Nobody Is Crying For You When You Are Worth Billions
I did a talk with Bill Werde at Billboard's FutureSound conference a few weeks ago. The entire talk is online (in two parts) here. If you go to 7:45 minutes in on the first video (embedded below) you will get to a conversation about Pandora and Spotify and the royalty negotiations they have with the record labels.
The specific issue we discussed was how can you expect the music industry to feel like they need to improve the economics of a relationship that allows a company to be worth billions of dollars. It's a great point and one that came back to me when I read the Airbnb article in the New York Times yesterday. It was this comment by Janan New, executive director of the San Francisco Apartment Association, that struck me:
I believe that any company that claims that sort of worth [$2bn] should have the social responsibility to disclose what the laws are in the jurisdiction that they’re in. And if they’re not capable of that, then their worth isn’t that high.
This is the new angle of attack from incumbents who don't want to see upstarts change their game. And it is a powerful one. Nobody is crying for you when you are worth billions. So be careful what you wish for and what you disclose.
We have a few companies that have kept their fundraising valuations private, at great difficulty and effort. They have done it for reasons like this. They believe it is nobody's business, other than their own, how they have raised capital.
And that was part of my point in the Billboard talk. Spotify's $3bn valuation and Airbnb's $2bn valuation aren't real valuations. Nobody bought their company for billions in cash. They are simply financings in which money traded hands on terms that spit out those big numbers.
Please excuse a deep dive on something a bit technical here. But I think it is important. When an investor like Fidelity puts tens of millions of cash into Spotify at a $3bn valuation, they are not buying publicly traded common stock that will go up and down with the value of the company. They are most likely (I don't know the terms of the Spotify deal so I am guessing) buying a Preferred Stock that gives them a liquidation preference (their money back or possibly plus some guaranteed return) in the event the company is sold at or below the valuation of their investment. So they are buying a bond plus an option. They are highly confident they will get their money back and they are taking an out of the money option on the upside. And they are very long term holders so they can wait quite a while for the company to be worth a lot more than they paid. The $3bn valuation is nonsense. That's not what they are betting on. They are betting that the company is worth at least its total liquidation preference, which is likely an order of magnitude less, and that it might be worth more than $3bn some day and possibility a lot more.
But of course the record label executives don't care. And neither does a landlord association executive. They just look at the huge numbers and say "fuck that". And I don't blame them one bit. I would feel the same way if I were them.
Here's my point. We, the tech/startup/VC world, are not doing ourselves any favors by bragging about the big valuations we are raising money at. We are in fact doing ourselves great harm. Because it makes us look like spoiled brats who are being fed with a silver spoon. Those inside these companies (Spotify, Airbnb, Square, Twitter, etc, etc) know that is not what is really going on. We know how hard it is to build something really new and different. It is a struggle and nothing comes easy. But it is important to realize how the broader world sees it. And they just see billions. And then you get the attacks that I mentioned above.
Honestly, there isn't much we can do about it. The securities regulations make it almost impossible to hide the terms of financings. And the media pounces on these big financing valuations like a hyena on red meat. But it is worth taking the time to downplay the numbers around a financing and focus instead on what it means (more jobs, better products, financial stability). And maybe the media can help us out a bit too by being intellectually honest what a $3bn valuation really means. That would be really nice. But I am not counting on it.
I am talking out of school here cause this is not my expertise and this is a bit tangential.But, to the public these distinctions are moot kinda. It appears (from a press perspective) that more entrepreneurs are taking money out of these raises so that there is a new class of uber rich, that have built a name but not necessarily a business with any longevity or value.My point is that to the public, big raises, big valuations, big payouts early seem to create new economy that is like a reality TV show to the masses. Out of reach, interesting and pisses you off.Whose to blame? No matter really. The media is not going to change. All we can do is what we do mostly about everything, is just start the change by our own behavior.
Right. The cashing out thing is real and thanks for bringing it up
Somewhat related, and a possible idea for a future post this month: what companies are doing to take advantage of current tax law ahead of its expiration on Jan 1st (pending no fiscal cliff deal). Michael Arrington tweeted about Costco’s special dividend recently ( http://online.wsj.com/artic… ); are any tech companies doing something similar?BTW, the reason I think this is somewhat related is, along with Arnold’s example of insiders cashing out early, this is the sort of thing that can undermine public confidence in business (though Arnold’s example is worse in that it’s only insiders benefiting, whereas in the Costco example at least all public shareholders will collect the special dividend).
i am not aware of any startups doing anything in particular. you might see a flurry of M&A activity before year end though
read my mind Dave, expect to see stake holders liquidating like mad
That is the whole idea. Quick flips, just like the recent real estate bubble..Here’s the problem… I tried for two years to get people to think long term business but they wouldn’t. Every VC I talked to thought it was silly to invest in building a business. They didn’t want to spend a dime to create anything. They just wanted a quick flip. I liked the idea because it makes a quick buck. However, you can’t *forget* about needing *real* businesses in the world!
