Posts from stocks

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telephone and cable companies are exploiting their natural monopolies in these communities, underinvesting in their outdated networks, raising prices and using the excess profits to buy back their stock, and buy their way into global entertainment businesses, pleasing shareholders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.

What Did And Did Not Happen In 2016

As has become my practice, I will end the year (today) looking back and start the year (tomorrow) looking forward.

As a starting point for looking back on 2016, we can start with my What Is Going To Happen In 2016 post from Jan 1st 2016.

Easy to build content (apps) on a cheap widespread hardware platform (smartphones) beat out sophisticated and high resolution content on purpose built expensive hardware (content on VR headsets). We re-learned an old lesson: PC v. mainframe and Mac; Internet v. ISO; VHS v. Betamax; and Android v. iPhone.

And Fitbit proved that the main thing people want to do with a computer on their wrist is help them stay fit. And yet Fitbit ended the year with its stock near its all time low. Pebble sold itself in a distressed transaction to Fitbit. And Apple’s Watch has not gone mainstream two versions into its roadmap.

  • I thought one of the big four (Apple, Google, Facebook, Amazon) would falter in 2016. All produced positive stock performance in 2016. None appear to have faltered in a huge way in 2016. But Apple certainly seems wobbly. They can’t make laptops that anyone wants to use anymore. It’s no longer a certainty that everyone is going to get a new iPhone when the new one ships. The iPad is a declining product. The watch is a mainstream flop. And Microsoft is making better computers than Apple (and maybe operating systems too) these days. You can’t make that kind of critique of Google, Amazon, or Facebook, who all had great years in my book.
  • I predicted the FAA regulations would be a boon to the commercial drone industry. They have been.
  • I predicted publishing inside of Facebook was going to go badly for some high profile publishers in 2016. That does not appear to have been the case. But the ugly downside of Facebook as a publishing platform revealed itself in the form of a fake news crisis that may (or may not) have impacted the Presidential election.
  • Instead of spinning out HBO into a direct Netflix competitor, Time Warner sold itself to AT&T. This allows AT&T to join Comcast and Verizon in the “carriers becoming content companies” club. It seems that the executives who run these large carriers believe it is better to use their massive profits in the carrier business to move up the stack into content instead of continuing to invest in their communications infrastructure. It makes me want to invest in communications infrastructure honestly.
  • Bitcoin found no killer app in 2016, but did find itself the darling of the trader/speculator crowd, ending the year on a killer run and almost breaking the $1000 USD/BTC level. Maybe Bitcoin’s killer app is its value and/or store of value. That would make it the digital equivalent of gold and the likely reserve currency of the digital asset space. And I think that is what has happened with Bitcoin. And there is nothing wrong with that.
  • Slack had a good year in 2016, solidifying its position as the leading communications tool for enterprises (other than email of course). It did have some growing pains as there was a fair bit of executive turmoil. But I think Slack is here to stay and I think they can withstand the growing competition coming from Microsoft’s Teams product and others.
  • I was right that Donald Trump would get the Republican nomination and that the tech sector (with the exception of Peter Thiel and a few other liked minded people) would line up against him. It did not matter. He won the Presidency without the support of the tech sector, but by using its tools (Twitter and Facebook primarily) brilliantly.
  • I predicted “markdown mania” would hit the tech sector hard and employees would start getting cold feet on startups as they saw the value of their options going down. None of this really happened in a big way in 2016. There was some of that and employees are certainly more attuned to how they can get hurt in a down round or recap, but the tech sector has also used a lot of techniques, including repricing options, reloading option plans, and moving to RSUs, to mitigate this. The truth is that startups, venture capital, and tech growth companies had a pretty good year in 2016 all things considered.

So that’s the rundown on my 2016 predictions. I would give myself about a 50% hit rate. Which is not great but not horrible and about the same as I did last year.

Some other things that happened in 2016 that are important and worth talking about are:

  • The era of cyberwars are upon us. Maybe we have been fighting them silently for years. But we are not fighting them silently any more. We are fighting them out in the open. I suspect there is a lot that the public still doesn’t know about what is actually going on in this area. We know what Russia has done in the Presidential election and since then. But what has the US been doing to Russia? I would assume the same and maybe more. If your enemy has the keys to your castle, you had better have the keys to their castle. And as good as the Russians are at hacking into systems, the US has some great hackers too. I am very sure about that.  And so do the Chinese, the Israelis, the Indians, the British, the Germans, the French, the Japanese, etc, etc.  This feels a bit like the Nuclear era redux. Mutually assured destruction is a deterrent as long as both sides have the same tools.
  • The tech sector is no longer the belle of the ball. It has, on one hand become extremely powerful with monopolies, duopolies, or nearly so in search, social media, ecommerce, online advertising, and mobile operating systems. And it has, on the other hand, proven that it is susceptible to the very kinds of bad behavior that every other large industry is capable of. And we now have an incoming President who doesn’t share the love of the tech sector that our outgoing President showed. It brings to mind that scene in 48 Hours where Eddie Murphy throws the shot glass through the mirror and explains to the rednecks that there is a new sheriff in town. But this time, the tech sector are the rednecks.
  • Google and Facebook now control ~75% of the online advertising market and almost all of its growth in 2016:

