Bubblewatch

Fascinating article on Pando Daily about how the VC community has moved from funding high potential people to funding Assholes:

Here’s the problem. Every venture capitalist, in every interview they’ve ever done will tell you the same casual lie: That they invest in people first and ideas second. They’ll tell you they invest only in people they’d want to work with. They’ll tell you that they have the luxury to say no to companies that don’t do things in line with the way they like to work, the way they like to treat people.

You don’t have to look too far into this year’s frenzied pace of dealmaking, and at the price tags of those deals to know that’s complete bullshit. In all too many cases, what venture capitalists are investing in is assholes.

It’s weighing on those who’ve been in the business for decades, and I’ve been having conversations about it all summer. A senior partner at a top firm recounted a partner meeting at breakfast recently.

“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”

His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”

That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”

Possibly, but looking back at the dotcom era one can argue that it gets that way as the cycle moves up to Maximum Froth, in my experience the Asshole count and valuations both went up exponentially as the froth rose in the dotcom era. At its height anything and everything was funded, and some of those people were very definitely many cards short of a deck. To me it's more a sign we are starting to see the Froth appear in the current "Tech" bubble (though, to be pedantic, most of these companies are not in fact "Tech" per se, in that its not their technology that is critical, they are mainly digital versions of long established services with some form of networking function overlayed on them to simplify the transaction between buyer and seller. It's the attraction of eyeballs - sorry, their traction - that is critical, as there is only space for a few winners)

The other very telling comment made in the article is this one:

At some point this business became about funding a founder, not a company. This has coincided with three other theories of venture capital portfolio management that have become prevalent of late. The first is an obsession with a VC’s “social game”—to steal the parlance of reality TV. Since 75% of venturebacked startups are destined to fail, VCs today assume they’ll do less damage overall by writing off a bad performer than doing the hard work to fix it. Even if they oust an ineffective founder, a company may be too damaged to salvage, meantime, the VC has ruined his rep of being “entrepreneur friendly” for nothing.

The second theory is the new valuation math: Given basic liquidation preferences and soft landings at bigger Valley companies, the risk to losing all your money is somewhat protected. Likewise, companies like Facebook and Google have thrown traditional valuation math out the window too, caring only if someone might disrupt them in another ten years.

So the only thing anyone cares about is the upside. VCs—in this point in the cycle—are smart to worry less about erring on the side of paying up too much for a deal than erring on balking at a seemingly high valuation. Especially when the next day Mark Zuckerberg could rewrite every rule by paying $2 billion for a hardware company that doesn’t even have a product on the market. As Bill Gurley of Benchmark says, “You can only lose your money once” if you invest. If you don’t, you can effectively lose that would-be appreciation many times over.

Is it the mantra of a bubble? Maybe.

I love how even the Valley pundits who insist they are "telling it like it is" shy away from the "Bubble" word - these above two point perfectly express the "game theory" of a Bubble dynamic. Anyway, on with the point:

The third change that rules venture decision making is an acceptance that no one has any clue of what works.

.....

The determiners of success in the Valley are no longer CIOs deciding on huge iron boxes that cost millions a pop. It’s not even whether geeky early adopters will like Twitter or FriendFeed more. It’s what teens around the world want to do on their phones. A hot mobile app has more in common with a movie premiere than a classic Silicon Valley tech company. And increasingly, VCs know they have no clue what’s a good idea and what’s a bad idea. Better to back all the apps showing “hockey stick growth” on college campuses.

This also is a descriptor of the beginning of the Frothy phase of the dotcom era - no VC knew what would work then either, so they invested in a huge range of patently daft ideas, praying for a few nuggest, because to not do so was job-risking. If one VC made a big play in a sector then the others piled into every other player in that sector (and by the end, even manufactured their own plays like pop svengalis manufacture boy-bands). Now to be fair, the sort of person who can set up and build a billion dollar company is seldom going to win the "person most admired for being nice and honourable" awards, and as Pando points out, the process of getting a company off the ground can make someone into an asshole - but Pando thinks This Time it is DIfferent:

The other sad reality is the continual erosion of what Silicon Valley—as a place—stands for, if anything. This used to be a place of misfits and changing the world. Even the legendary assholes had a cause beyond themselves and checks and balances on their board. It just may take another economic collapse to get back to that.

Pando also argues that the reduced cost of setting up a company has changed the power dynamic, but while that's true in the down-cycle and early up-cycle, by the time the Froth appears money is not the issue anymore. To me, this looks very cyclical. At the top of the dotcom bubble it wasn't about changing the world either, it was about get rich quick. Bubbles attract assholes, and they disappear again when times get hard. If you want to find a low asshole industry sector, look for ones in trouble - the mid 'noughties Valley was just that, and was arguably more asshole free than average.

