules of the game is because, as money flows in, the power is going to the rarer entity - the good startup.
(Update - and another TechCrunch article points out that you don't need home runs to create the new jobs - large numbers of small successes are doing most of the heavy lifting)
Incidentally, having run and/or turned around a number of Tech startups, I would point to Fred Destin's post here as the key to that succesful exit:
Exactly - never mind the team, market or product - they are irrelevant if the company cannot manage its cash.
Thursday, October 22. 2009
Growth rates of 100 software companies from IPO Dashboard
Fascinating study from IPO Dashboard showing the extreme unlikelihood of the "5 year dash to $50m turnover from startup" hockey stick business plan so beloved ov VC focussed business cases. The study was based on the top 100 publically traded (US) software companies, inflation adjusted. Some conclusions:
Most successful technology companies aren’t rocket ships.
As IPO Dashboard notes, is it wise to prepare a business plan featuring steep hockey stick sales projections?
(Hat Tip Robin Klein)
Sunday, October 11. 2009
Fred Wilson, referencing a Jason Calacanis post on the iniquity of angel aggregators charging startups to pitch to them, notes that:
..."startup agents" out there that charge entrepreneurs upfront cash to make intros to potential investors. They should also be avoided. A basic rule of thumb for fundraising agents is that they must work on a success fee basis or you should not use them. Otherwise, they have no incentive to see you actually get funded.
Fred calls it a scam. I am told it occurs in the UK as well. The key point here is that one about "they have no incentive to see you actually get funded." if you pay them. Says it all......
Hmm..maybe we should set up a service to validate Angel organisations. For a small fee, of course...
Friday, October 9. 2009
Paul Kedrosky has a funny paean to VC's over on TechCrunch - there are some classic lines I wish I'd written, and probably will...... (actually, there is some Irony in them - is Paul actually Canadian?*):
Hating venture capitalists is profoundly satisfying. After all, they are slack-jawed, monied, oily, know-nothings who carom off innovation, fire capable founders, squash angel investors, and exist mostly to make commercial bankers look smart and interesting.
But as Paul points out, its not that easy:
Creating a successful startup is among the hardest things you can do in a capitalist economy. Entrepreneurs must successfully navigate a sea of multi-dimensional uncertainty, from technology (will it work?), to people (do I have the right employees?), to market (will anyone care?), to financial (can I finance doing this, and can I then sell the product or service for more than it costs?) At big companies you can fail at launching a product, fail at hiring people, fail at making money on a product, and fail at figuring out whether something will work. Your big company will probably be unaffected, and you may even get promoted. Do any of those things wrong at a startup and, in all likelihood, you’re dead. You are wandering a maze of dark and twisty passages — most of which are paved with trapdoors to hell.
And if it works, someone else gets all the glory while VC's remain non-venture capitalists in everyone's mind:
It's a really good piece.
Except, except..... as an asset class its under major threat today, with diminishing returns as startup require less capital to get going, but also (like in media) stay on the hit parade top 10 for less time. I look forward to an equally sharp post from Paul about what they have to do to sort that issue out.
Also, I'm not sure that what they do is the hard bit compared to actually founding a startup. By definition a portfolio de-risks investment strategy. There is also a fascinating piece in Ian Ayres' book Supercrunchers where he notes that movie moguls hate using mathematical analysis to predict movie success, even though it provably works, because they prefer the system that those moguls in power have monopolised - ie a comfortable relationship game. There is also some similarity, I hypothesise, in predicting the success of movies and startups, but I have yet to see any serious study made apart from a few prediction market plays a few years ago. For a small consideration I wouldn't mind looking at this area
*Americans are famous for their lack of irony. Brits are famous for a love of stereotypes
Saturday, September 19. 2009
A short note on the eBay/Skype fiasco.....this is a chickens coming to roost thing.
I find it nearly impossible to believe that a due diligence team in this sort of size of transaction (eBay buying Skype) would not have been aware of the red flag that was the ownership of the underlying IP. (The biggest transactions I ever did were about 1/5th this size and for that price every jot and tittle was crawled over in minute detail). I would strongly suspect that there must have been a decision to overlook the IP issue.
So, what was eBay's management and Board thinking when they decided to press the button to buy? And more to the point, why were they thinking it? Why was it decided to overlook the IP issues? The mind boggles!
Fast forward a few years, and a soap opera like cast of characters manoeuvre to buy Skype from eBay, and even though most of the players seem to have been in place to see where the skeletons are buried, still the play goes on. As one of the commentators on the TechCrunch piece notes:
I suspect anyone who has ever done M&A (and many who haven't) is pretty certain that a lot of dirty washing is going to come out now.......
Wednesday, September 2. 2009
The New York Times reports that eBay is soon to sell Skype, and they are looking for a price north of $2bn (they bought Skype for $3.1bn in 2005). On what basis, we wonder. Given that Skype doesn't actually own the technology that its based on (the founders still own that and are busy suing Skype) its hard to see how such a price tag can be justified on c $600m revenues and minimal (if any) profits*
As GigaOm notes:
That’s why the decision to sell the company at just over three times sales doesn’t make much sense to me. Unless, of course, eBay management is trying to use this deal to paper over the problems that continue to plague its core business of auctions. The other reason could be the legal problems faced by Skype. These legal problems are a primary reason Skype’s IPO dreams have turned into a nightmare.
