
Facebook establishing a venture arm to invest in startups - doener
https://www.axios.com/facebook-establishing-a-venture-arm-to-invest-in-startups-91d9ee71-2282-4032-8f31-45b861a6ba9c.html
======
a13n
It's pretty interesting that FAANG doing venture capital is basically like
legal insider trading.

They clearly have data on web traffic, consumer usage, advertising spend, etc.
that other VC firms and investors generally don't have access to.

They can use this to understand entire markets, see who the incumbents are,
estimate revenue/users, see who's up-and-coming, etc. Obviously within some
margin of error.

I wonder if this is how Facebook identified that Instagram was on the path to
success, and knew $1B was a great deal. Meanwhile everyone at the time thought
they were crazy for spending that much.

Since startups aren't publicly traded, I don't think insider trading laws
apply to trading their securities. FAANG is legally allowed to use their
access to information to make better investing decisions than other companies
are able to. (IANAL)

It seems like they have a high chance of getting a great ROI. Once you're a
big tech company, this is just another way of monetizing the vast troves of
data you have.

~~~
gimmeThaBeet
That's not really insider trading. Matt Levine pops up here all the time, and
one of the really distilled mantras he has: inside trading isn't about
_fairness_ , it's about _theft_.

Like the people who track flights to speculate on M&A, or use satellite and
aerial imagery to look at parking lots. Gathering information isn't a crime,
in fact gathering and acting on that information is explicitly _what you want_
at an aggregate level. What you don't want is entities stealing or
misappropriating information that doesn't belong to them. I think all the
mentioned data categories are basically Fb's line of business, so if it's
usable it seems like its pretty fair game.

~~~
riantogo
And that exactly is the problem. The game is rigged in favor of folks who
already have access to information (or can afford to buy it), not available to
regular folks. That is how billionaires double their billions faster than me
essentially playing lottery/roulette with my $1000 on Robinhood.

~~~
ISL
There is probably a useful fact that you know that billionaires don't. It is
probably local or related to your technical expertise.

Peter Lynch famously researched companies by watching to see where his family
spent pocket money. I recall reading analyses of trading performance by
members of Congress -- they generally did about the same as everyone else
_except_ in companies associated with their districts.

Anecdotally, it is easier to double small dollars than large dollars.
Berkshire Hathaway's growth has eased for ~2 major reasons: 1) Prices have
been high for the last decade+, frustrating the core algorithm of value-
investing. 2) It is very difficult to put huge amounts of money to work.

The alternative to a world with asymmetric information (and probably
impossible to implement at that) is one with zero privacy, where all
information is open to everyone always. I don't think we want to live in that
world.

~~~
tomdell
On the large scale, wealth reliably collects progressively higher percentages
of return the higher the base capital.

~~~
smabie
The absolutely dismal performance of most hedge funds indicates otherwise. In
fact, it's probably easier to generate alpha using small amounts of money.
When you're managing billions and billions of dollars, you're severely
constrained in the types of strategies you can actually run. This is why, for
example, that RenTech's Medallion fund is capped at 10bn.

Just by investing in an index fund, retail investors are getting a pretty
great investment, essentially freeloading off of all the hard work the active
funds are doing.

~~~
artsyca
How does that bode for the vision fund? Doomed from the start?

~~~
smabie
I would say that the vision fund was predicated on a audacious idea that was
either pure genius or absolutely idiotic. The idea is as follows, instead of
investing our huge pile of money into a bunch of different companies, which
takes a lot of legwork, let's just fund a relatively small amount and give
them a bunch of money. We will give them so much money that it's not possible
for them to do anything except totally crush the competition and control the
entire market.

The problem with the idea, and the eventual reason it didn't work, was that
though it was largest VC fund ever, 100bn isn't actually that much in the
scheme of things. There's so much money sloshing around the system looking for
the place where it will be treated best. So, in essence, what Softbank ended
up doing was bidding up the price of the entire industry, creating massive
inflation. If Softbank gives a shi-tton of money , and another VC gives a
shit-ton to a competitor, they've both just wasted a shit-ton of money.

I actually don't think Masa is the compete idiotic everyone makes him out to
be. He has a very high tolerance for risk, but that doesn't make him
irrational. The Vision Fund might not be doing that well, but Softbank's stock
is looking pretty good at the moment.