I have always said it is hard to throw a hard punch when you are slipping around in a pile of your own shit. I’m going to throw out one example, but giving a dividend to common’s and getting a big preference against the commons when option holders haven’t exercised really hurts the option holders.Also there are some laws which need to be there. I live next to a B&B. I support that place. Everybody that sees me stays there, I accomodate the wedding parties by not doing projects or even stopping guys that work for me and paying them when they are during wedding ceremonies outside.I don’t want random people staying next to me with no protections or regulations. My wife shut down a photographer that was doing that.
Agree 100% on the cashing out part. You see a lot of tech entrepreneurs, angels and VCs, living the “newly rich” life on Tumblr, Instagram, etc (we’re not blind, we see your humblebragging). All without really building anything of substance and that’s starting to irk people. I’m not saying some of the wealth is not deserved nor is it ’99 again, but the outlandishness is there in new forms of waste, arrogance, idiotic ideas, focuses on growth instead of business models and longevity, and of course absurd valuations.PS: Love your last point even more about owning your own behavior.
‘humblebragging’…like this. Been looking for a term that articulates this poise of ‘arrogant humility’ that’s a new (and often grating) style.
Wish I could take credit for something so dear to my heart, but alas it’s been around for bit. One of my favorite twitters: https://twitter.com/humblebrag
New-2-me is the same as new. Thanks!
The NY Times had a great bit on humblebragging -> http://www.nytimes.com/2012…
To me it feels much more self indulgent than it did in 1999. Yes we had extravagent dinner clubs in 1999 where we spent obscene sums on food and wine, but we did not live blog them.
True…but then again in 99 or for me earlier, we didn’t have the web actually as we do today.Behaviors have changed along with the platforms that empower them.
What is acceptable has changed. A lot of it feels like the influence of “reality” tv. While the hipster mocks The Real Housewives their behavior is demonstrably influenced by the exhibitionistic example of shows like that.
Yup…the world has evolved and I think it’s more interesting.Through it all though BS and self aggrandizement whatever the form though are still the same.
Love the “reality tv” metaphor.In an important way social media, and the crossover last year to 50% plus of people having mobile/social, creates a visibility now to wealth and the use of it by the wealthy that will ultimately make the world a much better place.The most powerful force in human society has never been codified laws or even police or military authorities and physical force.The most powerful force in human society for good has always been social pressure from peers to “do the thing that most helps the group”,(I.e., peer pressure). Without that we would never have evolved even the most basic clan society much less the global society of 7 billion we have today.Overall public opinion in aggregate form is on its way to becoming a sentient entity that someday will act like a semi conscious give mind of the human race. We are at homo habilis stage of that evolution
Great comment!In my opinion though, social pressure, isn’t the big nudge, it’s tied to an acknowledgement of core similarities across people and cultures. It’s the empathy factor.People stopped eating their neighboring tribes once humanity was seen as more than just in your family, your tribe,…The web has changed the world cause it’s created this empathy handshake across the world if you will. Flattened cross cultural connections are the change agent of the times.My thoughts on this one.
Investor appetite for founder liquidity was scant in ’99
Very true. Founders and employees were not liquid until there was an exit (and the lockout ended) back then.
That was only because we did not have supercomputers that fit in our pockets in 1999. Having been there, I can tell you things were as obscene, if not more so, back then.
you also didn’t have heavy social media back then
I have spent a lot of time in an industry where profits rose fast.It went to people’s heads. It turns out that conspicuous consumption is another full-time job. It takes energy, attention, and effort to worry about your multiple homes. (To take another example, if you are investing with a manager who is spending too much time on his private art collection, that might be a sign too.)More importantly it diverts you from focusing on delivering value to your customer. That industry is starting to suffer because there are too many people like that.Because of my experience in this other industry — where I see elements of that behavior in our ecosystem — I turn away and wonder whether that person can really help us in building something.
True…but we work for money and winning sure is a wonder.I remember when Creative went public ages ago. My team was working for basically nothing, all stretch hires, and seeing people buy cars that actually ran, houses and start families, take on some self assurance that a bit of real cash for the first time brings. Still gives me joy.Wealth is not the issue. Balance is!
“Wealth is not the issue. Balance is!”This is an awesome reminder, thanks. I’m probably going to recycle it a lot.
Wealth is definitely not the issue.One of the great motivations/joys in building a business is creating jobs and wealth for your employees and others in the supply chain or platform.