The sale is theoretically to Marc Andreessen’s new venture fund, Andreessen Horowitz, and the original Skype investors Index Ventures. Also according to The Times Silverlake Partners, a Silicon Valley-based private equity group, is said to be involved with the deal.
Looks like the typical PE deal - take over a distressed asset from a distressed company, tidy it up and throw it on the market 3 years later in better times for a tidy profit.
eBay paid way over the odds in the bubble years, and is now going to sell in the distressed times. I agree with Pat Phelan, in that at a price tag $2bn plus I wouldn't be surprised if the founders were also involved in the deal, as that to me is the only way that the buyers could throw this company into another proifitable sale or IPO in a few years time - unless you believe VOIP is in for another major growth spurt, which I don't.
Update - El Reg says the actual deal is 65% of the company:
It’s official - eBay has offloaded a majority stake in Skype to a gaggle of investors in a deal that values the VoIP outfit at $2.75bn.
Slightly better news in that they get a share in any upside - one hopes the risks are similarly shared, and we wait with bated breath to hear about the lawsuit going forward...... but still, $ 2.75bn. Also, I wonder what the conditions in this deal are - that price almost paints the PE guys as dumb money, and they usually aren't. I'd be prepared to bet there are a few guarantees and indemnities in there.....
#Update 2 - nice analysis at Bronte Media
The earn outs were not met and the company actually only paid $3.1bn. But also of note is that the firm only paid $1.8bn in cash and $1.3bn in eBay stock.
Love the angle that compared to the Rest of Market, the Skype deal was value accretive despite itself.
*Apparently its making over $100m projected in 2009. Not clear if this is EBITDA or profit.
Sunday, April 19. 2009
Very interesting story from the Sunday Times, (seen initially on TechCrunch UK) about the setup of European Founders Capital (EFC):
Nice move, as its aimed squarely at the "Equity Gap" between "friends & fools" and VC funding, which is a real issue in the UK (as we have pointed out repeatedly).
There is also a bigger discussion that this news needs to be seen as part of, ie the restructuring of the global Venture Capital market (see this recent article by Sarah Lacy as an example of the issue) but thats a whole 'nother post.
Anyway, I hope the boyz will do well by doing good
Monday, March 2. 2009
Peter Thiel, one of the Facebook VC's on why the deal with Twitter failed:
In Facebook's first public confirmation of the talks, Thiel said the parties disagreed over price and structure when they seriously considered a deal last fall. "It became pretty clear it wasn't going to happen," Thiel says from the mid-Manhattan office of his hedge fund Clarium Capital. "The deal would have to be done with Facebook stock. And then you have to figure out how much the stock is worth."
And Facebook tried to over-egg its value:
Representatives of Twitter liked the sound of $500 million but balked when Facebook said its stock was worth $8 billion to $9 billion. Twitter's team knew that Facebook was letting employees sell stock on the secondary market at company valuations ranging from $2 billion to $4 billion. "We said it's not worth it," the person says. "Don't treat us like children."
Quite right, what self respecting Web 2.0 startup wouldn't take it all in hard cash and run for Miami (After all, thats what the rest of them have all done). Facebook did not have the cash on hand to afford Twitter, so wanted to use stock. However, this option was effectively nixed by Facebook's decision to show an Order-of-magnitude overvaluation - who in their right minds would take stock from such an entity?
(i) that its the VC, not the management talking here - how come, we wonder?.
Timing, as they say, is everything and going into the Crunch with overvalued stock was not a good place to be.
Saturday, January 3. 2009
Article in the FT today about the UK startup industry asking the government to provide more support to help young companies survive the recession:
Recently NESTA (National Endowment for Science, Technology and the Arts) called for the government to create a £1bn fund for “innovative technology ventures”.
But if I am honest, I think the word "innovative" is key. There has been (in the past anyway) a tendency for UK pork to often go to the well connected rather than the deserving. Any "bailout" money should not - in my view anyway - be used for companies that are doing me-too stuff, or are merely e-retailers, online consumer media plays etc.
What the government can do for all small companies is to reduce the friction in:
The trick in my view is to differentiate between the requirements of very small companies (less than 5 employees, c 80% of all UK companies), small companies (less than say 20 employees) and larger ones - currently far too much UK company/employment/regulatory policy is drafted with the assumption that all companies are at least medium sized.
I thought these two passages from the article articulated the key issue however, in that both are right:
Reshma Sohoni, chief executive of Seedcamp, an event held in London and across Europe for young tech entrepreneurs, said backers of start-ups that would in recent years have been allowed 18 months to start generating revenues are now being pushed to do so in two or three months.
Getting the balance between having a sufficient runway to actually build a business, but ensuring that the companies are actually viable (and what better way than real customers) is key.
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