According to a report on Fortune Term Sheet, Wall Street financial company are poised to slash nearly 21,000 jobs, focusing on investment banking and trading departments.  The layoffs will include senior bankers, and those remaining could see compensation drop by 30%.  Here's the link:   http://finance.fortune.cnn.com/2012/04/30/wall-street-layoffs-21k/


This supports an earlier story by the Wall Street Journal on the topic that was covered in a prior post.  Here's a link to the post:  http://www.allenlatta.com/1/post/2012/04/layoffs-expected-for-wall-street-investment-bankers-wsjcom.html 

The TechCrunch post "Be Concise! - The Top Questions Asked At A Y Combinator Interview" has a list of over 50 questions that entrepreneurs have been asked during the Y Combinator interview process.  As I reviewed the questions, it seemed to me that these questions are also useful to entrepreneurs as they prepare their marketing documents.  For example, one of the questions is "How big an opportunity is there?"  This is something every investor will want to know and all fundraising presentations I have worked on (as an investment banker and lawyer) have had something about the market opportunity (size, growth rate, addressable market, etc.).  If entrepreneurs go through these questions before they prepare their marketing documents, the final product may be more thoughtful and complete.

Here's the link:  http://techcrunch.com/2012/04/27/be-concise-the-top-questions-asked-at-a-y-combinator-interview/ 

In "Disruptions: With No Revenue, an Illusion of Value," author Nick Bilton presents a case that there is a technology bubble, based upon (a) how some start-ups are advised by investors not to have revenues, as revenues lead to valuations driven by science, where no revenues means "finger in the wind" valuations; and (b) most venture capitalists are more interested in quick flips with eye-popping premiums.  An example is no-revenue Instagram being acquired be Facebook for $1 billion, and other examples of multi-million dollar acquisitions of zero revenue companies are provided, including YouTube.

This led to a thoughtful response by Chris Dixon on his blog.  In "Is it a Tech Bubble" Mr. Dixon argues that the situation is more nuanced, and provides seven thoughts:

1. Public tech companies are not trading at "bubble" valuations, but at a reasonable 17x P/E multiple.
2. To argue that Instagram's acquisition by Facebook was too high requires arguing that either Facebook's expected IPO valuation of $100 billion is too high, or that it was irrational for Facebook to spend 1% of its market cap on perhaps one of its biggest threats.
3. There may be some over-valuation in deals in seed deals and in later-stage "momentum valuations," which Mr. Dixon provides thoughts of why this is the case.
4. Certain stages seem under-valued, such as Series A rounds, which is leading some investors away from seed stage investing to Series A investing.
5. Macro trends also play a role, and it's anyone's guess what will happen in the next 3 years.  In Mr. Dixon's words: "That's why smart investors continue investing at a regular pace through ups and downs."
6. It is somewhat true that start-ups with zero revenue may get better valuations.  This is because investors may be able to justify higher valuations when they "buy the dream."
7. Venture investors don't invest in companies with a primary strategy to flip them.  This is because VCs recognize that they are better off to invest in companies that can grow into a big business, which creates more options for exits, including selling the company.

I think Mr. Dixon's article is better reasoned and in my opinion better reflects where the tech industry is today.

Links:
"Disruptions: With No Revenue, an Illusion of Value"  
http://bits.blogs.nytimes.com/2012/04/29/disruptions-with-no-revenue-an-illusion-of-value/ 

"Is it a Tech Bubble"  
http://cdixon.org/2012/04/29/is-it-a-tech-bubble/ 

Tech entrepreneurs are able to develop ideas much faster and for less money than in years past.  This has led to entrepreneurs changing their company's business model mid-stream when they find the original business model didn't have traction or that feedback suggested moving in a new direction.  This rapid shifting of business models is now known as "pivoting" and in the case of Instagram, paid off very well.  Instagram, founded just a few years ago, was started as a mobile check-in site, but pivoted into the photo-sharing application that was acquired recently by Facebook for $1 billion.

The Wall Street Journal article "'Pivoting' Pays Off for Tech Entrepreneurs" discusses this phenomenon of pivoting, and how venture capitalists are embracing it.  It's an interesting read.  Here's the link:  http://online.wsj.com/article_email/SB10001424052702303592404577364171598999252-lMyQjAxMTAyMDIwNjEyNDYyWj.html 

"Aqui-Hires" are acquisitions where the acquiring company (usually a larger company) is primarily acquiring the talent at the smaller company, usually a start-up.  Michael Arrington, the founder of TechCrunch and now the founder of venture fund Crunch Fund, has written a very good article that is posted on From the Crowd discussing a component of Aqui-Hires, being stock grants issued by the acquiring company to the key employees of the start-up at values that are often much greater than the acquisition price.  The issue is whether the stock grants should be considered part of the overall price of the acquisition.

