is your investment geography up-to-date? | week 41

The top news stories we hand-picked for you this week:

  • 83% of U.S. companies that went public in 2018 have been losing money

  • Venture capitalists are on the hunt for "secondaries"

  • The most influential endowment manager just jumped into crypto

  • What is the “Online Platform Economy”?

  • People like you more than you think they do

  • J&J is looking for a lead, JetBlue Ventures needs an analyst, and a bunch of VC jobs available in Singapore

no profit? go public! | week 40

The top news stories we hand-picked for you this week:

  • 83% of U.S. companies that went public in 2018 have been losing money

  • Venture capitalists are on the hunt for "secondaries"

  • The most influential endowment manager just jumped into crypto

  • What is the “Online Platform Economy”?

  • People like you more than you think they do

  • J&J is looking for a lead, JetBlue Ventures needs an analyst, and a bunch of VC jobs available in Singapore

hiring trends in VC | week 39

  • VCs now prefer hiring entrepreneurs and corporate managers instead of investment bankers and PE investors

  • Family offices expect venture capital investments to deliver the best returns in 2018

  • Have you ever wondered about Softbank’s investment focus? We have the answer...

  • .. and a deck with Softbank’s 30-year vision

  • Venture capitalists now base their investment decisions on data science and algorithms

  • New jobs in venture capital in Saudi Arabia, France, Singapore, and Germany

true unicorns exist | week 38

  • A case study on how to earn $3 billion on a $1.8 billion private equity deal. 

  • One of the oldest and most successful VC firms in the United States is in crisis.

  • Most loyal Airbnb hosts can become shareholders of the company.

  • The “father of British venture capital and impact investing" published a guide to The Impact Revolution. 

  • A new business season — new jobs in venture capital in the United States, Europe, and India.

  • More venture capital news and stories, investing tips and hints, in our Facebook group every day. 

wholesale of unicorns | week 37

  • Investors can now buy a bunch of "unicorns" at wholesale.

  • The crypto industry has woken up to the reality that getting your capital from a handful of professional investors is a good thing.

  • Government officials and regulators are catching up with inventions operating in grey legal areas.

  • Learn which universities graduate the most of the unicorns, female founders, and serial entrepreneurs.

  • Do you encourage your best employees to consider outside job offers? Maybe you should.

  • New venture capital jobs in Canada, Kuwait and the Netherlands.

they ain't needing your money no more | week 36

  • A new breed of startups rejecting VC money is emerging.

  • Of the five new unicorn startups birthed last week, three came from outside the United States,

  • And Silicon Valley is losing its charm.

  • You too may be soon able to invest in Uber, Airbnb and other private unicorns. 

  • New VC jobs in Switzerland, Dubai, China and more. 

  • If you think the video below is fake, pay attention to blinking.

don't say we didn't warn you | week 30

3D-book-cover-master.jpg

If you are building a career in venture capital, be among the first to leverage the best advice out there on how to become the candidate that every venture capital firm would like to hire. One of the instructors of VC Academy, Renata George, has recently published a book "Venture Capital Mindset", which we highly recommend to all young investment professionals and aspiring venture investors. Bonus: you get access to the materials of Renata's coaching program for free! (If you are located outside of the United States, search for the book on your local Amazon website for faster delivery)

We've pointed out, here and there, that the private equity and venture capital industry is changing. For this newsletter, we collected some evidence of that. The media hasn't been paying enough attention to this topic yet, that is why we decided to draw your attention to it before it's too late. 

The stats:

  • An unprecedented 2,974 private equity funds last month were seeking a record $945 billion of capital, according to Preqin. The intense competition has continued even after the industry’s dry powder — or the uninvested capital committed by investors — rose to a new high of $1.09 trillion in March. 
  • Private equity firms have returned almost $2 trillion since 2013, with distributions exceeding capital calls for deal-making for at least six straight years, according to a June report from Preqin. The trend became pronounced in 2014, as investors sought to reinvest the gains to maintain their allocations or satisfy their increased exposure to the asset class.  
Week 31 - distributions.PNG

The word on the street:

  • An investment banker in the Midwest said that “crappy little companies” are being sold for 12 times cash flow, when they should be valued at seven times. The debt used to finance these deals could spell trouble down the road. Higher interest payments can eat into cash flow over time, leading to a large drop in a company’s valuation. 
  • Institutional investors are interested in a better deal on fees and consider managers who aren’t running “monster funds.” The 2-and-20 model in the industry was created when funds were $100 million. Now, many PE and some VC funds are above $1 billion in AUM, and the pricing has changed only a little. There are some funds out there that are willing to pay 2-and-20, but others are not. For example, Texas ERS pays management fees averaging about 1.1 percent, while its cost on carried interest is about 12.4 percent. 
  • Private equity firms started offering a discount in fees to early and large investors in a new fund, or giving them the opportunity to sidestep fees in a co-investment pool offered as a sidecar to the main fund being raised. The biggest pension fund in the U.S., the California Public Employees’ Retirement System, is exploring another private equity avenue that would avoid fees: it’s reviewing a plan to begin doing its own deals next year.  
  • First-time fund managers have been leaving large, global private equity firms to run their own show. Some of these managers prefer working on smaller deals because they believe they can add more value by leveraging their experience from larger firms to help build businesses in the middle market. They also feel like there’s more opportunity to generate strong returns in the smaller end of the market.
  • Institutional investors are now seeking to work with managers willing to give the fund more co-investment opportunities, as well as those that provide more geographic diversification.

The private equity capital-raising bonanza has at least one clear implication: inflated prices. Buyout multiples last year climbed to a record 10.2 times earnings before interest, taxes, depreciation, and amortization, according to S&P Global Market Intelligence. This year they remained elevated at an average of 9.5 times EBITDA through May, a level surpassing the 2007 peak of the pre-crisis buyout boom.

Week 31 - buyouts.PNG

Along with all this, entrepreneurs have started dumping the grow-at-all-costs model, and now prefer buying out their investors to gain full control of their companies, and take the path less traveled in the tech industry.

Wistia, a video platform for business, turned down the offer to sell the company and instead took on $17.3M in debt to return the investments to early investors and employees. More details on their blog

In Other News

If you’re a US VC with a foreign LP or have foreign co-investors, then youshould know the law is about to change. Congress is expected to pass legislation that will impact foreign investment into the venture and startup ecosystem in new ways. The purpose of the Foreign Investment Risk Review Modernization Act (FIRRMA) is to expand the power of the Committee on Foreign Investment in the U.S. (CFIUS) to scrutinize foreign investments into ‘critical technology’ for national security implications. FIRRMA was born out of U.S. government concerns that China is leveraging minority investments into startups to obtain sensitive information, like intellectual property, source code, and know-how. Under the final bill, CFIUS will have jurisdiction over any investment by a foreign entity in a critical technology company that gives the foreign entity:

  • access to any material nonpublic technical information of the company;
  • membership or observer rights on the company’s board or equivalent governing body; or
  • any involvement in substantive decision-making of the company, other than through voting of shares

VCs, LPs, and startups raising capital should be cognizant of these three factors because if any of these factors is triggered then a CFIUS filing is very likely necessary.

Recent Industry Reports And Studies (free instant access):

2Q-2018 European Venture Report by PitchBook

Latin America Tech Boom by CBInsights

2018 The Internationalization of Alternative Funds by Robert Wolfe

Reroute

Remember Tim Draper's effort to split up California into three separate states? It might not have worked out, but the tech sector has started to build its own distinct political platform for sure.

how old is young enough for VC? | week 28

Mark Zuckerberg officially passed Warren Buffett as the world's third-richest person with a net worth of $81.6 billion. IT-entrepreneur was only 20 years old when he launched the future Facebook. This week we are talking about the age when entrepreneurs are most likely to become successful — one of the subjects we discuss in details in our "Building Investment Portfolio"course.

