I read an interesting article today titled "Nasdaq 6000: What It Reveals About Tech Stocks And Venture Capital." The article discusses whether there is a tech bubble in the public markets (no) and whether there's a venture capital bubble (possibly). It's worth a read. Link:
In a couple prior posts I've discussed my definition of venture capital and compared early-stage venture capital to growth equity. Those posts can be found here:
In this post, I'll describe buyouts.
To read more, please click on "Read More" to the right below.
Private Equity is a term that has two common meanings: (1) as an asset class, which covers strategies such as venture capital, growth equity, buyouts, mezzanine financings and distressed debt; and (2) as a transaction type, where it really means buyouts.
There is often some confusion between venture capital, growth equity and buyouts, and this post explores the similarities and differences between venture capital and emerging equity. More specifically, this post will explore the difference between early stage venture capital and growth equity. Venture capital itself has a number of stages, from seed, to early-stage, to late-stage financings. By comparing early-stage venture capital to growth equity, the differences are more clear and understandable.
The Fortune article "Snapchat Actually Isn't the Hottest IPO This Year" argues that MuleSoft is actually a hotter initial public offering than Snap. This argument is based on post-IPO trading metrics, such as first day "pop" (first day closing trade price vs IPO price) and price-to sales metrics. It's an interesting article. Link: http://fortune.com/2017/03/30/snapchat-ipo-snap-stock-mulesoft/
In a prior post "Mike Moritz on Private Equity (aka Leveraged Buyouts)" an opinion piece penned by the famed venture capital investor was discussed. Now there's a rebuttal to Mr. Moritz's article.
Stephen Davidoff Solomon's opinion piece "A Venture Capitalists's Misguided Critique of a Trump Adviser" rebuts Mr Moritz's article in a number of ways. Whether you agree or disagree with the opinions of Mr. Solomon and Mr. Moritz, this very public debate is pretty fascinating.
Link to prior post:
Link to Mr. Solomon's article:
Link to Mr. Moritz's article:
Mike Moritz, the famed venture capital investor at Sequoia Capital, has published an opinion piece on the New York Times called "Stephen Scharzman's Bad Business Advice." In this opinion piece, he takes a swipe at the leveraged buyout business, which is now known as private equity. He focuses on the amount of debt used in these transactions and the attendant cost-cutting that often includes layoffs. I have met Mike Moritz on a couple of occasions, and found him to be a very smart and opinionated person. His piece is worth a read, even if you don't agree with his positions.
There's a recent Bloomberg Gadfly article by Shira Ovide called "Silicon Valley Needs Startup Drano" that explores the imbalance in venture capital between funds flowing into venture capital funds and companies and the money being returned from these companies and funds. I enjoyed this article, both for its Drano metaphor as well as for its content. I have been very concerned about this imbalance for some time now, and this article explains it well.
The bottom line is that too much money is going into venture funds and companies, and too little is being returned to investors. In my view, this will lead to overall lower returns for the venture capital industry and will highlight the need to be very selective when investing in venture capital funds in order to select only the best managers who can deliver exceptional returns.
My blog post "Fraud by Venture Capital Fund Managers" was originally posted in June 2014. My introduction to the post was that instances of fraud by venture capital fund managers were very rare. The post then highlighted a few cases of alleged fraud by venture capital fund managers
Now Fortune has published an article "The Ugly Unethical Side of Silicon Valley" which discusses scandals at portfolio companies. I found this to be an interesting article. My opinion is that scandal is likely more probable at startup companies than venture capital funds for a few reasons:
"Fraud by Venture Capital Fund Managers" can be found at:
The Fortune article "The Ugly Unethical Side of Silicon Valley" can be found at (copy and paste in browser):
The BloombergBusinessweek article "The Tech Bubble Didn't Burst This Year. Just Wait" examines the current state of the venture capital industry. The article provides various data points, and quotes Benchmark's general partner Bill Gurley as saying that the venture capital industry is "in a slow correction." I agree with Mr. Gurley's assessment. While venture capital funds are raising money at an incredible rate, it seems that VCs are being more selective and valuations are slowly rationalizing.
