Link:
http://techcrunch.com/2016/01/30/1269710/
There's an insightful article on TechCrunch "Will the Bubble Burst? Ask Your Cabbie" that I found interesting. The author recounts the first Internet bubble and then the credit/real estate bubble and how he realized that the markets were overvalued at these times and how he avoided the market downturns. From that experience, he then looks at the current environment. It's a good article and worth a read.
Link: http://techcrunch.com/2016/01/30/1269710/
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The PE Hub article "Reading the venture tea leaves for 2016" by Elizabeth "Beezer" Clarkson examines some recent trends in the venture industry and predicts how they may play out in 2016. The main take-aways are:
Link: https://www.pehub.com/2016/01/659549/ There are now over 170 "Unicorns" - venture-backed companies valued at over $1 billion - and recent tech post-IPO performance and market volatility suggest that many of these unicorns may have difficulty going public at their current valuations. The Fortune article "Silicon Valley's $585 Billion Problem" explores the unicorn phenomenon, looks back at tech unicorn post-IPO performance, discusses the slow-down in tech IPOs and the negative feedback loop created when IPOs trade below their IPO prices. The article discusses the IPO process and talks about the IPO pricing and the "pop" from the IPO price to the initial trading price. Having been an investment banker, I disagree with the characterization of investment banks in the article and I believe the article adopts a cynical view of the IPO process. Having said that, I believe there are some good take-aways from the article:
Has the general stock market anxiety carried over to venture capital? That's the question posed by the Forbes article "Everything You Need To Know About A Possible Slowdown In Venture Capital Investing." This interesting article explores 2015 funding levels and the current funding and valuation environment. It's worth a read.
Yesterday, mobile payments company Square, Inc. (www.squareup.com) filed an amended registration statement with the Securities and Exchange Commission for its initial public offering (IPO). What was noteworthy about this was that (1) Square is a "unicorn" - a venture-backed company with a valuation in excess of $1 billion, (2) the investors in Square's last round were reportedly guaranteed a 20% return in the IPO, and (3) the IPO pricing range of $11 to $13 per share could value the company at less than its latest private financing round. Pundits are arguing that if Square prices at below the valuation of the last private round, that it could be an indicator that the frothy Unicorn financing market may slow down.
Here's a link to Square's amended S-1 registration statement: http://www.sec.gov/Archives/edgar/data/1512673/000119312515369092/d937622ds1a.htm Here are some links to stories about this: Re/Code: http://recode.net/2015/11/06/square-takes-an-ipo-bullet-for-all-of-the-overpriced-unicorns/ WSJ: http://www.wsj.com/articles/square-outlines-ipo-terms-1446812826 NYT: http://www.nytimes.com/2015/11/07/business/dealbook/square-sets-conservative-ipo-price-range.html I am pleased to announce that I will be a panelist at the PartnerConnect West conference on October 13, 2015 at the Ritz Carlton Half Moon Bay. I will participate on the panel "LP Perspective: Five Reasons the Best Venture Returns are Yet to Come - And Five Reasons it Might be Too Late." Link to conference website: https://partnerconnectevents.com/West15/index.html
Unicorns, those private venture capital-backed companies with valuations in excess of $1 billion, are generating a lot of press these days. The term "unicorns" didn't exist a few years ago. CB Insights reports that there are 118 unicorns today, led by Xiaomi with a valuation of $46 billion, followed by Uber with a valuation of $41 billion. The list includes notable companies including Airbnb, Snapchat, SpaceX, Pinterest, Dropbox, Square, Zenefits, Lyft, Warby Parker, Docker and Shazam.