Week 28 - founders' age.png

If you were faced with two entrepreneurs and knew nothing about them besides their age, you would do better, on average, betting on the older one, a new study says. Although Bill Gates, Steve Jobs, Jeff Bezos, Sergey Brin and Larry Page were in their twenty-something when they launched their companies, the growth rates of their businesses in terms of market capitalization peaked when these founders were middle-aged.

The study found that in software startups, the average founders' age is 40, and younger founders aren’t uncommon. However, young people are less common in other industries such as oil and gas or biotechnology, where the average age is closer to 47. 

When the researchers looked at most successful firms, they discovered that the average founder age also goes up, not down. Among the top 0.1% of startups based on growth in their first five years, they found that the entrepreneurs started their companies, on average, when they were 45 years old. These highest-performing firms were identified based on employment growth. When they looked at the fastest sales growth, founder age is similarly high for such startups and those that successfully exit through an IPO or acquisition. 

Looking at success rates conditional on actually starting a company, the evidence against youthful entrepreneurial success becomes even sharper. Among those who have started a firm, older entrepreneurs have a substantially higher success rate. 

In light of this evidence, why do some VCs persist in betting on youngfounders? The authors of the study admit that they do not know the right answer, but believe that two mechanisms could be at play.

First, many VCs may operate under a mistaken belief that youth is the elixir of successful entrepreneurship — in other words, VCs are simply wrong. What they are implying by it is that there are two kinds of people: those who assess opportunities based on the patterns from the past that have been proven working, and those who believe in breakthroughs against the odds more. These two different mindsets exist on their own and don't really depend on the age much. There is a lot to discuss in this theory, including the fact that most of the venture capitalists themselves belong to the first category.

The second explanation suggested by the researchers is that VCs are seeking investments that will yield the highest returns, rather than looking for the firms with the highest growth potential. Then, it is possible that youngfounders are more financially constrained than more experienced ones, leading them to cede upside to investors at a lower price. In other words, younger entrepreneurs may be a better “deal” for investors than more experienced founders.

In Other News

  • Another part of an investment strategy is geographic investment preferences. A fresh study looking at the innovativeness of 126 different countries sees Switzerland coming out on top again. Out of the top-25 creative pioneers, Israel, China and Iceland have the biggest upward momentum. Not surprisingly, all of the top-20 most innovative countries are rich economic powerhouses. Behind Switzerland in the ranking are the Netherlands, Sweden, the UK, and Singapore. The US didn't make the top-5 but left Finland, Denmark, Germany, and Ireland behind.
Week 28 - Global Innovation Report.PNG
  • Saudi Arabia is accepting inevitable. The country’s securities regulator approved its first two financial technology licenses, part of a drive to develop a fintech sector in the Arab world’s biggest economy under reforms designed to reduce reliance on oil exports. The Capital Market Authority approved licenses allowing two companies to offer crowdfunding investment services on a trial basis. The ventures could serve two aspects of Saudi Arabia’s reform program: broaden its capital markets, and create jobs by helping entrepreneurs obtain funding for new ventures. A new market is being created.

Recent Industry Reports And Studies (free instant access):

2018 Global Innovation Index Report

2Q-2018 MoneyTree Venture Capital Funding Report by PWC

2Q-2018 Venture Monitor by PitchBook & NVCA

Reroute

When we say "leader" we mean "extrovert". Boy, were we wrong! 

Week 28 - introverts.jpg

M&A and IPO: what are the odds? | week 27

A new study suggests that the range of professions developing people who move into private equity and venture capital is narrowing. PE firms in Europe hire 82% of mid-level and junior men and 76% of mid-level and junior women from banking or consulting background. To combat a lack of gender diversity, please, help us bring more women into venture capital and share a discount code WOMENVC with your female friends and colleagues (can be applied to Venture Capital Executive Program). Thank you!

week 27 - M&A value.png

Thomson Reuters reported that both global and U.S. M&A activity hit all-time highs during the first half of 2018. As Axios points out:

  • This dichotomy was made possible by a massive increase in deals valued at $5 billion or more (+98%) and deals valued at $10 billion or more (+306%).
  • U.S.-based companies comprised 41% of all global deal targets, followed well behind by Britain with 11% and China with nearly 10%.
  • The U.S. saw a similar split, with deal value up 79% but the number of deals down 13%.
  • The only region with rising deal value and deal volume was Asia-Pacific (both inclusive and not inclusive of Japan).
  • Africa was the only region to see both numbers fall, while Canada was among the individual countries that saw a dip.
  • The value of M&A activity in Europe also leapt by 96% to $767 billion year-on-year, taking it to the highest level since the last deal-making boom in 2007.
  • Energy and power was the first half's busiest sector in terms of deal value, followed by media/entertainment and healthcare.

Many dealmakers, however, fear that an all-out trade war could severely slow new M&A activity in the second half.

M&A of portfolio companies is the most common path to exit for venture investors. What about IPOs? 

week 27 - IPOs.png

The 355 companies on the 2018 Tech IPO Pipeline have raised over $104B across more than 1,900 deals since 2000. Although analysts are bullish about IPOs of VC-backed companies, a slow drama is currently playing out that's radically altering the financial market landscape: the number of publicly listed companies in the US is steadily shrinking.

One trend that has been inarguable is venture-backed companies staying private for much longer than ever before. Since 2010, companies have been going public more than nine years after founding, compared to around five years in the mid to late '90s. That increase has meant these companies have gone public at a very different stage in their lifecycles—they’re much larger, they’re more sophisticated, they have a larger investor base and they're often global in reach. It also means that there are fewer of them, as it’s a lot harder to stay in business and/or independent for nine years versus five.

There are several drivers behind the trend of staying private longer, and a few commonly cited causes are the increased cap on investors from the JOBS Act (from 500 to 2,000), new deep-pocketed entrants into the venture market (e.g., SoftBank Vision Fund, PE firms, mutual funds) willing to fund nine-figure investments into these companies, and SOX compliance expenses. Another interesting theory put forth by Dr. Jay Ritter (aka "Mr. IPO" from the University of Florida's department of finance) is that private companies are moving so fast that a better route for them to reach their potential is to be acquired by an incumbent with scale, as opposed to building it themselves.

In Other News

  • This year has been off to a strong start, with Q1’18 being Canada’s first $1B funding quarter. In our previous newsletter, we mentioned a growing VC interest to Canadian startups. So we couldn't pass up the Canadian periodic table designed by CBInsights in honor of Canada Day (July 1st). The table displays 150 notable tech companies, most active venture capital and corporate investors, and top exits of Canada’s private company tech scene.  
week 27 - Canada periodic table.png
  • Techcrunch crunched the numbers and found out that older firms raise bigger funds, and appear to account for a majority of capital raised by U.S. venture firms. Although first-time VC fund managers raised $3.4 billion across 36 new funds in 2017 — a record dollar volume since at least 2004, their number has declined precipitously from prior maxima. Even though pre-2007 firms make up less of the total count of funds raised, they maintain dollar-raising dominance by raising bigger funds. And over the past decade, the size of those funds has gone up pretty significantly. As funds get larger, so does the Return-The-Fund Magic Number. To compensate, investors commit proportionately more capital (at least in some areas of the startup market — most conspicuously, in scooter startups), and valuations have grown accordingly. We've discussed already that bigger is not necessarily better: larger venture funds don't necessarily provide higher returns and advance the industry. They will, however, hire more, so stay tuned for our VC jobs updates

Recent Industry Reports And Studies (free instant access):

Private Equity Career Paths Report by Level 20

2018 Tech IPO Pipeline by CBInsights

2018 PE & VC Fund Performance Report (as of 3Q 2017) by Pitchbook

Reroute

What if you deleted all your emails during vacation and never looked back?

how to raise a unicorn in 18 months | week 26

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A bunch of this week's VC lessons to learn will be posted in our "unpublished and uncensored" Facebook group. For our weekly newsletter, we couldn't underestimate a story about a company that started from scratch, became worth billions of dollars in less than 18 months, and some important conclusions made by the VC community in that regard.