~~~
artsyca
He's the inventor of the danged electronic dictionary man.

------
tyre
If you're competing in any way, building in any part of the social media
space, this is an invitation to have your product copied as soon as you see
any traction.

Facebook doesn't need the money. It's looking for you to do the R&D.

~~~
a13n
I would guess it's more about the money than you think.

Public companies have a fiduciary duty to maximize profits and investor
returns.

They're simply using the data that's available to them to make great
investment decisions to make more money.

It seems like a conflict of interest to invest in a company and then turn
around and compete with them. If the end plan is to take their ideas once they
start becoming successful, you don't need to give them money in the first
place. (Case study: Snapchat)

~~~
tych0
> Public companies have a fiduciary duty to maximize profits and investor
> returns.

No, they don't. There are many articles on the subject, here is one:

[https://www.nytimes.com/roomfordebate/2015/04/16/what-are-
co...](https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-
obligations-to-shareholders/corporations-dont-have-to-maximize-profits)

~~~
colonelanguz
Delaware companies do. See, e.g., Frederick Hsu Living Tr. v. ODN Hldg. Corp.,
2017 WL 1437308, at *18 (Del. Ch. Apr. 14, 2017) (“[T]he fiduciary
relationship requires that the directors act prudently, loyally, and in good
faith to maximize the value of the corporation over the long-term for the
benefit of the providers of presumptively permanent equity capital . . .”).

Facebook is a Delaware company.

~~~
aspenmayer
Has this law ever been enforced against a company; that is, is there a ore-
existing verdict against a Delaware company for violating this statute? Or is
this more of a hypothetical threat? What would the damages or penalty be for
violation? It’s not like you can demand money a company should have made
without cause or more importantly, verifiable harm to the counter-party.

~~~
colonelanguz
Certainly it has been enforced against a company (thousands of them), but in a
way it is more of a hypothetical threat. I was not referring to a statutory
law, but rather to fiduciary duties, which derive from the common law of
equity. The quotation from the Hsu case I provided above is a clear depiction
of the standard of conduct required of directors and officers of Delaware
corporations. But in reality, fiduciary standards operate more like you
suggested—as a hypothetical threat. The reason for this is that, although the
standards of conduct demanded of Delaware directors and officers are onerous
and exacting, the standard of judicial review of challenged conduct is
ordinarily very relaxed. In most ordinary situations, the standard of review
is the business judgment rule, which essentially punts on the question of
whether a particular action violates a fiduciary duty. The idea is that courts
do not supplant directors' judgment with their own. More onerous standards of
review are available in other situations, such as mergers and transactions
where an interested party sits on the board or is an executive. (Facebook is
an interesting example of a controlled company, given Zuckerberg's ownership
stake, and its decisions might be subject to more scrutiny, but procedural
safeguards are generally available to cleanse even conflicted decisionmaking.)

It's worth clarifying that only those to whom fiduciary duties are _owed_ can
ever sue for damages resulting from their breach. In other words,
shareholders. That's how the threat gets operationalized—by a shareholder or
class of shareholders suing the corporation for failing to maximize
shareholder value through a fiduciary breach.

Anyways, the point I really wanted to make is that shareholder value
maximization really is meaningfully encoded in American corporate law. If you
meant to suggest that reality is less black-and-white than that, then I hope
the foregoing ramble confirms that you are correct!