“All without really building anything of substance…”They are building “ad lines” (not copy). The problem is ad lines aren’t a business in and of theirself. So, people have been investing in a single ad effort instead of a real business. That’s OK if there is one company that owns a bunch of ad lines but when a company only owns one then that’s a problem.
Speaking of cashing out, I got an inch-thick FedEx packet yesterday, from a start-up I worked at 10 years ago. Joined as the company’s first business development hire, brought it its first sales, first partnerships with institutions, etc. Had to exercise my options when I left by buying the stock. The company becaome profitable and grew, but that stock has been dead money for the last 10 years. The packet was the announcement that the company had been acquired along with the assorted legal docs. The big exit! Except, thanks to dilution, my stake is now worth 1.5% less than what I invested 10 years ago.Could have been worse. At least I’m getting most of my money back.
This sounds like a holiday present Dave! Congrats!
Thanks. It’s like finding a twenty dollar bill in the pocket of a jacket you haven’t worn in a long time.
One time I found 120 dollars in my pocket. That was awesome, but kinda scary in that how the f did I leave 120 in my pocket and not know about it.
So you’re the guy who stole my jacket.
Not difficult to understand, Kid. When you write here every day that the currency is practically worthless, your subconscious was a reader and chose to believe you! 😉
It’s the human race I guess…sometimes humans forget the most silliest of things, or even the more serious of things, like leaving a large sum of money in your pocket.
Better than a kick in the ass w a frozen mukluk.
Dinner out tonight kids! 😉
Been there. Done that.
Been there, but my shares were worth less than the selling price, so I got zero. Nice Christmas windfall.
If only there had been a way to hedge yourself against that outcome… 😉
Or a way to figure out my risk fingerprint and how much to invest in it…
Well that sucks, to say the least. I’m still glad that you got most of your money back out of your investments.
If you save that FedEx Letter in which your docs arrived, I’ll bet I can fill five with docs where no result ever occurred. If I do have an ‘event’ someday, I plan to build an extra room in my house titled ‘The ISO Room,’ in the spirit of how some wealthy folks have a ‘Map Room’ in their home.
When I read this article, Uber’s entry to NYC came to mind. Hubris, or naivete?
Anne – I think Über is the most for real of these types. This is a highly scalable low change in behaviour model. Drivers appear to love it too.Have they been ignorant of the prior regulatory framework? Absolutely.But Mr Gates did kinda he same thing and the DoJ came calling. More a misread of the power of incumbent legal hurdles, IMO.
That’s how I’d rather see it!
great way to think about it James
There is a long list of incumbents who have used the strategy “fuck the law” ill pay the fine down the road; If you believe that this isn’t part of business, I’ve got a loft to rent to you with the best views in NY: the brooklyn bridge.
I don’t have a personal relationship with any of your long list, but a lot of them share a personality type that is totally aligned with your comment. +1.It is a view that asks ‘what is the downside?’, comes up w the answer ‘success w static ‘ & decides NP,
the difference here is that in the traditional “fuck the law”, the company is taking on the risk. in most of the collaborative consumption cases, they are putting customers at legal risk. that’s a very big difference.
thats a really good point – and like the NYT article discusses – if you read and analyze this stuff too much you’ll never open for business.Another reason why successful bigcos just can’t create new many new businesses >> legal departments who are paid to “worry” about these things would have a fit.
Interestingly, Nassim Taleb often references taxi drivers as an example of an “antifragile” profession, while saying financiers are “fragile”.
The public sees only the billions associated with new companies valuations, the cash taken out by founders and the disappearance shortly afterwards or tanking of those companies. They look at their own financial struggles and think this is some kind of con.
There has alway’s been ‘us’ and ‘them’.Coming from the lower middle class, baby boomer generation, we were taught to just work hard and never take anything from anyone. Good values.There was always the other, the rich, the generational wealthy. The ‘them’.What I love about the entrepreneurial culture is that this line is not there. Anyone can do it, can aspire towards it. These are great values.The early flaunting cash out, ‘It-entrepreneur’, what’s his name co founder of Facebook who gave up his citizenship (?), are what the public sees. They separate not connect. They create clubs not culture.
To be fair to Eduardo Saverin he was born in Brazil and grew up there. But again, details.
Take the money and run is what carpetbaggers have done forever.I’m all about the ‘pay window’ as much as the next person.Edit….actually I am judging him. It is what it is. Citizenship not place of birth is the criteria here.
Great point Arnold. From an outsider perspective these valuations certainly appear hyper inflated and founders are diversifying earlier. It’s an uphill battle to communicate that valuations don’t equal cash. The only way around signaling massive equity is alternative financing (good ole fashion loans), but other financing is much less patient than equity pros.