Why is this an issue?  Because these Aqui-Hires often end in losses to investors of the start-up, and the start-up's investors may feel that they should share in the value of these stock grants.

It's an interesting issue, and Mr. Arrington's column explains it well.  Here's the link:  http://finance.fortune.cnn.com/2012/04/25/startup-investors-may-request-acqui-hire-protections/ 

Wired Magazine has posted an interesting interview with Marc Andreessen titled "The Man Who Makes The Future:  Wired Icon Marc Andreessen."  The interview traces Marc's remarkable career, as inventor of the first graphical web browser Mosaic, to co-founding Netscape (the IPO of which helped fuel the dotcom era), to starting Loudcloud (an early cloud computing services business), to co-founding venture capital firm Andreessen Horowitz.  It's an insightful article and a good read.

Here's a link to the article:  http://www.wired.com/epicenter/2012/04/ff_andreessen/all/1 

The Wall Street Journal recently interviewed demographer Joel Kotkin about the exodus of nearly four million people (mainly young families) from California to other states over the past two decades.  The articles is "Joel Kotkin: The Great California Exodus" and was in the April 20 edition of The Wall Street Journal.  

In the interview, Mr. Kotkin identifies several issues that are contributing to the exodus: state and local restrictions of development causing an artificially limited housing supply, especially in coastal areas; trade-and-cap law AB32 which will raise the cost of energy (California's electricity prices are 50% higher than the national average); restrictions on oil drilling; water restrictions which are endangering Central Valley farmers; an unfavorable business tax environment; and a steeply progressive income tax system where even middle class workers pay a higher rate than millionaires in 47 other states.

Where are the people (and jobs) going?  According to Mr. Kotkin, to the "growth corridors" of the Gulf Coast, the Great Plains, the Intermountain West, and the Southeast.  These areas have lower costs of living, lower taxes, less regulation and natural resources.  Salt Lake City is cited as an example.

It's an interesting article and a wake up call for California.

Here'a a link to the article:  http://online.wsj.com/article/SB10001424052702304444604577340531861056966.html 

The Wall Street Journal reports that the ax is about to fall on investment bankers at some of the largest banks, as a result of lower M&A deal volume this year.  According to the article, global M&A revenue fell 17% in the first quarter of 2012 compared to the same period last year.  With pay and bonuses shrinking at the banks, it's a tough environment for bankers.  

Here's the link:  http://online.wsj.com/article/SB10001424052702303978104577361833023859446.html 

Reuters reports that China's internet sector has seen a dramatic fall in venture capital investment.  According to the article, Chinese Internet companies raised $138.5 million in the first quarter of 2012, compared to a whopping $866.5 million invested in the same quarter last year, a decline of 84% (data from Thomson Reuters).  Last year, China's internet sector received $3.6 billion in venture investment, over double the $1.7 billion invested in 2010.  

The article cites several reasons for the decline in venture investment in the Chinese Internet sector include a general pull-back from an overheated sector, recent accounting scandals involving Chinese firms listed on US stock exchanges, tougher US listing requirements for Chinese firms, poor market performance of recent listings, and a shifting towards newer sectors.

I was recently in China meeting with venture capital firms, and the sense that I had was that there was a general cooling attitude towards venture capital investing in Chinese tech companies.  In addition to the factors cited above, a common reason that I heard was that liquidity in general (IPOs and M&A) was proving more difficult and taking longer than expected.

It's a good article and worth a read.  Here's the link:  
http://www.reuters.com/article/2012/04/23/net-us-dealtalk-china-internet-idUSBRE83M0AY20120423 

A couple of good weekend reading articles on M&A and why M&A deals fail are "Why So Many M&A Deals Fail"  and "If Financing is Marriage, Is M&A Death?" by Ashkan Karbasfrooshan, which are posted on TechCrunch.

