Posts filed under “Venture Capital”
Back on December 17th, I wrote that Facebook’s founder Mark Zuckerberg getting tagged as Time’s Man of the Year meant the top was likely in for Facebook valuation at $58.75 billion dollars (Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year).
This meme has slowly propagated, and quite a few other analysts have looked at the same; See Douglas Rushkoff and the Reformed Broker, amongst others. Goldman Sachs does not agree with this assessment, as they just poured $500 million into FB at a $50 billion dollar valuation, with an option for another $1.5 billion right behind it.
If and when Facebook goes public, they must monetize their user base — I find it hard to see how they do that without annoying their base of users away. Mine is a decidedly non-consensus viewpoint.
The free web app has to figure out a way to have the site generate revenue and profits from its immense user base. Currently, they generate about $ 1 billion dollars in revenues at about a 25% margin.
The challenge for FB is that as a free site, there is a dynamic tension between the users and the people who seek to monetize those users. The 15-25 year old demographic is well represented on Facebook, and while advertisers want to reach them, they don’t have all that much discretionary income.
But most intriguing for potential FB investors are the Facebook numbers:
How accurate are they? Facebook claims more than 500 million users, each one of whom can have as many as 5,000 friends. Yet as a privately held company, there are no real disclosure obligations as to this data. Their announcements have little legal impact; they can pretty much say WTF they want and there are no consequences. Publicly traded companies do not have that freedom.
Any investors into a Facebook Private or an IPO may want to get the answers to the following questions:
1. FB claims 500 million subscribers. How many of these are active users — at least once or twice per week? How many of these are dead accounts, with no activity for 30 days? 90 days or more?
2. What is the average revenue per subscriber? How are you planning to grow this?
3. How much churn does Facebook go through? For every 100 new subscribers, how many subscribers leave?
4. What is the life cycle of the typical Facebook subscriber? How active are they for how long, what sort of arc do they cut across theirFB life cycle?
5. Besides advertising, how will you monetize your user base? Are you selling their data to buyers? What about anonymized data — are you selling this also?
Bonus question: What is the subscriber growth like outside of the US? Where are your fastest growing areas? What area is not seeing big penetration ?
Investors have to consider if the Facebook business model has staying power, or if it will eventually morph into the next MySpace or Yahoo . . .
Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year (December 17th, 2010)
Facebook hype will fade
CNN January 7, 2011
This reminds em of “Downsizing America” post from 2 years ago (February 2009):
Most Trends Don’t Last Forever … Have Facebook and Apple Peaked?
Yahoo Tech Ticker, Jan 03, 2011 07:15am
“How Crazy Is That?”: Startups Are Safer Than Stocks, Howard Lindzon
Yahoo Tech Ticker Jul 14, 2010
April 16, 2010
By John Mauldin
First, Let’s Kill the Angels
Equal Choice, Equal Access, Equal Opportunity
Some Quick Thoughts on Goldman
La Jolla and Dallas
When you draft a 1,300-page “financial reform” bill, various special interests get language tucked into the bill to help their agendas. However, the unintended consequences can be devastating. And the financial reform bill has more than a few such items. Today, we look briefly at a few innocent paragraphs that could simply kill the job-creation engine of the US. I know that a few Congressmen and even more staffers read my letter, so I hope that someone can fix this. The Wall Street Journal today noted that the bill, while flawed, keeps getting better with each revision. Let’s hope that’s the case here.
Then I’ll comment on the Goldman Sachs indictment. As we all know, there is never just one cockroach. This could be a much bigger story, and understanding some of the details may help you. As an aside, I was writing in late 2006 about the very Collateralized Debt Obligations that are now front and center. There is both more and less to the story than has come out so far. And I’ll speculate about how all this could have happened. Let’s jump right in.
First, Let’s Kill the Angels
I wrote about the Dodd bill and its problems last week. But a new problem has surfaced that has major implications for the US economy and our ability to grow it. For all intents and purposes, the bill will utterly devastate angel investing in the US. And as we will see, that is not hyperbole. For a Congress and administration that purports to be all about jobs, this section of the bill makes less than no sense. It is a job and innovation killer of the first order.
First, let’s look at a very important part of the US economic machine, the angel investing network. An angel investor, or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.
Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally managed fund. Although it typically reflects the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.
Angel capital fills the gap in startup financing between “friends and family” (sometimes humorously given the acronym FFF, which stands for “friends, family and fools”) who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under $1-2 million.
Thus, angel investment is a common second round of financing for high-growth startups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but invested into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies). (Wikipedia)
(Incidentally, angel investing got its name from people who invested in Broadway plays, and the term began to be used for investors in similarly risky startups.)
This has become a very big deal in the US. Angel investors put as much money to work as all the mainstream venture capital funds. And the internet has greatly expanded the network of angel investors. In 1996 there were about ten organized angel networks, most quite small. Now there are many hundreds, and some of them are quite large and organized, with some serious money amongst the members.