But the valuations do equal cash for some
Yes, I agree. The emphasis on wealth is totally out of synch with what is happening with global recession, the decline of the US middle class, environmental problems tied to unsustainable consumption levels, and so on. The tech wealthy don’t come across as much different than the uber wealthy in decades gone past. They don’t appear to have any connection to the life that most people in the US and around the world actually lead. And if this image is based on fake financial numbers, all the worse. More examples of Wall Street games rather than real value.
I feel the need to temper what you say somewhat.There is give back for certain. I see the huge rise in seed funding and the splash of incubators and accelerators as real upside. I see the push towards investment in education, hardly an accelerated payback sector also as fiscal altruism of sorts.But mostly, the fact that today being an entrepreneur is a legitimate job description even without a win is a dramatic and pervasive cultural change. This change stemmed from an embrace of the entrepreneur from the mostly tech investment world.
“I see the huge rise in seed funding and the splash of incubators and accelerators as real upside.”But it is an echo chamber of sorts. The seed funding often does not go to innovations we need. The world could use more innovation in energy, health care, and so on.
I get what you are saying of course but I’m an optimist based on the dramatic changes that have occurred.Three years ago how many people were talking about hacking education? Lots’ are now. Kickstarter is funding dreams. And even though certainly health care is a mess, it is better. Nutritionists are more and more part of health coverage, doctors are available through email, records are digital.Small steps but steps nonetheless. I think that these huge structures like healthcare and energy will take shattering from below in order to change.But…no nothing about funding honestly outside of tech.
I’m a big fan of the shareable movement, the P2P Foundation, the solidarity economy, Occupy Wall Street, and so on. These developments have been facilitated by networking and will transform the global economy as profoundly as the Industrial Revolution. But the goal is to increase grassroots participation, remove the need for global multinationals, and in the process, make Wall Street financing unnecessary. So the result will be very disruptive to massive accumulation of wealth. Those who represent it will be out of sync with these developments. I am far more interested in the tiny house movement and less consumption than I am in who has amassed the most money and tools.For anyone to aspire to creating the next Google, Apple, Facebook, Amazon, or whatever, that goal is in itself too much about money and concentrated power. The tech elite merely replaces the previous generations of elites.
I think that’s a valid point, and it reminds me of a blog post I read entitled “Stop asking ‘But how will they make money?'” andrewchen.co/2012/05/30/st…The point of the post is to say that if you can get enough users, you don’t need to worry about a business model or making money (“business models are commodities”), with the implication that users leads to value (or at least valuation, FB-style. I am sure there is some truth to that (vis-a-vis ‘large networks of engaged users’), but it makes me think it might be part of the issue, that those approaches can create an outsized valuation without creating much actual P&L value. In addition to what Fred talks about above, could this be adding to it?
Don’t know….There number magic to large nets of course but the size of these nets and the size of the valuation is not the issue. It’s what you do with them and your poise around them that matters.I’m certain that in Fred’s series on revenue models we’ll address the monitization of nets. I’ll hold till we get there.
Many times VC’s benefit from the disclosure of these valuations, too, because they want to market their next fund. (Often with IRR’s of 100’s of percent, based on these lofty but unrealistic valuations.) We are increasingly going to see some down rounds with the maturation of consumer and series A, B, C crunch. Zynga at one point was (may still be) trading below two of its most recent private valuations.What is sadder still is that LP’s typically believe them. Many of the so called bubble funds of the late 90’s that did not return invested capital, sported nosebleed interim IRR’s.Often times, these reporters are responding to the PR folks hired by the VC’s. I was recently surprised to find a so called top-tier firm hiring a PR agency to pump their partners and investments in TV and print.
you can only play that game so long before you are found to be the emperor with no clothes
that day may be coming soon
true — but unfortunately “so long” is literally, decades.
Fred, agreed and well said. Two comments. First is that secondary sales certainly take advantage of those big valuations – to the employees and early investores who sell shares at those prices, those valuations ARE what the company is worth to them (pro rata at least). Second, don’t existing venture investors in a company routinely use the valuations paid recently by new outside investors as evidence of fair value in determining the value of their own holdings for financial reporting – and thus book a big uptick that makes the fund’s performance look better to LPs? So as much as I agree that promoting a company’s valuation isn’t smart for the business, there are incentives for its shareholders to take advantage of the valuations in ways that are at least semi-public.
