Posts from stocks

Fun Friday: Twitter

I don’t think there is a company we’ve discussed here more than Twitter. And since it is Fun Friday, we are going to talk about it some more.

I tweeted this out yesterday after reading the zillionth blog post claiming to know what is wrong with Twitter and how to fix it. Instead of puking, I tweeted. Ah, the irony of it all.

So let’s get to the discussion. Is the negativity too high right now? Does Twitter know what is wrong and how to fix it?

Full disclosure: We own a lot of Twitter. It is our largest personal holding and a material portion of our net worth.

Fun Friday: Stock Market Prognosticating

The Nasdaq closed 2015 at 5,007. It has fallen 6.4% this week and is now at 4,689.

Here’s the long term history of the Nasdaq:

nasdaq

5,000 is a number with some meaning with this index. It touched that number briefly in the Internet bubble, then built its way all the way back over the past fifteen years.

My question is this:

Let me know what you think in this twitter poll and, as always, in the comments.

What Is Going To Happen In 2016

It’s easier to predict the medium to long term future. We will be able to tell our cars to take us home after a late night of new year’s partying within a decade. I sat next to a life sciences investor at a dinner a couple months ago who told me cancer will be a curable disease within the next decade. As amazing as these things sound, they are coming and soon.

But what will happen this year that we are now in? That’s a bit trickier. But I will take some shots this morning.

  1. Oculus will finally ship the Rift in 2016. Games and other VR apps for the Rift will be released. We just learned that the Touch controller won’t ship with the Rift and is delayed until later in 2016. I believe the initial commercial versions of Oculus technology will underwhelm. The technology has been so hyped and it is hard to live up to that. Games will be the strongest early use case, but not everyone is going to want to put on a headset to play a game. I think VR will only reach its true potential when they figure out how to deploy it in a more natural way.
  2. We will see a new form of wearables take off in 2016. The wrist is not the only place we might want to wear a computer on our bodies. If I had to guess, I would bet on something we wear in or on our ears.
  3. One of the big four will falter in 2016. My guess is Apple. They did not have a great year in 2015 and I’m thinking that it will get worse in 2016.
  4. The FAA regulations on the commercial drone industry will turn out to be a boon for the drone sector, legitimizing drone flights for all sorts of use cases and establishing clear rules for what is acceptable and what is not.
  5. The trend towards publishing inside of social networks (Facebook being the most popular one) will go badly for a number of high profile publishers who won’t be able to monetize as effectively inside social networks and there will be at least one high profile victim of this strategy who will go under as a result.
  6. Time Warner will spin off its HBO business to create a direct competitor to Netflix and the independent HBO will trade at a higher market cap than the entire Time Warner business did pre spinoff.
  7. Bitcoin finally finds a killer app with the emergence of Open Bazaar protocol powered zero take rate marketplaces. (note that OB1, an open bazaar powered service, is a USV portfolio company).
  8. Slack will become so pervasive inside of enterprises that spam will become a problem and third party Slack spam filters will emerge. At the same time, the Slack platform will take off and building Slack bots will become the next big thing in enterprise software.
  9. Donald Trump will be the Republican nominee and he will attack the tech sector for its support of immigrant labor. As a result the tech sector will line up behind Hillary Clinton who will be elected the first woman President.
  10. Markdown mania will hit the venture capital sector as VC firms follow Fidelity’s lead and start aggressively taking down the valuations in their portfolios. Crunchbase will start capturing this valuation data and will become a de-facto “yahoo finance” for the startup sector. Employees will realize their options are underwater and will start leaving tech startups in droves.

Some of these predictions border on the ridiculous and that is somewhat intentional. I think there is an element of truth (or at least possibility) in all of them. And I will come back to this list a year from now and review the results.

Best wishes to everyone for a happy and healthy 2016.

What Didn’t Happen

Last year, I ended 2014 with What Just Happened and started 2015 with What Is Going To Happen.

I’ll do the same tomorrow and friday, but today I’d like to talk about What Didn’t Happen, specifically which of my predictions in What Is Going To Happen did not come to be.

