2015: The Year in Review

It's been another exciting year. Here’s what comes to mind as highlights for me:

 

Highs:

  1. Unicorns go mainstream. Valuations went sky-high, San Francisco rents hit nose-bleed levels, unaffordable Palo Alto became more unaffordable. 

  2. Record amounts of funding raised.

  3. Uber: I love to hate on this guys, but it's hard to dispute that they have completely owned 2015. They’ve also raised heretofore unheard of amounts of capital. They’re unlikely to *completely* dominate globally(thanks to Kuaidi, Ola cabs) etc. Which is a good thing, IMO.

  4. Autonomous driving: Between Tesla, Google, Mercedes, Volvo et al., it’s now a matter of how soon.

  5. Mr. Robot. Nice melding of ongoing themes of distrust of large corporations, hacking & security.

 

The Mehs

  1. Entrenchment of the Amazon/Facebook/Google/Microsoft axis of dominance. I reserve the right to be suspicious of large dominant corporations, especially those proclaiming “don’t be evil”.

  2. Sharing economy. The very definition of a misnomer. On other hand, great news for consumers but so-so for workers.

 

Lows:

  1. Unicorns ending the year on a rough note. See: Dropbox, Square & friends.

  2. Theranos. We moved from the next coming of Steve Jobs to unending scandal and intrigue.

  3. LivingSocial. At least they’re still alive, limping along. We said bye to the likes of Homejoy & others I can’t recall.

  4. Interest rate hike. Thanks Yellen!

  5. Hacks galore: Ashley Maddison. Enough said.

  6. Peak disruption. Harvard even protested on the misuse of “disruption”.

  7. Commodities bust. One of the begin economics stories of the year. What goes up must come down, together with entire economies.

  8. Uber et. al. The questionable practices kept rolling in.

 

2016

  1. VR goes mainstream? 2016
  2. More noise on encryption & cybersecurity.

 

Happy Holidays everyone!

Yahoo!

Not soo happy times at Yahoo

Not soo happy times at Yahoo

Yahoo is in the headlines, with the future of the company under intense scrutiny. 

It's been over three years since rock-star CEO Marissa Mayer was brought in, and investors have apparently grown tired of waiting to see improvements in the company.

Brought in with nearly universal critical acclaim, opinions seem to have shifted dramatically, particularly over the last few week.s

Orbituaries are now being written for Marissa's tenure at Yahoo.


The signs of troubles have been there for a while. Rumblings of discontent have previously leaked, especially from upper management. A few members of the C-suite abandoned ship, raising a few eyebrows.

At first glance, Yahoo! has been doing not too shabbily at least if one considers its share price since Marissa Mayer took charge.. It's suffered a decline since topping last year, but overall has done ok. Nasdaq is up +67% versus +109% for Yahoo over the same time period. Google has done better, at +159%.

The problem is that much of that increase appears to be tied to Yahoo's stakes in Alibaba and Yahoo! Japan. In fact, Yahoo's core business is currently valued below zero. 


A critical report

Investor in Yahoo, hedge funder  Eric Jackson decided to take matters into his own hands and we have a  99-page report  critiquing Yahoo.

Highlights:

  1. EBITDA is down 55% from 2012, Revenue growth is basically flat.
  2. If Marissa stays on board for another 1 1/2 years  at the helm of Yahoo, she will have earned her a staggering $365 million . Only 3.3 % of that package is tied to the performance of Yahoo's core business. 
  3. Burned through $3 Billion in M&A with very little to show for it. 

    Pretty hard to dispute,.

Meanwhile where's the plan from the current board/CEO to turn around Yahoo? We've gone from talks of spinning its Yahoo! Japan & Ali Baba stakes, to not-spinning, to spinning. I think we're back to not-spinning. All this back and forth cannot be a good sign, especially because it has nothing to do with Yahoo's core business.

 

Lessons

Struggling companies are incredibly hard to turn around. Today's hottest company may be tomorrows has-been

 

What to do?

