As liquidity events are crucial to the venture capital lifecycle, this is troubling news.
There were no initial public offerings (IPOs) of tech companies in the first quarter of 2016, according to the National Venture Capital Association (NVCA). This is the first time since the depths of the Great Recession that no tech companies have gone public in a quarter. Six life science companies did hold IPOs, but the total of six venture-backed IPOs in the first quarter of 2016 is the lowest tally since the third quarter of 2011, when there were five IPOs. To add to the misery, there were 79 reported mergers and acquisitions of venture-backed companies, down from 105 in the fourth quarter of 2015 and down from 97 in the first quarter of 2015.
As liquidity events are crucial to the venture capital lifecycle, this is troubling news.
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:
Links to prior posts on whether we are in a tech bubble:
Navin Chaddha, Managing Director of Mayfield, the global venture capital firm, has written an interesting article in Forbes called "In Tech, Reasons For Optimism In Times Of Bubble Or Bust," in which he offers entrepreneurs some insights from his many years as an early-stage venture capital investor. It's a good article and worth a read.
Uber has raised $1.2 billion at an $18.2 billion post-money valuation - see Uber's blog post here. The investors in this round must believe that Uber is worth this valuation, or else why would they have invested? Investors at the $18.2 billion valuation include Fidelity Investments as lead investor, BlackRock, venture capital firm Kleiner Perkins Caufield & Byers and Google Ventures. These are smart, sophisticated, successful investors. But $18.2 billion? Some are skeptical.
In the WSJ post "Uber's $18.2B Valuation Is a Head Scratcher" author Christopher Mims discusses how the "moat around Uber's services is incredibly shallow" and discusses how competition, a "frictionless market" and Uber's lack of owning its ecosystem present issues for the valuation. At the end of the article, which is worth a read, Mr. Mims takes a look at Uber's valuation and says that even if Uber captures 50% of the world taxi market in 5 years, the company would still be less than $18.2 billion. Here's the link to the article: http://blogs.wsj.com/digits/2014/06/06/commentary-ubers-18-2b-valuation-is-a-head-scratcher/
The Huffington Post article "Uber Worth $18 Billion Because Sure, Why Not?" written by Mark Gongloff skeptically compares the valuation of Uber to that of other companies, and states that at $18 billion, Uber is worth more than half the companies comprising the S&P 500 index, more than all of the personal real estate in Falls Church, Virginia, more than Alcoa, Clorox, Chipotle or Whole Foods. Here's the link: http://www.huffingtonpost.com/2014/06/06/uber-18-billion_n_5460748.html
Finally, in the San Jose Mercury News article "Uber valued at a whopping $18.2 billion," author Heather Somerville notes that Uber is now the most-highly valued private US venture-backed company (ahead of Airbnb and Dropbox at $10 billion, Palantir at $9 billion and Pnterest at $5 billion) and worth more than rental car companies Hertz (market cap of roughly $12 billion) and Avis ($6 billion). The article also explores some of the issues confronting Uber, including regulatory and legal issues. Here's the link:
To me, whether this valuation is correct or not (and only time will tell), it is another example of how frothy the market is for venture capital-backed technology companies in the "sharing economy" sector.
Guy Kawasaki posted an interesting op-ed piece on The Daily Californian website that explains his Principles of Innovation he has learned through his career. It's a worthwhile read: http://www.dailycal.org/2014/03/07/art-innovation/
The Globe and Mail article "Inside the fall of Blackberry: How the smartphone investor failed to adapt" which appeared yesterday, is an interesting and in-depth look at the mistakes made by the smartphone company that led to its downfall. It's a good article and worth a read. Here's the link: http://www.theglobeandmail.com/report-on-business/the-inside-story-of-why-blackberry-is-failing/article14563602/
CNBC has posted an article and video of an interesting interview with Marc Andreessen, co-founder of the venture capital firm Andreessen Horowitz. While the article covers the main points, I recommend watching the video as it provides a fuller sense of Andreessen's thoughts. In the video, Mr. Andreessen discusses the following:
Link to the article and video:
Glenn Solomon, a partner at GGV Capital who also has a blog Going Long, yesterday posted an article on Fortune called "Is your Company IPO ready" that I found interesting. Rather than focusing on whether a company has a $100 million revenue run rate, which many banks used to use as a metric (along with several quarters of profitability), Glenn identifies three key attributes that the company must have to go public: (1) predictability and visibility; (2) underlying growth potential; and (3) no single points of failure (no significant vulnerabilities). It's a good and useful article.
