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Why the Structural Changes to the VC Industry Matter - Scott Kupor

7/29/2014

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Scott Kupor, a Managing Partner with Andreessen Horowitz, has posted an article "Why the Structural Changes to the VC Industry Matter," which builds on Mark Suster's post that I discussed here.  In his article, Kupor discusses what's behind the structural changes in venture capital, and discusses the following:
  • The cost to build startup technology companies has declined dramatically, and today has less up-front capital expenditure because of the advent of cloud-based, pay-as-you-go technologies.
  • While it's cheaper to enter the market, it takes more money today to win the market, due to the much bigger size of the end-user markets.  Kupor highlights the growth and opportunity in mobile technologies to make his point.
Kupor ends his article noting that the structural changes being experienced in the venture world are also occurring in other services-based businesses, such as investment banks, law firms, etc.

It's a good article especially when read in context with Suster's article.

Link to Kupor post:  http://a16z.com/2014/07/25/why-the-structural-changes-to-the-vc-industry-matter/

Link to Suster post: http://www.bothsidesofthetable.com/2014/07/22/the-changing-structure-of-the-vc-industry/


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The Changing Structure of the VC Industry - Mark Suster Article

7/26/2014

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Mark Suster, a partner at Upfront Ventures, has an interesting article "The Changing Structure of the VC Industry" that recently appeared on Fortune.com.  Mark looks at a number of changes that have occurred in the industry over the past several years, including:
  • The growth of the Internet and mobile devices;
  • The "right-sizing" of the VC market;
  • Declining cost of starting a business; and
  • The continuing need for venture capital to scale a business.

The article goes on to discuss how money being invested in the venture industry is being bifurcated between seed funds and large funds, with the concentration of capital in large funds; how the industry has changed due to technology - cloud computing, social networking and mobile; how more value is being captured pre-IPO; and how some non-traditional VCs have entered the late-stage VC market.  He then discusses how VCs are adapting to these changes.

It's a good article and worth a read.

Link to Mark's post:  http://fortune.com/2014/07/22/the-changing-structure-of-the-vc-industry/

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Gurley v. Damodaran on Uber's Valuation

7/12/2014

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In early June, Uber raised $1.2 billion at an eye-popping $18.2 billion valuation.  In my blog post on June 7, I summarize some of the skeptics of the valuation.  Since that time, valuation guru Aswath Damodaran came out with a valuation analysis "Uber Isn't Worth $17 Billion" on FiveThirtyEight.com, which provides an estimated value of $5.9 billion to the company.  Professor Damodaran is the leading academic authority on valuation, and he was a teaching assistant for an economics course I took while I was an undergraduate at UCLA.  His bio is here:  http://pages.stern.nyu.edu/~adamodar/

Professor Damodaran's analysis centers on two significant assumptions: Size of Potential Market, and Uber's Market Share.  Professor Damodaran estimates the size of the global taxi market at $100 billion, growing at 6% per year for the next 10 years to a total global market of $183 billion in 2024.  Next, he estimates Uber's future market share of this market at 10%, and notes that while Uber's market share is minuscule today, "the market share it can aspire to gain will depend on at least three factors: drivers' and passengers' openness to a different way of doing business, the competition and regulation.

Now, Bill Gurley, General Partner at venture capital firm Benchmark, and a board member and investor in Uber, has provided his thoughts on how Professor Damodaran may have underestimated Uber's total addressable market and market share.  Bill Gurley is no slouch when it comes to valuation.  He was a Wall Street equity research analyst covering personal computer hardware and software, and has invested in a number of highly successful companies.  He is also a CFA Charterholder (as am I).

In his article "How to MIss By a Mile: An Alternative Look at Uber's Potential Market Size" he outlines his thoughts on why the total addressable market may be significantly larger than Prof. Damodaran's assumption, and market share may also be higher.  Respecting the total addressable market, Gurley points out that "[w]hen you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process."  He then analyzes each of these improvements, and argues that Uber's total addressable market may range from $450 billion to $1.35 trillion.  Gurley then looks at market share and points out several reasons why Uber's market shares may be much higher than 10%.  All in all, a very interesting post and a recommended read.

So who's right?  These are two very intelligent, accomplished and respected professionals that have different views on the addressable market opportunity.  So I don't know who is right, but I will continue to watch Uber closely to see how it is valued in its initial public offering and by the market thereafter.

Link to Prof. Damodaran's article:  
http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/

Link to Bill Gurley's article:  
http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

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