Joining me for tomorrow’s 3rd show of WatchMojo Live is Tim Sykes.
Tim Sykes is an investor, author, entrepreneur and media personality who parlayed $12,415 Bar Mitzvah Gift money into a fully audited pre-tax sum of $1.65 million from 1999 to 2002 before founding his hedge fund, Cilantro Fund Management, LLC in 2003. Author of An American Hedge Fund, Sykes was born in Connecticut but attended school in Tulane, Louisiana and today lives in New York City. Since the beginning of 2008, Timothy has been the #1 trader/investor, out of 25,000+ on Covestor.com, a website that tracks and verifies all trades, by earning 365% as the overall US stock market dropped 40%. He has written for AOL and featured on ABC, CNN, CBS, CNBC, FOX News and far too many other places to name in this blurb. Catch him on WatchMojo Live on Wednesday November 11th 2009.
Let’s hope he brings the ladies tomorrow:
Check out his site here. Check out the show tomorrow, Wednesday, at 3pm EST on WatchMojo Live.
Somehow*, I came across Paul Lee’s post on high valuations, he’s a founding member and Senior Vice President at the Peacock Equity Fund, a joint venture between NBC Universal and GE Capital:
A high valuation is problematic for a number of reasons. The first, and probably most important, is the impact on the company’s ability to attract quality talent. That’s not to say that you couldn’t (I’m sure the aforementioned microblogging site is seeing a flood of resumes). However, most people in the startup world join startups for the equity upside in a liquidity event or IPO (although the garage sale furniture and stale pizza at 1 a.m. is tremendously appealing). When a highly priced round is completed, guess what–the strike price of the options also go up. In effect, the hurdle for the options to be “in the money” has gone up and the value of the options has decreased. The motivation for the employees coming in after the financing has been materially altered.
Another difficulty in raising a highly priced round is the set of expectations from the new investors. Given the high valuations, the milestones that you’d have to hit to justify the valuation are usually aggressive. The difficulty in setting such aggressive milestones is that if you only complete 50%, you’ve basically built a bridge to nowhere. When you next need to raise capital, you may be faced with a down round, or in extreme circumstances, a complete recap or non-funding. Lawsuits and tensions around the board about fiduciary responsibilities are common. Not very fun stuff.
It sort of reminds me of a quote from a low-profile entrepreneur named Bill Gates who started a software company in Seattle back in the day. He quit to run a non-profit to help end poverty:
One challenge Microsoft did face, and that Netscape now faces, is coping with a high market valuation. Netscape has little income, but investors have valued its stock at more than $2 billion. When a company’s shares have a high value, expectations from investors, including employee-owners, are correspondingly high. Failure to meet those expectations can be damaging. If you’re giving share options to employees so that they can participate financially in the expected success of a company, a high valuation hurts. If the market’s already anticipated the great work those people are going to do, then their stock options won’t appreciate much in value, if at all. This can make the options worthless. Many times in the past I have felt that Microsoft stock was higher in value than it should be. Subsequently I was proven, in a sense, to be wrong. Controlling expectations—whether about deliveries, product features or stock value—is often wise in a technology business. It’s a lot better to under-promise and over-deliver.
Read more about that here.
[* A lie. You will see why and how I was on Fast Company in a few days when I post the Fast Company article that mentions WatchMojo.]
Could it happen? Sure, why not. Markets are looking for a catalyst and if any media company could IPO these days, NBC Universal could be it. See the interview with John Battelle here:
It is astounding that eBay forked over $3B for Skype and didn’t actually buy Skype’s underlying technology.
It is amazing that they didn’t realize this and outright criminal that they didn’t get a fully-paid, irrevocable, perpetual, non-exclusive (exclusive for the purposes of international calling) license.
Om Malik has all of the links you need:
- Skype Founders suggest they still own underlying technology to Skype
- Will Joltid turn eBay’s planned Skype IPO into a nightmare?
- Why eBay Should Accept Skype Founders’ Buyout Offer.
Now this will probably get settled one way or another, and as a non-Skype user, non-eBay shareholder, I don’t really care either way.
But a few points:
- this proves that just because you hire expensive lawyers doesn’t mean anything.
- One more example of upward failing, and to think this woman, Meg Whitman, could have been our Treasury secretary. I am sorry how wonderful Ms. Whitman was, this was done on her watch and it’s just appaling in terms of botched due diligence.
