
In Silicon Valley Frenzy, VCs Create New Inside Track - larrys
http://www.wsj.com/articles/in-silicon-valley-frenzy-vcs-create-new-inside-track-1427992176
======
nemo44x
If you've been looking to place bets on early stage companies that can boom or
bust - often for little to no reason other than trending with the sector,
biotech in the public markets has been the place to be the last few years. It
very much is resembling the .com boom in internet related technology.

RNAi has had some great moments the last few years in particular, and some
spectacular busts and more great moments, for instance. But the public biotech
sector as a whole has essentially been 1 big casino in the public markets.
Even the ETF's are up a few hundred percent the last couple years.

I believe there's one more huge parabolic move before it tumbles - we'll see.
Anyways, my point is we like to focus on the VC bubble in technology but the
real "frenzy" has been in biotech IPO's and early/mid stage clinical companies
even though private equity technology gets all the bubble press.

~~~
IndianAstronaut
I worry that the basic science pipeline is drying up in biotech. A lot of good
people are leaving the field due to erratic funding situations and generally
low income and poor career outlook. I left my PhD in biology and many of my
fellow PhDs, even if they graduated, are looking outside of the field for
jobs.

RNAi is an example of something that was discovered 'by accident' from basic
and exploratory research. To add, a lot of novel discoveries can be made from
studying natural habitats and organisms(PCR for example) and many of those are
disappearing. Making bets on biotech is making a bet on a field where long
term prospects look poor.

~~~
nemo44x
Indeed, and a vast majority of early stage biotech's will simply contribute
nothing. But then you get a story like Pharmasset which made any semi-early
investor realize unbelievable gains in a very short period. But these stories
are rare and it's pure speculation and the playing of market dynamics.

But yes, it is expensive research and although these companies have been able
to find funding in the public markets due to a healthy appetite of risk for
these types of things, I fear that when this obvious bubble bursts it will be
very hard to find funding and a lot of research will simply run out of runway.

RNAi had a hot streak years ago and then had "dark ages" for quote a few years
before it suddenly got hot again. And really the entire sector has been on
fire. But I expect reality to take over soon and biotech will have some dark
days ahead of it.

But for now, the casino chugs along.

------
fraserharris
The lead example of FirstMark Capital is not new and its not a trick. A VC
investment comes with pro-rata rights to invest in future fundraising rounds
to maintain their % ownership of the company. A VC firm will allocate capital
to a new portfolio company to follow-on in future rounds. FirstMark's fund is
too small to utilize their pro-rata right in the late stage rounds of
Pinterest. They have offered their LPs the option to use the right (which may
be an obligation in the fund's limited partnership agreement). The "inside
track" here is being an investor in a VC fund that funds a unicorn. Hardly a
trick.

~~~
jacquesm
Anti-dilution clauses do not only benefit VCs, they're pretty common in
companies of all sizes, with and without external capital.

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revelation
What's the problem with secondary shares? Seems like someone unhappy when
theres an actual market and changing valuation instead of retirement funds
ripped off by your banking buddy.

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aliston
I don't see how one can write an article about these funding rounds and not
mention ratchets/liquidation preferences and executive/founder/insider stock
sales.

I also don't see how one can look at these private, illiquid, balance-sheet
gimmicks and think that the "valuations" are tied to anything in reality. It's
a huge game of pass the bag, and it wont be pretty when these deals unwind.

~~~
jacquesm
All stock sales are 'insider stock sales' if they do not refer to a public
company.

How else do you think people become aware of the opportunity to buy or sell a
stock in a private company if not through an insider?

~~~
aliston
I am referring to the practice of taking money off the table vs. issuing new
stock.

~~~
jacquesm
If all parties agree to that there is nothing wrong with it.

Also, you can bet your bottom dollar that deals where money gets taken of the
table are looked at even harder than ones where only new stock is issued.

------
NelsonMinar
Excellent article. Should be read together with "MARKETS How Wall Street
Middlemen Help Silicon Valley Employees Cash In Early."
[http://www.wsj.com/article_email/how-wall-street-
middlemen-h...](http://www.wsj.com/article_email/how-wall-street-middlemen-
help-silicon-valley-employees-cash-in-
early-1427474284-lMyQjAxMTE1NjI0OTIyNjkyWj)

------
angersock
So, what does this look like for the rest of us? Is it a viable way to raise
money, like for an enterprise company?