~~~
aspenmayer
Thank you for typing this well thought out response! I see the fiduciary duty
canard brought out and it usually functions in debate as a thought-terminating
cliche. My comment was meant to elucidate whether or not it was the last word
on fiduciary duty; your comment helps clarify the judicial and fiduciary
reality on the ground, and really added a lot to my understanding of these
issues. Thanks again.

~~~
colonelanguz
Thank you for your kind words! I totally agree about how flippantly people
throw out the value-maximization point. And it is definitely true that the
real standards which govern directors' and officers' conduct are murkier than
the maxim "maximize shareholder value." The Business Roundtable's recent
embrace of stakeholder theory seems likely to complicated things [1], and
efforts by influential people like former Delaware Supreme Court Chief Justice
Leo Strine [2] and legendary corporate lawyer Martin Lipton [3] have
meaningfully contested the accepted definition of corporate purpose outside of
the academy in recent months. But I do think Delaware law is pretty clear on
the principle behind D&Os' fiduciary duties. The best summation I have seen of
it is in a talk that Vice Chancellor Travis Laster gave at UVA Law last
spring; [4] it's a great talk. Cheers yo.

[1] [https://www.businessroundtable.org/business-roundtable-
redef...](https://www.businessroundtable.org/business-roundtable-redefines-
the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans)

[2] [https://corpgov.law.harvard.edu/2020/05/16/purpose-with-
mean...](https://corpgov.law.harvard.edu/2020/05/16/purpose-with-meaning-a-
practical-way-forward/)

[3] [https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-
of...](https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-of-the-
corporation/)

[4]
[https://www.youtube.com/watch?v=ET8v47XPcUY&feature=youtu.be](https://www.youtube.com/watch?v=ET8v47XPcUY&feature=youtu.be)

~~~
aspenmayer
Oh wow! Even more info. I remember hearing about the Business Roundtable on a
podcast when it was breaking, but haven’t heard much since.

Did it end up just being lip service, or are there lasting changes in industry
or individual companies that we can point to which show prioritization of
stakeholder value over simple shareholder value?

~~~
colonelanguz
_That_ question is probably a bit over my head. My outlook is pretty grim and
skeptical because of my experience with American capitalism so far. But the
fact that people like Leo Strine and Marty Lipton are apparently meaningfully
moving these ideas beyond the bounds of academia is definitely a good sign.
(Slightly) more tangibly, 93% of investor respondents to a recent survey about
corporate purpose indicated that it's important for a corporation to have a
purpose, and 38% agreed that defining/managing stakeholder impact is an
important reason to have a corporate purpose.[1] (This study was published on
the HLS Blog after I wrote a more cynical reply to you yesterday and forgot to
send it. Neat I guess.)

I read the Harvard Law corporate governance blog pretty regularly, and a
staggering percentage of recent scholarship on there has been about corporate
purpose, stakeholder capitalism, and ESG. ESG and stakeholder theory aren't
exactly the same thing, but here's a good overview of how ESG might impact M&A
and governance moving forward [2].

[1] [https://corpgov.law.harvard.edu/2020/06/19/making-
corporate-...](https://corpgov.law.harvard.edu/2020/06/19/making-corporate-
purpose-tangible-a-survey-of-investors/#more-130582) [2]
[https://corpgov.law.harvard.edu/2020/02/20/the-coming-
impact...](https://corpgov.law.harvard.edu/2020/02/20/the-coming-impact-of-
esg-on-ma/)

------
hvaoc
This will not work. If they are that good with information, they must be
building products after products that people will love. Tell me one last known
successful launch by Facebook in the last 2 years, outside tweaking their
existing products.

Only way it could work is if they share their wealth in other areas / people
which must be invested in and will not get enough capital if not for them. Ex:
Google Venture - Solar City, Tesla.

But founders have to be fiercely independent and the companies must be
independent. Like Elon Musk as founder and Larry / Sergey as investors.

Facebook DNA doesn’t allow that, they are predatory in nature. Trying to
diversify by external forces since internal options simply failed. Founders of
the companies they acquired, left with very unpleasant experience.

Take their money, if you are ready to be as independent as Elon Musk were and
ready to say NO to Zuck when and if you have to.

~~~
ericflo
> Tell me one last known successful launch by Facebook in the last 2 years

Oculus Quest

~~~
ta17711771
They...bought Oculus. No?

~~~
TeMPOraL
Long time ago. Quest was developed way after that acquisition.

~~~
Traster
Facebook did the same thing they did with Instagram, they bought the company,
kept it essentially independent with the founders continuing to run it as an
independent management team. As with Instagram, Oculus is now big enough to
actually matter to facebook, and so Mark proceeded to fuck with the successful
management team until they quit. It's almost the perfect example of Facebook
failing to innovate internally.

