Posts from stocks

Numeraire Is Live

Back in February, I posted about Numeraire.

I wrote:

the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other

And roughy four months later, I am happy to write that the Numeraire token is live on the Ethereum blockchain.

You can read more about this here.

Well done Numerai team.

A Man For All Markets

I have had this book, A Man For All Markets, on my kindle for the past year. I can’t recall who recommended it, possibly my friend Jeremy, but I can’t be sure.

A couple weeks ago, I had lunch with my friend Harry and he again suggested it to me. I decided to put it at the top of my to read pile (a virtual pile) and have been reading it for the past week.

It’s a terrific book, nominally the life story of Edward Thorpe, the math professor, blackjack card counter, and hedge fund manager.

The book is a reminder that math, particularly the highly agile mathematical mind, is a very powerful thing. But it is also full of amazing insights on risk and return, from gambling to investing.

I particularly liked this observation that Edward makes after testing his “ten count” system with the the backing of some less than reputable characters:

For the second time, the Ten-Count System had shown moderately heavy losses mixed with “lucky” streaks of the most dazzling brilliance.

My person experience with investing includes plenty of moderately heavy losses and the occasional “dazzling brilliance.

I am pleased to know that pairing is common in all sorts of risk taking ventures.

If you like math, cards, and/or investing, I am sure you will enjoy this book as much as I am.

Being Public

Two former USV portfolio companies had tough earnings calls last night.

And you look at that and you might say “why would any company want to go public?”

But here is the thing. Being public is about being transparent, accountable, and owning up to the issues and dealing with them.

I think it makes companies better.

If you are losing your biggest customer, you have to tell the world and deal with the consequences.

If you are making a leadership change, you have to tell the world and deal with the consequences.

Both of those companies are great companies, in which the Gotham Gal and I are a very large shareholder, and in which we believe in totally and completely.

Nothing is always up and to the right, even though you might want it to be.

The great companies are the ones that have the guts to bare it all and keep building.

Which is why I think being public is a good thing for the companies we work with that are large enough and have unique and differentiated businesses and business models.

I think more tech companies should be going public and I have been saying that for quite a while now and last night doesn’t change my views one iota.

When The AI Comes To Your Annual Shareholders Meeting

I was looking at the top twenty shareholders of some public companies last week and saw quite a few “quant funds” on those lists.

With the news that Blackrock is going to move much of its asset management business to models and machines, I think we will see more of this in the coming years.

It’s annual meeting season for public companies and all of this made me think about when the AI shows up to your annual shareholder meeting.

Or when the AI gets your proxy and needs to vote for Directors, executive compensation, and the choice of auditors.

Governance is an important part of being a shareholder.

When the shareholders are all machines, how does governance work?

A Direct Listing

I saw this question pop up in my Twitter feed this morning:

I don’t know anything about Spotify’s plans so I am not going to comment on that.

But the idea of doing a direct listing instead of an IPO is a super interesting to me.

Here is what I said to a friend of mine over email on this subject last week:

we don’t need IPOs to raise money anymore

the private markets work great for that now

but we do need a way to allow small investors to own the stock and we need a way to give employees, former employees, early investors, etc liquidity

So the idea of taking the fundraising function out of the going public equation is super interesting to me.

The questions that come to mind to me are; who will make a market in the stock?, who will write research on the stock?, how will companies build an understanding of their company prior to the listing?, will there be a lockup for existing investors?

The “IPO road show”, which is the roughly two week process before the IPO, is both a sales process to raise the money and a great opportunity to build excitement for the stock and understanding of the business. I guess a direct listing could include a road show as well. I think it probably should.

And the underwriters, who make a big commission on the IPO, commit to trade the stock and write research on the company in return for “being on the cover.” There needs to be some other way to get the investment banks involved in the stock to ensure that there is a market for the stock and research is done on the stock.

Finally, you wouldn’t want the entire cap table to come into the market on the first day of the direct listing. So that means there would need to be a lockup of some sort for the existing investors. But if there is no primary raise, then you would need some shares to trade, so maybe you let some of the existing cap table off of lockup on the direct listing and the rest over time.

I suppose this has been done before. If that is true, then there is a history of prior listings to look at to understand how this is done and how it worked. But as I said earlier in this post, I am super interested in this idea and I would like to see some big companies that don’t need capital but want a public stock try this.

Stocktoberfest East

My friend Howard Lindzon, who I met on this blog something like twelve years ago, runs an annual conference for fintech entrepreneurs and investors called Stocktoberfest.