Electric scooter company Bird raised $300 million at $2 billion in just a few months after raising money at a $300 million valuation. 

The rule of thumb for raising venture capital amount sufficient for the next 18 months has gotten old. Today, 18 months is apparently enough to become a "unicorn". Bird has been scaling its revenue at a staggering clip with no paid customer acquisition, which might have been seen in software, but is definitely something new for a hardware company like this one.

Besides Bird, Lyft has raised $600 million at a $15.1 billion after having raised strategic funding at a $11.7 billion valuation in March; and Hims doubled its valuation to over $400 million from a round announced in March (but which technically closed last December).

As Axios put it: "Hypergrowth" is taking on new meaning in venture capital, as popular startups have begun raising new funding while the ink on their prior funding is barely dry, at significantly increased valuations."

Why is it happening? Some of the factors cited by several VCs are:

  • Earlier investor scooped up most of the original, massively oversubscribed round. Company doesn't really need the extra money, so has leverage.
  • Company legitimately experienced unexpected growth surge.
  • VCs are desperate to have hot names in their portfolios in order to impress LPs, even if doing so could prompt tough LP questions about how why those VCs missed out on the lower price point.
  • And, the old standby, too much money chasing too few deals (we have discussed that in details several times this year alone).

As you can see, such factors can vary from totally reasonable to astonishingly unreasonable. Electric scooters are a lot of fun though, we must admit! 

Also, Mark Suster thinks that "Bird could be the fastest growing company to reach a billion dollars in run rate revenue" and explains in details why not "anybody can launch a scooter service". If that's not enough, learn from the Bird's CEO directly why his scooter startup needed $300 million. 

In Other News

  • The U.S. Securities and Exchange Commission is not going to loosen up their rules for tokens. However, the regulator seems to be thinkingabout other ways of allowing people to invest more and easier. SEC Chairman Jay Clayton has called for opening up startups’ private stock sales to more than just accredited investors. A possible measure is to broaden the definition of "accredited investor" that restricts investments in off-exchange sales by hedge funds, startups and private equity funds out of concern about potential fraud against Main Street. The SEC will deal with the issue of whether such investors are "capable of handling the private investment arena" before allowing them to enter the "minefield" of private offerings, Clayton said, adding: “I would like to see us modernize the accredited investor definition to make it easier for more people to participate in funding small businesses.” 
  • Silicon Valley may be competing with Canada soon. Investors from US-based VC firms are traveling north to Canada more than ever, with Canadian startups attracting a record amount of US investment in recent years, according to 1H-2018 Canadian PE VC FactBook. Canadian Prime Minister Justin Trudeau has been doing a lot for that, including personal visits of the American tech heavyweights — such as Amazon's Jeff Bezos and Salesforce's Marc Benioff — to encourage them to invest in Canada. Because Salesforce Ventures has launched a $100 million vehicle to invest in Canadian startups, you should probably consider this market too. After all, University of Waterloo is a leader when it comes to training unicorn founders (sharing the fourth place with the University of California, Berkeley, per PitchBook's 2017 Universities Report). The eight entrepreneurs to come from the University of Waterloo include the founders of Wish, Pivotal Software and Instacart.
week 26 - Canada.png

Recent Industry Reports And Studies (free instant access):

Integrating ESG in private equity: A guide for general partners by UNEP

1H-2018 Canadian PE VC FactBook by Pitchbook

2018 The Internationalization of Alternative Funds by Robert Wolfe

Reroute

This list sorts "dead" coins by the following categories: parody, scam, deceased and hack. Have you purchased any of the listed coins? We hope not. 

VC 💚 ICO | week 24

Thank you! 

We now have more than 10,000 students and subscribers from all over the world. That makes us happy! There is no better way to prove that we are doing the right thing. Stay with us and we'll all become better venture investors.

Dozens (maybe hundreds) of articles opposing ICO to VC have been published in the media. Well, we have also dedicated one newsletter to this subject. Today, however, we are observing an unexpected turnaround: ICOand VC aren't rivals anymore.

We at VC Academy believe that venture capital has become a discipline in its big part, and this case confirms just that. Venture investing is guided by a set of best practices developed by people in the industry through trial and error over more than six decades. All of these practices may now be easily learned, which is why we created VC Academy in the first place.  

Token offerings (ICOs) didn't exist five years ago, so most of the venture funds had no way of investing in them when they became a thing, because VCs are legally bound to invest in equity and other traditional types of securities. Giving a startup money in exchange for an ownership stake in the company is what limited partners expect venture capitalists to do.

Blockchain created a completely new asset and model of funding through it, which were unavailable to traditional venture funds. Known for their fear of missing out (FOMO), venture capitalists couldn't stay away from what could be the next Google or even Apple and found ways to invest in tokens.

Week 24 ICO heart VC.png

So if not equity, then what do venture investors get in exchange for their money and how? Traditional investors have been taking equity stakes in blockchain companies before an impending ICO, or acquiring tokens outright via regulatory compliant offerings. Many created dedicated entities to do that, due to legal restrictions in traditional venture capital partnership agreements, and were then able to purchase tokens at pre-sales.   

In one notable example of the trend toward pre-sales, Telegram held such a large pre-sale that it no longer has plans for a public sale. The encrypted messaging service raised $1.7B from 175 private investors in two separate private rounds, selling “purchase agreements for cryptocurrency” (not equity). How does this work? Here is one of the possible solutions.

What is SAFT?

In fall 2017, a new type of an investment agreement called SAFT or Simple Agreement for Future Tokens, was created. Typically, according to said agreement, the VCs get the rights to a certain portion of the tokens that a company issues in an ICO. It differs from a traditional equity investment — where VCs have a stake in the success of the startup they are investing in — by them being much more concerned about the success of the underlying technology.

It's a subtle distinction, but an important one. A SAFT pays off for an investor if a token becomes valuable — even if the organization that created the token is a non-profit, a loose affiliation of programmers, or even potentially a for-profit company that goes out of business.

This approach makes the line between ICOs and equity financing very blurry, as traditional equity investors use non-traditional methods to invest in blockchain companies.

SAFT, however, is still in the grey area, regulation-wise. Because the U.S. Securities and Exchange Commission is vigorously chasing token issuers and sending them subpoenas, nobody knows what will happen to investors using SAFT if it doesn't satisfy the securities law. Lawyers believe that whatever conclusion the SEC may come to, they wouldn't hurt the investors, because protecting them is the SEC's mission. This hope, as well as the prospect of long legal procedures if the SEC eventually goes to court against token issuers, keeps investors busy.

Read more about SAFT in this whitepaper and enroll in our ICO course to learn more about new private equity investment strategy.

Why does it matter?

Venture investors play with tokens — an even riskier card than usual — hoping to get relatively fast returns until the window of opportunity closes.   

In Other News

  • When we launched our course "Impact Measuring Framework" last year, we used GIIN's data, which estimated the impact investing assets of the respondents of its annual survey, at USD114 billion. We are pleased to be able to increase this figure in our lectures up to...USD228 billion today! This has gone up twice in just one year, which is amazing, considering that the number of the respondents has changed only slightly — from 208 to 229. Isn't this proof of investors' belief that impact investing is able to provide financial, social, and environmental returns? More comprehensive proof is, of course, returns on investments, which you'll be able to calculate easily, having studied our course. We make an impact too by making the course free for all!
  • A couple of weeks ago, we wrote about the unusually harsh terms for investing in Ant Financial Services Group, a financial-technology juggernaut controlled by billionaire Jack Ma. Investors could only join the $10 billion round (reportedly) if they agreed to not invest in, or raise their stakes in, companies controlled by major rivals. Despite this unusual condition, the Chinese financial services group has confirmed that the round totals $14 billion (almost 50% more than was reported!). With this round, Ant Financial could be valued at up to $150 billion. Let's see how this 4-year-old company, backed by one of the most valuable companies in the world, got to this figure.
  Funding rounds: Ant Financial vs. median

Funding rounds: Ant Financial vs. median

  Valuations: Ant Financial vs. median

Valuations: Ant Financial vs. median

Recent Industry Reports And Studies (free instant access):

2018 Annual Impact Investor Survey by GIIN

2018 Insight Global PE Performance Report by eFront

1H-2018 Canadian PE VC FactBook by Pitchbook

Reroute

With more than $20 billion spent in disclosed-price purchases of U.S. VC-funded companies — that’s about 80% of the 2017 full-year total — here is a survival guide for M&A process. 