Hunker down, conserve cash, and defend margins. The future may no longer belong to Yahoo, but it may find a spot as a stable, profitable boring company. 

A Defense of the Investor's Legal Fee Reimbursement (Suck it up buttercup)

I’ll start out by saying that we never charge a portfolio company for our legal fees. Whether or not we are the lead investor, we look at legal fees as just a part of doing business.

That said, let me tell you why it is 100% reasonable for portfolio companies to reimburse their lead investor’s legal fees.

In most rounds (with the exception of party rounds) there is a lead investor who assumes 90% of the diligence and legal burdens. Each of the investors in the round benefits from the work done by the lead investor but the non-leads don’t pay any of the expenses. The lead could theoretically pass the hat around but that would involve many frustrating 1:1 deals and would almost certainly not result in a fair split of the legal/diligence fees. When the lead investor “charges” the company for the legal fees they are essentially taking a short cut and making all investors pay a fair share through the company.

Now the obvious response to this is if the round is only buying 20% of the company then charging the company for legal fees means that prior investors and the company’s employees unfairly bear the burden of the remaining 80% of the legal fees. On its face this is a compelling argument but remember the legal fee reimbursement isn’t sprung on the company at the last minute, it is a default provision included in the initial term sheet. 

If the company believes it shouldn’t bear the actual economic impact of the investor’s legal fees the solution isn’t to push back on the legal fees, its to slightly raise the valuation.

BOOM! Everyone is happy. Each investor bears proportional responsibility for the cost of getting the deal done and the company gets the deal it thought it was getting from the start.

To all the founders out there, in case you missed it, I just gave you one more arrow in your quiver when it comes to negotiating your valuations. Now sally forth and brow beat some hapless VC.

Atlassian Victory

Atlassian is perhaps the rarest of those unicorns: IT happens to be profitable. It was also started and headquartered in Sydney, Australia. 

Also, they didn't raise outside funding for the first 8 years of operation . Which probably means they had to have been breaking even from pretty early on. 

I know what you're thinking: is this real? 

Yes folks, the founders at Atlassian took a less conventional, just-as-successful route.

Oh and they priced their IPO above the range that they had indicated, indicating strong investor appetite . And the stock has had a nice pop: its up 32% as at closing.

Who knew the Kangaroos would be joined by a unicorn?

Who knew the Kangaroos would be joined by a unicorn?

The Square IPO and talks of downrounds already feels like a distant memory.

 

Lessons?

They are other ways to building large, successful companies that don't necessarily involve raising huge amounts, burning cash at record rates and last but not least, being located in Silicon Valley. I'm sure there are plenty of great startups outside of Silicon Valley that just dont get the amount of attention by virtue of location. We ignore them at our own peril. 

 

 

The love of learning and barriers to equality

12299247_10207068795412023_8207870252888426556_n.jpg

As a parent I feel like there are only a few key things I need to teach my daughter.

  1.  A love of learning,
  2. Empathy for others, and
  3. Perseverance in the face of adversity

With these 3 things under her belt she will easily acquire the knowledge she needs, be a good person with a sense of integrity and will apply her knowledge to life despite the inevitable set backs. What more could anyone do as a parent to set their children up for success?

In this spirit my wife and I took Amara (4) to the Chabot Space and Science center last weekend. She loved it, just like she loved the Lawrence Hall of Science 2 weeks before. She can’t wait to go back and while it may not be as exciting as Disneyland, these trips are a close 2nd for her. When I ask her if she wants to do a science experiment at home, she always drops the iPad (an unfortunate addiction) and joins me on whatever project I’ve got set up for us. In short, Amara loves science and learning and I am going to do everything I can to make sure that never changes.