- With all due respect to Skype founders Niklas Zennstrom and Janus Friis, you have to wonder, will anyone ever buy a company from them again? I mean, sure Viacom/CBS and a number of VCs invested in their next venture Joost (hmm… is there such a thing as karma?), but this was before this bit of news was out. Ultimately, I am not sure I would have a lot of comfort and confidence doing a deal with these guys.
Latest figures peg Apple’s revenues off the App ecosystem at a whopping $20-45M. I should have added “quotation marks” to whopping to connote sarcasm.
Back in March 2008, when Facebook hype was at current “Twitteresque” levels and FB (and iPhone) app funds were popping up right and left, I asked Where’s The YouTube Fund. Side note I: YouTube is one of our largest distribution partners.
The rationale then was:
In my opinion, monetizing YouTube is the single greatest business opportunity online right now:
- YouTube streams 1 out of 3 videos;
- YouTube is part of the most profitable online media company, Google;
- Online video advertising is the next high growth area;
- YouTube has hitherto not generated any meaningful revenue, so the upside is far more considerable;
Nothing has really changed my point of view.
In fact, the case for a YT-focused fund is stronger.
You can’t, after all, tell me that Google’s rules of engagements are any harder to overcome than Facebook’s or Apple’s, after all.
- Much as Google has become the dominant navigation platform,
- The iPhone will be a dominant ecosystem in wireless,
- Facebook is the dominant “directory” platform, and
- Google’s YouTube is the dominant entertainment platform right now (no disrespect to Hulu, of course, though Hulu knows its role: to serve traditional media’s interest). Side note II: Hulu, too, is a distribution partner.
Biggest Opportunity in Business Today: Cracking the YouTube Enigma
Online video is big in terms of consumer activity right now: there are more video streams generated than search queries.
Over time: it will be huge in terms of advertising (it will also be huge in terms of e-commerce, and some companies are playing in that field.)
I don’t think - despite my evident bias as the CEO of a content production, distribution, syndication company - that online video advertising will totally usurp television advertising’s size ($1B vs. $75B right now, after all)… but I do think that since online advertising/publishing/media in general will shrink traditional advertising/publishing/media, over time, online video could be larger than a smaller television ad market.
The economic meltdown is shrinking media companies faster, but even without the meltdown, I have news for you: CBS, News Corp., Disney, Viacom etc. will have shrunk anyway. To quote Chris Rock, no one [in media] is above an ass-kicking [because of the Internet]. Ok, so that was a quasi Chris Rock quote.
It might sounds crazy now, but basic math suggests eventually online video will be larger than search and online ads (by 2018) in general will be bigger than television ads (by 2021).
This is why it baffles me to see both Facebook, Apple and yes, “even” Twitter app funds get all of this hype. I think it’s cute, frankly.
Media vs. Technology
So why are investors not rushing to fund YouTube related companies?
- Well, for one: VCs (for the most part) are irrelevant after the meltdown. Their limited partners are broke, the VCs have nothing to show for it… and this is why apart from follow-up investments in portfolio companies that have a shot of succeeding (ie. not dying, forget the cliche 100 or 1,000x returns some of the more ballsy VCs sought), you will see very few new investments.
- But more importantly, all video-related investments - even the tech oriented ones such as CDNs, players, platforms, etc. - are really media businesses and not technology ones. In other words, the technology nuts and bolts is afterthought, a detail. By now, the truth is out: VCs understood technology so they successfully helped build the backbone of the Web. But when it comes to anything touching media and entertainment, they are clueless.
These two reasons explain why despite YouTube’s massive business opportunity, you won’t be seeing any YouTube funds.
I need to perhaps start to set the stage for some impending news, so I will be a tad more diplomatic in my observations on venture capitalists in the days, weeks and months to come… but I think venture capitalists don’t invest in companies or people, they ride trends.
Say all that you want: but Facebook has lost so much of its glitter in the past year, and I think Twitter will undergo the same (some would say it’s already begun). Today, Facebook can’t raise a penny over $3B, last year a lot of people (in addition to MSFT) didn’t blink at the $15B paper value. Yes, a lot has changed in the economic landscape, but I’d argue the meltdown in traditional industries has accelerated the rise of digital and interactive.
VCs have began to complain about many things (Sarbanes Oxley, banker fees, etc.) to explain their lacklustre record of late, but I think it boils down to their carpet bombing approach to backing the latest it thing, hoping for a quick flip to the greater fool.
I’d like to see VCs get back to backing great people and big ideas… today it’s Twitter API derivatives and iPhone apps?
Give me a freaking break. What ever happened to Built to Last?