  1. I said that the big companies that were started in the second half of the last decade (Uber, Airbnb, Dropbox, etc) would start going public in 2015. That did not happen. Not one of them has even filed confidentially (to my knowledge). This is personally disappointing to me. I realize that every company should decide how and when and if they want to go public. But I believe the entire startup sector would benefit a lot from seeing where these big companies will trade as public companies. The VC backed companies that were started in the latter half of that last decade that did go public in 2015, like Square, Box, and Etsy (where I am on the board) trade at 2.5x to 5x revenues, a far cry from what companies get financed at in the late stage private markets. As long as the biggest venture backed companies stay private, this dichotomy in valuations may well persist and that’s unfortunate in my view.
  2. I said that we would see the big Chinese consumer electronics company Xiaomi come to the US. That also did not happen, although Xiaomi has expanded its business outside of China and I think they will enter the US at some point. I have a Xiaomi TV in my home office and it is a really good product.
  3. I predicted that asian messengers like WeChat and Line would make strong gains in the US messenger market. That most certainly did not happen. The only third party messengers (not texting apps) that seem to have taken off in the US are Facebook Messenger, WhatsApp and our portfolio company Kik. top social apps year end 2015Here’s a shot of the app store a couple days after the kids got new phones for Christmas.
  4. I said that the Republicans and Democrats would find common ground on challenging issues that impact the tech/startup sector like immigration and net neutrality. That most certainly did not happen and the two parties are as far apart as ever and now we are in an election year where nothing will get done.

So I got four out of eleven dead wrong.

Here’s what I got right:

  1. VR has hit headwinds. Oculus still has not shipped the Rift (which I predicted) and I think we will see less consumer adoption than many think when it does ship. I’m not long term bearish on VR but I think the early implementations will disappoint.
  2. The Apple Watch was a flop. This is the one I took the most heat on. So I feel a bit vindicated on this point. Interestingly another device you wear on your wrist, the Fitbit, was the real story in wearables in 2015. In full disclosure own a lot of Fitbit stock via my friends at Foundry.
  3. Enterprise and Security were hot in 2015. They will continue to be hot in 2016 and as far as this eye can see.
  4. There was a flight to safety in 2015 and big tech (Google, Apple, Facebook, Amazon) are the new blue chips. Amazon was up ~125% in 2015. Google (which I own a lot of) was up ~50% in 2015. Facebook was up ~30% in 2015.  Only Apple among the big four was down in 2015 and barely so. Oil on the other hand, was down something like 30% in 2015 and gold was down something like 15-20% in 2015.

Here’s what is less clear:

  1. Bitcoin had a big comeback in 2015. If you look at the price of Bitcoin as one measure, it was up almost 40% in 2015. However, we still have not see the “real decentralized applications” of Bitcoin and its blockchain emerge, as I predicted a year ago, so I’m not entirely sure what to make of this one. And to make matters worse, we now seem to be in a phase where investors believe you can have blockchain without Bitcoin, which to my mind is nonsense.
  2. Healthcare is, slowly, emerging as the next big sector to be disrupted by tech. The “trifecta” I predict will usher in an entirely new healthcare system (smartphone becomes the EMR, p2p medicine, and a market economy in healthcare) has not yet arrived in full force. But it will. It’s only a matter and question of when.

So, I feel like I hit .500 for the year. Not bad, but not particularly impressive either. But when you are investing, batting .500 is great because you can double down on your winners and stop out your losers. That’s why it is important to have a point of view, ideally one that is not shared by others, and to put money where your mouth is.

A Chart To Ponder

I was looking at some charts this morning. This one of the NASDAQ got my attention.

nasdaq chart

You can see the wind we’ve had at our back since the financial crisis of 2008/2009. Seven years of good financial markets.

My career as a fund manager started in 1996. We had five years of good times followed by three years of bust. Then we had five years of good times followed by two tough ones. Now we’ve had seven years of good times.

I will leave it at that. Sorry to be a bummer this morning.