------
larrys
If you hit the paywall google "In Silicon Valley Frenzy, VCs Create New Inside
Track"

------
michaelochurch
At first, venture capital was (may have been?) like any other investment
strategy: the goal is to generate a portfolio that delivers a high return on
investment.

The problem? Variance, mixed with a short-term/instant-gratification culture
at all levels of society. The more variance, the more whale-driven the
business. You end up with binary returns: no whale, and you lose (relative to
your peers) and even if you did everything else right it fucks up your career;
or you get a whale, and you win. The doubles (3x) and triples (10x) don't
matter and it's all about the elusive home runs (1000x). Or, I believe the
term of art these days is "unicorn", because chasing an animal that only
exists in the mind of people under 10 just makes sense in this culture of
neoteny.

The second-stage venture capital wasn't about portfolio returns. Even if you
had a profitable array of doubles and triples, you could face redemptions or
struggle to raise the next fund, because you wouldn't have a _visible_ proof
of competence. Sure, you did 20% per-year, but that guy over there who lucked
into Facebook did 25% per-year (even though that one lucky call saved him).

Also, the career-making allure of _access_ outgrew the original job of
delivering the best returns possible. So it became about "having been in on" a
Google or a Facebook, even if most of the portfolio withered on the vine.
That's why you get the culture of note-sharing (often inappropriate and
illegal) and co-funding and collusion. VCs aren't chasing returns, which is
what their investors want; they're chasing the intangibles that come with the
appearance of prescience and social access, and those only come with the
whales. An added bonus for VCs, which helps them personally but not their
portfolios, of the extremely-high-variance strategy is that it opens up
executive positions for underachieving friends who need favors. "Lifestyle"
businesses that grow at 30% per year don't, because those tend to need
specialized skills at executive levels. But the neat thing about a company
that is really just a pile of cash and young coders ready to "pivot" on a dime
is that any idiot can be placed at an executive level.

In this third phase, the game isn't about _finding_ big winners but _creating_
them. The VCs have fully grown into their role of king-makers, injecting huge
sums of cash to end the game for all competitors almost instantly, create a
"natural monopoly", and exploit it for 5-15 years until the monopolistic
advantage fades (as it will if the idea is any good). Your product doesn't
matter if your competitor gets a 9-figure injection, because that'll pay
poaching fees for your best people, generate a lot of press, and push you
aside.

That's where we are, now. The VCs don't invest money into a market that then
decides what succeeds or fails. They have so much money that _they_ pick the
winners, with not only their resources but their nearly absolute power over
exit arrangements. ("Call Tom at Google. He owes me a favor. Let him acqui-
hire this stinker at $4M per engineer so I don't have to think about it
anymore.") Obviously, there are constraints upon them because they can't just
fund anything-- they would run out of political capital if all they produced
were stinkers-- but they have so much power at this point that almost all
valuations are recursive.

~~~
krampian
>> The VCs have fully grown into their role of king-makers, injecting huge
sums of cash to end the game for all competitors almost instantly, create a
"natural monopoly",

Yes, capital can certainly be a competitive advantage. Another manifestation
of that is economies of scale. Most of the companies on the Fortune 500 have
and exploit such economies on a daily basis, and I don't see them
apologizing...

>> "Call Tom at Google. He owes me a favor. Let him acqui-hire this stinker at
$4M per engineer so I don't have to think about it anymore."

Do you actually have evidence that this kind of thing is going on? Could you
post it if so? I'm thinking that Larry Page and plenty of other Google
shareholders might be interested...

~~~
jgalt212
When Green Dot acqui-hired Loopt, Mike Moritz was on both boards.

~~~
jacquesm
Did they regret the transaction? Did any of Green Dot's minority shareholders
sue Green Dot or mr. Moritz?

~~~
jgalt212
I was a Green Dot shareholder at the time and I regretted the transaction.

~~~
jacquesm
So what did you do about it?

~~~
jgalt212
I complained about it here on HN.

~~~
jacquesm
That's probably not the most effective venue.

If something like this ever happens again make sure that you make your
objections known before the deal goes down, have them register your objection
and reason during the shareholder meeting (you won't be able to block the deal
from going through) and make it known that if you ever feel that you have been
disadvantaged by the deal that you will sue for compensation (and follow
through on that if push comes to shove).

As a minority shareholder you have rights, but you will have to stand up for
them and push the proper levers at the right time.

Consult a lawyer in your local jurisdiction for the exact detail around the
procedure and your options.