Let me ask you something: why is it that raising venture capital means that suddenly companies that do raise money can allow themselves to show bad judgment?
Time Value of Money Suddenly Means Denial
Traditionally, a company raised financing from VCs, which bought them time to focus on long term payoffs. But over time, this meant that founders and executives could remain “pre-revenue” for as long as they desired. In turn, this basically camouflaged bad business models, woeful products and inept managers.
What Would Fred Say?
Don’t take it from an entrepreneur who’s never raised VC like me, however, take if from one of the best VCs in the game: Union Square Ventures’ Fred Wilson, who in this video from the Insite NY series (via Business Insider) talks about how money doesn’t solve problems. I’ve embedded the video at the end of the post.
I tend to agree with Fred on this point. We’ve never raised any VC. Initially, this had to do (I think) because we faced litigation from a major media company (since settled). Then, I think, VCs got all hot and heavy over social media and UGC (how’s that faring, gents?). Eventually, I realized it actually had to do with my bad approach to fundraising altogether, which I’ve outlined here: Why salespeople make bad fundraisers.I think by focusing on sales, however, it forces management to take a candid approach to what works and what doesn’t.
Reporting From The Front Lines
For example, I was on a call with a potential “partner client”. By partner client, I mean a company that pays WatchMojo.com either via
a) flat-fee licensing revenue or
b) ad-share syndication revenue
In both cases, we get branding and distribution. It’s quite genius, if I daresay so, as we end up getting paid to promote our brand and add to distribution (we’re past 50,000,000 and counting), but this is because the demand and supply of content vs. distribution is in our favor, even though the so-called “smartest guys in the room” have yet to figure this out and are pouring more and more money into distribution (how are the results faring, gents?)
On this most recent call with my counterpart, she was arguing how they were doing us a favor and we should be happy about the incremental distribution. I didn’t give in an inch, arguing that “it’s unfair to our other clients who do pay us”, which I think is a pretty fair argument to make.
Ultimately, she paused and asked: “are you VC-backed?”
“No, we fund our operations via actual client sales” was my response.
“Oh, you’re bootstrapped? Ok, we’ll pay the minimum and work with you to build up the revenue we generate for you”.
It was odd. Maybe she pitied us, who knows. But the point is, when she assumed we were VC-funded, she took it for granted that we needed to show actual sales, even though VC-funded companies are expected to increase sales in a hockey stick pattern. It was as if VC-funded companies were reckless, foolish, or worst: both.
What Does This All Mean
While VCs get a bad reputation, they are supposed to be an entrepreneur’s best friend. Entrepreneurs need VCs to keep investing, and right now, that is not happening. Just as VCs start to see a light at the end of the tunnel, the numbers come out and suggest that the light is in fact an incoming train.
One of the few IPOs, Current TV, is canning their public altogether. Tech Crunch summarizes the data, and it doesn’t look good:
Number of U.S. Venture Funds Raising New Capital
1Q09: 40
4Q08: 47
3Q08: 62
2Q08: 78
1Q08: 71
4Q07: 85
3Q07: 77
2Q07: 85
1Q07: 81
Dollar Amount of New Funds Raised By U.S. Venture Capital Firms (in billions)
1Q09: $4.3B
4Q08: $3.5B
3Q08: $8.4B
2Q08: $9.3B
1Q08: $7.2B
1Q09: $4.3B
4Q07: $11.9B
3Q07: $8.6B
2Q07: $8.7B
1Q07: $6.5B
That doesn’t look like a hockey stick pattern if you ask me.
In fact, you start to see that the strongest funds will only grow stronger while the weak will die out.
“There’s pressure on the newer funds,” says David Pakman, a partner with Venrock, an established New York-based venture fund originally started by the Rockefeller family. “It’s not a great time to be investing if you are a new fund. It’s not because they are bad. It’s because their track record is not as long. ”
As a sign of the times, Intel Capital is now only going to focus on the bigger deals, those, in fact, that need VC less.
What is the silver lining? Well, hate to be negative, but I am not sure there is one.
- If you are a VC and have burned millions - if not billions - and your investors (pension funds, endowments) start to ask some tough questions, you might start to have to answer to the feds, and no one wants that.
- If you are an entrepreneur, start a company where you know clearly who your clients are, or hit up angels that know you and will fund you. Otherwise, you’re screwed.
Here’s the video with Fred Wilson of USV:
How the mighty have fallen.
Talk about kicking VCs when they’re down. Wow.
I thought I had a “lack of affection” for VCs, these guys make me look like the president of the VC fan club.
PLAY