Github-free news | week 23

No, we are not going to repeat what a great case study the Microsoft's acquisition of GitHub is. The deal has received more than enough attention from all possible media outlets this week, so we'll save it for our collection of the best case studies. We've got more to tell.

Gig Economy: The Dreams

Gig economy has recently faced a legal challenge when The Supreme Court of California (USA) made a landmark decision by placing the burden on employers to prove that workers are independent contractors, and not employees. This week, the market observed another twist. Watch this megatrend closely to make well-informed investment decisions. 

Many companies bet on gig economy — an environment in which temporary positions are common and organizations contract with independent workers for short-term engagements. This trend seemed to be growing unstoppably yet a couple of years ago. Intuit in its study predicted that by 2020, 40% of American workers would be independent contractors. A 2011 report from the McKinsey Global Institute found that 58% of American employers expect their workforce to contain more temporary and part-time workers in the next five years.

China and India are the largest internet populations in the world, and not surprisingly, have been seeing the emergence of gig economy too.

According to EY study "Future of jobs in India: A 2022 perspective", 45% of the survey respondents viewed new ways of working — such as freelancing — as an important mega-trend shaping the industry. While up to 400 million people in China (almost one-third of the population) may be self-employed members of the gig economy by 2036, according to AliResearch, the think tank affiliated with Alibaba Group Holdings. 

Week 23 - gig countries.PNG

Gig Economy: The Reality

However, according to the Labor Department’s Bureau of Labor Statistics, the percentage of individuals employed as independent contractors in the U.S. has actually dropped in the last 12 years. The data shows that contract workers comprised 6.9% of the labor market in May 2017, down from 7.4% in February 2005, which was the last time the survey was taken.

The number of people earning more than half their income from crowd work in Europe is even lower: ranging from 1.6% of the adult population in the Netherlands (equivalent to an estimated 200,000 people) to 5.1% in Italy (equivalent to 2,190,000 people).

When you analyze the numbers, keep in mind that different sources may have different definitions of gig workers. We have all worked as contractors at least once in our lifetime, so "casual earners" is a grey area in the market. Strictly speaking, gig economy is built by people whose primary income or more than half of it comes from contract work.

Week 23 - gig categories.PNG

Overall, 10.1% of Americans have ‘alternative’ work arrangements, a term that includes independent contractors, on-call workers, and people working for third-party contractors. That means approximately 90% of working Americans have traditional jobs — a percentage largely unchanged from 2005. The share of temp workers have also remained more or less steady.

While reality check is quite sobering, there is one slight exception. According to one economist’s analysis of the data, those who work in transportation — such as driving for Uber or Lyft — have seen an increase.

Why is this important?

A significant social trend in one industry or a sector may not be copied or become equally strong in other industries or sectors.  

In Other News

  • We love stories about uncommon venture capital careers and passionately collect them to show that you can always climb the window! Breaking into VC from professional sports isn't new to the industry, but some athletes are more likely to start investing than others. The owner of the glorified Golden State Warriors basketball team Joe Lacob is also a partner at Kleiner Perkins Caufield & Byers. No wonder that the team's best players like Steph Curry, Kevin Durant, Draymond Green, and JaVale McGee — are into investing and tech. Read more about their investment portfolios and co-investors.
  • You might have noticed that we post almost as many job opportunities in corporate venturing as in traditional venture capital. Besides big tech companies investing in small ones, world’s largest insurers and asset managers want to tap into disruptive technology startups as well. Insurance companies have always been among the main sources of capital for VC firms, although very conservative one due to their low risk tolerance beyond their own portfolio risks. These days, insurance companies are closer to the startup world than ever before. Allianz, the German insurance behemoth, is pursuing larger-ticket investments via its private market investment arm Allianz X. Other market players will follow soon.

Recent Industry Reports And Studies (free instant access):

2020 Report: Twenty trends that will shape the next decade by Intuit (see where else Intuit was wrong)
Future of jobs in India: A 2022 perspective by EY
2018 Contingent And Alternative Employment Arrangements In the U.S. by BLS

Reroute

The secret reason why venture capital investments often fail: 72% of entrepreneurs suffer from mental health problems as compared to just 7% of the general public. Hire a therapist for your portfolio companies before it's too late.

does VC exist outside of the US? | week 22

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Find other facts and cases that didn't fit this newsletter in our Facebook group.

U.S. Still Outperforms In Venture Capital

The report, published by private equity software firm eFront, analyzed the risk and returns of venture capital funds in different countries. According to it, the United States had the best risk-return profile, boasting an internal rate of return of 14.37% overall.

U.S.-based VC funds also had a shorter lock-up period than most, and the time-to-liquidity was roughly 5.9 years for vintage years 2003 to 2007. This is compared to an average holding period of 6.4 years in the United Kingdom over the same time period.

Chinese venture capital funds also generated “exceptional returns,” according to the report, with an overall internal rate of return was 11.53%. However, a “low level of maturity means that risk will increase and internal rates of return will decrease,” the report stated, meaning it is “too early to draw conclusions.”

The report also concluded that Italy’s venture capital market could be appealing for some investors. While the VC funds in the country are some of the riskiest to invest in, they also offered some of the highest returns, according to eFront, with internal rates of return of roughly 6.78% for fully realized funds.

eFront also got an answer for skeptics who believe that it is unfair to compare the venture capital industry in different countries due to its very different history and current stage. Even after leveling the playing field by only assessing funds after 2001, the U.S. still outperformed, according to the report. 

Size Matters

To timely bolster the continent's venture scene, the European Commission launched its VentureEU programme, an initiative designed to give Europe's venture community a shot in the arm to the tune of €2.1 billion (about $2.6 billion).

The initiative will see the EU invest €410 million across six funds run by established managers, which will, in turn, raise up to an additional €1.7 billion to spread across European VC funds.

The small size of Europe's VC funds has been recognized previously as one of the reasons that European late-stage funding is lacking. "The ability to write bigger cheques and take more risks in order to build a bigger upside has changed quite a lot in the Valley. And now, Europe is catching up quite fast", said Simon Cook, CEO of Draper Esprit.

VentureEU will also spread capital wider than is usually the case in Europe's venture scene, with each mandated to back funds and projects in at least four countries each. According to PitchBook's 2017 Annual European Venture Report, the UK and Ireland alone accounted for almost 37% of Europe's VC deals last year.

In Other News

We've discussed the US mega-funds in our newsletter several times already, and all of them just in 2018. In March, General Catalyst had closed a $1.375 billion fund, the biggest vehicle in its 18-year history. Battery Ventures also closed on two funds of a billion size earlier this year. Sequoia Capital, meanwhile, is raising $12 billion across a series of funds, a move that’s unprecedented for the firm — or any U.S.-based venture firm, for that matter. However, there are always some contrarians who choose to go against the flow. Fifteen-year-old Emergence Capital could easily follow the same path, but instead, it closed its fifth fund with only $435 million — a humble 30% increase from its previous fund of $335 million. Jason Green, a co-founder of the venture firm that invested in Box (now public), Yammer (sold for $1.2 billion to Microsoft in 2012) and Veeva Systems (produced a more than 300x return for Emergence when it went public in 2013) said: “Our sweet spot is on early market fit, with a core team we can work around. Because that hasn’t changed, neither has the size of the funds it raises.”

