Thursday, April 21. 2016
This shouldn't surprise readers of this blog, but there is a nice analysis of the problems Unicorns have with the funding rounds with guaranteed payouts to certain funders (ratchet, prefs etc) on "abovethecrowd" blog - "dirty deals" made by "shark investors"
One is that they “unpack” or “explode” at some point in the future. You can no longer simply look at the cap table and estimate your return. Once you have accepted a dirty offering, the payout at each potential future valuation requires a complex analysis, where the return for the Shark is calculated first, and then the remains are shared by everyone else. The second reason they are a massive problem is that their complexity will render future financings all but impossible.
As the blog points out, later-stage investors may be tempted to become Sharks themselves and start including "dirty deal" into their own term sheets. They will need to embrace a Shark culture, and be comfortable knowing that they are adverse to and in conflict with the founders, employees, and other investors on the capitalization chart. This is filed under "No Shit, Shylock" in Broadstuff Towers...
Troubled waters lie ahead for many of the Unicorns.....clearly these deals have inflated the Unibubble, but it looks like they will also be a major reason it bursts.
(Update - this article by Sarah Lacy notes the author of the above is an early stage VC, and thus one of those being scraped by the "dirty deals" I assume. Now while one feels a tad sorry for him, he must have known (i) the VC game, (ii) the potential burn rates of these businesses trying to colonise industries with neglibible costs of entry and (iii) that they have been in the Bubbletime for c 3 years - heck, we did, this is not hard!
Thursday, November 19. 2015
Nemo's Dory - Boundless optimism, no memory. Essential characteristics for the Bubbletime
Today was Square IPO's, after re-valuing its business from $15 to $9 a share. As of 3 pm on Day 1 its trading at about 40% above $9, and the Silicon Valley press is positively bubbling over in praise
"Hang on" I hear you ask "didn't they just take a massive haircut last week to go out the gate? They were valued at $15+ last round, that's at least 70% above $9?"
You are right, dear reader, but this is Silicon Valley in the Bubbletime, and that de-valuation was so last week. What is important is that an IPO must "pop" up bigtime, so the hype machine can crank up to full volume. Details like the above de-valuation are forgotten, Dory-fish like, in the great game of finding Alpha
Given that most Unicorns are way overvalued (the rest are just overvalued), for the bubbling to continue, first must come the bath. Of course, this screws the employees and later investors without ratchets and preference shares, but hey that's the breaks, right?
Update - Bloomberg reports that everyone made money but for the Series D (late, un-ratcheted) its a close call - and they put in the largest lump of the money (40% +) pre IPO - probably not unique to this Unicorn
Thursday, September 3. 2015
This is a lovely piece in Vanity Fair about whether there is an emerging Silicon Valley Bubble or not. They report on Andreessen Horowitz' Scott Kupor's recent talk:
It always is....or at least the reasons why "it's different" are different every time anyway The piece continues:
.....and charts highlighting the decrease in tech I.P.O.’s, the metric that eventually pierced the froth in March of 2000. Back then, a company went public almost every single day; now it was down to about once per week. This time around, he noted, the money was flowing backward. Rather than entering a company’s coffers in the public markets, it was making its way to start-ups in late-stage investments. There was little, he suggested, to worry about.
At this point may I raise the Mandy Rice Davies riposte....
We first saw early bubble signs in 2010, the hardest thing is to work out "when" it will pop. I'm a great believer in 7 year cycles from genesis to nemesis because its a mystical number with a great pedigree, every 7 years the Queen of Faerie pays a tithe to Hell, and besides its the 4th prime number and I like 4 as well:)
Maybe a better strategy than trusting amateur numerology is to try and avoid the fallout - the article quotes Marc Cuban, who points out:
“The biggest of all losers will be anyone who has borrowed money to invest in private companies,” he told me. “You were stupid. You blew it. You lost. That simple.”
Chances are though, that the biggest losers will be the "other people" when those investors that use "other people's money" invest, too late in the cycle, without really understanding the game.
Friday, July 31. 2015
Uber is now valued at $50 bn - WSJ:
Uber Technologies Inc. has closed a new round of funding valuing the five-year-old ride-hailing company at close to $51 billion, according to people familiar with the matter, equaling Facebook Inc.’s record for a private venture-backed startup.
This is...extraordinary, for a business that essentially bases all its economic value on arbitraging a section of the labour market, essentially the newly emergent (and thus poorly regulated) zero-hours-contract, dead end contract job market, or whatever the equivalent is in whichever country you look at. History tells us this will inevitably be regulated at some point in OECD countries.
Plus, all public service markets (like taxis, hotels etc) were eventually regulated to protect providers (eg drivers) and customers (eg passengers) after the inevitable high profile abuses, this one will be too at some point. (The recent scalping of Uber customers in London during the Tube strikes didn't help their cause)
But also what also fascinates me is the view is that it is a sustainable high margin business among many people who really should know better, i.e. those handing over the money at these values, with all that implies. The dream is that efficient algorithms match supply to demand and the customer pays the value added surplus. That is fine in startup scale, when most customers are time starved salarimen with brass in pocket, buts its not a mass market proposition. The cost of running a taxi is little different no matter who is running it (unless you want people to skimp on all those regulated issues like maintained cars, drivers licences etc...), so when it tries to scale to this valuation it is going to have to offer rides to teh kless cash-flush hoi polloi. So unless Uber is being run as a not for profit (and the $50 bn valuation rather belies that) then the bulk of the money taken out of the business model will be from the drivers' wages. And when that is dis-allowed (see - skimping, abuses, etc above) , where are the margins and who takes the hit?.
I guess its more that the backers are betting on Uber being able to
Do you believe this will lead to higher or lower standards in the industry? Do you believe that there will be public pressure to regulate this part of the taxi industry? Do you believe it will come sooner, or later?
Answers on a share application form for the impending IPO.....
BTW - there is an implication for all those building the "Uber for X", they maybe better think carefully about their business model (or their IPO date), as it will probably have the same (low) returns that the other regulated players they are trying to disrupt have, unless there is some other cost pool in that X value chain they can take surplus from other than arbitraging unregulated labour. (Hint - one doesn't get Unicorn values if one takes it from one's own cut...)
*Definition of IPO post Facebook - to sell unicorn-poo for a lot of dollars to those people who believe in unicorns
Monday, July 6. 2015
From the "Well, we would have told you so if you'd asked" Dept:
For those who are surprised and shocked by the popping of the Chinese stock market bubble, can we point you to the Broadstuff Bubble-O-Meter which says that, when taxi drivers give you stock tips and private citizens gamble their savings it really is the endgame of the bubble, and the next step is "pop"
Addition from the "we didn't tell you this though":
And right to the end, those with financial interests in the bubbletime, and their mouthpieces, will insists that there is no bubble.
This is a public service announcement
Wednesday, October 8. 2014
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.
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.
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.
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)
Wednesday, June 18. 2014
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
Friday, June 13. 2014
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 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?
Tuesday, April 29. 2014
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).
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
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.
Wednesday, March 26. 2014
King Digital stock price fall on IPO day courtesy Yahoo Finance
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.
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