Getting The Deal Done

There’s a scene in Ben Horowitz’ book The Hard Thing About Hard Things when LoudCloud was burning through cash and financing options were challenging and so they went public. The valuation of $450mm was much lower than they had hoped and getting the deal done was hard but they got it done. It saved the company and ultimately the company, after changing its name to Opsware, sold to HP $1.6bn.

Here’s the opening text from a story about that LoudCloud IPO:

Shares in the company climbed 15 cents, or 2.6 percent, to $6.15 on a volume of 15 million shares. This gives the company a market value of about $450 million, less than half the $1.1 billion it planned for in its earlier filings.

Thursday, Loudcloud raised $150 million when it sold 25 million shares for $6 each to large investors such as mutual and pension funds. Lead underwriters Morgan Stanley and Goldman Sachs twice changed the size of the offering to make it more appealing to investors.

Initially the company planned to sell 10 million shares, or a 9.6 percent stake of the company, at a range of $10 to $12. The terms changed to 20 million shares, or a 30 percent stake, at a range of $8 to $10 in mid-February. Thursday, the company altered the terms again, offering 25 million shares at $6 each, or 34 percent of the company.

“It’s desperation,” said Dave Nadig, a portfolio manager with MetaMarkets.com, who said he will not buy the stock. “I think they’re pretty much standing on street corners trying to find people to buy. They need the $150 million to build their business.”

Sometimes you just need to get the deal done. When you are burning through cash and need to finance your company, the terms might suck, but the cash doesn’t. So you do the deal and live to fight another day. Marc and Ben did the right thing at LoudCloud and Jack Dorsey did the right thing at Square.

If you believe in your business and yourself, take the money and get back to work. A financing is not an exit. The price matters less than the cash most of the time.

The Blurring Of The Public And Private Markets

Five or six years ago, as the USV team was discussing the evolution of late stage financings and secondaries on the venture landscape, our partner Albert described something to us that was, in hindsight, very prescient. He said “there is no reason why there is such a bright line between public and private markets, we should have one market where the more a company discloses, the more liquid their security becomes” (or something like that). His point was that the only thing that really matters is how much information a company is willing to disclose.

We are increasingly seeing what Albert described to us come to pass. The ability to raise large sums of capital from public market investors has been available to privately held companies for a number of years now. There is no real difference between the public markets and the late stage growth markets in terms of availability of capital. That was not true a decade ago.

With the recent SEC adoption of Title III of the Jobs Act, non-accredited investors can start investing in private companies. There are limitations and reporting requirements which will certainly limit the adoption of Title III fundraising, but even so, we have crossed a threshold here that should lead to more individuals investing in privately held businesses over time.

Privately held companies are increasingly using electronic stock ledgers (like the one our portfolio company eShares offers) which allow them to easily manage a large and rapidly changing cap table, much like the function that brokers and transfer agents provide in the public markets.

So, as you can see, we are slowly witnessing the blurring of the lines between the public and private markets.

But maybe the biggest “tell” is the recent brouhaha over Fidelity’s public markdowns on its holdings of well known startups. One of the many reasons companies don’t want to go public is they don’t want to have to deal with a valuation that moves around all the time without their ability to manage it. Well guess what? If you raise from certain investors in the late stage growth market, you are doing that, even if you didn’t realize it.

I don’t think we will see less of these public markdowns. I think we will see more of them. And we VCs are now facing the choice of whether to markdown our portfolios in reaction to Fidelity’s markdowns or explain to our investors and auditors why we did not do that. Since our quarterly holding values don’t really matter to us (cash on cash returns are what matters), it’s easier to markdown than discuss why we didn’t do that.

It’s interesting and noteworthy that when the private capital markets got the benefit of large pools of capital coming in, that came with increasing transparency. Of course it did. We just didn’t realize that was going to happen. Staying private won’t shield you from the pains of going public. Because the lines are blurring between the private and public markets and we are in for more blurring and it will come faster in the coming years. Be careful for what you wish for, you may just get it.