Recent Industry Reports And Studies (free instant access):

1Q-2018 European Venture Report by PitchBook
2018 Internet Trends Report by Mary Meeker, KPCB (plus video)
20 takeaways from Meeker’s 294-slide Internet Trends report (for lazy)

Reroute

A recent study shows that workaholic American employees didn’t use 705m of their vacation days last year — collectively leaving $62.2B in benefits on the table. Know any startup to take care of this?

power redistribution | week 21

It's venture capitalists who have been typically known for twisting entrepreneurs’ arms in deal terms. However, sometimes the latter turn the table.

Ant Financial Services Group, a financial-technology juggernaut controlled by billionaire Jack Ma, is preparing to close a $10 billion private fundraising round that would value the company at $150 billion, according to people familiar with the matter.

As part of the deal, investors putting money into Ant must agree not to invest in or raise their stakes in companies controlled by major rivals such as social-media giant Tencent Holdings Ltd. (owns popular Chinese social-messaging app WeChat), online retailer JD.com Inc., and large Chinese online-services and food-reviews platform Meituan-Dianping, the people said.

If investors breach those covenants, Ant could try to get an injunction to prevent them from putting money into Ant’s rivals, or sue them for damages.

Some investors who wanted to take part couldn't "pass the interview" because they’d backed some of the above mentioned companies.

Ant’s ability to dictate its investment terms shows how the company and its affiliate Alibaba Group Holding Ltd. wield significant market power. People say these days: "Everything touched by Jack Ma turns into gold". Here comes FOMO.

In China, however, such edicts aren’t unprecedented. Also, a few hot US startups have recently used similar tactics to prevent potential investors from funding their rivals. In 2015, Uber Technologies Inc. and its rival Lyft Inc. required potential investors to agree not to invest in competitors for a certain period — before seeing financial data on the companies during their fundraising efforts.

Now, venture capitalists need to take a broader perspective to mitigate risks of exclusion  from lucrative later-stage deals due to previous funding of the competition.

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In Other News

If none of the previously given reasoning behind the Bitcoin wild price behavior convinced you, here’s another possible explanation.

The Justice Department has opened a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies. The investigation is focused on illegal practices that can influence prices — such as spoofing and wash trading.

In spoofing, a trader submits a spate of orders, and then cancels them once prices move in a desired direction. Wash trades involve a cheater trading with herself to give a false impression of market demand that lures other to dive in too. Coins prosecutors are examining include Bitcoin and Ether, the people said.

Even with innovative products, there’s always a room for old-school frauds.  

Recent Industry Reports And Studies (free instant access):

1Q-2018 Global League Tables by PitchBook
2018 State of Innovation by CB-Insights
Framework for Assessment of Crypto Tokens, Switzerland 2018

Reroute

Think you don’t have any addictions, or just don’t have a name for them yet? Make sure you don't have the one named, “technology addiction”.

if there's no exit, there's always an exit | week 20

New Enterprise Associates, one of Silicon Valley’s largest venture-capital firms, created a new way of exiting portfolio companies. The firm plans to sell roughly $1 billion worth of its stakes in about twenty startups. This is obviously an effort to return capital to its limited-partner investors in response to a dearth of initial public offerings. The companies at stake will mostly be those that initially raised money from NEA about eight to ten years ago, are currently illiquid, and may or may not become liquid at all.

However, what's more interesting is that the buyer of this secondary sale is a new firm that NEA is seeking to create itself. Yes, you've heard it right.

Let's draw a picture. A venture fund"s lifecycle is ending, and it has to exit all held investments in order to return capital to the limited partners. None of the commonly known exit options have happened: no IPO or M&A, and no other party bought the venture fund's stakes in the portfolio companies. What’s left to do? Create an affiliated entity that will become a buyer of these stakes, thus, providing a legitimate exit.  

This type of an exit by the means of a secondary sale of this scale has never been heard of in Silicon Valley before, so we've chatted with several limited partners to get their opinion on such a deal. Mind you, the NEA's deal details are publicly unknown, so we don’t judge or analyze it in question, but rather explore this kind of transaction in general.

The limited partners we interviewed listed several questions that they’d have to ask:

  • Where does the money [for the newly created entity buying the venture fund's stakes] come from? There are no limitations to the legal and stockholder structure of such an entity, so practically, general partners of the selling venture fund may be as well its stockholders, which clearly creates a conflict of interests.  
  • Who does determine the price of the stakes at sale? This possible conflict of interest can be very severe depending on the sale price. Let's imagine that an IPO or M&A of these companies follows soon after the venture fund has sold their stakes and distributed the proceeds to the limited partners. If the subsequent IPO or M&A gets a significantly better price than the price of the sale from the venture fund to the newly created entity, there's enough room for suspicion about this model’s incentives.
  • Who does decide which stakes to sell? Because it's not clear who and how determines the price of the sale, the logic behind the choice of stakes to sell is open to question as well. The venture fund may decide to sell its stakes only in those companies that provide a better return multiple, but the company itself may be currently struggling to survive. While the promising portfolio companies whose stakes don't make general partners look better, they may receive nothing in this transaction. At this point, one can get really creative.

The entire idea of controlling the exits from one's portfolio gives general partners a huge leverage of calculating the fund's performance math to their benefit: carried interest, clawbacks, and other terms framing general partners' incentives can be manipulated. It's fair to mention that such a model can be absolutely legit as far as lawyers are concerned. Here's to the new type of exit.

In other news:

It's not only blockchain that’s able to greatly affect the venture capital landscape. A change of limited partners' strategies is much more critical for the industry.

The largest US pension fund, CalPERS, announced that it will invest directly in businesses.

The program, called CalPERS Direct, would be composed of two evergreen funds – one for venture capital-type investments, and one for long-term investments in established companies.

Why is this important?

Corporate and state pension funds have always been among the largest, most influential, and longest running investors in alternative investments. Even though pension funds tend to invest in assets with high liquidity, allocating only 10-15% to alternative assets, 27% of all capital commitments of VC funds come from them. At the end of 2017, total pension assets were estimated at USD 41.3 trillion globally.

If pension funds start investing in the tech companies directly, the competition for money among venture capitalists will become even more severe.  

The program is expected to invest as much as $13 billion across the two funds and would have its own board and presumably pay investment staffers compensation closer to the private sector. This is similar to the model used by pensions in Canada and has long been a dream of very large US institutions.

The good news — everyone who has been dreaming of working in venture capital will have more job opportunities to consider.

But don’t get too excited yet: CalPERS said that the plan isn’t a done deal and that the board has many questions (ultimately, the plan requires board approval). On of the board members told the "Buyouts": “We want it to be scrutinized, we want questions to be raised, and we want it to be transparent as we get it out there.” CalPERS wants to roll out its new program next year and answer all the possible questions to put this idea through a full and extensive vetting. Such questions are:

  • Will the program go in-house or will it be managed by a third party?
  • How will it interact with CalPERS’s traditional PE portfolio?
  • What does this mean for traditional private equity at CalPERS?

We'll keep an eye on this, so feel free to send us any of your questions, which we can address to CalPERS at some point.

Recent Industry Reports And Studies (free instant access):

2018 Global Pension Asset Study
HALO Annual Report on Angel Investments
Framework for Assessment of Crypto Tokens

Reroute

Wall Street Journal analyzed 1,450 white papers of ICOs to find red flags in 271 of them such as plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams.

Startups are like wine | week 19

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If you missed the Berkshire Hathaway Meeting last week, here's Warren Buffet take on Bitcoin: "It's probably rat poison squared." Find 13 more quotes of the Master and more venture capital brain picks in the VC Academy group on Facebook

Startups are like wine

Pitchbook released their 1Q 2018 Venture Capital Valuations Report that made us think of tech startups as wine: the more mature they become, the more expensive they cost. Here are the main takeaways:

• The most significant valuation increase was at the late stage, where the median pre-money valuation as of the first quarter of 2018 went up to $75 million, which is a 19% increase from 2017. The main reason for this is tons of dry powder we talked about earlier.