LPs are sophisticated and don’t put too much stock in unrealized values. nor do we. in many cases, we don’t mark up to the last round price. we will do a comps analysis and mark to what we deem is fair value regardless of a valuation put on a company by a third party
Perception is reality. Unfortunately fed by limited scope of knowledge and less than full information for most.
while I understand the finer points of your post … it still strikes me as ironic that you (and everyone else with financial stakes) are in the game for the billions, you make your investments based on the assumption of billions … yet when people with “opposing” finacial stakes take you up on your game you downplay it.startup evaluations have systemically created an unhealthy disassociation between potential-real value and perceived value (I doubt anyone in the startup-game can even begin to fathom the depth of this disassociation) … and isn’t it natural that exagerated hype is now meeting you face on?get honest. get real.
I accept that criticism
would an open, even voluntary system, where VCs and companies would disclose the size, price etc of rounds, solve this problem? (assuming this could be done)
i would prefer a system where none of this is disclosed so we would focus on the real stuff and not the “noise” around valuations
But doesn’t mystery breed more speculation? If it’s open, then after the novelty of openness wears off, everybody will focus on the real stuff again.
I personally think so. It would take some of the voodoo speculation out of the way. But that same system would need to include company-side disclosures on how they are using the proceeds of these large raises. Maybe anything over a $10 million raise or some number needs to have that type of disclosure.I wouldn’t worry so much about smaller raises. It’s the larger raises that raise the eyebrows.
isn’t it also interesting that this is the point where your support of openness and transparency breaks down?it’s as if this (the financial game) is where something devious is taking place, as if this is where cheating happens in an otherwise open game, as if this is where something different than everything else takes place … something best kept hidden.why is that?
because it is not devious. when a homeowner takes out a mortgage to finance their home, is that devious? when an entrepreneur finances their company, is that devious?
I had to think about that one a bit 🙂 and came to the conclusion that it is a great example … though I can’t (yet) respond directly to your point I can dance with it.To answer your question almost directly (not necessary relating to an entrepeneur trying to build a business) then absolutely YES. The world of business is filled (if not dominated by) outright devious financial manipulations. From my basic understanding a corporation has way more options to manipulate and deviate than an individual would.But I am not sure your analogy is totally legitimate … comparing and individual and a corporation …If I turn your example on itself … the bank that gives a mortgage does not respect privacy (if they are doing their job) … they will demand to see personal financials to assess the risk/safety of the loan … HOWEVER when privacy is given to the banks themselves… well … do we need to look further than the USA and global economic collapse?Honestly, I would have a hard time justifying financial anonymity on any scale … from an individual to a company. I believe that if I can take on a risky mortgage … that risk applies to more than just me … I am part of a social system that in one way or another has agreed to have my back … to take care of me … is society not entitled to know about my risk taking?Why do we hide finances? It is one of the most common-denominator / enablers in modern day societies … yet is is also one of the most kept-in-the-dark secrets out there?Are we hiding finances because we know instinctively that we are doing something wrong? that we are deviating from a moral order of some kind?Can private financial information be used against us (individual or corporate) more dangerously then any other kind of information? If so why does money have such vulnerability built into it?
Not devious, but a mortgage is publicly filed ( in most counties and states if not all).
I think you are confusing investing strategy with competition. Of course, the entrenched companies are going to fight back, wouldn’t you? Usually their method is via regulatory fiat because over time they have used crony capitalism to get regulations that benefit them. Cab services aren’t a lot different than Monsanto or Wall Street banks.If you are going to put risk capital in a company, it has to have a potential billion dollar exit because there are a lot of companies that you are going to put money in that fail. One company pays for a lot of sins.
This all makes perfect sense, of course. But a place where the these valuations are “real” is in 409A valuations that drive strike prices on stock options. You have a lot of experience here – how are strike prices being impacted by these valuations? From my experience with 409A processes, it’s hard for me to imagine the valuation truly recognizing the call option nature of the new round. The idea of preference definitely moves the strike price needle a bit but ultimately, that price looks like a price even to a “sophisticated” party. What has been your experience?
409a prices are almost always a fraction of the last round price. for all the reasons i outlined and more. they are probably a much closer approximation of true enterprise value in a startup.
This is a great post! I don’t comment often/ever here (I probably should more) I take in the information; and I must say that I’ve learned an abundance of knowledge that, at times, have clarified a question I’ve had or concern I’ve thought about writing about. I enjoy your posts. I’m just a currency trader looking to diversify into other avenues of business. Thank you for the knowledge and the openness of your AVC community. Thank you!
your welcome. Come back, ask a qustion, shoot me an email when you do (shana dot carp at gmail) and i’ll even corral people to answer/discuss it 🙂
Great discussion, couple of thoughts.As pointed out secondary shares do price off the latest round albeit at discounts up to 50% for common so $3b is still $2b or so, lots of money everywhere but NYC or Silicon Valley. Working on one high profile company secondary right now. Also a number of these companies they turned down acquisition offers at big numbers to proceed with financing. These big numbers bring attention and bad things happen with higher profiles.On the matter of disruptors, companies do have a societal obligation once they become large enough to obey the laws and to take steps that their customers do as well.(if you dont like them , work to change them eg Stubhub). I should qualify this statement that i am an investor in a public company that owns hotels in NYC and SF. The hotel industry does employ lots of people in those cities, most of whom come from lower economic groups.
