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
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…
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.
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."
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.
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.
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.
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:
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:
Here are some links to stories about this:
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:
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:
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:
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/
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