• The shift toward funding more mature companies was especially present in the angel & seed stage in Q1. At those stages, the median age for companies receiving financing pushed to three years, which is twice as old as a decade ago. The reason? Lots of alternative funding options such as accelerators, equity or product crowdfunding, and a greater ability to bootstrap.

• The median time between venture rounds remains extended, sitting at 1.4 years for angel & seed and early-stage rounds, an increase from a long-term average of 1.2 years. For late-stage, it sits at about 1.8 years compared to an average of 1.5 years.

• It doesn't seem that VC valuation increases are driven by an increase in investor protections. For instance, the percentage of deals with cumulative dividends — as well as those with participation rights — has fallen steadily over the past decade. Learn more about these terms and their significance to investors and entrepreneurs

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In other news:

  • Endowments keep their money in alternative investments regardless of unimpressive performance, or even add to holdings. Last year, alternative investments accounted for an average of 52% of endowment assets, and over 60% in the largest endowments. But besides that, they also back their own entrepreneurship programs to get an early access to future unicorns. As students increasingly pursue startup path, more universities are creating accelerator and incubator programs to support them. Why does it matter? Universities become a stronger source of potential deals. If you're an early-stage investor, make university campuses your priority: become their advisor, hold informal meetings with students, build your network there.
  • What is a successful exit? Walmart's acquisition of 77% stake in the Indian e-commerce company Flipkart is the biggest news of the week. Walmart's shareholders aren't very happy about this deal that cost the company $16 billion, because Flipkart is expected to generate meaningful losses for at least the next few years. While Walmart shares were falling as low as 4.2%, some venture investors across the street were opening champagne. Tiger Global Management, a New York-based, low-profile investment firm, made about 3x return. While the firm first invested in Flipkart only $9 million back in 2009 and put total of $1 billion over the years, SoftBank joined the investor pool with roughly $2.5 billion less than a year ago, and its stake is now worth about $4 billion. That'd be a pretty quick good return, if only Softbank didn't have to hand over about $600 million to the Indian taxman out of it due to the steep 40% short-term capital gains tax. Finally, Accel, a Palo Alto based venture capital firm, has been holding on its share for 10 years. The firm invested $800,000 back in 2008 when Flipkart was operating with an 8-person team. (It now employs more than 30,000 people, and it is the largest e-commerce company in India.) Accel invested approximately $160 million over several rounds, and its position in the company is now worth about $1.1 billion. That's a staggering almost 7x return! Lesson learned: be patient and make your term-sheet strong. 

Recent Industry Reports And Studies (free instant access):

1Q-2018 MoneyTree Canada by CB-Insights

2018 Private Markets Due Diligence Survey by eVestment

1Q-2018 VC Valuations by Pitchbook

Reroute

From the DeLorean and New Coke to the Newton and Google Glass, here's a list of the biggest product flops from corporate giants.

gig economy is losing | week 18

Every week we have to make hard decisions regarding the news and wisdoms of the venture capital we are not including in our newsletter. Why do we leave some of them out? It’s simply because we try to keep our newsletter short and convenient for you to read. However, we don't want you to miss something you can learn from in order to become a better venture investor. From now on, you can find all of our unpublished and uncensored notes on venture capital in the VC Academy group on Facebook. We'll also be publishing the most recent VC jobs, allowing you to be among the very first candidates to apply for them. Join the group now to access our exclusive content.

Coachella For Capitalists

87-year old Warren Buffet is hosting, probably, the largest party for investors this weekend — an event also known as "Coachella for capitalists". About 40,000 people are attending the Berkshire Hathaway annual meeting in Omaha, where they are soaking up the folksy wisdom of Buffett himself, the world's most famous investor. 

You weren't invited? Anyone can attend the Berkshire Hathaway Shareholder’s meeting who holds at least one share of stock. You don't need to sell your kidney to buy an expensive $300,000 share of BRK.A stock. In fact, you only need to own 1 share of BRK.B stock (around $200) to get the credentials to attend the meeting. Get prepared for the next party! 

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Gig Economy Is Losing

The Supreme Court of California (USA) recently made a landmark decision in the battle between gig economy companies and their workers, and expanded protections for the latter, placing the burden on employers to prove that workers are independent contractors, and not employees. You know something has become large enough when the government gets interested in it. A study by Intuit predicted that by 2020, 40% of American workers would be independent contractors. 

Why does it matter?

A good bunch of the current tech "unicorns" became such thanks to a major trend called the "gig economy", where temporary positions are common, and organizations contract with independent workers for short-term engagements. 

The business and financial models of companies like Uber and Lyft, DoorDash and Postmates, were built considering the condition that their workers – drivers and couriers – are independent contractors, not employees. This is now about to change and may affect the companies' valuations – private and public (learn more about valuations in our weekly lessons or a dedicated course) — adding more risk. Take a look at the business plan of that gig economy startup you're about to invest in once again.

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In Dynamex Operations West v. Superior Court, the court simplified and clarified the rules governing which workers are “employees” and are therefore protected by minimum wage guarantees, some social security benefits, workers compensation provisions, mandated breaks, and other protections to which employees are entitled.

To determine whether a worker is an independent contractor or an employee, the hiring entity must establish each of the following three factors, commonly known as the “ABC test”:

A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work; and

B) The worker performs work that is outside the usual course of the hiring entity’s business; and

C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

If any one of the components isn’t met, then the worker is considered an employee by law, which obviously causes new expenses for their employers (up to 20% of the salaries in the US), that would unlikely be part of their business plan prior to this ruling.

Uber and Lyft are primarily transportation companies, therefore the work their drivers perform is pretty core to their businesses, raising the specter that they could run afoul of provision (B).

Although California is only one state of the US, some other states have already followed its lead by implementing similar laws. However, due to California being the home state for many of the world’s largest technology companies, it could force them to rethink how they label their workers, potentially raising the cost for providing their services.

This problem of a worker's employment status has been chasing different companies for quite a while. This particular case concerning Dynamex began in 2005 and has only just been ruled on in 2018. So, should gig economy companies argue with this law, it can take years for a resolution to be reached. Whatever happens in this regard, industry players are hoping that these companies and their investors saw this issue coming and fully considered the risk that it brings with it.

Read the full 82-page ruling in the case of Dynamex Operations West Inc. v. Superior Court of Los Angeles.

Week 18 - gig economy map.png

In other news:

Keep an eye on the temperament of the CEOs of your portfolio companies – it can hurt a business a lot! Tesla stock fell more than 5% after Elon Musk cut off analysts during a call. In a conference call last Wednesday, Musk showed his worst self in public communications – something you would not expect from a genius marketer such as him. Analysts think that he may be very frustrated.

He didn't want to answer any questions related to the company's embarrassing financial results and manufacturing pitfalls, and rudely shut off his opponents. Musk insisted during the call that he has no plans to raise capital at this point, but many on Wall Street say that his insistence does not seem to square with what they see in Tesla's finances.

This is not the first instance where we have seen brilliant CEOs behaving like…jerks contemptibly obnoxious people. A professor of management, communication & leadership at NYU says that: "Musk's temperament is not right for a CEO".

Recent Industry Reports And Studies (free instant access):

1Q-2018 European Venture Report
1Q-2018 MoneyTree Canada
1Q-2018 M&A Report

Reroute

Keep things simple. Groundbreaking physicist Stephen Hawking left us one last shimmering piece of brilliance before he died: his final paper says that the universe is far less complex than current multiverse theories suggest.