~~~
ijpsud
Isn't Oculus doing better than ever? Citation for "Mark proceeded to fuck with
the successful management team until they quit"? (genuine question)

------
cryptica
These kinds of articles about VCs and companies offering to invest big funds
used to give me hope, but now that I've participated in bootstrapping a
startup, I see these articles as bad news. They're going to fund my
competition... Give them easy money and keep funding them until they get that
big corporate exit and I'm out of business because my margins are too small
and I can't afford bulk discount on Facebook advertising like they can with
all that free money they got.

You know that someone else is going to get that funding, but it's not going to
be you. It's more likely to help your competitor than it is to help you (the
reader of the article). This is bad news for the typical reader of this
article.

~~~
MattGaiser
In a world of easy VC money (granted that may be over), how viable is
bootstrapping in a competitive market?

~~~
hw
Am working at a bootstrapped startup. Actually profitable. In a very
competitive space. No VCs to answer to, no irresponsible burning of cash on
marketing and bloating of engineering team. No AWS. No expensive SF office or
lunches paid by VC money. Hiring is dictated by our revenue and profit growth,
and no we don't spend VC money on absurdly overpriced engineers.

Because we're run super lean, we've been able to hire more and spend more on
marketing during these tough times while businesses are downsizing or putting
a halt on hiring/marketing dollars.

If the space you're getting into requires lots of capital, fundraising is
unavoidable, but if you're thinking of even bootstrapping a company, it better
be one that won't require a lot of capital (SaaS), and you need to run it
lean.

------
ChicagoDave
I wouldn't take a penny from Facebook. You know they will lock down any patent
you create and steal your IP.

~~~
fheilz
Would you take a penny from Softbank?

~~~
amitutk
A penny from Softbank? Didn't you get the memo? Softbank requires you to take
at least 1 billion.

~~~
cosmodisk
Getting funding from Softbank is like foie gras: they'd literally stuff
dollars down your throat.

~~~
andy_ppp
Yes, it might end up making your startup sick too...

------
riazrizvi
Naturally. How else are they going to monetize the data they have on business
traffic?

Just think twice about turning down a deal from them, no matter how bad it
seems, because they probably know a lot more about your market and their
alternatives to your services than you do. And the strategy in monopolistic
situations like this is join us or suffer.

Surely this how Alphabet has grown so big.

------
beager
A lot of people are rightly concerned here that Facebook will run this arm in
a cutthroat way so as to stifle innovation and competition. Though they might,
I have no reason to believe that’s because they want to usurp and control
every technology they invest in. I think Facebook knows that their core
products and business lines are under threat of attrition, and the margins on
ad revenue will get tighter. A venture arm, coupled with one of the world’s
beefiest analytics muscle, will probably return more than their core
businesses, and insulate them from a potential turn away from social media as
a profitable vertical.

That’s what I thought they were doing with Oculus originally. Same with
WhatsApp, then they started to commingle the branding.