“Angel investors committed fewer dollars but increased the number of investments during the first half of 2009,” according to “The Angel Investor Market in Q1Q2 2009: A Halt in the Market Contraction” by the Center for Venture Research at the University of New Hampshire. Total investments in the first half of 2009 were $9.1 billion, a decrease of 27% over the first half of 2008, the study reports. However, 24,500 entrepreneurial ventures received angel funding during the period, a 6% increase from the first half of 2008. The number of active investors in the first half of 2009 was 140,200 individuals, virtually unchanged from the same period in 2008. (Tech Transfer Blog)
And according to a conversation I had with the very enthusiastic David Rose of Angelsoft this week in New York, the numbers are growing as the economy improves. If you assume that as many new ventures were funded in the latter half of 2009, then we are looking at 50,000 new businesses last year. At an average of (my guess) 10 employees a firm, plus all the business they contract for, that is at least 500,000 jobs, with the promise of many more for the firms that become viable.
Angel investors do more than just provide money. Many are successful businessmen, and they give guidance and often bring their networks of contacts and potential business partners to the new venture. While I can’t find the statistics, I will bet you that companies that are started with angel money are more successful than those that aren’t.
And remember, that is 50,000 new businesses or more every year, as 2009 was not exactly a banner economic year. This is the very heart of the job-creation machine in the US. It is what keeps this country competitive. And the Dodd bill places this at severe risk. Let’s look at how it would handcuff potential investors.
Here are a few quotes from Venture Beat, a publication of the venture industry. (http://venturebeat.com/2010/03/26/angel-investing-chris-dodd/)
“There are three changes that should have a particular effect on angel investors, a catch-all category which includes everyone from friends and family members who invest in a startup, to unaffiliated wealthy individuals, to side investments made by venture capitalists acting on their own.
“First, Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups – if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.”
I have to call foul on a surprisingly foolish article in today’s NYT. Less than a month into 2010, it is already a leading candidate for the dumbest article of the year. It reads like it was written by the PR firm for a group of VCs and Palo Alto law firms.
There were numerous ignorant comments in the article, but this is the one that actually made me laugh out loud:
“Newer restrictions, like those on executive compensation, have made I.P.O.’s even less attractive to some entrepreneurs, said Doug Collom, a partner at Wilson Sonsini Goodrich & Rosati, a Silicon Valley law firm. “Lawyers now have a profound significance in the boardroom,” he said.”
WTF is this idiot talking about? Last I checked, none of the Silicon Valley tech firms had received TARP money during the bailouts. The exec comp restrictions this dimwitted Wilson Sonsini lawyer mentioned came with the nearly trillion dollar taxpayer bailout/subsidy for insolvent banks and the incompetent execs who ran them into the ground — not dot com start ups.
What a tool.
I cannot figure out who is more responsible for this brain dead exercise in ignorance and spin — the writer who (re)typed it from a press release, or the editor who let this nonsense slide by.
Here’s some more stupidity:
“In the last two years, only 18 tech start-ups have gone public, compared with 143 in the two years prior. The Sarbanes-Oxley Act of 2002, which tightened corporate governance and accounting rules, has taken a lot of the blame.”
Astonishingly, the article fails to note the massive decrease in IPOs across all sectors due to the recent turmoil. Even more amazingly, the author somehow fails to deploy so much as one single word regarding the total collapse in the markets, or the simple fact that investors have seen precisely zero gains over the past 11 years.
Quite bluntly, I am embarrassed that this is what passes for Journalism today.
UPDATE: January 18, 2010 3:02pm
Here is a chart of IPOs going back about 3 decades. Note after the 1987 and 2000 and 2008 crashes, the IPO numbers plummeted. I do not know what the actual impact of Sarbanes Oxeley was on IPOs, but the data shows that after SARBOX passed, the number of new IPOs actually went up.
I am NOT suggesting there is a correlation between SARBOX and any subsequent increase in IPOs; I am merely pointing out that blatherings of those mentioned above is factually incorrect, and belied by actual data.
Have a look at these two charts, courtesy of Jim Bianco. They show the number, and the dollar amount raised in IPOs; There appears to be no correlation with SARBOX, but a huge correlation with market crashes.
IPOs by Deal Volume 1991-2010
IPOs by Dollars (billions) 1991-2010
More charts after the jump.
For Many Start-Ups, a Spot on the Nasdaq Is No Longer the Goal
CLAIRE CAIN MILLER
NYT, January 17, 2010
Excel Spreadsheet for IPOs anbd secondaries, Bianco Research
Equity IPO And Secondary
Some Factoids about the 2009 IPO Market
Jay R. Ritter, Cordell Professor of Finance
University of Florida, Jan. 14, 2010
A conversation with Marc Andreessen, co-founder and chairman of Ning and an investor in several startups including Digg, Plazes, and Twitter. Best known as co-author of Mosaic, and founder of Netscape. He is on the Board of Directors of Facebook and eBay
Charlie Rose, February 19, 2009