Bond, Junk Bond | week 17

Sequoia Capital has sued the founder of the largest cryptocurrency exchange for allegedly violating an exclusivity agreement for the upcoming funding round (i.e., a term sheet provision prohibiting negotiations with other investors after agreeing in principle with Sequoia). This doesn't happen often in the VC-land, so the case is important to study. Learn why a term sheet isn’t exactly a non-binding agreement — as they say — in our next weekly VC lesson


WeWork gave us a lot to think about this week. It's been a little over half a year after the most recent massive venture capital financing round of $4B lead by Softbank’s Vision Fund. As a rule of thumb, every VC investment round should be sufficient to keep the company afloat for 18 months on average. However, WeWork has been burning cash like crazy and raising money every year. Even though the last Softbank injection was more than 4 times larger than any previous round, it will still be insufficient for this disruptor in the near future.

Because there’s hardly anyone else left to turn to for money at this point, WeWork decided to raise new funds through a junk bond. "Junk bonds" are so called because of their higher default risk in relation to investment-grade bonds. Knowing that, WeWork offered a pretty high seven-year yield — 7.75-8% — and managed to raise 40% more than they asked for: $720M instead of $500M. Higher interest rates is one of the reasons why investors purchase risky junk bonds. Some investors, however, buy them to speculate on potential price increases, which may happen if WeWork does well and grows its valuation further. No guarantees, of course.

WeWork said the proceeds, together with the money left from SoftBank's last funding, will give it over $3B of cash to finance its expansion. Let's see where the problem is.

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How Are Things, WeWork?

Due to the bond offering, WeWork had to disclose some financials, which allowed the broad public to guess how venture capitalists are feeling about this portfolio company.

Good news: the revenue of the office-space management company more than doubled between 2016 and 2017 — from $436M to $886M. Nearly 93% of revenue ($822M) is tied to membership. WeWork revenue in 2017 totaled $886M in cash.

Bad news: the net loss more than doubled compared to 2016, which totaled $933M. But the worst news is that WeWork has $5B of lease payments due through 2022, and another $13.2B in 2023 and beyond. The annual lease payments for all WeWork's real estate is roughly around $1B. Current revenue is close enough to pay for the rent. However, all other expenses are or will be close to that $1B mark, so if WeWork is planning to become profitable in its current state, the company needs to at least double the revenue. Not easy at this scale.

According to the financial statements and newly raised bond money, WeWork has somewhere around $3B in cash. This money is kinda emergency funds to cover three years of the company's operations, excluding the rent (which can be paid for by the membership should it remain the same or grow). However, unless the company cuts expenses significantly or doubles the revenue, its future after 2020 is uncertain. Although IPOs of unprofitable companies are common today, the amount of public finding WeWork could possibly raise wouldn't cover it anyway.

"Community Adjusted EBITDA"

WeWork decided to put a new face to its extreme spending and invented a new measure called “community adjusted EBITDA”. The classic plain-vanilla EBITDA — or earnings before interest, taxes, depreciation, and amortization — is negative at $769M, according to the documents. However, WeWork’s "community adjusted EBITDA" subtracts not just these costs, but also ordinary expenses for things like marketing, design, administration, all tenant fees, rent expense, staffing expense, facilities management expense, and even executive salaries.

WeWork's intention is to best quantify its unit economics as it continues to prepare for an IPO. Since many of the expenses listed above relate to growth efforts, the company insists that the approach to EBITDA should be different from the one traditionally applied.

By its controversial new financial metric, WeWork reported an adjusted EBITDA of negative $193M and a loss from operations of $932M.

Although the interest for WeWork’s bond was strong, let’s not forget that just a month ago Tesla’s notes plunged to a low of 86 cents on the dollar, showing that creditors aren’t totally sure the company will be “money good”. Netflix’s stock slipped down  5% after the streamer announced new $1.9B junk-bond offering. As of March 31, Netflix had $6.54 billion in long-term debt and $17.9 billion in streaming content payment obligations, but the company is at least profitable.

What Were VCs Thinking?

WeWork’s soaring membership exploded from 7,000 members four years ago to 251,000 as of March 1, 2018. Its occupancy rate increased to more than 80% on Dec. 1, 2017, from 76% a year earlier, according to the documents. As we recall, it was fashionable at the time to invest in growth rather than actual profits. However, some industries — and real estate is one of them — are tougher than others.

Lease flexibility, a major perk for potential WeWork tenants, also poses one of the company’s biggest risks. The company is subject to "mismatched terms" when it takes 10- or 20-year office leases from landlords, and then offers companies month-to-month rental options.

Selling WeWork for the current company's valuation of $21B wouldn't even be enough to cover its existence with all the liabilities. However, we all know that what happens to a company after a venture capitalist exits. It’s no longer their concern. Keeping that in mind, the long-term future of WeWork from the financial standpoint is worrisome.

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Pitchbook surveyed its readers if the co-working giant's business model and $20 billion valuation will hold up long-term. Here's what we've heard. Some responses have been lightly edited for length and clarity:

* * *

"WeWork has effectively built an aura around itself that allows it to borrow money cheaper than everyone else. If it can do that faster and reach profitability faster than the economic cycle shifts to the downtrend, it will be fine. If it cannot, it will be toast."

"Without a clear path to sustainable profits, there is no clear path to sustainable value."

"To me, the business model does not look much differentiated from serviced office companies like Regus—other than how they arrange the spaces they rent and sublet to their tenants. Their costs per square foot must be about the same; ditto for the rents they collect. So...how can they sustain their valuation? What am I missing?"

In other news:

To add some brighter colors, let's put Docusign in the limelight. On Thursday, the company went public at $29 a share, and the stock rose 37 percent in the first day of trading on Friday.

The biggest winner investor is a venture capitalist who has never appeared on a Midas List, and whose firm isn’t one of the venerable investment firms on Sand Hill Road in Silicon Valley. Nevertheless, he made a bet on the startup that lets people securely sign contracts online 12 years ago. Pete Solvik was so sure of the idea that he kept buying shares over the years for his firms, Sigma Ventures and San Francisco-based Jackson Square Ventures, where he’s a partner.

To accumulate a 13% DocuSign stake for his funds — which is now worth $687M — Solvik spent only $17.5M of venture money. As you can see, patience gets rewarded by an almost 40 times return.

Recent Industry Reports And Studies (free instant access):

WeWork Teardown by CBInsights
HALO Annual Report on Angel Investments by Angel Resource Institute
2018-Q1 US PE Breakdown by Pitchbook

Reroute

Europe’s first national government-backed experiment in giving citizens free cash will be terminated. Since January 2017, random 2,000 unemployed people aged 25 to 58 have been paid a monthly €560, with no requirement to seek or accept employment. The idea aimed primarily at seeing whether a guaranteed income might incentivise people to take up paid work, but two years will not be enough to make a reasonable conclusion for the experiment.

Occupy Silicon Valley | week 16

Do you measure your life in billable hours? There’s another metric you may want to add to your system: Cost Per Reasonable Decision (CPRD). Find instructions at the end of the e-mail.


Occupy Silicon Valley

Merrill Lynch, the wealth management division of Bank of America, issued a report called “Occupy Silicon Valley”. An investment forecast with the catchy title addresses the bank’s clients — traditional investors in the stock market. However, we can’t miss it because it summarizes recent events occurring in the tech community and describes a broader social phenomenon. Here’s why.

A decade ago, the tech industry in general, and Silicon Valley in particular, had an image of bold innovators advancing the entire world. Since early 2000s, they’ve been accused in creating too many meaningless mobile applications and social networks, and too few real breakthrough technologies. Today, the tech industry draws attention by public scandals, increased regulation, and taxation, all of which makes it vulnerable. Privacy breaches, institutionalized sexism, and jobs in jeopardy are only a few of the worries of common people. Venture capitalists are no longer knights in shining armor. Instead, they have become enablers. 