Software Is The New Oil

I was with some friends this weekend and one of them was talking about an investment committee meeting he attended and there was a discussion at that meeting about some of the threats out there in the macro investment landscape. One of them was “vanishing liquidity” and the significant change in net cash flows from the global oil sector. Oil producing regions have gone from being a massive cash generator to a relatively small one in the past few years. Now this could well be a temporary thing as the oil market adjusts to some new realities. This post is not really about oil, even though that word is in the title of this post.

As I pondered that, I thought about oil’s role as the thing that captured the economic surplus of the industrial revolution. You can’t run factories, railroads, trucks, etc without carbon-based products and in particular oil. So oil has been a cash/capital magnet for the wealth that the industrial revolution produced. Those that owned oil producing assets (or better yet, oil producing regions) sat back and collected the economic surplus of the industrial revolution and that has been a path to vast wealth and economic power.

What is that same thing in the information revolution? And where is cash piling up around the world? On tech company balance sheets, of course. Apple has $200bn of cash on its balance sheet and produced $53bn of cash in the six months ending March 2015. Microsoft has $110bn of cash on its balance sheet and produced $30bn of cash in the year ended June 2015. Google/Alphabet has $70bn of cash on its balance sheet and produced $14bn of cash in the six months ended June 2015. Facebook could have $20bn of cash in the next year and could be producing $20bn of cash a year soon. Amazon, the company that “will never make money” surprised Wall Street last week with strong profits and it seems to me that they are going to start producing cash like these other big tech companies now.

It makes sense to me that software is the oil of the information revolution. Companies that control the software infrastructure of the information revolution will sit back and collect the economic surplus of the information revolution and that will be a path to vast wealth and economic power. It has already happened but I think we are just beginning to see the operating leverage of these software based business models. The capex spending necessary to be a software infrastructure provider at scale has shielded the cash producing power of these companies (and many others) and may continue to do that for a time, but I suspect at some point the profits are going to overtake the capex at a rate that the cash will be flowing out of software companies the way that oil flows out of wells.

Full Disclosure: The Gotham Gal and I own a lot of Alphabet stock and also shares in several hundred other software based businesses. We are long software.

Twitter’s Moment

Ben Thompson has penned the bull case for Twitter the product, Twitter the company, and Twitter the stock in a blog post carrying the same title as this post.

Those who have been reading this blog over the past few weeks will know that I share Ben’s views and have articulated similar ideas on this page. It should also be stated that I am long Twitter the stock and subject to whatever emotions, conflicts, and other bad behaviors that generates.

Ben ends with something I have not articulated on this blog before but have felt since the day I sent my first tweet, and that is the notion that there is something special about Twitter:

There’s just something different about Apple, a company that seems so full of contradictions yet one that has continued to lead the industry both financially and in key innovations. I’d argue the same about Twitter: it doesn’t make sense, hasn’t really ever made sense, and perhaps that’s the reason it, and the irreplaceable ideas it contains, are so important.

I realize that I am horribly biased on this topic and that others may not see what I see. But I have always felt that Twitter is a special company, full of conflicts and contradictions, that, maybe because of them, had the potential to deliver something unique, different, and compelling. And I continue to believe that.

The New Reassurance

My friend Steve observed something to me this week that speaks to the changing dynamic in the world of business, finance, and markets.

He pointed out to me that a decade or two ago, when the financial markets tumbled, the Secretary of Treasury would arrange a press conference, stand behind a podium with some official looking seal on it, and make reassuring comments about the economy in hopes of reassuring investors and the markets.

Now, the Treasury Secretary has been replaced by Apple’s CEO Tim Cook, the reassuring comments are delivered via an emailed letter to Jim Cramer, and the whole thing is reported on Twitter.

Apple has the largest market cap of any publicly traded company and may be the most widely held stock (I don’t actually know), so reassurances from Apple’s CEO matter. Twitter is the world’s real time news channel, and Jim Cramer has a high a profile as any market commentator out there. So it makes perfect sense if you think about it.