Here are links to the articles:  
http://techcrunch.com/2011/12/17/why-so-many-ma-deals-fail/ 

http://techcrunch.com/2012/04/21/if-financing-is-marriage-is-ma-death/ 

Pebble is a new "e-paper watch" which is a smart watch (in development) that will download data and apps wirelessly from an iPhone or Android device.  The video on the www.getpebble.com website is pretty informative.  Basically, the Pebble is a customizable watch that runs apps and connects wirelessly to an iPhone or Android device.  In addition to being a customizable watch, the Pebble can do things like act as a running odometer, a gps-enabled bike computer, show text message alerts, caller ID and control smartphone music apps, all available when your phone is with you.

Pebble is a project of a small team of engineers led by Eric Migicovsky, and they previously developed a smart watch for Blackberry called inPulse.  

Pebble has received pledges of nearly $5.5 million (at the time of this writing, and rising fast) from over 37,000 backers on Kickstarter, the funding platform for creative projects.  This is not an equity fundraising - this is funding obtained from people who believe in the project and want to see it succeed.  In general, they get nothing in return other than the satisfaction that they helped the company get off the ground.

Why did Erick Migicovsky go to Kickstarter to fund this project?  Based on several reports, it was because he could not receive backing from venture capitalists, despite having gone through the respected Y-Combinator program and having received backing from some respected angel investors.

To me, what Pebble has done is very impressive, and portends favorably for the new crowdfunding form or equity fundraising that was recently passed into law by the Jumpstart Our Business Startups (JOBS) Act.  Soon sites like Kickstarter will be able to help companies raise equity financing directly from investors - small amounts - but it will enable people enthusiastic about a project to obtain a (very) small equity stake in the company in addition to helping it get off the ground.  This could be big...

Links:

Pebble website:  http://www.getpebble.com/

Kickstarter website:  http://www.kickstarter.com/

Articles on Pebble and Kickstarter:  

Forbes:  
http://www.forbes.com/sites/anthonykosner/2012/04/19/who-needs-venture-capital-pebble-smart-watch-raises-over-5-million-on-kickstarter/

GigaOM:  
http://gigaom.com/2012/04/18/forget-the-money-kickstarter-turns-pebble-into-a-platform/ 

Prior posts of crowdfunding: 

Wall Street Examining JOBS Financing Act: NY Times DealBookhttp://www.allenlatta.com/1/post/2012/04/wall-street-examining-jobs-financing-act-ny-times-dealbook.html 

JOBS Act Jeopardizes Safety Net For Investors: Andrew Ross Sorkin
http://www.allenlatta.com/1/post/2012/04/jobs-act-jeopardizes-safety-net-for-investors-andrew-ross-sorkin.html 

JOBS Fundraising Act to be Signed into Law on Thursday
http://www.allenlatta.com/1/post/2012/03/jobs-fundraising-act-to-be-signed-into-law-on-thursday-venturebeat.html

The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:  
http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html 

Unintended Consequences of the JOBS Act: 
http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html 

Fundraising Bill Passes Senate:  
http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html 
  

Splunk, a data gathering and analysis company, priced its IPO at $17.00 per share, opened trading at $31.98 (for an opening pop of over 88%), and closed its first day of trading at $35.48 for a first day increase of over 108%.  Splunk's IPO is impressive, and bodes well for the broader technology IPO market, including Facebook's IPO expected in May.

Splunk's IPO raised $230 million, with $212.6 million going to the company and $16.9 million going to selling shareholders.  At the closing price, Splunk's market capitalization was $3.28 billion.

Morgan Stanley was the "lead left" manager of the offering, and was joined by Credit Suisse, JP Morgan and BofA Merrill Lynch as joint book-running managers and UBS, Pacific Crest Securities and Cowen and Company as co-managers of the offering.

Venture capital investors in Splunk include Sevin Rosen (17.7% post-IPO ownership), August Capital (17.7%), JK&B Capital (15.2%), Ignition Partners (10.5%) and Technology Crossover Ventures.

Links:
Splunk's IPO press release:  http://www.splunk.com/view/SP-CAAAGW7 

Splunk's latest S-1A filing (prospectus not available at time of posting):   http://www.sec.gov/Archives/edgar/data/1353283/000104746912004425/a2208909zs-1a.htm 

Facebook is targeting May 17 for the date of its initial public offering, according to a report by TechCrunch, citing "multiple sources close to the company."  May 17 is a Thursday.  

Here's a link to the article:  http://techcrunch.com/2012/04/18/facebook-targets-may-17th-for-ipo-date/ 

Venture capital investors in Facebook include Accel Partners, Andreessen Horowitz, Elevation Partners, Founders Fund, Greylock Partners, Kleiner Perkins Caufield & Byers, Meritech Capital Partners, Millennium Technology Value Partners and Technology Crossover Ventures.    