From my investment banking days at Bear Stearns and CIBC Oppenheimer during the Internet bubble, these points ring true. However, while these may be three key attributes that a company must have in order to go public, they are by no means the only attributes a company must have in order to be ready to hold a successful initial public offering. Other attributes could include a phenomenal management team, differentiation from competitors, strong IP portfolio, impressive and consistent financial performance (for most tech companies this is rapid revenue growth), real cash revenues (no reciprocal agreements), operating in a large, rapidly growing market, sterling reputation, well-developed internal business processes and controls, and on and on. And while a tech company may not need $100 million in current revenue run rate to go public, they should be close (for example, a $20 million revenue run rate won't do it, but if a company has all of the other attributes, perhaps a $70 million revenue run rate might be sufficient). There are a lot of pieces to the puzzle that are required to fit for a company to be ready to go public and have a successful IPO, and the three attributes that Glenn identifies in his article are essential.
Here's a link to the article:
Dell Inc. is going private in a $24.4 billion deal led by Michael Dell and private equity firm Silver Lake. This is the largest buyout since the financial crisis and the biggest since Hilton Hotels were acquired by Blackstone Group in the summer of 2007 for $26 billion. Michael Dell is rolling over his existing 14% equity stake in Dell and will contribute additional cash from his private investment vehicle, MSD Capital. Microsoft Corp. is loaning $2 billion to the deal. Additional debt financing will be provided by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets. The sponsors are offering $13.65 per share, which represents a 25% premium over the stock price when the news of the discussions leaked out, but a small premium over recent trades.
Dell is the third largest personal computer maker, behind Hewlitt Packard and Lenovo. By going private, Dell will have more flexibility to transform the business that he started while he was in college in 1984.
Links to articles:
NY Times DealBook: http://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/
Reuters recently had an interesting analysis on knowing when to sell tech stocks. In "Analysis: For tech investors, it's hard to know when to bolt" the article identifies a couple of signs of when it might be time to consider selling shares in a tech company:
It's an interesting article and worth a read.
There's an interesting article by Sarah Mitroff on Wired.com today called "Hardware, the Ugly Stepchild of Venture Capital, Is Having a Glamour Moment." The article explores some of the historical reasons that hardware investing has not been especially popular for venture capital investors (capital intensity, market demand identification, sales issues, etc.), as well as why some venture capitalists are becoming more attracted to hardware investing (costs coming down, it's becoming easier to determine market demand, etc.). It's an interesting article and worth a read. Here's the link:http://www.wired.com/business/2012/12/hardware-funding/
There have been a number of interesting posts recently about the changing environment for consumer Internet companies:
Fred Wilson's "What Has Changed" which provides his thoughts on the changing funding environment for these companies. He lists three developments that have made it harder for consumer internet companies to get funded:
Another post, "R.I.P. Frothy Times, A Return To Normalcy" by Alexia Tsotsis on Techcrunch.com, also discusses the increasingly difficult environment for consumer internet companies. According to the post (citing Dow Jones), investment in consumer internet companies is down 42% in the first nine months of this year compared to the same period last year.
These posts echo what I've been seeing in the industry. I would add that the public markets have been especially harsh on companies that disappoint (Groupon, Facebook, Zynga, etc.) and that IPO buyers are more scrutinizing, making it harder for consumer internet companies to go public. Another impact is that under FAS 157 (ASC 820) guidelines, funds may need to mark down some of the consumer internet companies in their portfolios based on the poor performance of public comps.