And we are enetring the Frothy time, so expect the asshole count to increase. Then there will be a crash, a collapse, and things will go back to being more asshole free again - until the next bubble starts to froth.

(Update - a friend of mine pointed out that what I reallyw as saying is that asshole density is a measure of bubbletime, so I have changed the title to that ffrom my original)

People Invested $1 Million In An App That Just Says ‘Yo’

"It’s not just an app that says Yo,” says Mr Arbel. “It’s a whole new means of communication"

'nuff said... are we getting to an age when every startup gets $1m just for existing? Will tomorrow see $1m for an App that says Ni! ?

As was noted by James Surowiecki* in the New Yorker, the problem is increasingly not getting started and seeded these days, its finding a way out the Darwinian stew of all the other crap ideas encouraged to start up - and this ain't the way to fix that.

* Author of Wisdom of Crowds

When the Twitter IPO was mooted, we believed that although the company has potential, one of the major risks to its future valuation was its management - see here for example, where we wrote :

6. As always though, realizing potential comes down to execution.

- The FB team are very focussed, Twitter is harder to judge - lots of change at the top over the years, we wouldn't be at all surprised if they bring in an "Eric Schmidt" figure.

The fun and games this week was totally predictable (see above...), now we await part 2 of our prediction - an Eric Schmidt type character brought in to reassure investors.

Who's your money on?

So, Twitter posts perfectly good results that make perfectly good sense for it's business progression, yet the stock falls sharply (down 10% at one point in aftre hours trading).

Why?

Well, unfortunately for Twitter, the Bubbletime Punditocracy wants to believe its a $50 stock, despite its fundamentals (which are very well known) implyingits more a $26 stock (it's IPO price). Twitter is what it is, and hasn't changed its model dramatically since its IPO, and its track hasn't shid=fted much from then - so its hard to imagine why its value should be be double its IPO valuation - Irrational Exuberance and Irrational Analysis at the same time.

To quote that great tech stock analyst, Mr D Bowie:

"And I want to believe in the madness that calls now
And I want to believe there's a light shining through somehow
And I want to believe, and you want to believe
And we want to believe"

(Cygnet Committee)

Facebook had the same problem, the Punditocracy was desperate to believe it was something it wasn't, it took them a good year or so to get their business to a point where it started to resemble their wishes, and its stock price driftef ever lower from its peak of irrational exuberance until that happened. Twitter is best advised to ignore the Pundits as well and just get on getting on with it.

It was no great surprise to us that the makers of Candy Crush, King Digital Entertainment Plc , had a less than illustrious IPO. As we wrote in February, it was high time to run for the IPO gate before it closed on them, and they have. Good luck to them, they now have $500m in the bank now, a useful cushion against the slings and arrows of outrageous future misfortune. The c £8.5bn valuation (now c $7bn) will not be quite so easy to live with, I suspect.

But nothing changes our analysis since February, this stock is a still very high risk punt, and sold at Bubbletime prices to Bubble-minded investors to boot.

Who needs Google Glass with these goggles...

Facebook has bought a tiny Virtual Reality company with a near-virtual product for $2bn (mainly stock) - Grauniad.

Facebook has bought the virtual reality technology firm Oculus VR for $2bn [£1.2bn], it announced on Tuesday. In a surprise revelation, the social networking company said it had paid $400m in cash and the rest in more than 23m shares, currently worth $1.6bn [£970m], plus an additional $300m pegged to future performance.

A detailed company statement said that Facebook recognised how Oculus had built a solid following among game developers with 75,000 pre-orders for its virtual reality headset, but that virtual reality technology would expand to other industries from communications and entertainment to education and media.

Kudos to Oculus, it started as a kickstarter project 2 years ago and has taken some serious funding. And actually, its likely that goggles or glasses of some sort will be the view-screen of choice at some point. This is clearly where Facebook see it going, as Mark Zuckerberg notes:

After games, we're going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home.

This does point to a rather interesting tussle between Google Glasses and Facebook Goggles for nerdiest eyewear, and it also points to a new tussle for video screenware device-as-portal. But this is very early days for a virtual product for virtual reality, to go for for $2bn. Still, its all virtual money and it all works out in the Bubbletime.

Can't wait for the iGlass now.....you just know its coming.