Calpers, the largest US pension fund, is anticipating weaker returns from private equity, according to the Bloomberg article "Calpers Sees Next Headache in Slowing Private-Equity Cash Gusher." After several years of receiving strong distributions, Calpers believes that the outlook for returns may be diminishing, leading to an ever larger gap between beneficiary costs and revenue from contributions and investing, according to the article
Reasons for the reduced outlook for private equity returns include an "unprecedented" $1.47 trillion in capital overhang in the private equity market - known as dry powder - which PE firms will use to invest in companies. As PE firms are expected to invest the capital they raise, this could present a problem as PE firms compete for deals, increasing entry prices.
Another interesting point in the article is that Calpers has had negative cash flow for the five of the past seven years, which is leading to a shortfall forecast at $9.2 billion by fiscal 2032. What's troubling is that this forecast is based on a 7.5% annualized return from Calpers' investments, when a prominent consultant has projected a more conservative 6.0% annual return rate. If the 6% annual return rate is accurate, the shortfall could be much higher.
The Harvard Crimson has an article "A Tale of Two Endowments" comparing the endowment performance between Harvard and Yale. David Swensen, Yale's Chief Investment Officer, has posted some impressive returns over the past decade.
I recently gave a talk about Venture Capital at UC Hastings College of Law (where I went to law school), and during the talk we went over the basics of venture capital. It seemed to me that it would be a good exercise to write out the definition of venture capital as I see it. So here goes…
To read more, please clilck on "Read More" to the right below.
Need help raising capital? “Finders” – individuals who help raise money for a percentage of the money raised – on the surface seem like an appealing way to raise capital. It seems to accomplish the goal: the fund or startup raises the money needed, and the finder is paid a “success fee” out of the monies raised (known as "transaction-based compensation"). The big “However” is that many of these finders are operating in a gray area of law, which can have very significant implications for the fund or startup. This blog post outlines some of the issues relating to finders. Note that this post is not to be construed as legal advice – consult with your attorney.
To read more, please click on "Read More" to the right below.
Professor Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University, is a leading expert in the fields of corporate finance and equity valuation. Yesterday, Prof. Damodaran posted a very interesting article on his Musings on Markets blog called "The Ride Sharing Business: Is a Bar Mitzvah Moment Approaching?"
In this article, Prof. Damodaran examines the ride sharing market, the business model, and an analysis of a ride-sharing company's transition from surface measures of growth to more substantive measures of monetization. He then updates his valuation of Uber, which he valued at $23.4 billion in September 2015, to $28 billion, which is significantly lower than the reported pricing of Uber's recent financing rounds.
It's a fascinating article and well worth a read. He also has a downloadable spreadsheet which contains his valuation model. Finally, he has added a video explaining his valuation methodology.
Disclosure: Prof. Damodaran was a teaching assistant for an economics course I took while I was an undergraduate at UCLA.
Damodaran's NYU page: http://pages.stern.nyu.edu/~adamodar/
Damodaran's blog: http://aswathdamodaran.blogspot.com/
Damodaran's blog post on Uber: http://aswathdamodaran.blogspot.com/2016/08/the-ride-sharing-business-is-bar.html
Link to a prior blog post on this topic:
I knew the market for initial public offerings was bad, but wow. Here's a link to the Fortune article "IPO Market Is Worst Since the Financial Crisis."
Venture capital firm have raised $8.8 billion in the second quarter of 2016, raising 67 funds according to Thomson Reuters and the National Venture Capital Association (NVCA). In the first half of 2016 126 funds have raised a total of $22.9 billion. This compares to the first half of 2015 when 129 funds raised a total of $18.6 billion. The 2016 year to date totals suggest that total fundraising will likely exceed $30 billion this year and could even reach $40 billion.
While the numbers are impressive, I believe there may be cause for some concern. These totals don't include monies allocated to venture capital by corporate venture capital arms, mutual funds and hedge funds. These totals don't take into account angel investors. The bottom line is there is a ton of money in the venture capital ecosystem. This money will finance hundreds of venture capital companies over the next several years. The problem is that the exit market isn't keeping pace with this explosion of capital into the venture world. The amount of capital raised by funds but not invested is known as dry powder. There seems to be lot of dry powder in the industry right now.