------
hi5eyes
my (stupid) theory is fb/goog/youtube are now trying to help small businesses
as much as possible on their platforms to drive more traffic and revenue since
expansion is tapping out at some point

~~~
gentleman11
I don’t think that’s stupid at all. When you are as big as a small country,
you legitimately do benefit from a strong, lively economy

------
zacharycohn
I'm actually more surprised they didn't already have a venture arm.

------
gentleman11
I would dread having Facebook on my board. I intend to treat my future users
very well and wouldn’t want somebody with 1-2/5ths ownership in my company
pushing me to chase their data

------
juanbyrge
This makes sense to me. Facebook knows that consumers are finicky when it
comes to social networks and they need to stay on top of the latest fads. Once
new social networks catch fire Facebook needs to do anything possible to gain
control of them, and venture investing is one way to do that.

------
shoo
If you were an investor in Facebook, instead of Facebook investing excess
cash, wouldn't you prefer Facebook to return the excess cash to investors?
Then if you agree that investing in startups is a winner, you could reinvest
the cash through some venture fund? Or if you disagree and feel that there's a
better use for the cash, such as investing in index funds or paying off your
student loans or buying a yacht or whatever, you could do that instead.

One of William Bernstein's Efficient Frontier articles summarises some
research on this:

> In the December issue [of Journal of Finance] Jarred Harford found that
> cash-rich firms destroyed 7 cents of corporate value for every dollar of
> cash reserves held. How does this happen? Let’s take two firms, both of
> which are considering a project or acquisition of marginal value. The first
> firm is cash-poor, and must obtain the capital from a bank, or a stock or
> bond issuance. This necessitates scrutiny of the project from the outside.
> The second firm is cash-rich, and thus requires no outside scrutiny—they can
> simply cut a check. Clearly, the cash-rich company is much more likely to
> make this potentially unprofitable investment.

> Rajan, Servaes, and Zingales look at the performance of large conglomerates,
> and find that investment capital tends to flow most readily to its least
> productive divisions. The more highly diversified the company (i.e., the
> less related its component businesses) the more dramatic the effect. What is
> most interesting is that Harford's research found that cash-rich companies
> are more likely to make diversifying acquisitions—in other words, to turn
> them into the same companies that this paper shows are the least efficient.

> [...] the February JoF contains an absolute gem from La Porta, Lopez-de-
> Silanes, Shleifer, and Vishny on dividend policy around the globe. Their
> primary finding is that in so-called "civil law" countries, such as most of
> Latin America, Scandinavia, and southern Europe, where investor protection
> is the weakest, dividend payouts are low. In so-called "common law"
> countries—basically the world’s English-speaking nations, where investor
> protection is excellent—payouts are high. Which gets back to Graham’s basic
> premise; investors prefer dividends and take them whenever the law and
> culture allow. The authors reinforce the points made by Graham and the other
> pieces; "failure to disgorge cash leads to its diversion or waste, which is
> detrimental to outside shareholders’ interest."

> But what is most remarkable about this piece is its tone, which is almost
> Menckenesque in its description of modern corporate ethics. They describe a
> Hobbesian world in the kind of plain English rarely seen in academic
> finance; "Firms appear to pay out cash to investors because the opportunity
> to steal or misinvest it are in part limited by law, and because minority
> shareholders have enough power to extract it."

\--
[http://www.efficientfrontier.com/ef/700/agency.htm](http://www.efficientfrontier.com/ef/700/agency.htm)

~~~
smabie
This is exceedingly fascinating. Thanks for the link!

------
kgraves
Facebook is the modern day internet gangster cartel, they are not even trying
to hide it any more. This is an obvious trap that is easy to avoid.

Sadly, I doubt there is any company that can take them on.

~~~
a13n
How does investing in startups make you an internet gangster cartel?

~~~
alasdair_
"I'm gonna make him an offer he can't refuse..."

"... one billion dollars in cash and stock."

~~~
Fezzik
I mean, that’s a bit of the stretch. The implication in “an offer he can’t
refuse” is that the mob is going to kill you if don’t accept the offer, not
that they are going to drown you in more dollar bills than you can swim
through.

~~~
alasdair_
That was the point of the joke :)

I don't mean this impolitely - the fact it wasn't clearly obvious as a joke
means I should have tried harder.

~~~
Fezzik
It definitely whooshed over my head.

------
uptownfunk
I am surprised they have not started this sooner frankly

------
ponker
Surprised that this didn’t exist already.

------
zuhayeer
No good co will actually take money from the incumbent they're trying to
uproot

~~~
asdff
Mozilla is funded by google.

~~~
ta17711771
But Mozilla is no longer trying to uproot Google.

Their job now is to keep Google from getting an antitrust lawsuit/similar
sentiment etc.

------
hogFeast
So will this use data harvested from their malware apps (Onavo)?

~~~
jasonvorhe
I wasn't aware that installing something by yourself that provides you with a
promised benefit could be considered malware.

Your accusation even conflicts with the basic definition of malware:

> Malware is any software intentionally designed to cause damage to a
> computer, server, client, or computer network.

I know what you're getting at, but why chose such a loaded term that doesn't
fit?

~~~
normalnorm
You forgot to include some more details from the Wikipedia article
([https://en.wikipedia.org/wiki/Malware](https://en.wikipedia.org/wiki/Malware))
from where you borrowed your definition:

> A wide variety of types of malware exist, including computer viruses, worms,
> Trojan horses, ransomware, spyware, adware, rogue software, and scareware.

It specifically mentions spyware, so let's take a look at that definition:

"Spyware is a type of malware that aims to gather information about a person
or organization, without their knowledge, and send such information to hack
another entity without the consumer's consent."

------
moogly
Let's spread the cancer!