"What Has Changed" by Fred Wilson:
"R.I.P. Frothy Times, A Return To Normalcy" by Alexia Tsotsis:
"Silicon Beach" is a three mile stretch of oceanfront from Venice to Santa Monica that is becoming an increasingly popular area for LA startups. A couple of recent articles have discussed this trend. Today's Bloomberg article "Silicon Beach Draws Tech Startups to L.A. as Rents Jump" discusses how startups are finding interesting office space near the beach, and how cheaper rents and the beach lifestyle are attracting startups. Another story a few months ago "Silicon Beach Emerges as a Tech Hotbed" also discussed this trend. Both are interesting articles and if the trend continues, LA could attract even more venture capital.
The recent New York Times article "How Big Data Became So Big" explores the meaning behind the term "Big Data" and its evolution. It's a good article to help one understand how the term Big Data came into being and what the term means. Here's the link: http://www.nytimes.com/2012/08/12/business/how-big-data-became-so-big-unboxed.html?
A recent Wall Street Journal article "Social-Media Stock Frenzy Fizzles" provides an interesting look at public social media companies and some of the concerns that investors have about the business models. The poor stock performance of the public companies has brought down the valuations of private social media companies as well, according to the article. A worthwhile read. Here's the link (may be behind subscription firewall): http://online.wsj.com/article/SB10000872396390443477104577553431459135876.html
GigaOM has an interesting article today "The economics of Google Fiber and what it means for U.S. broadband." The article discusses Google's fiber to the home network in Kansas City, Mo. that provides gigabit (yes gigabit) internet access for $70 per month. And making a profit doing it. Incredible. How is Google doing this?
If Google starts rolling this service out to other markets, I think the traditional access providers are going to be in tro
Mark Andreessen, co-founder of Netscape and venture capitalist at Andreessen Horowitz, was recently interviewed at the Fortune Brainstorm Tech conference in Aspen, CO. The interview covers a wide range of topics including the $100 million Series A investment made by Andreessen Horowitz in GitHub, the environment for taking a company public and being a public company, public tech sector valuations, and current innovations in technology. The interview is well worth a read. Here's the link: http://tech.fortune.cnn.com/2012/07/16/marc-andreessen-transcript/
Two venture-backed companies launched their initial public offerings today, and had a mixed first day of trading. Tesaro, a biotechnology company, and Exa, a simulation design software company, are the first venture-backed IPOs to begin trading since Facebook's IPO on May 18.
Tesaro priced its IPO at $13.50 per share, at the mid-point of its $12-$15 range, and raised $81 million in the offering for an IPO market capitalization of $360 million. Tesaro's stock opened at $13.94 per share for an opening pop of 3.4% and closed at $13.69, up 1.4% from the IPO price. Citigroup was the lead left book-running underwriter on the offering. Venture capital investors in Tesaro include InterWest Partners, Kleiner Perkins Cauflied & Byers, New Enterprise Associates, Pappas Ventures and Venrock.
Exa priced its IPO at $10.00 per share, below the offering range of $11-$13, and raised $63 million in the offering for an IPO market capitalization of $132 million. Exa's stock opened at $10.01 per share, flat, and closed at $9.80, down 2% from the IPO price. Stifel Nicolaus Weisel was the sole book-running manager on the offering. Venture capital investors in Exa include Boston Capital Ventures and Edelson Technology Partners.
It would have been nice for these companies to have strong performances for the day, but another test will be tomorrow's expected IPO of ServiceNow, an IT management cloud service backed by venture firms Greylock Partners, JMI Equity and Sequoia Capital. ServiceNow plans to trade on the NYSE with Morgan Stanley as the lead left boor-running manager.