There's an interesting article on PE Hub called "The Unicorn Dilemma" that discusses the lack of IPOs or M&A transactions involving unicorns this year. There's concern that these unicorns are raising late-stage venture rounds at valuations that won't be sustainable in the public markets. These late-stage rounds, sometimes called "Private IPOs" occur when the private company raises a significant amount of capital that can sustain their operations for several years, so they are under no pressure to go public. The PE Hub article discusses all of this and is a good article. Link to PE Hub article: https://www.pehub.com/2015/07/the-unicorn-dilemma-vcj-cover-story/ The venture capital bubble is about to burst. That's the premise of an interesting and thoughtful article by Tallat Mahmood, founder and managing director of SkyPanther Capital, in his TechCrunch article "The Tech Industry Is In Denial, But The Bubble Is About To Burst." The article discusses the rapid growth in the number of venture-backed "Unicorns" - companies with valuations in excess of $1 billion, the rapid cash burn rate of many venture-backed companies, and how the low interest rate environment has created an asset bubble. The article then defines and identifies the elements of a bubble, and uses Uber as a case study to argue that the bubble is about to burst. It's a good article and worth a read. Here's the link:
http://techcrunch.com/2015/06/26/the-tech-industry-is-in-denial-but-the-bubble-is-about-to-burst/ Note that we've been hearing about a venture capital bubble for a couple of years now. Here are links to prior posts on the bubble. A good place to start is my post in February of 2015: http://www.allenlatta.com/allens-blog/are-we-in-a-venture-capital-bubble-more-thoughts Other posts include my thoughts from April 2014: http://www.allenlatta.com/allens-blog/is-venture-capital-in-a-bubble A post from March 2014: http://www.allenlatta.com/allens-blog/fred-wilson-on-the-bubble-question Finally, a post from April 2012: http://www.allenlatta.com/allens-blog/tech-bubble-two-views There's an interesting interview in today's USA Today with Josh Lerner, a professor at Harvard Business School and a leading authority on the venture capital industry. In the article "Picking Venture Capital's Biggest Brain," Professor Lerner discusses the current state of venture capital and why it is so important for the US economy. It's a short article and worth a read. Here's the link: http://www.usatoday.com/story/money/business/2015/06/22/ozy-venture-capitals-biggest-brain/29100991/
There's an interesting article by Gretchen Morgenson on the New York Times website called "When Private Equity Firms Give Retirees the Short End." This article explores discounts that some PE firms may obtain from service providers, such as auditors and lawyers, that benefit the firm itself, but not the funds they manage. It's worth a read. Here's the link:
http://www.nytimes.com/2015/06/14/business/retirement/when-private-equity-firms-give-retirees-the-short-end.html There's a fascinating story from the NY Times DealBook that highlights some of the risks that private equity investors face when doing business in South America. Add jail to the list. In "An Airline Investment in Uruguay Becomes a Catch-22" the unhappy story of a Latin American private equity firm Leadgate and its founders is recounted. The firm acquired a majority interest in the troubled airline, Pluna, that was Uruguay's national airline. After restructuring the airline and making operational improvements, a perfect storm of politics, litigation, surging fuel prices and a volcanic eruption sent the airline into a downward spiral. After unsuccessfully trying to raise capital, the private equity firm transferred its ownership to the Uruguay government.
Unfortunately for the principals of the PE firm, they were all later detained and one of them has remained in prison for several years, without any charges filed. It's a remarkable cautionary tale about private equity investing in South America. Link: http://www.nytimes.com/2015/05/15/business/dealbook/risky-web-of-privatization-in-uruguay-where-charges-are-optional.html?ref=dealbook Investment in US venture-backed companies reached $15.7 billion in the first quarter of 2015, according to data provided by Dow Jones VentureSource and quoted in today's WSJ.com article "Startup Funding Hits 15-Year High While Valuations Set Record." A few highlights from the article:
Link to article: http://blogs.wsj.com/digits/2015/04/20/startup-funding-hits-15-year-high-while-valuations-set-record/ San Francisco's South Park neighborhood is centered by a beautiful park surrounded by Victorian homes. Over the past several years, there has been an influx of venture capital firms to the neighborhood. The Re/Code article "Has South Park Finally Become the New Sand Hill Road?" takes a look at this phenomenon. But it's not just South Park - venture capital firms are either headquartered or opening offices all over San Francisco. San Francisco is also home to many venture-backed companies, including Twitter, Uber, and more. San Francisco has become the new epicenter of technology venture.
Link: http://recode.net/2015/04/13/has-south-park-finally-become-the-new-sand-hill-road/ Scott Kupor, Managing Partner of venture capital firm Andreessen Horowitz, has an interesting blog post "What's Holding Tech M&A Back?" that's worth a read. In the post, Kupor asserts that only 10% of tech mergers & acquisitions have been "growth" transactions - deals "involving rapidly expanding, venture-financed private companies or modern software-as-a-service providers." Worse, 40% of this deal volume has been by five acquirers - Facebook, Google, Microsoft, Oracle and SAP.
This paucity of growth transactions is due to two main factors: (1) venture-backed companies are staying private longer due to the significant availability of private capital available to these companies; and (2) public companies are hamstrung due to activist investors, which are demanding actions like stock buybacks, dividend distributions and breakups - short-term actions to books stock price - at the expense of actions that enhance long term shareholder value such as investing in R&D or growth-oriented acquisitions. It's a thought-provoking piece that's worth a read. Link to blog post: http://a16z.com/2015/04/10/whats-holding-tech-ma-back/ Fortune's Dan Primack interviewed Marc Andreessen the other day, and the ensuing article "Brainstorming with Marc Andreessen" makes for a good read. The title is telling, as they cover a lot of different topics, from why M&A is down, why companies really need to be thoughtful about going public, whether tech is in a bubble.and how innovation is disrupting healthcare and education in a positive way. It's a good read.
