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?"  ​

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."

Link:
http://fortune.com/2016/08/01/ipo-drought-sorry-private-equity/

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:
http://newsroom.kelloggcompany.com/2016-06-20-Kellogg-Company-Establishes-Venture-Capital-Fund-To-Support-Growth

Here'a a link to a Fortune article on the topic:
http://fortune.com/2016/06/20/kellogg-launches-vc-fund/

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.

Links:
http://www.wsj.com/articles/startup-employees-invoke-obscure-law-to-open-up-books-1464082202

http://www.wsj.com/articles/own-startup-shares-know-your-rights-to-company-financials-1464082203

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:

https://www.washingtonpost.com/opinions/why-is-the-number-of-us-start-ups-falling/2016/05/19/53fe8e04-1ded-11e6-9c81-4be1c14fb8c8_story.html

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:

• VCs may not be as supportive in the future
• Expenses (and headcount) will be "slashed:
• Some companies will fold
• Startups that mainly sell to other startups will have problems
• Large companies may acquire startups, but only if it's strategic and at a discounted valuation
• Some startups will suffer a down round
• Other startups will be forced to recapitalize, wiping out early investors and employees
• Employees with huge paper profits (from options and/or restricted stock) will suffer
• All of the above signals a return to normal

Each category is discussed in the article, with comments from the VCs.  It's a good article and worth a read.

Link:
http://www.businessinsider.com/what-happens-when-tech-boom-turns-to-bust-2016-5

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.

Links:
NY TImes (general overview):
http://www.nytimes.com/2016/04/22/business/dealbook/ruling-on-pension-fund-debt-could-shake-up-private-equity-industry.html

White & Case article (legal analysis):
http://www.whitecase.com/publications/alert/private-equity-funds-held-liable-pension-obligations-portfolio-company

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
http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/

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.  

Link:
http://nvca.org/pressreleases/biotechnology-companies-leading-way-six-venture-backed-ipos-recorded-first-quarter/

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.

Link:  http://fortune.com/2016/02/20/venezuela-oil-bolivar/

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.

Link:
http://www.businessinsider.com/the-great-reset-vcs-startups-go-from-greed-to-fear-2016-2?op=1

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/

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:

• Emerging managers matter.  First-time venture funds and emerging managers (which the article defines as the first four funds of a given general partner) provide LPs with opportunities to obtain strong returns as well as new approaches to investing.  I completely agree with this view, and over 10 years ago wrote an article that appeared in the Venture Capital Journal on how emerging managers could attract LP capital.
• LPs may slow their investment pace until some of the unicorn valuations moderate.  The article indicates while unicorns - VC-backed companies with valuations over $1 billion - have posted impressive paper returns, on the whole most of these returns are unrealized.  The article also discusses the recent slow down in the number of funds successfully raising money in the past couple of quarters and suggests that LPs may pause on fund investing until the unicorn valuations moderate.
• The investing barbell suggests that more VC funds will invest in the "middle."  The article points out that many VC funds are being raised to invest in the very early stages and in the very late stages (creating a barbell), leaving few funds investing in the middle.  The article suggests that more VCs will raise money to invest in this middle area in 2016.
• Geography still matters in the earliest stages.  In most cases, VCs will want to invest in early-stage companies that are physically close to the location of the VC fund (there are exceptions to this).  However, once a company achieves "escape velocity, international relevancy with product/market fit locked in," geography matters less and VCs will invest in these companies no matter where they are located.
• LPs will become more transparent.  The article points out that many LPs are blogging today, and that this trend will help LPs become more transparent, agile and able to provide more value to the VC ecosystem.

It's an interesting article and worth a read.

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:

• There has been dramatic growth in the number of unicorns in the past couple years.  Most of these unicorns are tech companies.
• The average profitability of tech companies going public has declined over the past several years.
• After they go public, the stock price of many of these unicorns have dropped below their IPO price.
• The tech IPO market has slowed, partly due to poor post-IPO stock performance of recent tech IPOs and partly due to recent volatility.
• The combination of the above will make it difficult for many unicorns to go public at their current valuations.

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

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

The other day, I attended a function after work and needed transportation home from San Francisco's financial district.  I've been using Uber X lately, but a taxi was right there, so I decided to take the taxi home.  What a mistake.  Here are my gripes about the taxi ride:

• Filthy car.  The taxi seemed to be a newer model car from the outside, but once inside, the seat was dirty, uncomfortable and the vinyl was cracked.  I should have left the taxi immediately, but didn't - my bad.  Part of this in my opinion is that taxi drivers lease the cars and so have no incentive to care for the car.
• Bad smell.  Once we were on our way, I noticed a horrible smell coming from the front of the taxi - stale fast food.  It was horrible and I had to roll down both back seat windows so I could breath.
• Reckless driving.  The taxi driver drove recklessly - speeding, swerving and in my view completely disregarding my comfort and safety.
• Mechanical problems.  The taxi made all sorts of mechanical noises - some from the engine and some from the brakes - which made me nervous about the safety of the vehicle.  Again, I believe this is partly due to taxis being leased by drivers and so the drivers have no incentive to care for the car.
• Surly driver.  The driver of the taxi was not friendly and there was little conversation as I was concentrating on not throwing up from the horrible smell and reckless driving.

Now I recognize that this is one taxi ride and that one ride isn't necessarily representative of the entire industry.  But compare that ride to my typical experience with Uber X:

• Newer and clean cars.  Uber requires cars to be newer models and, because the cars are owned by the drivers (see below), they are clean and well cared for.
• No mechanical problems.  I have not had any Uber X that had mechanical problems or noise.  I believe this is due to (1) they typically own the cars, (2) they are newer models, and (3) I understand that Uber has periodic inspections of the cars to ensure they are safe to drive.

• Drivers typically own their cars.  This is an important point.  Because they typically own the cars, Uber drivers have an incentive to keep them in good mechanical order, clean and safe.
• Friendly drivers.  I typically talk to drivers in Uber X about their experiences, and I have found most Uber X drivers to be nice and friendly.  While I have had many friendly taxi drivers, I have had a few unfriendly ones as well.
• Lower cost.  I have found Uber X to be competitive with taxis and in some cases less expensive (like going to the airport).  However, this is not the case when surge pricing (which I dislike) is in effect.

The Bottom Line:
I am embarrassed by the taxi system in San Francisco.  I travel a lot internationally, and in my experience San Francisco has one of the worst taxi systems in the world.  How can such a wealthy and advanced city like San Francisco have such a terrible taxi system is beyond me.  When I hear that people are going to visit San Francisco, I urge them to download the Uber app and avoid taxis altogether.  I am very glad that Uber is disrupting the taxi industry - it needs it - and perhaps the taxi industry will wake up and put a better product on the road.

I'm sure I will use taxis in the city in the future, and I hope to report that the service is improving, but I'm not holding my breath.

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:

• The $15.7 billion invested in 1Q2015 is up from the $15.6 billion invested in 4Q2014 and up from $12.4 billion invested in 1Q2014.
• Venture-backed companies had the highest median valuations on record during the first quarter.
• The largest financing in the quarter was a $1 billion round by SpaceX.
• There were 12 venture-backed IPOs in 1Q2015, down from 23 IPOs in 4Q2014.
• M&A was down in 1Q2015, with 104 deals in the quarter, down from 109 in 4Q2014, and the amount paid in 1Q2015 was down a whopping 71%, at $9.9 billion, compared to the $33.8 billion paid in 4Q2014.

Link to article: 
http://blogs.wsj.com/digits/2015/04/20/startup-funding-hits-15-year-high-while-valuations-set-record/