The example that bothers me the most is Netflix. You can argue that Blockbuster was poorly managed and behind the times, but I enjoyed their rental offering – I got videos in the mail, and I could return them (and get another free video) at the brick and mortar store down the street from us. Very convenient, and met our “old fashioned” need.When Netflix undercut Blockbusters price, it drove them quickly out of business. Then, Netflix almost immediately increased prices to reflect the “true value and cost” of their offering. Now, maybe Blockbuster would have gone under regardless. But I found it insulting that they raised prices so much right after they lost their major competitor. And now, they are claiming Amazon (their largest online competitor) loses “billions” of dollars with online video. Too bad.When a startup gets a ton of money to figure out a new business model, lowering prices so they are selling at a loss is not an altogether creative solution. And it damages the overall market. I’m not claiming that Spotify or Pandora or AirBnB are doing this – just Netflix. But those other players are asking that the rules be changed specifically in their favor, at the cost of other players in their market.A rising tide lifts all boats. Create rules that benefit the entire industry, and the overall market will respond favorably.
i concur with the approach outlined at the end of your comment
I won’t count on from the press on this one. This is too easy a target especially in rough economic times.Look at the coverage the “fiscal cliff” lots of hand wringing and calculated hysteria but few hard core facts or explanation.
“Maybe the media can help us out a bit too by being intellectually honest.”The problem here is that TechCrunch, Mashable, etc. may be “the media,” but they are not journalists. They are large scale blogs. And not all bloggers choose to conduct themselves like a responsible journalistic entity, especially tech bloggers (save a few individual reporters like Jordan Crook at Tech Crunch).Journalism is rooted in finding and investigating the “news” that the people “need to know.” To get more people to pay attention, good zinger stories are bubbled up to the front page, but meatier, newsy stories are still the bulk of what makes up such a publication.The Times, CNN, your local broadcast channel — they produce journalism. Even web-native entities like Gothamist, the Drudge Report — journalism.The tech media is mostly (not all) full of gossip rags run by old kids who grew up blogging about whatever they want, with little regard or knowledge of what it means to be a journalist.
To be intellectually honest you have to first understand what’s actually happening.I don’t think most journalists understand the math behind valuations in the first place.(Also the Drudge Report is not journalism. They link to journalism but they produce no journalism.)
very true. or you at least need to consult and get a quote from someone who knows what’s going on. and when’s the last time you saw a quote from an expert in a techcrunch article? circa never.and, yes druge only curates. duly noted.
I discount journalism today. They don’t perform what the fourth estate used to perform. instead of reporting news in an intellectually honest way and letting customers decide, they “shape” news, or make a story. Totally bereft of any compass. Very few journalists are journalists in the classic sense today.
the shaping is the saddest part.at the same time, trying to launch a product from the ground up, the single most important lesson i’ve learned is that people want to be told why they should pay attention to you. they do not want to take anymore than 3 seconds to see if you’re worth listening to. you have to tell them immediately exactly how you fit into their lives and consciousness and why they should care. they want things shaped.did the internet do this to us? or has this always been human nature?
I think that the internet has made us less attentive. how many people spend more than two minutes watching a youtube vid? Bloggers do a far better job of reporting and analyzing in many cases than journalists-who sometimes just want to go to good cocktail parties. On this blog, I know what I am getting. I know where Fred stands. He and I aren’t going to agree on a lot of the methods to get to a goal, but I bet we agree on the goal. Additionally, I know Fred uses his blog as a megaphone for his portfolio companies-but that’s a good thing for him and the companies. Learning a lot from reading the blog and the comments.
It’s a very good point– Fred (and other blogs) IS part of the media. That’s a great thing.
Just a terrific post. Early in my working life, I asked a Dutch executive who had come out of retirement to work in the screwed up start up that was the 2nd startup of my career:’ why does the founder / CEO seem so addicted to press releases? Don’t we want to make our billion dollars quietly? ‘His answer was ‘ that is how I like to do it. ‘ great guy Nico.PS – I thought this post was going to be about Sheryl Sandberg 😉
and then there is the quiet onehttp://www.avc.com/a_vc/201…
When I first heard of and started using Spotify, I couldn’t help but think of Netflix. At first, Netflix was making great content deals, but there seems to be an inverse relationship between the success of their product and their ability to keep getting good, fresh content.
content owners don’t like it when you make “billions” on their content.