Link to the article: http://fortune.com/2015/04/10/brainstorming-with-marc-andreessen/ There's an insightful post on CB Insights called "It's a Boom, Not a Bubble," written by Tony Tjan, CEO and Managing Director or Cue Ball Capital, and Andrew Fu, Associate at Cue Ball Capital, that compares the tech bubble of 2000 with today's environment. The article is data-heavy (which I like) and concludes that things are different and that this is a boom, not a bubble.
Link to article: https://www.cbinsights.com/blog/tech-bubble-boom/ Mike Moritz, the Chairman of famed venture firm Sequoia Capital, has cautioned that valuations are very high and that a number of "unicorns" - startups that are valued at over $1 billion - will become extinct. Both Business Insider and Fortune have good analyses of Moritz's warnings (the remarks were made originally in an interview with The Times of London, but the article is only available to subscribers).
Moritz joins other notable venture capitalists, such as Bill Gurley of Benchmark, in warning of valuation concerns in Silicon Valley. While Moritz does believe that valuations are "very sporty" and that some unicorns will fail, he also adds that "a good number" of unicorns that will succeed. Moritz also feels that while there will be a setback in Silicon Valley tech, he does not believe it will be as bad as the tech bubble bursting in 2000 because companies today are more sustainable. Links: Business Insider article: http://www.businessinsider.com/michael-moritz-warns-that-the-bubble-is-about-to-burst-2015-3 Fortune article: http://fortune.com/2015/03/24/sequoias-moritz-joins-chorus-of-concern-about-silicon-valley-valuations/ Bill Gurley warned of there being "no fear in Silicon Valley right now" at South by Southwest, according to this article by Fortune. While he said that we may not be in a tech bubble, we are in a risk bubble. He added that he thinks there will be some "dead unicorns" this year, a unicorn being a startup with a valuation in excess of $1 billion. Gurley also warned that if the free flowing capital dries up, it could have a ripple effect that will affect more than money-losing startups. It could affect San Francisco real estate prices as well as companies that rely on spending by these startups.
It's a good article and worth a read. Link to Fortune article about Bill Gurley: http://fortune.com/2015/03/15/bill-gurley-predicts-dead-unicorns-in-startup-land-this-year/ Link to Fortune article "The Age of Unicorns": http://fortune.com/2015/01/22/the-age-of-unicorns/ Link to Fortune's "The Unicorn List": http://fortune.com/unicorns/ My Rebuttal to Mark Cuban's Post on Why This Tech Bubble is Worse Than the Tech Bubble of 20003/6/2015 Mark Cuban has published a post on his Blog Maverick site called "Why This Tech Bubble is Worse Than the Tech Bubble of 2000", which is an interesting read, but one with which I generally have a different perspective.
The distinction Mr. Cuban makes is that in the Tech Bubble of 1999-2000 the tech companies were publicly traded, while today the tech companies (apps and small tech companies) are not. Mr. Cuban contends that investors in public companies during the Tech Bubble had liquidity - the ability to sell their stocks on the public market. Today, investors in these private companies have no liquidity, and so can't sell their stock if things turn south. A second point he makes is that there are significant numbers of "Angel" investors investing in these companies and he first states that he thinks most of the investments made by these angels are under water because of the lack of liquidity. He then takes a jab at equity crowdfunding, the rules for which have not yet been finalized by the SEC, because he believes "there is no reason to believe that the SEC will be smart enough to create some form of liquidity for all those widows and orphans who will put their $5k into the dream only to realize they can't get any cash back when they need money to fix their car. I respectfully disagree with much of Mr. Cuban's post. First, he assumes that we are in a bubble today, while I think there is lots of disagreement on this point. Please see my prior blog posts on this for more on whether we are in a bubble. Second, as the law stands today, it is mainly accredited investors who invest in these private companies. An accredited investor in the US is one who has net worth of $1 million (not including the value of their primary residence) or who has income of at least $200,000 each year for the last two years (or $300,000 together with their spouse if married). This seems to contradict Mr. Cuban's comment about these Angel investors not knowing what they have gotten into. Third, the Jumpstart Our Business Startups (JOBS) Act does provide for annual limits on investing through equity crowdfunding platforms. The Act provides that people earning under $100,000 the investing limit is the greater of $2,000 or 5% of their income. These limits suggest to me that the maximum losses incurred by "widows and orphans" should not be devastating. I do agree that the lack of liquidity in private company securities means that it is harder to exit the investment, but my view is that sophisticated investors understand this already, and for unsophisticated investors there are protections in place already (and probably more to be included in the SEC rules) that will prevent them from betting the farm on a poor, illiquid investment. Link to Mark Cuban's post: http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-than-the-tech-bubble-of-2000/ Links to prior posts on whether we are in a tech bubble: http://www.allenlatta.com/allens-blog/are-we-in-a-venture-capital-bubble-more-thoughts http://www.allenlatta.com/allens-blog/is-venture-capital-in-a-bubble http://www.allenlatta.com/allens-blog/fred-wilson-on-the-bubble-question http://www.allenlatta.com/allens-blog/tech-bubble-andreessen-and-conway-say-no http://www.allenlatta.com/allens-blog/tech-bubble-two-views Venture capital funds are marketed as a 10 year limited partnership, with two one-year extensions that can be exercised by the General Partner in their discretion in order to liquidate the portfolio and wind-up the fund. This implies that the life of a fund should be 12 years, right? Not in my experience.