Yesterday he hit me up on sms and told me they are doing Stocktoberfest East in NYC next week on March 29th and 30th. He asked me if I would do a chat with him. I told him that I’m not that interested in stocks but super interested in digital assets, cryptocurrencies, blockchain, etc. So we are going to do a 30min chat and I’m calling it Cryptoberfest.

My vision for this talk is a completely unprepared and unscripted talk between two old friends about all the amazing things happening in crypto land these days. It should be fun. If you want to attend, you can get a ticket here.

Numeraire

Late last year, USV invested in Numerai, a hedge fund that uses data scientists all around the world to “crowdsource” stock price predictions. I blogged a bit about Numerai then.

If that business model wasn’t cutting edge enough for you, the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other.

When I read the Numerai blog post about Numeraire yesterday, I tweeted this out:

This is all pretty out there stuff in a world, hedge funds, that has more or less done things a certain way for the last thirty years. I’m not saying hedge funds haven’t innovated, they certainly have, but I don’t think anyone has attempted to change the behavioral economics that underpin hedge funds in quite the same way that Numerai has. It is, if nothing else, a fascinating experiment that will tell us a lot about crypto-tokens, machine learning, and behavioral science.

I must admit that some of this is over my head. I’ve read the Numerai blog post as well as the Forbes and Wired posts several times now and I am not sure if I could explain all of this perfectly at a dinner party. But I am super excited that USV has invested in this audacious experiment and I look forward to seeing how it all pans out.

Tucows

Reblogging from USV.com today:

Union Square Ventures has made a substantial investment in Tucows, a 23 year old company company that has been publicly traded for over 15 years. Since we have never before invested in a public company, that requires a bit of an explanation.

All of us at USV feel fortunate to have participated in the wave of innovation unleashed by the open Internet. That innovation is now threatened by consolidation at the application layer and the access layer. Watching football over the weekend and seeing every carrier advertise video and music services on national television that don’t count against your data cap punctuated, for me, the end of the era of permissionless innovation that gave rise to Twitter, Tumblr, Etsy, and Kickstarter. As Fred pointed out  when large companies can pay to play, start-ups ability to reach consumers has been seriously compromised.

We are investing in Tucows because we believe they have built a great business, but also because they have been a stalwart defender of the open Internet. We are excited to be working with them now because they are challenging the incumbent access providers and the conventional wisdom, by building modern fiber networks in local communities across the U.S.. They are doing this at a time when telephone and cable companies are exploiting their natural monopolies in these communities, underinvesting in their outdated networks, raising prices and using the excess profits to buy back their stock, and buy their way into global entertainment businesses, pleasing shareholders but doing nothing for the communities they serve.

Tucows is doing the exact opposite. They are using hard won profits from the competitive wholesale domain name business to invest in modern fiber networks in cities like Charlottesville VA, Holly Springs, NC, and Centennial, CO. They believe, as we do, that, a modern communications infrastructure is the most important investment any community can make to expedite the transition from a 20th century economy based on undifferentiated manufacturing to a 21st century economy based on highly specialized manufacturing and services.

While they are at it, Tucows is exploding the myth propagated by the cable and telephone companies that the only way to finance a fiber network is to return to the gatekeeper model of the cable industry where the network build is subsidized by fees extracted from content providers in exchange for access to consumers. Tucows is committed building open networks that offer unfiltered, unthrottled, and unfettered access to consumers.  Open networks preserve the defining feature of the open Internet, permissionless innovation. It is that feature that ensures applications layer services have the freedom to innovate. More importantly, without open access to the Internet, no community can protect the economic, political, or personal freedom of their citizens. And without those freedoms, communities will have little chance to successfully manage the transition to a modern 21st century economy. Individuals in these communities will need unfettered access to knowledge to retool their skills for the new opportunities. Gig workers will need to access multiple platforms to optimize the return on their labor. Specialized manufacturers will need to fit seamlessly into global supply chains. All of this will need to happen quickly if we are to minimize the economic dislocation these communities are already grappling with. None of this will happen, if access to the Internet is mediated by vertically integrated global conglomerates.

The cable and telephone companies would like us to believe the open Internet is threatened by over reaching government regulation. In fact, it is threatened by crony capitalism. Instead of investing in local communities, the incumbents deploy thousands of lobbyists to argue that communities should not be able to invest in their own future. We are thrilled to be working with Tucows, because instead of lobbying Washington, to prevent competition, they are actively investing in fiber networks, the critical 21st century community infrastructure, and while they are at it, proving that investing in community fiber networks is a great business.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.