Isn’t that true for the likes of FB, Tumblr, Pinterest?Isn’t it just a question of time before this perception becomes a problem for any for-profit self-publishing platform?Isn’t that pointing to a future where only low-income, low-education demographics would be using those platforms?
In the case of Netflix, perhaps more precisely, the content owners/cable distributors don’t like when you threaten their billions.The entire MVPD model and its decades of ever-increasing annual prices is threatened by the unbundling of non-sports content from sports content that is allowed by Netflix. The key thing to understand about MVPD is that it is driven by the price of the sports networks such as ESPN, Fox Sports, and various regional sports networks (such as MSG and SNY in New York).To the extent that you are not interested in live sports and are willing to endure a certain delay in watching other programs (for example, when a series is available on DVD). Netflix with online supplementation gives you the option to cut the cord.
untrue. j.k. rowling is quite happy with warner brothers. james cameron is very content with news corp. and so on. just watched the pbs documentary bio of david geffen. for many many years the artists on asylum records loved him. ahmet ertugen is similarly loved. pretty sure larry gagosian is liked by the artists he represents and trades. the point is, as you write, “content owners don’t like when you make billions on their content”…and they don’t get equally well compensated.
We can’t even get them to take out money
Great post. I particularly appreciate your deep dive into how preferred shares work. Valuations, PR and perception are one thing; the reality of hard work and making shit happen is another.
I think you might be overestimating the guile of some of these institutions. When they hear that a company is worth a $1B they believe that’s the value. Why wouldn’t they?”A million dollars isn’t cool. You know what’s cool? A billion dollars,” is part of our culture now. The average person has no idea how valuations are established nor do they care. It’s just a fun, unreachable thing to fantasize about like little kids dreaming about growing up to become astronauts or people in Europe reading those magazines about the royal families.I’ve said it before and I’ll say it again: the world would be a better place if we were all better at math.
There are a host of unsettling dynamics around private and public valuations for startup companies. The most concerning is the recent history of early investors and founders selling shares in secondary markets or as part of a packaged secondary offering. These liquidity events are realized at the inflated valuations that, as Fred notes,”aren’t real valuations.” Wouldn’t it be great to be Andrew Mason or Marc Pincus or Mark Zuckerberg and sell tens of millions of dollars of private stock at a price that everyone knows is a result of negotiated terms “that spit out those big numbers”?Flash forward a few months and these same companies’ public valuations (post IPO) start to reflect the real value of the business; down 50%-80% from the “spit out” big numbers of the last private valuation or secondary sale. Most employees and almost all public shareholders are left holding the bag while the private investors and founders have cashed out months earlier at hugely inflated and misleading valuations.Nobody cries for you when you are worth billions and when you have rigged the game. This is not a media problem. This is a greed problem that is being perpetuated by insiders who are creating a class of winners and losers based on the phantasmagoric private market valuations of startups.This problem lies squarely with the Boards, investors and founders of startup companies and needs to be addressed through more stringent governance around secondary sales by insiders.Meanwhile, I hear FourSquare is trying to raise a round at a $1 billion valuation. Hopefully there won’t be any secondary sales packaged with this “spit out” valuation.
great comment Marka few reactions1) yes Boards are responsible here. but they are responsible to do the right thing for all the shareholders. and that often means taking money on the best terms. but as you point out, there are complications with that. it’s not easy to sort through all of the consequences upfront.2) the point about the valuations collapsing is one i made in the Billboard talk. it is part of the answer i gave. that discussion goes from 7:45 to about 12 mins in the first video.3) Foursquare will raise money at whatever the market values it at. you can read my thoughts on the current market Foursquare is dealing with herehttp://www.avc.com/a_vc/201…
Exactly. Great post.Imagine doing this with a home. Your Uncle buys a 10% stake in you home at a 500% inflated price, with downside guarantees. This establishes the “value.” You then sell shares on the secondary market at the inflated new “value”.It all falls apart when you actually place the home on the real market….But, who cares? The buyers are buying without looking at what the other houses are selling for. If they lose, they got what they deserved.
This reminds me of the “what changed” post. Valuations are outside of reality, and some startups are becoming more established and need to force either a change of law or to start restricting users. I am not sure the clickthrough sign up is going to cover their liability.Things got to change. The piep piper is coming.
Well said. Media does make a lot of noise. Most of us just need to be heads down focused on one startup. Was just having this convo yesterday with @danielha
True…but what the world thinks of you is part of who you are.Ignoring the media as a rule is honestly no better than being ruled by it.
well said arnold
For sure. Not saying I advocate ignoring ALL media. Just filtering and getting back to work.