In the first half of 2016, there were 155 total M&A deals, with disclosed value of $14.1 billion and 18 initial public offerings raising $1.5 billion, again according to Thomson Reuters and the NVCA. This means a total of 173 liquidity events. However, there were 1,061 deals in the first quarter of 2016 according to PricewaterhouseCoopers LLP and the NVCA, suggesting around 2,000 deals in the first half of 2016. Now the number of deals is different than the number of companies, but one gets a sense of the number of companies that have received venture capital funding is very large compared to the number of liquidity events. If companies don't or aren't able to achieve a liquidity event, the rates of return for venture capital will ultimately suffer.
Venture capital is a cyclical industry, and the amount of dry powder may be cause for concern.
Kellog Company has announced the formation of a corporate venture capital fund, called eighteen94 capital to "make minority investments minority investments in companies pursuing next-generation innovation, bolstering access to cutting-edge ideas and trends." The focus will be on "start-up businesses pioneering new ingredients, foods, packaging, and enabling technology." The fund intends to invest about $100 million. Kellog joins General Mills and Campbell Soup which have established venture capital efforts.
Here's a link to the Kellog press release:
Here'a a link to a Fortune article on the topic:
The Wall Street Journal has two articles today that are of interest to shareholders of startup companies, primarily former employees who hold shares of these startups. The articles "Startup Employees Invoke Obscure Law to Open Up Books" and "Own Startup Shares? Know Your Rights to Company Financials" discuss laws that may require some startup companies to deliver certain financial data to shareholders which may help these shareholders value their stock.
Specifically, the articles reference Section 220 of the Delaware General Corporations Law, Section 1501 of the California Corporations Code and Rule 701 of the Federal Securities Act of 1933. These provisions may provide certain shareholders of some private companies the ability to obtain selected financial statements.
I enjoy watching the Sunday morning political news shows, and I often watch Fareed Zakaria's show GPS (Global Public Square) on CNN. This week he had an interesting segment on the decline of the US startup, and he has an accompanying op-ed piece in The Washington Post. Here's a link to the story:
The piece has some very interesting observations, including that the decline in start-ups may be generational. Baby boomers were great entrepreneurs, the article observes, but succeeding generations have been less likely to start their own companies.
I think it's an interesting piece and worth a read.
Business Insider had an article this week called "The steroid era of startups is over -- here's what 8 top VCs think will happen next" that made a number of good observations. In this article, eight venture capitalists discussed how the environment has been changing, and the article identifies a number of ways the changing environment will impact startups. The main categories are:
The NY Times has an interesting article "Ruling on Pension Fund Debt Could Shake Up Private Equity Industry" that is worth a read. A federal District Court in Massachusetts has held that two separate private equity funds were jointly liable for the pension fund debt of one of their portfolio companies Scott Brass. The case revolves around some unique facts and some interpretations of ERISA, the law governing these retirement plans, but it could deter private equity firms from acquiring companies with unfunded pension liabilities. Time will tell.
NY TImes (general overview):
White & Case article (legal analysis):
Bill Gurley, General Partner at Benchmark Capital and a leading venture capitalist, has posted a sobering, but excellent article about the state of the venture capital industry. I generally concur with his viewpoint. While a long read, it's definitely worth the investment of your time.
Here's the link
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.
I am fascinated by closed economies. One of these is Venezuela, where the main driver of the economy has been oil. However, Venezuela's economy is ravaged by hyper-inflation, chronic shortages of basic goods, stifling currency controls, and plummeting global oil prices. A recent Fortune article "4 Steps To Fix Venezuela's Economy" outlines the economic problems the country faces, and proposes four steps to stabilize the economy. It's an interesting article, and worth a read.
According to the Business Insider article "'The Great Reset': Venture Capitalists and Startups Have Shifted from Greed to Fear," the technology startups and venture capitalists have begun to temper valuation expectations. This is driven by a number of factors, including (1) the slowdown in the tech IPO market, (2) public tech company valuations have declined, some significantly, making many private tech companies looking overvalued, and (3) some tech companies are now laying off people.
The article indicates that the conversation is changing between venture capitalists and startups, with VCs asking tougher questions, and now looking for "cockroaches" - companies that can survive in any market.
It's an interesting article and worth a read.
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