
U.S. Tech Funding – What’s Going On? - randomname2
https://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/
======
thorfish
_" And the tech IPO is basically dead. The tech IPO market is at early 1980's
volumes. For most of the 90's the majority of tech funding was public. This
has reversed. It used to be routine to hit $20 million in revenues and go
public. Not anymore."_

It's interesting how it seems that inequality is an unintended consequence of
Sarbanes-Oxley. Before an engineer might vest after four or five years, just
as the company is going public at a modest valuation. But if the company stays
private, the employees are forced to go double or nothing. Either the company
continues to grow, and there is a Google or Facebook like outcome with
hundreds of employees getting rich. Or the company goes sideways and the stock
ends up diluted to nothing. Furthermore the general public would have shared
in the growth in the 1980's, but now most of the value has accrued by the time
the company goes public. So for the few that make it, all the wins go to the
founders and VC's, rather than having the general public get in early.

~~~
bane
I'd also add that until the public validation of an IPO and some time trading
on the markets, tech companies have just become investment "tokens" that hold
arbitrary amounts of wealth as "valuations" that make no meaningful sense. M&A
efforts are simply capturing this fanciful valuation and hoping they can sell
this token off in some way for more to somebody else.

It's like putting $1 in a sock and under your mattress, claim it's worth
$1million and never letting up on that claim by trying to sell your "money
sock 1.0" on the open market. You might even be able to get somebody to buy
your "million dollar" sock and _they 'll_ go and claim to everybody that it's
worth this ridiculous amount (or even more ridiculous they'll trade you their
"million dollar" hat for your sock so you can both claim private market
validation). Then if the hype lives long enough, they can then sell it for
$1.2million to another private buyer, or tear it up and sell it off in threads
for even more "buy a genuine thread from the million dollar sock! only
$1,000!".

It's almost completely divorced from reality.

~~~
_delirium
I'm not sure public markets are a unique way of getting "real" prices.
Private-equity sales are a real market with real money; if Google buys a
company for $50m, that's an actual market transaction that valued the company
at $50m. Is the idea that public markets provide better price discovery than
private sales do? If so, is there empirical evidence that publicly traded
companies really are more accurately valued than privately held companies are?
(Genuine question; it's possible there is such evidence, but I haven't found a
good article on the subject.)

~~~
darkmighty
It's a fair hypothesis to me: the public market has a larger amount of people,
so more information; it also has mechanisms such as securities that benefit
highly and rapidly information bearers.

But the idea that private investors' valuation is not "real" somehow sounds
silly to me. The companies are still getting sold. The companies/investors
that buy them have real value and expect to generate enough revenue from the
acquisitions amounting at least to the acquired value.

The question then (and I think is a good one), is why private investment is
getting more prevalent if public markets have more efficient valuation
mechanisms. I think the answer is that private investors are more willing to
'kickstart' so to speak the early stages of startups, and from then have grown
to dominate the investment market to their great benefit.

~~~
cmullen
Public markets investors typically have far _less_ information about companies
than do private investors. For most technology companies, the probability of
success / profit is driven more by specific company factors rather than larger
industry and macro trends. Most public tech companies are understandably
worried about disclosing detailed sales metrics / technology roadmap to all
investors for competitive reasons; however, as part of any PE / VC backed
investment process, private investors are typically given access to all of
this detailed information.

~~~
darkmighty
Ah yes so private investors have more specific information while public market
investors focus on overall market trends. But is there no way to public
investors to get a glimpse of the internals of the companies without
disclosure of competitive information? Maybe through some kind of report by a
consultancy under NDA, or a small group of investors under NDA giving an
investment report?

~~~
cmullen
Under the SEC's Reg FD, public companies are required to disclose all material
information to all investors at the same time. So, what you propose is not
really workable under the current regulatory regime. Sometimes public
companies will give extra disclosure to help investors (e.g., product line
revenue, numbers of employees within each function, etc.), but often that
information is not enough to truly diligence an investment thesis.

As a result, there is a slight information asymmetry penalty in the valuation;
however, this penalty is dwarfed by the liquidity premium you get as a public
company.

------
timr
Note that they use the valuations of public companies to argue that the market
isn't overvalued, then spend 90% of the presentation arguing that all of the
value is being "created" in the private markets, and that IPOs are dead.

