Rocking since I was young #tbt
Robert Randolph jamming out. (at Brooklyn Bowl)
First #nets game @WeWork #weworknets (at Barclays Center)
Let’s go giants!!! (at MetLife Stadium)
4K UltraHD aka 4x higher res than your TV. #notbuyingit
Richard Branson just walked in with three hott blondes #baller (at Gansevoort Meatpacking NYC)
Bday mini hoops
It’s starting to get really annoying reading a growing number of stories and comments that we’re in a tech “bubble” right now because of a number of recent massive rounds of funding by a few select companies. I was only 12 years old in 2000 when the “dot com” crash tanked the markets because too many companies IPOed with no business models and a lot of vaporware. Granted, some tech companies have IPOed with less than stellar financials, I don’t see how we can compare current times with the past.
At least 200 companies are now expected to debut this year, according to Renaissance Capital. That would be the most since 2007. Investors have profited handsomely from many of these offerings. The average IPO has returned nearly 34% from its IPO price, according to Renaissance Capital.
Before we discuss that aspect, let’s first understand why these companies are raising so much money, which starts with the VCs and angels. Everyone thinks that these investors are in the business of “investing” when they are really in the business of “exits.” Think of investing as a generous long-term loan with certain rights and obligations that are negotiated behind closed doors based on projections, financials and just really what everyone agrees upon. So why the lofty valuations in the hundreds of millions and billions? When raising such large amounts of money, if the valuation (bet) isn’t high enough, investors will get too much % of the company, which could de-incentive the company management to work very hard. Trust me, these are not just rich old guys signing a check – there is a lot of thought that goes into this.
The rumors of Snapchat potentially being offered $1 billion dollars by Facebook and declining it, is a perfect example of why they shouldn’t or can’t sell. They previously raised $80 million dollars at an $800 million valuation, so if they sold for $1 billion dollars, their investors make very little money off the deal. You have to understand that once a company raises money, like a public company, your goal is to increase the value for investors – they have a funding business model as well.
Even Ron Conway’s second angel fund, which had the good fortune to invest in Google (a 400x cost winner), only broke even (that means close to a 0 percent IRR)
Investors are making big bets and need 10-30x returns (big hits especially for angels) to keep their investors happy and make a quality return on their investment (because most of their investments will not work out). Like the mentality of “go big or go home,” investors are holding out on small return acquisitions for the BIG IPOs where they can make most of ther money. It is so unbelievable and ridiculously rare that investors have the opportunity to invest in companies that have even the slightest chance of a $1 billion acquisition or potential for IPO that they make sure that growth and leadership capital are not a problem for them.
The New York Times reported, that there are 25 to 40 private tech companies worth over $1 billion that were started over a period of five to 10 years. If you recognize that more than 50,000 companies get funded each year by some combination of angels and VCs, the chance that a funded company goes on to become a billion-dollar business is 0.005 percent to 0.016 percent. Rounding to any significant digits, that’s basically zero.
Yes, there are a lot of companies that are getting huge amounts of investments with no revenue, but that’s just one way that our business models work. A business model doesn’t have to mean you generate revenue right away, while it would obviously make sense. Counter-intuitively, if they generate revenue, they could be valued at less - it can actually be a strategy not to generate revenue. Look at Facebook, Twitter and countless other companies, who are 7-year, over night successes.
My understanding of a bubble was that there were companies IPOing without a real business in place. If you think we’re in a bubble now because there is a lot of private money flowing to “startups,” then you just obviously don’t understand the early stage investment business. So to everyone crying “bubble,” please stop. When the dot com crash happened, it was a bubble because a lot of people who lost money in the “public” markets, couldn’t afford to lose that money. Now, if today’s bubble was to burst and these investors lost their money privately, they will still be able to live their lives well and very few people will be affected.
If you want to cry wolf about a possible dumb bubble, I think crowd funding for equity (JOBS act) can cause a new type of IPO-like bubble (more like a POP – but to a lot of people). Amateur (at best) “investors” giving money to business they don’t understand (no appropriate due diligence), with money they can’t afford to lose and more government oversight… With professional VCs still looking to figure out how to make money, angels chasing a very rare financial dream, how can we expect the thousands of democratized masses to make smart and informed decisions online? Scary thought!
Punishing myself with some Central Park foosball (at Rumsey Playfield)