He basically told me straight up that working hard to build a real business with real value was a sucker's game. Every example he'd seen of people making real money was -- as he put it -- from "equity plays."
By equity plays he basically meant this kind of thing. I started calling it "hype, leverage, flip." If it were just a lot of harmless hot air that would be one thing, but what's really happening here is wealth transfer from honest and productive sectors of the economy and from the long-term savings of the population (e.g. pensions) into the chip stacks of high stakes gamblers.
Throughout history, gambling has always been one of the favored pastimes of decadent nobilities. Today's gambling is particularly clever, as it has the outward appearance of productive work. I cannot help but see today's financial elite in powdered wigs, and probably merkins too. Guillotines can't be far behind.
Luckily there are a few honest VCs and angels, as well as a new emerging financial system built around crowd funding and peer to peer finance. That's the future. When the guillotines fall -- literally or metaphorically -- the new distributed financial system will take over in the same way that mercantile and industrial financial systems took over after the fall of Medieval feudalism.
I unfortunately learned about their reputation too late... they pressured my company into signing a Series A term sheet only to pull it 3 months later (at the end of the no-shop) after THEY messed up a partnership negotiation. Needless to say we were out of cash at that point, but luckily we had some great seed investors who re-upped and a month later we signed a term sheet with another VC. What a nightmare though.
You could also email me at firstname.lastname@example.org if you'd prefer.
Either party can still back out of the deal at any time, and this typically only happens when something bad emerges during the diligence process. It's important that startups can trust this fact because agreeing not to solicit investment for 3 months while (presumably) running low on cash is a pretty big risk. KPCB broke this trust in our case.
Feel free to email me at the address in my profile if you'd like to chat more.
The VC's have a lot of money to run their PR machine, but no one ever hears the negatives about them. It's important to a functioning market that the information is out there.
"37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.
Founder Jason Fried informed his employees about the new deal at a recent company-wide meeting. The financing round was led by Yardstick Capital and Institutionalized Venture Partners."
And I thought it was fiction.
First, forget liquidation preferences. $20 million is a drop in the bucket to Kleiner. This funding is not concerned with downside; as the post clearly explains, it's designed to manufacture leverage to the upside. Note that leverage isn't exclusive to Snapchat; the name of the game is perpetuating and promoting the market dynamic of arguably insane valuations.
Second, if this was convertible debt, it wouldn't be pegged to a valuation. The use of late stage convertible debt is typical when the funding would be dilutive and the company needs a bridge to its next round of funding. You often see existing (and not new) investors do late stage convertible deals because they're less concerned with valuation and maximizing their stake. Kleiner, as far as I know, is a new investor in Snapchat, and having raised well over $100 million in the past year and a half, I doubt very much that Snapchat needs a bridge.
Capital structure doesn't change the enterprise value of a company. Call it equity, venture debt, mezzanine, super-duper late series H, etc. Enterprise value is what is. The capital structure can be 100% equity, it can be 99% debt and 1% equity, but valuation, which is what the article talks about refers to a $2bn to $10bn change in value. I think you should check some corporate finance theory, it might help clarify things.
The structure of the deal is less central to that argument. If it's convertible debt, does that really matter if the point is lost on most people? If the point of inflating the valuation is hype, then who cares how it's structured.
Reminds me of "Investment Grade Beanie Babies"
When these carefully orchestrated valuation maneuvers meet liquidity (and in a lot of cases some liquidity comes pre-IPO), a lot of the money is invested back into the Valley. Those with it become angel investors and limited partners in venture funds, or start and fund their own companies, perpetuating the cycle.
This in and of itself isn't a bad thing, but anybody living and working in Silicon Valley should contemplate what will happen when the music stops. Even if you're just an average engineer with no real exposure on the equity side, less capital chasing opportunity will lead to fewer startups, and less heavily funded startups. Fewer startups competing for talent will mean fewer jobs and downward pressure on wages. Obviously, major companies like Google and Facebook aren't going anywhere any time soon, but the $1xx,000/year early-stage startup jobs are going to be harder to find, especially at the junior end of the market, and the days of being able to jump from six-figure job at unsustainable startup to six-figure job at unsustainable startup in a matter of a few days or weeks will be a thing of the past for most.
This could happen two months from now; it could happen two years from now. But it will happen. Given the valuations we're seeing and the increasing difficulty with which the Fed is maintaining the status quo, I think one has to be prepared for the possibility that we're closer to the end of the cycle than we are to the beginning.
As for the financial services industry ("Wall Street"), this doesn't exist in a separate bubble. Who led Uber's recent $1.2 billion round? Fidelity. Who else participated? Blackrock and Wellington Management.
I get that investment money pretty much is the economy in SV presently. But I definitely have major concerns that so much money is being paid for so little.
Not enough people think about this. The ease with which multi-million dollar valuations are obtained in the Valley is incredible. Heck, Y Combinator, which offers a six figure valuation to entrepreneurs, many of whom have no real-world experience and nothing more than an idea, is considered a "bad deal" by many.
Outside of the Valley, the market is more like Shark Tank, where you'll struggle to get anywhere close to a million-dollar valuation without real traction (read: revenue and profit).
Silicon Valley's easy money supports a lot of high-paying jobs. If entrepreneurs in the Valley didn't have the ability to raise six and seven figures of capital so easily, and without giving up 100% of their businesses, there would be a lot fewer developers with a year or two of Ruby on Rails experience making $120,000/year.
When you get a job offer with a 4 year stock vest in Microsoft, that's a 6 figure valuation on your contribution to Microsoft.