Moreover, they're basically arguing that it's logical for investors to pile
into these late-stage deals, because waiting around for IPO is a losing
strategy.

If you believe this data, it doesn't tell you that there _isn 't_ a bubble. It
says that if there _is_ a bubble here, it's mostly happening off the books,
and depends on the _huge public exits_ of a handful of mythical creatures.

Also, slide 38 is an argument for the "No Exit" way of looking at startups:
we've got a boom in low-cost, early-stage deals (2x growth since 2009),
coupled with an ever-more-ruthless culling of the herd, where most of the
aggregate funding goes into fewer (<20) hot deals than ever. Investors are
taking a cheap call option on your youth.

~~~
twotwotwo
Interdependence is a big deal.

Some real, present revenue to big companies comes from the startup world.
Maybe it's where I live and what I do, but startups seem to pay for a ton of
the Twitter and Facebook ads I see. Amazon makes good money running
datacenters for them. Apple and Google see a lot of the value of their mobile
platforms created by startup app developers. The big companies' current
revenue helps determine how much they're willing to invest, including
investments in the form of acquisitions, so the dollars invested into the
system can themselves contribute to exit amounts in a weirdly circular way.
I'm not the first to observe this.

That in itself proves very little; both sustainable and unsustainable systems
can feed on themselves. And all these large companies I'm mentioning are
certainly sticking around.

But it does suggest there are paths were one thing goes bad first--new
investment falters, the market starts pricing ads drastically lower, big
regulatory interventions shake up some subsector or other--and the ripples are
bigger and reach further than might be expected.

~~~
timr
Yeah, this is definitely a reasonably-sized elephant in the room. It's clear
that a big chunk of tech revenues come from spending by other tech companies.
You can't throw a stone in SOMA without hitting the fancy offices of a
startup-servicing startup.

In the late 90s, this happened because all of the companies were buying ad
contracts from one another, booking the total value of the contract as
revenue, and using that to pad revenue growth. Today's version is the deferred
ARR, which turns a tiny cash flow from subscription software into a magically
big top-line number. But what goes up quickly, can fall just as fast...it
doesn't take many companies to pare back on spending before your fictional
deferred revenue graph falls off a cliff.

------
sharkweek
I thought Dan Primack had a solid response:

[http://fortune.com/2015/06/15/andreessen-horowitz-why-
were-n...](http://fortune.com/2015/06/15/andreessen-horowitz-why-were-not-in-
the-next-tech-bubble/)

"Andreessen Horowitz’s presentation treats the relative lack of tech IPOs as a
sign of market health. As I wrote last week, there is a much less charitable
way to view it. Moreover, the lack of IPOs also means that the public markets
have yet to validate many of these unicorn valuations."

~~~
beambot
Except that the valuations are meaningless without understanding all the other
undisclosed terms granted to the VCs in the latter rounds (eg. liquidation
preference, participating preferred, etc).

~~~
nugget
How important is a liquidation preference on a $500m round which values Uber
at $40b? Not very.

Moreover, most of the institutions doing these late stage rounds and
secondaries are the same banks and asset management firms that float the IPOs.

One of the unintended consequences from SOX is the creation of this public-
private funding environment where huge private firms and high net worth
individuals can invest, but small retail investors are shut out until the
venture firms believe the company's value has plateaued (Slide 30). We saw
this happen with Facebook, for which there is a ton of second market valuation
data from 2007 through the IPO to the present. If you believe that small
retail investors should be protected from themselves when it comes to early
stage investing, this is a good thing.

~~~
beambot
> How important is a liquidation preference on a $500m round which values Uber
> at $40b? Not very.

It's substantial. If VCs get a 1x liquidation preference, then it's
(effectively) a no-downside investment since Uber is worth (worst-case)
$500M+. If they get >1x and are the last investor (most-preferred), then they
are virtually guaranteed solid return. Late stage VCs know what they're doing
and valuation is still only half the equation.

As for private firms and high net worth individuals.... that's an entirely
different issue; I'm certainly not a fan of accredited investor regulation.
I'm also not a huge fan of my retirement (401k funds) being invested into the
startup ecosystem without any say in the matter either.