Now there's a thoughtful article by Diane Mulcahy, a senior fellow at the Ewing Marion Kauffman Foundation and an adjunct lecturer in entrepreneurship at Babson College, on the topic called "The New Reality of the 14-Year Venture Capital Fund." This Institutional Investor article discusses recent data that indicates that the median fund takes over 14 years to end. It's a very interesting article and worth a read. In my experience, the strategy of the fund and vintage can influence the overall lifespan of a fund. So for example, 1999-vintage funds that invested in early-stage technology companies had two economic downturns to work through, which extended the lives of these funds. Conversely, later-stage funds that invested in pre-IPO tech companies in 2006-2007 will likely have shorter lives. I have worked with several funds where the life span was well over 14 years, so this article was very interesting to me. Link: http://www.institutionalinvestor.com/blogarticle/3428857/blog/the-new-reality-of-the-14-year-venture-capital-fund.html#.VOZ73vnF-y4 There's an interesting post by Glenn Solomon, a partner at GGV Capital, on his blog, called "Why Private, Late-Stage Valuations are Skyrocketing." This is an interesting read, and I recommend it. In the post, he points to four reasons why valuations of private, later-stage venture-backed companies have seen such extreme valuations:
I generally agree with the points raised in this article, but would add a few more:
The debate of whether venture capital is in a bubble has been going on for some time now.
On the "yes we are in a bubble" side, proponents point to:
On the "no we are not in a bubble" side, proponents point to:
Now a new article has added to the debate. In "Silicon Valley Boom Unnerves Some Venture Capitalists" a few additional points were raised:
My take on this is that we are in a very healthy venture capital cycle, and that the peak of the cycle will likely occur after interest rates rise meaningfully. When this occurs, valuations will have to come down, and then lots of companies will be under water from a valuation perspective. This will lead to losses and the cycle will end and move toward correction. What do you think? Here are some links to prior posts on the bubble question: http://www.allenlatta.com/allens-blog/is-venture-capital-in-a-bubble http://www.allenlatta.com/allens-blog/fred-wilson-on-the-bubble-question http://www.allenlatta.com/allens-blog/tech-bubble-andreessen-and-conway-say-no http://www.allenlatta.com/allens-blog/tech-bubble-two-views Aswath Damodoran, the valuation guru and Kershner Family Chair in Finance Education at NYU Stern, has posted an interesting article on pre-money and post-money valuations in the venture capital context on his blog Musings on Markets. The blog entry is "Blood in the Shark Tank: Pre-Money, Post-Money and Play-money Valuations" and it is especially useful to entrepreneurs who are looking to raise venture funding.
Link: http://aswathdamodaran.blogspot.com/2015/02/blood-in-shark-tank-pre-money-post.html The Financial Times reported yesterday ("Calpers takes axe to costly private equity managers" - subscription required) that CalPERS is planning to cut back on the number of private equity managers by more than two thirds in order to invest more money with fewer managers as a way to reduce costs. In the article, funds-of-funds were specifically identified as a likely initial casualty of the policy, as funds-of-funds are "criticised for adding an extra layer of fees while outperforming the wider industry."
As a fund-of-funds manager, I believe that funds-of-funds can add value to a portfolio in a number of situations - but that's the subject of a future post.... Link (subscription required): http://www.ft.com/intl/cms/s/0/af4fff4e-9fe6-11e4-9a74-00144feab7de.html?siteedition=intl#axzz3PPG23Vb2 In a recent post on mergers & acquisitions, I outlined some of my thoughts of the qualities of acquisitions that had the greatest probability of success:
Subsequent to that post, an article "Why so many mergers and acquisitions fail after the deal is closed" looks at why many middle-market M&A deals fail in the integration process. The article lists four primary reasons why the post-closing integration period is so prone to failure, including that the importance of the integration process is under-appreciated, integration is complex and takes time, and the integration leader is often installed too late in the process. It's a good article that builds on my thoughts above. Here's the link: http://www.denverpost.com/business/ci_27174636/why-so-many-mergers-and-acquisitions-fail-after |
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