In the 90's and 'Noughties I made many trips to San Francisco/ the Valley, and as the 90's dotcom bubble built up on I noticed two "non-stock" signals of its frothiness - house prices and occupation of the SoMa (South of Market) area by trendy bars and techie startups:

- House prices rose to the point that educated non techies couldn't afford them, so people like teachers were priced out. This is starting to happen again. (By the way, my "top of market" indicator was when teachers in SF/SV decided to sell and go and teach elsewhere/semi retire based on the huge house price gains)

- SOMA became littered with start up bumf, not old newspapers, and you were tripping over blue-bazered dotcommers instead of winos (SoMa to me has been the flood plain of economic exuberance in the SF/SV area, its use is a good marker of prevailing conditions) - and its filling up with DotCom 2-ers again.

So, another sign of the BubbleTime.

Of course, this time it Will Be Different....

Of course it will....

Incidentally, I recall going back in c 2003 after a 2 year absence and there was a house price tumble almost back to Palo Alto, plus SoMa was full of winos and old newspapers again....

News out today that King, manufacturers of the current hot mobile game Candy Crush, have filed for a $5.5bn IPO. We were asked what do we think?

- Based on a growth from a few $100m revenue in 2012 to $1.9bn in 2013, and real profits of c $570bn, a valuation of $5.5bn is tame by Dot Com 2.0 standards, but....
- ......King bases c 80% of its revenue on just 1 hit game
-. Hit Games come and go fairly rapidly, and there is no guarantee they can come up with a second hit game, so its quite conceivable that in another year they will be a few $100m company again, and worth nowhere near $5.5bn.
- Remember Zynga? Zynga share price collapsed after they failed to consolidate their success (see chart at top of page).
- King made c $570bn in proft last year, it has paid over $500 bn of dividends to its senior management and early investors, and its now looking for c $550 bn public investment - in normal times that counts as "things that make you go hmmmm..."
- However, its the Bubbletime (proof: Zynga shares rose after this IPO was mooted in September last year and hit a 52 week high after this IPO was announced today), so the best thing to do with a windfall year is rush through the IPO gate as fast as possible.

They may be able to replace Candy Crush with a "next hit" but the Gaming ecosystem is littered with the bones of companies that didn't The music industry's stage is littered with the bones of 1 hit wonderbands. The movie industry...well, lets see what Candy Crush 2 looks like.

We have watched the rise and rise (and slight wobble post Facebook IPO) of the Next Tech Bubble for the last few years (see our BubbleWatch series), and as you can see teh NASDAQ Indez (abobve) tells you fairly clearly what is going on. As the NYT reported about a month ago:

Once again, new “metrics” are being applied to justify stratospheric valuations. Twitter is losing money. A price-to-earnings ratio? There is no E in the P/E. But its stock is trading at 20-odd times the company’s annual sales. Good enough.

There is more. Technology companies have become the takeover bait du jour. A report issued by Ernst & Young last week said that mergers and acquisitions in the global technology industry have rebounded to “a new post-dot-com bubble high.” Roughly $71 billion in deals were made during the third quarter.

And then there is Kozmo.com, the poster child of the dot-com bust. Kozmo is back. Last time, its couriers would deliver just about anything at any hour — CDs, Milky Way bars, you name it. It burned through $280 million before going bust. “Remember us?” a banner on the Kozmo.com reads now. “We’re relaunching soon.”

Yet interestingly, there are still Bubble Deniers - NYT again!

Many technology entrepreneurs and venture capitalists say there is little to worry about. Which tells you something about bubbles and Silicon Valley. It is difficult to know when any bubble is going to pop until it does. And in Silicon Valley, with its inherent optimism in brighter tomorrows, the view tends to be that the way is always up.

“I’m not going to say there is a bubble or there isn’t a bubble,” said Naval Ravikant, co-founder of AngelList, a website for raising money for start-ups. “But I lived through the first bubble, and I was in disbelief the entire time, and I don’t see anything of that magnitude or scale here today.”

At about the same time, an article in Forbes argued that there were 3 reasons we are not about to witness another equity-led bubble bursting:

- Price/Earnings ratio too low. In January 2000, the S&P 500 P/E ratio based on trailing twelve months earnings as reported was 29, now it’s 19.8. Even though that P/E ratio has risen from January 2012′s 14.9, the current level does not imply excessive over-valuation.
- Number of tech IPOs too modest. In 2013 there have been 28 tech IPOs and there may be 31 by year end, according to PitchBook. In 1999, 308 tech companies went public, according to Morgan Stanley. To be sure, Twitter’s IPO has gotten plenty of attention — since so many in the media seem to use the money-losing service. But we have a long way to go before the IPO market looks like it did in 1999.
- Popular media bubble fever absent. In December 1999, Amazon’s Jeff Bezos graced the cover of Time as its man of the year — and everyone was talking about dot-com stocks. These days the public’s interest in stocks is muted and the popular conversation is about the failure of a government web site.