~~~
nugget
I personally wouldn't call it substantial. You can quantify the value of the
liquidation preference by looking at the difference between the value of the
preferred shares and the value of common shares available on secondary
markets. Once you have a company that owns its market, has healthy and growing
revenue, etc, there is very little difference. This is what happened to
Facebook and Twitter. I'm not familiar with Uber but I do track Pinterest and
Airbnb and right now their common stock (no preference) sells for about a 10%
discount to the latest preferred rounds. Square and Palantir, which people
seem to have less faith in (for whatever reason), trade at a steeper but still
not what I'd consider substantial discount.

~~~
foobarqux
Preferred shares have different terms, they don't all have liquidation
preferences. Even if they do, the preference is worth much less once the stock
appreciates significantly. For example, if I get a preferred with liquidation
preference at some price P then that is worth far more than the same security
once the price appreciates to 3*P (since it acts more like a common share, the
value of the preference being reduced [since the chance of it being useful is
less]).

And which secondary markets are those?

~~~
nugget
The most active secondary markets I see today are the broker dealer successors
to Frank Mazzola/Felix Advisor type outfits who use company approved (or
tolerated) LLCs to vacuum up stock from ex employees who want liquidity. You
have to find them or be referred to them and then they will periodically pitch
you inventory as it becomes available. Chris Sacca is doing the same thing but
it looks like a venture fund and (as far as I know) he holds to IPO, where on
the east coast it looks like a private equity fund and they will allow intra-
fund exchanges between old and new investors. Very little transparency in this
market and probably the perfect breeding ground for the next Bernie Madoff
style Ponzi scheme (not Frank or Chris who are both legitimate).

------
michaelvkpdx
My takeaway- the VC's have leveraged the money from their successes to create
a vortex that sucks in money from consumers, into privately owned companies,
back into VC pockets, and back into more companies that get more people to
spend more money.

The tech vortex that is sucking away quality of life from the middle class and
padding the billionaires (and large company) bank accounts. Throwing out a few
bones on occasion (fewer and fewer) to entrepreneurs to keep the vortex going.

Vortex is the opposite of bubble, but it does the same thing to the life of
the average person.

~~~
nostrademons
That's the way capitalism has always worked - it is up to you to make deals
that increase your overall level of happiness, and it's up to your
counterparties to ensure that those deals _also_ increase their happiness. In
past years, instead of "VCs" the villains have been hedge funds, private
equity, corporate raiders, giant conglerates, corporations in general,
investment trusts, robber barons, and colonial empires.

In return, the average person has gotten information at their fingertips,
sheep-throwing, Farmville, Candy Crush, easy travel bookings, a place to stay
in every city, a computer on every desk, the ability to fly through the air, a
car of their own and a house in the suburbs, and many other things.

The reason money gets drawn away from "the average person" and collects in
"billionaires and large companies" is because the average person values money
for what it can do for them, while billionaires and large companies value
money as a scorecard. Naturally, it makes sense that money will flow away from
people who want it so they can spend it, and toward people who want it so they
can hoard it. If you're unhappy with this arrangement, decide which side you
would rather be on and then act accordingly.

~~~
jsprogrammer
>In return

In return for what? I've read your post several times now and it's unclear
what you are referring to.

~~~
nostrademons
In return for forking over the vast majority of their income. It doesn't just
vanish (well, except for credit card interest...that _does_ just vanish). The
"vortex" that the grandparent's referring to is the money that customers are
shelling out for services, which then becomes a tech company's revenue. But in
return for shelling out that money, they get mobile phones, cloud storage, a
place to stay in every city, on-demand transportation, access to service
professionals, a second income stream, exposure for their business, and many
other things of value.

------
narrator
Here's my current map of where the money is coming from and going to.

Fed buying trash MBSs with QE -> Investment Banks -> Stock Market -> Big Tech
Companies -> Acquisitions -> Venture Capitalists -> Tech Companies -> Startup
Employees -> San Francisco Landlords and Fancy Toast Restaurants.

~~~
mahyarm
And the landlord step is further accelerated by the overseas wealthy using sf
real estate as a secure bank account compared to their home country and hedge
funds buying up stock as an investment step.