  • Artificial Intelligence has inserted itself into our every day lives. Whether its a home speaker system that we can talk to, or a social network that already knows what we are about to go out and purchase, or a car that can park itself and change lanes on the highway automatically, we are seeing AI take over tasks that we used to have to do ourselves. We are in the age of AI. It is not something that is coming. It is here. It may have arrived in 2014, or 2015, but if you ask me, I would put 2016 as the year it had its debut in mainstream life. It is exciting and it is scary. It begs all sorts of questions about where we are all going in the next thirty to fifty years. If you are in your twenties, AI will define your lifetime.

So that’s my rundown on 2016. I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

If you are in need of a New Year’s Resolution, I suggest moving to super secure passwords and some sort of tool to manage them for you, using two factor authentication whenever and wherever possible, encrypt as much of your online activities as you reasonably can, and not saying or doing anything online that you would not do in public, because that is where you are doing it.

Happy New Year!

Selling

I think selling is the hardest part of investing. Buying is, of course, critical to generating strong investment performance. Figuring out what to buy and when to buy it is what most people think of when they think of investing. But your returns will have as much to do with selling as buying. And buying is a fairly rational decision. Selling tends to be emotional. And that is why selling is the hardest part of investing.

In venture capital, thankfully, VCs don’t drive a lot of the sell decisions. I wrote about that back in 2009. Most sell decisions that really matter in a venture portfolio will be made by the founders and management of the portfolio company, including the timing of the public offering if that is where a company is headed.

But even so, I have struggled with the sell decisions, both personally and professionally, over the course of my career. I have held on way too long and watched a publicly traded stock literally go all the way to zero without selling it (ouch). And I have made the even worse decision of selling too soon and watching a stock go up three, four, five times from where I sold it.

So where I have landed on selling is to make it formulaic.

If we (USV) have to make a sell decision, we like to have a policy and stick to  it. We like to distribute our public positions as soon as we can, for example. That’s a policy and we stick to it. If you look at the SEC forms we have filed as a firm over the years, you can see that is what we do. It is a formula. It doesn’t mean that it is the right decision in each instance, but it does mean that, if we stick to it, we will do the same thing every time and the law of averages will work things out. We also let the people we work with know that is our policy so they are not surprised by it. What is worse is to make each decision emotionally and get them all or most of them wrong.

Personally, I like to dollar cost average out of a stock (sell a position over time instead of all at once) and I also like to hold onto some of the position for the very long term (schmuck insurance). I have a formula for the disposition of public stocks I get via distribution from USV and the other VC funds we are invested in. We execute the formula time and time again. It takes the emotion out of the decision and it works better for us.

The thing I have learned about selling is that it is almost impossible to optimize the sell point. You need a crystal ball and you need to know something that others don’t know. That is either impossible or criminal. So I don’t try to optimize it. I try to make it formulaic and systematic. It works better for me and I think it may work better for you too.

In Defense Of Bubbles

There is nothing the tech media and the broader press likes to ask me about more than bubbles.

“Is Snapchat a bubble?”

“Is Uber a bubble?”

“Is Facebook a bubble?”

“Is seed investing a bubble?”

“Is growth investing a bubble?”

And on and on and on.

It’s like bubbles are a disease that we need to eradicate.

Don’t get me wrong. Bubbles are something investors need to be careful with. You can make money on the way up but lose it all on the way down. I’ve done that. It hurts.

So at USV, we are careful to invest early in cycles and get defensive later in the cycle and take profits when they are available. If anything, I think we have been too conservative in this regard.

However, as I pointed out in a conversation with my colleagues yesterday, bubbles are a necessary part of any technology cycle, large or small.

Carlota Perez talks about this in her seminal book on technology cycles, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.

But maybe the best thing written on this topic is my friend Tom Evslin‘s blog post from January 2005, when the investment world was just waking up to the fact that the Internet bubble wasn’t the end of things, but just the beginning. I particularly love how he ends that post:

Historically, the results of bubbles have usually been more empowerment for more people.  Historically, bubbles have provided an explosion of funds which blasted away the entrenchments of an old oligarchy not only to the benefit of entrepreneurs but also to the benefit of consumers in general.  Think of the constantly falling price of transportation and communication.

If we should find a way to stop bubbles, if we were to put the genie of irrational exuberance back in the bottle, the winners will be whoever are the incumbents at the time and the losers will be all those who could benefit from another great breakthrough in infrastructure like railroads, canals and the Internet.

Bring on the next bubble.  And invest in it at your own risk. I will.

Generally Accepted Accounting Standards (GAAP)

I understand and appreciate the need for rigorous accounting standards and I appreciate that our financial system and our capital markets in the US enforce the use of generally accepted accounting standards (GAAP) for the reporting of company financial information. Without standards rigorously applied, investors would not be able to understand what is going on in the companies. That would be awful.

But when I read Gretchen Morgenson’s recent article in the New York Times accusing companies of “spinning losses into profits” my eyes rolled.

The truth is the the accountants who run the accounting standards have forced companies into reporting their financials in a certain way that neither the companies nor the sophisticated investors who own many of these companies’ shares believe accurately represents the financial condition of the reporting companies.  Gretchen quotes this stat in her piece:

According to a recent study in The Analyst’s Accounting Observer, 90 percent of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72 percent in 2009.

That sure feels like the market speaking. When 90% of your customers order the scrambled eggs differently than you normally serve them that tells you something.

My pet issue is stock based compensation. When a company issues options to an employee, accounting standards require that the option be valued (usually by a formula called Black Scholes) and expensed over the vesting period. That sounds reasonable. But the truth is that that option may end up being worth nothing. Or it may end up being worth 10x the value that it was expensed at. By taking out the stock based comp expenses and reporting an “adjusted EBITDA” number that does not include it, companies are giving investors an idea of what the earnings power of the company is without this theoretical expense. And that stock based compensation expense is a non-cash expense meaning that even though it theoretically costs the company something, it is not paid in cash but in dilution of the total number of shares outstanding.

This is not a cut and dried issue. Different investors will approach it differently depending on whether they care about cash flow, long term dilution, or something else. But the accountants who control the accounting standards board require a certain way of presenting these numbers and that is that.

So investors and the reporting companies offer other ways of looking at these accounting issues. That is not bad. That is not spinning. That is transparency and it is good.

The IPO Standoff

The NY Times suggests that the reason there have been no tech IPOs in the past quarter is that the tech sector is having a “standoff” with the public markets.

The logic goes like this:

  • many of the tech IPOs that happened in 2015 are now underwater so public market investors are tired of losing money on IPOs
  • the prevailing valuations that exist in the private markets are higher than comparable companies in the public markets
  • it is relatively straightforward to raise capital in the private markets using convertible debt or other structures that are driven off the eventual IPO price

So why rush to the public markets now when you would be forced to take a lower valuation than you could get in the private markets and maybe a lower valuation than you got in your last round?

Eventually someone is going to blink. If the public markets wait long enough many of these IPO price driven structures will force the companies that issued them to go public and “price their stock.” You can only kick the can down the road for long enough.

I do think this “standoff” could go on for a while longer, maybe for most or all of this year. Unless a courageous company or two decides to go public regardless of price, gets the capital and liquid stock that comes with the IPO, and shows that you can in fact do well as a public company.

I am hoping for that latter scenario to play out. I think its better for everyone than the standoff we are having now.

The Twitter Contradiction

So everyone around here knows I’m bullish on Twitter and we own a lot of stock. So take all of this in that context please.

I just don’t understand the narrative around Twitter. “It is in trouble. It isn’t growing. It’s time has come and gone. The kids all use Snapchat and Instagram.”

That last part is true, to a degree. But it isn’t as simple as that.

The presumptive Republican nominee for President of the United States has largely conducted his campaign on Twitter and in massive public appearances that feel like rock concerts. He has avoided the traditional media channels and taken his message direct to the people on Twitter. Not on Facebook. Not on Instagram. Not on Snapchat. Not on Pinterest. Not on his website or mobile app. On Twitter.

My brother in law and I watched the best basketball game of the year so far on Saturday night. Steph Curry was unreal. And he won it with a few seconds left in overtime with a bomb from something like 40 feet that everyone knew was going in. And what happened next?

This:

And this:

And this:

Steph’s opponents expressed their appreciation for what he is doing on Twitter in the moment. Not on Facebook. Not on Instagram. Not on Snapchat. Not anywhere else. And you don’t have to be on Twitter to see that. You can see that here and many other places.

Here’s the thing about Twitter. You don’t need to be logged into Twitter to see these tweets. You can see them on Twitter logged out. Or you can see them embedded in other places on web and mobile or on TV and elsewhere. You only need to be logged into Twitter to tweet.

So anyone who is focusing on the logged in monthly active user number is missing something bigger. Twitter is where people who have something to say go to say it. And right now we are witnessing Twitter being used for what is arguably the biggest thing out there. A run for President of the United States.

That is the contradiction of Twitter.

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.