Here are links to prior posts on Facebook: 
http://www.allenlatta.com/1/post/2012/04/the-rationale-behind-facebooks-acquisition-of-instagram.html 
http://www.allenlatta.com/1/post/2012/03/facebooks-updated-ipo-registration-statement.html 
http://www.allenlatta.com/1/post/2012/2/facebook-files-for-ipo.html 

As I discuss in my prior post, Path and Instagram are focusing on social networking on mobile devices, which is where I see the future of social media.  As more and more people use their mobile devices to connect with each other through apps like Instagram and Path (and Facebook and Twitter, etc.), these companies become more valuable.  Path and Insagram are very different companies, with different business models and approaches to mobile.  There's a good article by Om Malik on GigaOM that discusses how Path and Instagram are different.  It's worth a read.

Link to the Om Malik article on GigaOM:  
http://gigaom.com/2012/04/16/why-path-is-no-instagram/ 

Link to my prior post on Path:  
http://www.allenlatta.com/1/post/2012/04/mobile-personal-networking-app-path-raises-30-million.html 

Path, a mobile application that enables people to share comments, photos and videos with close friends and family (a mobile personal journal), has raised approximately $30 million in a financing round that values the company at roughly $250 million, according to reports.  Redpoint Ventures led the round and was joined by Greylock Partners, Kleiner Perkins Caufield & Byers, Index Ventures, and personal investors including Sir Richard Branson.

Path is a year and a half old, and reportedly has almost 3 million users, and is not profitable.

Why is this important?  Because mobile photo-sharing application company Instagram was acquired by Facebook last week at a valuation of $1 billion.  As people shift their social networking experiences to mobile platforms, companies like Instagram and Path become more valuable.

Links to stories on Path:

WSJ.com (subscription firewall):  http://online.wsj.com/article/SB10001424052702304299304577348302143474314.html

TechCrunch:  
http://techcrunch.com/2012/04/16/path-announces-30m-round-of-funding/

AllThingsD.com:  
http://allthingsd.com/20120416/path-confirms-series-b-funding-from-redpoint-richard-branson-and-others/ 
 
GigaOM:  http://gigaom.com/2012/04/16/path-30m-funding-round/ 

Private equity firm The Carlyle Group, L.P. has filed an amended S-1 registration statement with the SEC indicating that it expects to sell 30.5 million common units (representing limited partner interests) at $23 to $25 per share, for a maximum offering size of $762.5 million and maximum implied IPO market capitalization of $7.6 billion.  Carlyle's listed competitors include Blackstone Group, L.P. (ticker: BX), KKR & Co., L.P. (ticker: KKR) and Apollo Global Management LLC (ticker: APO).

JP Morgan is the "lead left" underwriter for the offering, and is joined by Citigroup and Credit Suisse as joint-bookrunning managers.

Link to Carlyle's amended S-1 registration statement:  http://www.sec.gov/Archives/edgar/data/1527166/000095012312005979/x83442a7sv1za.htm 

Links to articles discussing Carlyle's IPO:
WSJ.com:  
http://online.wsj.com/article/SB10001424052702304299304577346561593778158.html?KEYWORDS=Carlyle+Group

Bloomberg:  
http://www.bloomberg.com/news/2012-04-16/carlyle-seeking-as-much-as-762-5-million-in-initial-offering.html 

I attended the SuperReturn International conference on private equity and venture capital in Berlin earlier this year, and was impressed by the speakers and format of the conference.  Before the conference I had posted a link to an article on ReadWriteWeb discussing East Berlin's start-up scene (link here), and so was curious to learn more.  At the conference, it was clear that Berlin had become a center of activity for technology start-ups.

Bloomberg Businessweek has now posted a good article "Berlin Cracks the Startup Code" which expands on the earlier ReadWriteWeb article and identifies some of the venture capital firms active in Berlin and some of the Berlin start-ups that have received funding from international venture capital firms.  One key takeaway is that more than 500 tech start-ups were founded in Berlin in 2011, an impressive number.