Bill Davidow, co-founder of Mohr Davidow Ventures, has an article on the Atlantic "What Happened To Silicon Values" that provides an interesting take on the shifting perspective in Silicon Valley on the value of the customer. Here's the link: http://www.theatlantic.com/technology/archive/2012/06/what-happened-to-silicon-values/258905/
The recent Bloomberg Businessweek article "Workday: The Gentleman's IPO" offers an interesting view of the initial public offering plans of Workday, the human resources and financial management cloud services provider. According to the article, Workday should post bookings of $500 million this year, and plans to raise a $500 million in its IPO. The company will file its S-1 registration statement with the SEC confidentially, as allowed under the JOBS (Jumpstart Our Business Startups) Act. Under the JOBS Act, companies filing their registration statements confidentially only have to make them public 21 days prior to their roadshow. This confidential filing option is attractive to smaller companies as it allows them to work through any issues with the SEC outside the glaring spotlight of the media, and their competitors.
Venture capital investors include: Bezos Expeditions, Greylock Partners, InterWest Partners, and New Enterprise Associates. According to the article, other investors include Dell's Michael Dell, LinkedIn's CEO Jeff Weiner and LinkedIn co-founder Reid Hoffman.
Here's the link to the article: http://www.businessweek.com/articles/2012-06-18/workday-the-gentlemans-ipo
The article on The Verge "After Facebook's IPO Flub, Value of Tech Startups Falls Back to Earth" discusses the divergence in the pre-IPO and post-IPO valuation disconnect for companies like Facebook, and how there have been no initial public offerings since Facebook. This means that tech startups will have a harder time raising capital and that more tech companies will be more receptive to being acquired. One tidbit from the comments was that apparently Anthony Noto of Goldman Sachs (a co-lead manager on Facebook's IPO) indicated that Facebook refused to take the usual IPO discount of 10-20% that allows institutional investors to profit on the first day. If this is the case, then Facebook really did do a great job of taking all the money off the table in the IPO. If an IPO is truly fully priced, there's really no where to go but down for the stock price.
Here's a link to the article:
Yammer, the enterprise social networking company, is being acquired by Microsoft for $1.2 billion, according to The Wall Street Journal. Yammer facilitates social networking, collaboration and file sharing across the enterprise, and currently more than 85% of the Fortune 500 use Yammer's services.
Benefits to Microsoft of the acquisition include:
Prior post on the acquisition: http://www.allenlatta.com/1/post/2012/06/yammer-to-be-acquired-by-microsoft-for-12-billion-wsj-report.html
WSJ.com article on the acquisition:
VentureBeat article on the synergies from the transaction:
ZDNet article on the synergies (and an argument that the acquisition is "zany"):
Trefis article on the synergies:
Starbucks has fully endorsed the digital age with the creation of a new position, Chief Digital Officer. The VentureBeat article "How Starbucks is turning itself into a tech company" explores how Starbucks has recognized the importance of the digital offerings to its customers and to the company. Starbucks' customer base is increasingly mobile and social. By combining all of its digital businesses (such as wifi offerings, social media, digital marketing, etc.) under one executive, the goal is to make digital a priority and to help spur even more growth for Starbucks. In my view, we will see more companies develop this type of role as customers shift even more to mobile applications and social networks. The article is a good read. Here's the link: http://venturebeat.com/2012/06/12/starbucks-digital-strategy/
The recent DealBook article "Companies Born in Europe, but Based on the Planet" provides an interesting look at how many European start-ups are making an international expansion strategy a focus early on. The article highlights the experience of SoundCloud, the web-based audio sharing service, and discusses how London, Paris and Berlin are attracting technology start-ups and investors. Here's the link: http://dealbook.nytimes.com/2012/06/11/companies-born-in-europe-but-based-on-the-planet/
Kim-Mai's article on TechCruch "It’s Not A Bursting Bubble. It’s a Correction And It Will Take Awhile." provides a good look at the current state of valuations of early-stage technology companies in the aftermath of Facebook's initial public offering. The article also discusses the fundraising environment and lists several early-stage venture capital funds that have been raised recently. Interesting read. Here's the link:
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