NIMBYs then leverage it further by constraining supply.

~~~
narrator
The "overseas wealthy" is the trade deficits we've been running for the past
30 years slowly trickling back into the U.S asset markets. We were able to
export our inflation for 30 years and it was all piling up in foreign central
banks as treasury bills. Now, with very low interest rates, it is going into
any asset that's not a bond. If the dollar index starts to go the wrong way,
watch out, that little stream of overseas dollars buying into U.S assets is
going to become a flood.

------
ThomPete
As I have mentioned in another thread.

We don't have a tech bubble we have a Silicon Valley valuation bubble, one
a16z is part of themselves.

The discussion isn't whether tech companies are under or overvalued, they are
most likely in general undervalued.

The discussion is whether the kind of investments that companies like a16z and
other VC companies make are over valued or even valuable.

In other words, they are setting up a straw man about tech funding in general
but the very issue is that it's not the tech sector in general that is having
insane valuations tied to it but a small but important subset.

~~~
vasilipupkin
they made a number of specific points about why they don't think it's a
bubble. Now, they could be wrong, but at least they are coherent

~~~
freyr
It's a red herring. They present data about _public markets_ to conclude
there's no bubble. But the bubble, whether real or not, is generally
considered a funding bubble taking place in private markets.

~~~
ThomPete
Exactly!

They are showing that there is in fact no tech bubble which I agree with. But
that doesn't mean there isn't a bubble far more problematic inside the tech
sector. There are a bunch of companies that get a lot of attention for their
valuation but without any real proven path to ever honor it.

------
ripberge
When Andreesen talks about "tech funding", what do they mean by this?

A lot of VC funding that used to go to "tech" companies is now going into much
less profitable types of businesses that should not be considered "tech".
Businesses that most VC's don't really have a lot of experience with.

For example, their investments in Soylent, Walker and Co, Dollar Shave Club.
It is REALLY hard to make money in these types of businesses when compared to
software. They could be in for a rude awakening...

~~~
spitfire
If your business has a website, it is now a "tech" company.

It's a brave new world.

~~~
abakker
Us consultants call this the "Digital Business Transformation"

------
j_baker
Robert Shiller had an interesting analysis of the current stock market's
"frothiness": [http://www.businessinsider.com/robert-shiller-stock-
market-b...](http://www.businessinsider.com/robert-shiller-stock-market-
bubble-2015-5)

Basically, the stock market is a bit overvalued, and people expect that trend
to continue. However, peoples' level of confidence in the stock market pricing
is very low. To me, if there's a coming crash, it's going to be because
investors are overly anxious rather than because valuations are so
stratospheric.

~~~
TTPrograms
Hopefully gradual increase in interest rates will result in stabilization of
stock value as people pull out for safer low-rate returns (which are basically
non-existent now).

Then again the fed sure is taking their time...

~~~
marincounty
The average retail investor is still licking their wounds from 2008. Many,
like myself, put our tiny blood soaked wads in CD's, at .01 percent. There are
millions of Americans who can't gamble on a rigged stock market, and relied on
a healthy 5% interest rate.

This free money being doled out by the Fed to a select few entities will have
consequences. My biggest fear is market will finally win over retail investors
from 2008. Then, and only then will the big boys pull out leaving us holding
the empty bag. Big boys who should gave bleed out if Bush Administration
didn't throw them a coagulant? (I know a cheezy metaphor.) Oh yes, My America
--you are the picture boy of Capitalism?

~~~
saryant
The average retail investor is doing just fine. Anyone who did something as
basic as _hold an S &P 500 ETF_ is up quite a bit from the crash.

~~~
brc
Well, yes. But that dies to fit the narrative of markets bad! Capitalism bad!

------
codemac
If anyone had trouble seeing the embedded flash of slideshare, here's the
direct link to the slideshare:

[http://www.slideshare.net/a16z/state-
of-49390473](http://www.slideshare.net/a16z/state-of-49390473)

------
TTPrograms
This doesn't really directly address the issue of valuations for the unicorns.
P/E valuations are probably insane by most metrics - the type of user base
growth required to get them in line (P/E wise) with other companies is on the
order of double-digit percentages of the global population IIRC.