See the NASDAQ chart above for an alternative viewpoint to this - and would it surprise you that trading volumes are rising to near-2000 levels too? Forbes notes in the same article that more money has poured into equity mutual funds in the first 10 months of 2013 than it has since 2000, although most is washing round in international funds at the moment (as it was in the late 90's until Tech really got sexy).

And you know its on its way when the Tech Fan-Press argues that This Time its Different - as Wired did in December:

...exuberance isn’t always irrational. It seems that the kinds of companies now being backed by investors — not to mention the way that they’re run and the way the market responds to them — are far different from what we saw at the turn of the millennium.

Twitter is this year’s poster startup for how internet IPOs have changed. First, there’s the company’s product itself, which is truly original and arguably transformative. It’s not the sort of copycat e-commerce site or “portal” that puffed up the first dotcom boom.

Spending is also different. It’s true that, as a kind of new-age marketing platform, Twitter is uniquely suited to sell itself. But the rise of social media has transformed the marketing strategies of nearly all tech companies, after their predecessors in the late 1990s blew through millions on traditional advertising to no discernible effect. This breed of fashionable “leanness” has also meant that companies haven’t gone overboard with hiring and expenses like office space, at least compared to the first time around. When companies do shell out, it’s for talent. In the San Francisco-Silicon Valley tech nexus especially, there’s a prevailing belief that whoever has the smartest people in the room wins.

Re Talent and so on, I recall that it's about what everyone said in 1998/9 too, but by 2000 it was all about pumping money from Wall Street to Madison Avenue and throwing money at rare skills.

And yes, I know that some giant companies were formed in the DotCom era, and we understand the function of bubbles in facilitating creative destruction - but I also know there was a huge amount of money lost by innocent people. To me its clear that we are in a run up, we haven't quite hit irrational exuberance but when you look at that NASDAQ graph it won't be long in coming unless some other investment area gets major returns.

To me though, as ValleyWag notes, you just know that if something like Kozmo.com is relaunching, the blue touchpaper has been lit. I now await WebVan to stir, and we know we're off. Get your telescopes out, 2014 watching is going to get interesting.

From Broadstuff's Bubblewatch Dept:

Dominic Rushe over at the Grauniad asks for our thoughts on the Twitter IPO. which he summmarised in this article. To give a bit more background, we think that:

1. Twitter is far more sensibly priced than Facebook and other "Social Media darlings" like Zynga and Groupon were at float

- Twitter valuation in price per user terms is $14bn/c 240m users (assumed at IPO) = $58/user, i.e. about 50% of FB ratio at flotation
- Ditto, its valuation/revenue is about 25% of that of FB's at float

2. Compared to Google's IPO, it is very similarly valued.

- GOOG was $23bn valuation on (est) 500m users and $970m revenues,
- Twitter is $14bn on c 240m users and c $500m revenues, so the ratios are not that different

3. It has higher future growth potential that Facebook

- 240m users to FB c 1 billion at time of IPO
- It is not just a social network, it is a flexible comms medium - the various uses to which it has been put in the last 5 years are exraordinarily wide compared to a pureplay Social Network
- Twitter is truly native on mobile, and has a very small footprint so can be used by fairly simple devices
- The emerging Internet of All Things and other unified multimedia approaches play well to Twitter's capability

4. It is more reasonably priced within its own fundamentals and lifestage than Facebook was

- (Assumed) c $0.5bn revenues, 240m users = c $2 per user, 50% of Facebook's IPO, but at 15% of valuation.
- Very early days in its revenue model, advertising is only beginiing and there are possible (owing to its comms system nature) other potential streams
- At only 240m users so IMO more upside than FB with its 1 billion - Facebook growth was alraedy peaking at IPO, with half the c 2bn available onine people on the planet on the service already. Twitter has much more headroom

5. Twitter probably has a longer life than Facebook post IPO - there are so many directions it can still grow in, whereas you exactly knew what FB was at IPO, and you even could see the competition emerging. That is not so clear with Twitter.

6. As always though, realizing potential comes down to execution.

- The FB team are very focussed, Twitter is harder to judge - lots of change at the top over the years, we wouldn't be at all surprised if they bring in an "Eric Schmidt" figure.
- There is always a risk that. like email, Twitter becomes a "$0 trillion industry" - ie everyone uses it but it is ubiquitous - but as the first one out the traps, it has more chance of capturing its value.

7. Facebook took a year to find its IPO price, so that pricing debacle is also unlikely to be repeated with Twitter.....we hope. (Hype springs eternal, as you all know....)

In other words, by the standards of stupidly overhyped and overpriced Social Media floats so far (excepting Linked In) it is almost rational - its lower priced, with more future potential, than the most recent ones. With Twitter you only have to believe it has a similar future potential to Google at IPO, not 4x the potential of Google as as you do with FB.