Merrill Lynch’s forecast of a backlash against the industry is based on the spicily valued tech giants whose market values surpass the gross domestic product of some major US cities. “Google is bigger than Chicago, Amazon is bigger than Washington,” wrote Michael Hartnett, chief investment strategist with Bank of America Merrill Lynch. Google and Apple have a combined market capitalization of $1.45 trillion, greater than the combined $1.31 trillion market value of euro zone and Japanese financial stocks.

Week 16 Occupy SV.png

All those negatives and increasingly concentrated wealth of Silicon Valley feeding the gap between tech capital and human capital may spark a backlash against the industry similar to that one against the banks of Wall Street. That’s why the report's title draws parallels to the 2011 "Occupy Wall Street" protest against the wealth of the largest US financial institutions that arose from the financial crisis. Because more and more people feel left behind, Silicon Valley is on the edge of becoming a new punching bag.

But it’s not only the common people who are unsatisfied with tech. It’s also politicians and regulators who have started taking actions against the tech frenzy. A new EU privacy law and digital advertising tax, tougher antitrust enforcement, the US Senate bill to form a new Commerce Department Committee to grapple with the impact of AI and automation of workers, or South Korea’s world's first "robot tax" to reduce automation incentives, let alone severe regulations against cryptocurrencies and tokens — are only a few measures currently being implemented by the world governments.

Altogether, it may slow down the growth of tech stocks, even though Merrill Lynch is still expecting it to continue rising in the near future. Nevertheless, it advises its investors to start adding out-of-favor sectors — such as gold, natural resources, and banks — to their portfolios.

So what does it all mean for venture investors and entrepreneurs? Besides potential redistribution of wealth and power, the current environment will definitely require updating the values of technology companies. People will want more jobs created, more taxes paid, and better working and living conditions offered in the geographies most exposed to the tech gold rush. For some companies, this will mean cutting the profits, for others it will open new opportunities. At the end of the day, current technologies can address all concerns of the unsatisfied.

In other news:

  • This is the time of lists. Forbes released its Midas List, and CBInsights updated their Top 100 Venture Capital Partners of 2018 list. Seeing new faces is very encouraging, while losing some regular actors — especially due to sexual harassment accusations — proves that one mistake can cost a career even in venture capital.
  • As we’ve reported, the US Securities and Exchange Commision is on a hunt for different players of the cryptocurrency sector: startup fundraising through ICOs, their marketers, and now, cryptocurrency exchanges. You know it’s getting serious when investors step in. Andreessen Horowitz, Union Square Ventures, and other venture-capital backers of digital-currency firms met with the SEC to argue that severe regulations can slow down innovation based on blockchain technology. Let's see how that goes. While, the crypto community showcases Switzerland as an example, which has issued guidelines for initial coin offerings (ICOs) where it classifies cryptocurrencies into three types: payment tokens like bitcoin, utility tokens that provide access to a service, and asset tokens that represent participation in hard assets, companies, or profit or capital flows. The guidelines also recognize hybrid coins that serve multiple purposes.

Recent Industry Reports And Studies (free instant access):

2018 Marijuana Trailblazers by CBInsights
2018 Global Startup Ecosystem Report by Startup Genome
2018-Q1 US PE Breakdown by Pitchbook

Reroute

How to make reasonable decisions reasonably quickly? How would you estimate the direct cost of some recent decisions in your companies? What about the opportunity costs of all that time/energy that could be spent elsewhere? Read here.

Investing With Love | week 15

How many hours a day do you typically spend answering emails? Find out how to reduce the stress that your mailbox causes you, at the end of this newsletter.


week 15 - impact millennials.gif

Investing With Love

This week, we noticed that many investment professionals in our LinkedIn community are interested in impact investing. It's a well-known fact that the millennial generation cares about impact far more than any of the other generations, but it's always amazing to see it happening right in front of your eyes. Coincidentally, this week brought with it a handful of important insights about impact investing, so we decided to dedicate our newsletter to this subject.

The Ford Foundation, a globally-oriented private philanthropy organization, pledged $1 billion to mission-related investments last year, and following on from this, Switzerland’s Partners Group announced a $1 billion vehicle this week, that will seek investments focused on alleviating poverty and back companies developing affordable and clean energy technology. These are impressive amounts for impact investing, considering that there are still many people who doubt it can guarantee market returns.  

Target returns, overall and by geographic focus

As you can see in the image above, up to 71% of impact investors generate “risk-adjusted market rates” for financial returns. They keep in mind the social and environmental impact of their investments, but they do not sacrifice financial returns by making impact investments.

This makes total sense from a strategic marketing standpoint. "If a company is doing something very important in the world, customers are going to want to buy more of it, employees are going to be more committed, and investors are going to want to be very involved in helping that company succeed", explains Alex Pitt, the co-founder of Mustard Seed, a London-based impact investment firm. "We see these dynamics at work across our portfolios every day. This means these companies will have very strong long-term commercial returns, in our view." This has been confirmed by different surveys - see the first image above.

Where Do I Take The Money?

What is equally important is that institutional investors see this trend too, and they are becoming more and more interested in impact investing as well. A 2017 study by BNP Paribas shows that 20% of institutional investors intend to increase alternative allocations to ESG (Environmental, Social, and Governance)/impact assets.

Of all the different types of limited partners, development finance institutions (DFIs), e.g. investment banks, institutional investors, advisors, and managers, show the strongest aggregate commitment to impact funds, with almost 9% of all commitments to PE and VC funds being impact funds. However, their check may be too heavy for smaller impact investors - this is where high net worth individuals (HNWIs) and family offices step in. ("Family offices" is the next topic of our Weekly VC Lesson per our students’ request — subscribe here to receives it.)

More than 90% of HNWIs globally — particularly those under 40 — believe that driving social impact is important. Asset managers have increasingly adopted impact asset offerings in order to serve this demand. A 2017 family office survey reports that 28.3% of family offices utilized impact investing as a strategy and 40% of surveyed investors expect to increase commitments to impact/ESG investments in 2018. Read the analyst note on sources of impact capital prepared by PitchBook.

This trend has been out there for some years now, and last year we published a free "Impact Measuring Framework" course authored by the brilliant impact investor, Cynthia Ringo of DBL Partners. It's not too late to jump on this impact investing train yet, so enroll today!  

In other news:

Theranos, "the latest indignity for the once fabulously rich blood-testing company that’s become a parable for Silicon Valley hubris", is at risk of a foreclosure sale to private equity firm Fortress, which, if this happens, will be entitled to a 300% return on its investment before other investors are paid out. There is no hope for the latter, who were asked by its CEO Elizabeth Holmes to invest more (you read it right) in order to avoid this scenario. While some of the company's employees were laid off, others were playing a home-made crude version of the classic “Space Invaders” video game, in which players shoot at a likeness of the Wall Street Journal reporter John Carreyrou, who was the first to break the story of the company’s troubles in October 2015.

In addition to replacing the game’s titular aliens with Carreyrou’s face, the programmer replaced the canon with Theranos’ proprietary miniLab testing kit, and swapped out the bullets for the company’s “nanotainer” blood vial. The WSJ reporter didn't waste time while Theranos was sinking, and wrote a 300-page book titled “Bad Blood: Secrets and Lies in a Silicon Valley Startup”, where he paints a damning portrait of the culture of dysfunction and deception overseen by CEO Elizabeth Holmes. People like drama after all.

Theranos is a unique case where the company made so many of the mistakes that a Silicon Valley company can make, including suffering the irreparable damage caused by media revelation.

Recent Industry Reports And Studies (free instant access):

1Q 2018 Venture Monitor by PitchBook-NVCA 
2018 Cyber Defenders by CB Insights
Q1-2018 Venture Capital Funding Report by PWC and CB Insights

Reroute

You thought Slack or Telegram would set you free from hundreds of emails and remove the stress? Didn't work, huh? Here are some thoughts about why emails are so stressful for busy people like you. Spoiler alert - each “yes” leads to more work.