Starting and growing a business is hard. If it was easy, everybody would do it. There are tons of people who are capable of thriving and creating value as an employee of a large company but who can't run a business. That's not a knock on them, it's just reality.
We're spoiled in the Valley, especially during boom times, and it's helpful to spend some time outside of the Valley. Like I said, Shark Tank is a lot closer to reality for most people in most places. Six and seven figure valuations aren't handed out like candy on Halloween. They are earned through meaningful traction.
These firms are like that scene in Jurassic Park when Jeff Goldblum's character tries to distract the T.Rex and ends up getting thrown into the outhouse by it. You have potentially valuable companies like AirBnb, Uber, etc. but the whole market is being skewed by completely outrageous valuations for products like Snapchat or Lyft.
I don't think it's intentionally malicious(by K9 and other firms) I think they think they know the value of these companies and that value is really high(in their minds) when it's really not. It's going to get worse and worse until pop. But the real ones will survive.
The problem is it's going to affect investment in potentially viable companies in the future.
Fool me once(2000), shame on you; fool me twice(2015), shame on me.
That said, the article says Snapchat has raised $160M. If you push them to take money at a high valuation, you can cut them off at the knees when they run out of money. No IPO required, just sell off the company to one of the existing players for your liquidation preference and maybe a small premium.
I will be quite surprised if Snapchat tries to IPO before any revenue, but if they do make that leap I'll be really interested in watching the market response. That would be a good data point for bubble/notbubble arguments.
1. For KPCB to exit, they need to find an investor that values the company more than they do. To find an investor who values an unprofitable picture sharing company at over 10B would be a difficult task. It will probably be possible to find retail investors to provide the exit strategy, but the big tech companies of the world (Google, Facebook, etc.) do not have incentives for buying out unprofitable poor performing companies with no future. They have an agenda, and their CEO's are looking for strong future revenues because they themselves are heavily vested in the companies which they work for. These are savvy people with a team dedicated to valuing M&A transactions. There is no good reason for a large tech company to acquire a snapchat unless it thinks it will contribute to the bottom line, the brand, the network, the IP, or the scale of the existing business.
2. There's this incorrect notion that VC firms are somehow not exposed to the risks of the market. Times are good right now, and if you're a VC firm, you should be making a profit right now. A typical pump and dump occurs because of timing effects, insider knowledge, and mass marketing. While you could argue that an IPO is a "mass marketing", I think that external financial institutions (hedge funds) are very much looking out for shorting opportunities. An overpriced IPO is a great opportunity for a hedge fund. Also, It's worth mentioning that the VC firms which will profit so nicely this year, are likely to lose 50-80% during a downturn. They are very much exposed.
3. If KPCB really wanted to profit, why only invest 20MM? This won't make them much money. The real reason they made this investment is because they're skeptical of snapchat, but still want the talking point if there is an upside. It will be a great story for investors, pretty much regardless of how snapchat exits.
So in the event the company sells for $300M, the investor get first get his $200M out. Then get 20% of the remainder. He won.
I don't second guess Mark Zuckerberg, as that is a consistently losing bet. That being said, there is no reason the price should have been $2B. The frothy prices, mean that a $100M company was priced at $2B and that dumped a lot of money from Mom and Pop to VCs.
Yet in the long term I'm not so sure. Facebook's revenue is built on doing things that cannibalize the value of their platform-- annoying ads, creepy surveillance, even creeper "experiments" on their users, etc. That's making them decidedly uncool. Network effects are holding their popularity high for now, but while network effects are powerful they are not unstoppable. Things can "tilt" at any time.
I think that's why Facebook is acquiring things like Oculus. If they're to become the next Yahoo they want to make sure they've invested in some other properties. That of course is why there's still a Yahoo-- the core Yahoo brand is almost worthless.
The bet is that Oculus will be used in many areas (not just gaming) and will become multi-billion business in the future. It a big bet and it could go wrong. Keep in mind that $2B is 1% of FB stock price - placing 1% bet on new promising technology is not unreasonable.
Basically let's assume a company raised money on a $10B valuation, and needs money down the line for a variety of reasons. They will have to make sure that the future round is at $10B+ which may or may happen, especially if the company is not flying high at that time. And, if they can't raise at $10B+, they'll have to go for a down round which can look very bad.
- Their shares go farther if they buy another company with stock
- Helps recruiting and retention if their employees can sell their options on secondary markets
This existing post is extremely aggressive and over-the-top.
Then higher valuation works even better for you. Oh Facebook you really need to pay at least 6 billions, b/c we valued them at 10. Such a great deal. VC enjoy your 300% ROI.
My original post:
I was with this piece until it went off the rails, deep into the swamp of Federal Reserve conspiracy theories.
If you're interested in the title, I'd stop reading this article after about the 6th paragraph. After that, you're in the swamp.
Or just scoll to the bottom and read the real, original article. (Mods, I'd recommend switching the link to that article, which is actually about SnapChat):
All the surveillance state stuff that the wacky Bill Cooper types were ranting and raving about in the 90s has all come to pass, often in weirder and more alarming ways than they predicted. Yet I'm still waiting for my 666 stamp, nor do I see very much Masonic influence in things.
A conspiracy theorist is kind of an investigative journalist with bad epistemology and a poor understanding of how the world really works. They see the smoke and correctly extrapolate the fire, but they think fire is phlogeston excreted by underpants gnomes.
The reason they're so often right probably boils down to the fact that as loony outsiders they've got no vested interest in towing the official party line. So they're able to say really contrarian things and not give a damn. According to Pravda, stocks always go up. Saying different is not a good way to advance your career in the Party.
I don't remember saying that.