This doesn't really mean there's a "tech bubble", though. It's possible we'll
see a massive correction to those companies, but it will likely be isolated,
and thanks to the weird structuring of these private equity deals I can't
imagine that the VCs will be much worse off.

~~~
encoderer
Facebook revenue grew 8000% from 2007 to 2014. Clearly not all "unicorns" will
perform this well. And maybe none will. But possibly they avoided discussion
of these companies' P/E because the data is both unavailable and unreliable
given their size?

It's not just a canard that these companies are "not focusing on revenue".

------
jackgavigan
I think a lot of people don't grasp the extent to which the cost of founding a
tech company has fallen since the dot-com boom. I remember forking out tens of
thousands of pounds for physical hardware (which then had to be hosted
somewhere) and software licences for things like Oracle and Checkpoint
firewall, which I then had to install, set up, admin and maintain.

These days, with Google, AWS, Rackspace, Heroku, there's none of that. You can
spin up a new server in minutes and scale up as required. All the technical
infrastructure is already there, so you can focus on the product and market.

------
pbreit
1999-2000 was insane.

Regulators killed the IPO market such that all the gains are being made by
venture investors and the public is totally missing out.

~~~
dylanjermiah
>Regulators killed the IPO market such that all the gains are being made by
venture investors and the public is totally missing out.

A point which seems to be lost in this discussion.

------
foobarqux
Lot's of points to dispute:

Slides talk about S&P IT but no one is concerned with IT public market
valuations (at least relative to the rest of the public market). The concern
is with private tech market.

Slides talk a lot about how the amount of funding is justifiable but the
question is whether the valuations are. Lower amounts of funding do suggest
there is less at risk, however.

How do you reconcile slide 37, which suggests that fund raising is as
difficult as ever, with the widely held view that money is flowing freely
today.

You can't own an index of unicorns (slide 32)

etc.

~~~
vasilipupkin
you can own an index of unicorns if you are an LP in a16z :)

~~~
foobarqux
No, you can own some unicorns but not all of them or something that represents
all of them. I suppose you could invest in the top 5-10 VCs but in either case
you would also own a bunch of non-unicorns. It would be like saying you can
buy an index of CPG companies by buying the S&P500.

------
kamilszybalski
"It’s Carlota Perez’s argument that technology is adopted on an S curve: the
installation phase, the crash—because the technology isn’t ready yet—and then
the deployment phase, when technology gets adopted by everyone and the real
money gets made" \- [http://www.newyorker.com/magazine/2015/05/18/tomorrows-
advan...](http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man)

------
sgwealti
The slide about e-commerce only making up about 6% of total retail sales is
only relevant if there are a lot of "unicorns" which are in that market.
According to Fortune's Unicorn list there are only 3 unicorns that are retail
e-commerce based businesses.

------
foobarqux
Is a16z focused on the seed stage now? That seems to be what they are selling
in these slides.

------
mkagenius
Who were those companies which had funding > 1bn within a year in the year
1999?

~~~
GBond
[http://wayback.archive.org/web/*/fuckedcompany.com](http://wayback.archive.org/web/*/fuckedcompany.com)

------
jgalt212
Maybe the tech IPO is dead because Andressen Horowitz (et al) invest in Series
B, C, and D at geometrically increasing valuations and have pushed valuation
levels to where the public markets are skeptical.

------
kosigz
The takeaway for me is that investing in tech companies during the growth
stage has gone from being mostly for rich people to being pretty much
exclusively for very very rich people.

------
cdnsteve
Why are IPOs no longer viable? Too much red tape? It seems that investors and
their money have a better chance underground (private) where public stocks are
either too slow to get a return or the return amount would be much less.

Why does it seem all the money is in the US and not in Canada? More investors?
More money? Taxes?

~~~
foobarqux
If you want to raise money and can't do so without going through the
regulations of being a public company you would do so.

The only reason to IPO these days is to provide liquidity to existing
shareholders (i.e. cash them out).

------
graycat
Didn't see where the OP explained _why_ the tech IPO market is dead.

------
BinaryIdiot
Is there a video of someone giving this presentation? It's interesting.

------
iblaine
IPO's are dead and so are options.

------
MichaelCrawford
I've been adamantly opposed to the public trading of tech companies for
fifteen years now:

The Valley is a Harsh Mistress

[http://www.warplife.com/tips/business/stock/venture/capital/...](http://www.warplife.com/tips/business/stock/venture/capital/misery.html)

Investment yes, Wall Street no.

The reason to seek investment is to grow one's company so that one can grow
one's business in ways that would not be possible to fund out of one's current
revenue.

One of the very wealthiest people I have ever met founded "The Nation's
Largest Sperm Bank" in the early 1970s with $2,500.00 of his own money, along
with just one other partner, mostly for liquid nitrogen dewars, medical lab
equipment as well as pr0n.