Link to the Bloomberg Businessweek article:  
http://www.businessweek.com/articles/2012-04-12/berlin-cracks-the-startup-code 

Link to my prior post on East Berlin's startup scene:  
http://www.allenlatta.com/1/post/2012/02/east-berlins-start-up-scene.html 

As an investor in private equity funds, fund terms are of keen interest to me.  Carried interest (profit share) and management fee are cornerstones of the economic agreement between the general partner and the limited partners in a fund.  According to a Reuters story, Bain Capital is reportedly raising a new global buyout fund and offering investors options on the economics.  Apparently, in a prior Asian fund, Bain offered investors two fee options: (1) a 2% management fee with 20% carried interest after a 7% hurdle rate, or (2) a 1% management fee with 30% carried interest after a 10% hurdle rate.  I applaud Bain for offering investors options on fund economics, as it shows an understanding that different LPs view economics differently.

Also of interest is that Bain itself is committing a large portion of the fund, showing "skin in the game" and aligning their interests with their investors.  According the the Reuters story, Bain employees committed about 15% of the capital of the prior Asia fund.  I am a big believer in GPs making a substantial commitment to their fund (and it not be funded by loans or management fee offsets), as it demonstrates a belief in the strategy and helps to align GP and LP interests.

Here's a link to the Reuters article:  
http://www.reuters.com/article/2012/04/11/us-bain-idUSBRE8390Y620120411 

Here's a link to a related peHUB story: 
http://www.pehub.com/144737/bain-capital-plans-smaller-fund-may-offer-3-fee-options-reuters-exclusive/ 

Yesterday's post covered some of the reasons why Facebook acquired Instagram.  Don Dodge, a Developer Advocate at Google, has posted some thoughts on his blog why the acquisition makes sense, which add to yesterday's analysis.  Don points out that the acquisition price is roughly $30 per user, when Facebook is valued at roughly $100 per user.  So if Facebook can monetize the users, the acquisition makes a lot of sense.  In addition, as discussed in yesterday's post, Don points out that everything is going mobile, and Facebook needs to upgrade its mobile application, so the acquisition also helps Facebook from that perspective.  He also points out why Instagram might not be worth $1 billion to Microsoft or Twitter.  Interesting read.

Link to Don Dodge's post:  
http://dondodge.typepad.com/the_next_big_thing/2012/04/why-instagram-is-worth-1b-to-facebook-web-20-just-went-mobile.html 

Here's a link to yesterday's post on the rationale behind Facebook's acquisition of Instagram: http://www.allenlatta.com/1/post/2012/04/the-rationale-behind-facebooks-acquisition-of-instagram.html 

Facebook announced yesterday that it was acquiring mobile photo-sharing application provider Instagram for approximately $1 billion in cash and Facebook stock.  Why would Facebook pay so much for a two-year old company with only a dozen or so employees and no revenue?  Reports have identified several reasons for the largest acquisition in Facebook’s history:

• Defensive acquisition.  By acquiring Instagram, Facebook keeps this rapidly growing company out of the hands of its competitors, such as Google and Microsoft.  In a short period of time, Instagram has accumulated over 30 million users, and their recent introduction of an Android application has been a huge success.  Certainly Facebook doesn’t want this to be in the hands of its competitors.  In addition, if Instagram were to remain independent and continue its remarkable growth trajectory, it could end up being a formidable competitor to Facebook in the future.  From a defensive perspective, this acquisition makes perfect sense.
• Mobile photo-sharing platform  synergy.  Instagram’s mobile photo-sharing application has proven to be very popular and easy to use.  By acquiring Instagram, Facebook will be able to leverage this technology and improve its own mobile experience, which by some reports has lagged lately.
• Engineering talent acquisition.  Istagram has a small team of a dozen or so employees, but they have created a highly successful platform that is experiencing rapid growth.  Facebook can leverage this engineering talent to improve its own mobile platform.
• Users and data.  Facebook acquires access to 30 million users and the treasure chest of data contained in the uploaded and tagged photos.  This type of data could be very valuable to advertisers.
  

Instagram completed a $50 million round of financing just last week.  Venture capital investors in Instagram include Greylock Capital and Sequoia Capital.

The acquisition is expected to close later this quarter.
Link to Facebook's press release:  
http://newsroom.fb.com/Announcements/Facebook-to-Acquire-Instagram-141.aspx

Links to articles on the acquisition:
WSJ.com:
http://online.wsj.com/article/SB10001424052702303815404577333840377381670.html

CBSNews.com:
http://www.cbsnews.com/8301-205_162-57411761/facebook-buys-instagram-...but-for-what/

NYTimes.com:
http://dealbook.nytimes.com/2012/04/09/facebook-buys-instagram-for-1-billion/