Now that I’m done bragging about my daughter, the reason for this post:

Each time I visit one of these science theme parks its costs our family at least $50 and it dawned on me last weekend that this cost was yet another socio-economic barrier to advancement. For us the $50 isn’t a consideration but for the working single mom in Oakland who is struggling to put food on the table how can she hope to give her kids the same experience? There are other and cheaper ways to instill a love of learning in your children but they may not be as effective or as easy. Our relative privilege confers on my daughter an almost impossible to quantify but no doubt significant advantage in life that she will take with her no matter where she goes to school or how the markets are doing. She will fundamentally be a more effective human being because of the privileges we can provide.

It makes me a little sad that we can’t make these public facilities free or at least free for the socio-economically disadvantaged. I often think about what kind of charitable work I would do if I were retired and in a position to fund a foundation. One thing I would like to do is to make sure that facilities like these are available to all. Every child should be able to grow up inspired to learn.

Its on my bucket list now. If this is something that interests you, let me know. Lets chat and see what we can do about it. 

It truly is a brave new world: Part 2

By now its no longer news that the Great SIlicon Valley party-like-its-2000 Unicorn rally is now officially stuck in the mud. Not in free fall, just stuck at stall speed. 

 

 

Its true that valuations had gotten a little, umm, stretched, if you will. 

Some of the froth is finally blowing off the top. 

And as always, when the music stops, we find out who is left holding the bag. 

In this case, we have various mutual funds taking significant losses on their late-stage investments, with Fidelity taking top prizes for write-downs.

But given these mutual funds manage massive funds (Fidelity manages a staggering $2,074 billion! ) whatever losses are incurred should be nothing more than a rounding error.

Square, which just IPO'd below its last private round, is perhaps the poster child of the new normal. Still, even at a $3 Billion valuation, Square is an amazing success story. And apparently all classes of investors made money even at the lower cap. And lets not forget it received a nice pop on the first day though its now trading at $12.1 for a roughly $4 Billion Market cap.

Fundamentally,  what we're suffering from is the hangover from a period of absurdly heightened expectations. 

Over at the even more illustrious startup Airbnb, it reportedly raised $100 million at a $25.5 billion, same as last time. i.e. a flat round.

And as a twitter user humorously noted: 

"Flat rounds may be the new up round"

Furthermore, with the odds of the Fed raising interest rates in December rising, it appears that the inevitable correction in the markets has been on the cards for a while. 

Still, the influx of down rounds has been some sort of surprise, even for those who had long raised eyebrows on the ceaseless march of valuations upwards.

In closing, I found this quote from the CEO of floundering startup LivingSocial:

"Valuations are one of those things that are in the eye of the beholders"  Mr Thakar pontificated. 

Indeed.

 

Brave new world in investing

It’s the Wild Wild West out there

Investor beware. With startup scene hotter than ever, retail investors have been clamoring to invest in the space. So far crowdfunding has been limited to accredited investors - generally high net worth individuals and instiutitions. So if you're not worth north of $1 million(no, your house doesn't count) or earning >$200K per annum, tough luck. Drool over angel investor success stories or laugh at those who got burned. No more.

 

The adoption of new SEC rules allowing non-accredited investors to invest in return for equity represents a major breakthrough.  Previously, crowdfunding sites like Kickstarter allowed donations, for no equity in return or Wefunder which only permitted accredited investors to access equity stakes. With the new rules, retail investors can now jump in, albeit with some limitations as summarized here.

What could go wrong? 




Venture investing remains a risky business; none of this has changed with the recent announcements. The long term returns to capital across the venture capital space remain positively pedestrian, the recent tech boom notwithstanding. For every Facebook and Airbnb, we have countless other startups muddling through or worse, going belly up.

A deeper problem lies within the ability of these retail investors to perform appropriate due diligence on prospects. The recent Theranos debacle exemplifies the difficulty this presents even for storied, well-resourced venture firms.


TL;DR: New SEC rules allow non-accredited investors to fund startups. Venture investing remains risky and may leave many burned, due to difficulty in due diligence 

Reminder that Kickstarter has a few problems of its own: