Posts from 2010

Top Records of 2010

This has been a tradition since I started this blog. While I have moved all of my music blogging to my tumblog and fredwilson.fm, I've continued to do a year end roundup on this blog. I used to do a top ten and I would post every day for ten days (sometimes eleven or twelve days), but I collapsed that to one post a few years ago. I'll do that again this year. Here are the records I enjoyed the most this year:

Sir Lucious Left Foot - Big Boi – This record is so much fun. In classic Big Boi/Outkast fashion, it combines hip hop and R&B into something unique and special. It's my favorite record of the year.

Brothers - Black Keys – I think this is the best record yet from the awesome blues rock duo from Akron Ohio. It was a close runner up for record of the year.

Teen Dream – Beach House – Beach House's dreamy music held sway in our home all year long. If you check out my last.fm profile, you'll see that this record got more listens in our home than any other this year.

Gorilla Manor – Local Natives – My favorite new band of the year, this indie rock band from LA has a great sound combining cool afro guitar and excellent harmonies.

Down By The Way – Angus and Julia Stone – We discovered this brother and sister duo from Down Under late in the year, but even so, this record was the eighth most listened record all year with only about six weeks of air time. It became our standard morning music late in the year.

My Beautiful Dark Twisted Fantasy – Kanye West – @kanyewest got on twitter and got his mojo back and this record is on non stop in our family right now. This is another record that was in the top ten in listens this year with only a few weeks of air time.

The Wild Hunt – The Tallest Man On Earth – The "Swedish Bob Dylan" put out a great record that was another our morning music standbys.

This Is Happening - LCD Soundsytem – The Gotham Gal wasn't a fan and wouldn't let me play this much until she saw them live at ACL. After that, this record got more rotation. This record is pure fun, perfect for getting your energy up for a late night or anything else.

The Lady Killer – Cee Lo Green – Almost perfect soul and R&B from the current master of the genre. 

The Suburbs – Arcade Fire – This was a hard choice as there were really solid records from some of our favorites this year. But on the strength of the outstanding Sprawl II, I am making this one my tenth and final top pick.

Other favorites – Come Around Sundown – KOL (Gotham Gal loves this record), Write About Love – Belle and Sebastian, High Violet – The National, Broken Bells – Broken Bells, Recovery – Eminem, Sigh No More – Mumford & Sons.

Mixtapes – All Day – Girltalk, I Am Taylor Gang – Wiz Khalifa, Vizzy Zone – XV

For the next ten days, until the end of the year, I will feature a track from one of my top ten records on fredwilson.fm and fredwilson.vc. Check them out if you want to sample some of this music.

Buying and Selling Assets

MBA Mondays are back after a week hiatus. We are several posts into a series on Merger and Acquisitions. In our last post, we talked about the key characteristics of mergers and acquisitions. And we touched on the two kinds of purchases, the asset purchase and the company purchase. Today I’d like to talk about the asset purchase.

As I said in the prior post, a buyer can either purchase the entire company or the buyer can purchase select assets and assume select liabilities. This kind of transaction is known as an asset sale.

Asset sales can happen as a partial exit or a complete exit. In the partial exit, a company transfers certain assets and certain liabilities to another company in exchange for some consideration, and then continues operating as a going concern. In the complete exit, the company transfers all of the assets and liabilities that the acquirer is interested in and then winds down the company and settles all remaining liabilities and then liquidates.

In the partial exit, the asset sale is a desirable transaction. It is the way that many spinoffs are done. Many companies will build or buy themselves into a diverse set of operating businesses and they ultimately realize that the business has gotten too complex to operate or too complicated to explain to investors. They can simplify their business by spinning off, selling, and otherwise exiting some, but not all, of their businesses.

In the complete exit, the asset sale is often an undesirable transaction. If there is not going to be an ongoing business left after the sale transaction, it is most often best to get the purchaser to take all the assets and all the liabilities via a company purchase. 

The asset sale allows the purchaser to “cherry pick” the desirable assets and take on the liabilities they are comfortable with and leave the seller with undesirable assets and remaining liabilities. The seller then has to unwind what is left and liquidate the company. The seller may have to use some or all of the consideration that was given (cash or stock) for the desirable assets to settle the remaining liabilities. The seller cannot liquidate the business and take out the consideration before settling with the creditors. If the liabilities are larger than the consideration obtained, a bankruptcy or some other settlement procedure with creditors may be necessary.

The asset sale may also be undesirable for tax reasons. In a company purchase, the acquirer purchases the stock from each of the stockholders and takes control of the entire business. The stockholders get a capital gain, either short term or long term depending on the length of time they held the stock. In an asset sale, the consideration goes into the seller’s company and is used to settle liabilities and wind down and liquidate. Any remaining cash after all that will be distributed out in a liquidating distribution. There may be taxes to be paid at the company level on the sale transaction which will further eat into the proceeds which can be paid out. And there is the possibility of taxation of the liquidating distribution depending on what kind of business entity the seller was operating. That is called “double taxation” and you want to avoid that in an acquisition transaction.

There may be times when an exit is best done via an asset sale. I can imagine a set of circumstances where it might actually be desirable for a seller to do that. But those circumstances are not very common and it is generally true that if you are looking to exit a business, you want to do it via a company purchase transaction, not an asset sale transaction.

If you are the acquirer however, asset purchases can be very desirable. They allow you to avoid liabilities you don’t want to take on and cherry pick the assets you want. 

In my experience, asset sale transactions are generally done in “fire sale” situations and company sale transactions are generally done in all other M&A transactions. At least that is how I’ve seen it done in venture backed technology companies.

Next week we will talk more about the company sale transaction.

 

Nexus S Review

Nexus s Last week I got a Nexus S to replace the Nexus One that I have been using for the past year. I love my Nexus One and was hesitant to replace it but the Nexus S looks like the exact same phone, just better, so I went for it.

As I was installing the basic apps (Twitter, Foursquare, Facebook, Kik, Tumblr, GetGlue, Yelp, Flickster, etc) on the phone last week, I tweeted that I love the new Twitter Android client on the Nexus S. I got a bunch of replies asking for a review of the Nexus S. So here it goes:

The physical in-hand experience is not much different but slightly better than the Nexus One. The phone is plastic instead of metal (which I like surprisingly), the screen is crisp and bright, the phone is very light, and feels great in the hand. The case is very slightly curved and this makes a small but noticeable improvement in the in-hand experience. 

The camera is terrific. The Android 2.3 build comes with new and improved camera software. I am still figuring out all the features but it can do a lot more. The Nexus S has a back and front camera. It’s fun to take pictures that include the photographer in them and the front camera makes that so much easier. I am on my way to a family vacation and I didn’t bring another camera so all my pictures will be taken with the Nexus S camera. I’m not the least bit concerned about that.

It is still a bit too early for me to talk about battery life. I always carry a spare battery for my Nexus One and once or twice a week I had to do a swap intraday. I don’t have a spare for the Nexus S with me on this trip so that will be a big test of its battery life. But so far in the few days I’ve been using it, I’ve not run out of battery so I am cautiously optimistic. 

The Nexus S is fast, significantly faster than the Nexus One. I feel the speed most in the browser, but I also feel it loading and running apps and generally moving around the phone. I am really enjoying using this phone and I think it has a lot to do with the speed.

I don’t notice any difference in voice utility or quality between the Nexus One and the Nexus S. I don’t use voice that much anyway, but when I do, it works fine. I am running the Nexus S on T-Mobile, which is the wireless carrier I’ve used for almost fifteen years, and the T-Mobile voice service is not Verizon quality. But I have lived with it and the Nexus S does just fine voice calling for me on T-Mobile.

The touch keypad is a significant improvement over the Nexus One. The four main buttons at the bottom of the phone are also a major improvement over the Nexus One. The haptic feedback works better on the Nexus S. These issues, keypad, buttons, and haptic feedback are probably my biggest beefs with the Nexus One and they really fixed them on the Nexus S.

The Android software keeps getting better and better. It is not as simple and easy to use as iOS. But once I figured out the quirks in the UI, I’ve come to like it very much. The Android app ecosystem has developed very nicely in the past year and most apps I want to use are now available on Android. Purchasing apps on the Android is not as simple as iOS, but I’ve got my credentials stored with Google and once you do that, it’s not a terrible experience.

All in all, the Nexus S is as close to an iPhone experience on Android as you can get. And the phone can be used on any GSM network you want. I just popped in my T-Mobile SIM card and I was off to the races. I also like that all I needed to do to get mail and calendar and contacts working was login with my gmail credentials. It all happens over the air. There is no need to sync an Android phone with a computer. It’s mobile to cloud and bypasses the PC altogether. That feels like how phones should work these days.

If you can deal with a touchscreen phone and are looking for an alternative to iPhone, then I think the Nexus S is an ideal phone for you. It sure is for me.

Out Of Office Away Message

I just turned on my vacation message on gmail. The Gotham Gal and I are off to the middle east with our kids for the next week and a half.

I love blogging when I am on vacation. I get up earlier than everyone else in my family so it's a time when I can relax and put thoughts down on paper (or web page as it were).

So the posts will keep coming and I'm hoping I can do some deeper dives than I've been able to do recently. The Gotham Gal is the travel blogger in our family so if you are interested in what we are doing and where we are going, check out her blog starting Monday.

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Etsy Taste Test

I spent some time this morning playing around with an "experiment" our portfolio company Etsy has launched on the web. It is called the Etsy Taste Test.

It looks like this:

Etsy taste test

The idea is you click on stuff you like and Etsy builds a "taste map" for you. The end result is a set of recommendations for you. As Etsy has grown, the "discovery problem" has become an issue. Etsy has a bunch of stuff coming out to address that issue and this is an example of one of them.

Give it a try and let me know what you think.



Something I Want To Be Able To Do

I love coming across a quote, a tweet, an image, a video, a link and being able to quickly share it with my friends on Facebook or my followers on Twitter and Tumblr. Its a big part of what I do on the web everyday.

I listen to a lot of music. In our car, in our home, in cafes and bars and restaurants. I want to be able to take out my phone, shazam the music to identify it, get the mp3, and post it to fredwilson.fm and possibly some or all of the social services I use. And I want to be able to do that as easily and quickly as it is to use Instagram.

I am in my car listening to SIRIUS XMU and I've heard three tracks in the past ten minutes I would do this with.

I know there are rights issues standing in the way of something like this. But more and more artists, particularly the emerging artists I hear for the first time when I am out and about, are posting their music to services like Soundcloud.

I don't know if Shazam and like services have APIs but I know that Twitter, Tumblr, Facebook, and Soundcloud do. It might be possible to build this. If you do, I will be your first user (if you build it for Android).

And yes, I did write this blog post on my Android in my car listening to music waiting to pick up my son.

Doubling Down On The Overpay

One thing I've seen many VCs do wiith their initial investment in a company is invest more when the valuation gets expensive. They are ownership driven, not valuation driven. So if they originally wanted to invest $4mm at a $20mm post money valuation and buy 20% of the company, they talk themselves into investing $8mm at a $40mm post money valuation so they can still buy 20% of the company.

I have never liked this approach. When the price of an initial investment goes up, I prefer to invest less, or nothing at all. Investing nothing at all is a fairly obvious approach when the price gets beyond your comfort zone. Investing less is not as obvious.

My rationale for investing less has to do with the fact that most venture investments involve multiple rounds. If you believe there will be additional opportunities to invest in the company and you really want to be involved, then you can invest less and reserve more funds to invest later in hopes that the risk reward of the investment improves. Since you will be an investor in the company, you will be shown those opportunities before or at least alongside new investors in future rounds.

Investing more when the price is too high makes no sense to me. If you are overpaying by 2x, doubling down feels like overpaying by 4x.

I think the root of this "doubling down on the overpay" issue is that many VCs manage large funds of other people's money and they really don't care so much about how much they invest in each deal. They are looking to buy large stakes in companies and hope that one or more turns into a big winner.

I try to invest as if I have a fixed amount of capital and it is my own capital (some of it is). I like to think that every investment we make takes funds away from other investments we can make, even though this is not actually true. Our firm could raise more money if we wanted it and needed it. But I think raising larger funds will ultimately lower the returns we can deliver to our investors and we have resisted doing that.

So instead of being ownership focused, I prefer to be valuation focused. And the key figure I look at is average valuation of our entire investment. We take the total amount of capital we have invested in a company and divide it by our total ownership. We like that number to be as low as possible relative to the current value of the business. I believe that is the recipe for the best returns and that is what we seek to deliver to our investors.



A Fun Talk This Morning

I met Scott Kurnit in the mid 90s when I had just started Flatiron Partners with Jerry. He pitched me on the Mining Company. I passed on it. We stayed friends and have both regretted that decision for the past fifteen years. Mining Company went on to become About.com which went public, was sold not once but twice, and has produced many amazing entrepreneurs and manager alums in the NYC tech scene.

It’s fun to think back to those days in 1995 and 1996 when there were so few people working in NYC tech and we had an inkling of what was going to happen. It did happen and NYC is a different place as a result.

This morning at 8:20am eastern I am going to talk to Scott for about 40 minutes at the Paley Center and it will be broadcast live on this URL.

Just think about that last bit “broadcasting live from the Paley Center on this URL.” That says it all. I hope you can log on and join us. It should be fun.

UPDATE:

It was fun. Here’s the video. Also, William provided some cliff notes in the comments.

paleycenter on livestream.com. Broadcast Live Free



In Search Of Open Internet Access

Our regular programming, MBA Mondays, is being interrupted this week for a public service announcement.

The net neutrality debate is front and center again. FCC Chairman Julius Genachowski has announced that he will ask the FCC to adopt rules to protect the open Internet at its open meeting on December 21st. We have not seen these rules. Apparently nobody has outside the FCC. But we have been briefed on them. And we think that with one small tweak they will work well. But without that small tweak, they are problematic. My partner Brad has posted our firm's thoughts on the USV blog.

Back in the 80s and 90s, you could start, build, and invest in cable based services. But in order to get your new company distribution on the cable system, you'd have to go to the cable MSOs and give them free equity in your company for distribution. This mafia style shakedown has not existed on the Internet thank god. And the result is literally millions of web services and trillions of dollars of shareholder value.

That's what this debate is all about. The advent of broadband internet access has resulted in a duopoly in most markets. And the companies that provide you broadband internet access want the ability to "manage their networks." We think it is critically important to set some rules on how they can manage their networks to make sure we don't recreate the cable monopoly on the Internet.

We'd love to have an open and unregulated Internet access market. That will take a lot more competition in the last mile than we have now. We need policies that allow the spectrum and fiber to the home to become available and the capital to get invested in making that happen. Until that happens, we need some rules to keep everyone honest in the Internet acccess market.

The FCC's proposed rules prohibit unreasonable discrimination but don't define what that is. We think they need to go that extra mile so that startups don't end up in expensive lawsuits with monoplies with huge bank accounts.

And we are proposing that the FCC adopts the following language:

A non-discrimination rule that bans all application-specific discrimination (i.e. discrimination based on applications or classes of applications), but allows application-agnostic discrimination.

The logic and reasons behind this approach are laid out in our blog post on the USV blog. If you are interested in this debate, and we think you should be, please go read it.



The Present and The Future (continued)

It's the theme of the weekend. What looks great today may suck tomorrow.

Case in point, Blackberry and their parent company RIM. I was at dinner a few weeks ago with old friends. Both of them carry Blackberrys and they love them. I predicted that they would be using a new device shortly and that RIM would be in deep financial trouble within a few years. They were surpriseed to hear such a negative point of view.

But as this excellent analysis of RIM's business suggests, the present and the future look very different for RIM. The charts in this post come from the post I just linked to. You should read it.

If you look at RIM's financials, everything looks rosy:

RIM revenue and profit
Not only are revenues and profits at an all time high, but so are subscribers:

RIM subscriber growth
But subscriber growth has peaked:

RIM subscriber growth rate
And may be headed into decline:

Future OS plans of smartphone users

It is often the case that on the surface companies can appear to be in great shape. If you just focus on the financial results, you can miss the underlying symptoms of future problems. I've made that mistake many times, hopefully enough times that I will make it less in the future.

What you need to do is peer into the future and try to figure out what is going to happen next. In RIM's case, I sense that a "platform collapse", as the author of the blog post calls it, is a real possibility in the next year or two.

RIM's stock is trading at a PE of just under 12, almost identical to Microsoft's. It seems like the market is well aware that the growth era is over and is counting on a long period of flat growth but strong profits for years to come. A platform collapse is not baked into the market's multiple.

The big platforms out there, Apple, Android, RIM, Facebook, Twitter, etc are powerful but fragile. They need to keep innovating and providing users AND developers real value. As myspace has shown, when platforms stagnate they can easily fall apart and the decline can be fast and devastating.

I think the assumption that tech platforms can stop growing but remain great businesses is flawed in most cases. Maybe RIM can pull it off. Their strong enterprise franchise may make it possible to execute the long fade, but it is also possible that it won't. If you are an investor or manager in a large tech platform, dont' get caught up in the present. Think hard about the future and where the platform is going. That's where the value is.

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