Certainly….But especially when you go from being a start up to a company (long grey line ) building your market and brand is your product as much as the code that underlies your infrastructure.Neither one is of any value without the other.
tangentially, in politics they are “hating the rich” too. Why should this be any different?
Thanks for this post. Your explanation was helpful, including (especially!) the technical part.The part I’m going to comment on, however, is the part about the media not giving the full story. This: “And maybe the media can help us out a bit too by being intellectually honest what a $3bn valuation really means.” That would be really nice. But I am not counting on it.”I run a media start-up, so the reasons why media companies behave as they do is a source of endless fascination to me. And I see it happen in a great many “news” stories these days. Especially as news itself becomes more ubiquitous and the only way you can differentiate yourself is to either get there faster or lead with your opinion.And so, there’s a rush to judgment — this is good! this is bad! that number is a lot of money! They dangle sound-bytes like 3 billion because it’s link-bait. Because they want to be worth 3 billion too some day, and if they can get it by riding on the coattails of someone who appeared to have fast success, so much the better. We sometimes forget how hard the media business is as a business as well. But I agree — after the headline, there’s little excuse for not taking the time to dive into what those number really mean. “Intellectual honesty” is not valued as much as it should be. But unlike you, I do think that will change.How? Forgive me for stating the obvious, but people like you, Fred, are a media company. You put out regularly scheduled content to an ever-growing, targeted audience. Will you ever be mainstream enough? That’s actually what I’m betting on. The media world is changing. Heck — the world world is changing — people are becoming more entrepreneurial in everything they do — both as a result of the economy and by the opportunities of technology advancement. And I believe that even people who don’t see themselves as entrepreneurs but work for large companies will need to better understand the business strategies of the organizations they work for in order to keep their jobs. The very information you dispense will become ever-more valuable to the mainstream, perhaps sooner than you think.
“people are becoming more entrepreneurial in everything they do”that is so trueand that is a point i made at the very end of the second video in that Billboard talkhttp://bcove.me/65y94qaz
I’m not a fan of the entire “sleeping giant of entrepreneurialism” that is currently sweeping our country.Not everyone is cut out to be an entrepreneur and not everyone can, or should, own their own business. And while you can learn some of the technical skills necessary to running your own business online, or by reading, the fact is most people are not cut out for starting or running a business. Because they lack common sense and don’t know how to spot and take advantage of an opportunity.I ordered a home exercise machine the other day from Sports Authority. Two guys showed up one white one black. The black guy definitely had street smarts and was a hustler, very chatty seemed to have a good vibe. The white guy was serious didn’t chat much and just did his job. They both worked for this company with a HQ in NYC that did logistics and had contracts to do deliveries all over the east coast. While they were doing the assembly I took a look at the company website. And I saw they also operated what is known as a pick and pack warehouse. So I started to talk to the white guy about this and he essentially knew nothing about what his company did other than he was at my house to assemble my exercise machine. No curiosity at all. Never visited or browsed your own company website or listened to stories from others working there?One of the things I immediately thought (prior to this) was that these two guys could potentially start a business doing home assembly and work on their own. (And I know people who have done this as I have chatted up others that have delivered things.)I was going to give them a tip for the assembly. At the very end I asked the white guy (the other guy had left to throwaway the boxes) if he could move the machine (next to the new machine) over an inch. He gave me some story about not being able to move anything bla bla bla which was total BS. (Like all those signs in the repair shop that say “insurance regulations say…”.That was not entrepreneurial. An entrepreneur would have realized immediately that if he did a small favor for the homeowner he would have almost certainly received a tip. This guy did not. My snap judgement was: not an entrepreneur.
I agree with others that part of the issue is personal because founders are able to sell for cash at that valuation. Executives at other companies that do business with Square or Twitter may, for example, resent Jack Dorsey specifically more than either of these companies generally.I also tend to feel that we need to find a better balance between the people who make media — writers, musicians, movie-makers — and the people who distribute it via the Internet. The Internet has mostly been a disaster for the makers.But separately may I just add that I have become a Sunday subscriber of this blog; it’s like the Sunday New York Times, which features longer or more thoughtful articles that you wouldn’t have time to consider during the week. Fred’s Sunday posts are his best work.
now i am going to have to live up to that!i think it is because i have time to think (and write) on the weekends
this is a great post fred. i would nominate it for the fredland hall of fame. VCs who insult readers with obscenely long posts should take note here; this is an information packed post that is pretty easy to read.but enough with the niceties. i want to comment on this beef and help magnify it:1. as arnold observed there is a lot of cashing out, a lot of home buying in palo alto, a lot of VCs talking about how software is eating the world and how it’s so great to raise a bazillion dollars. if you talk the game, and if you play it by cashing out, it’s real.2. the startup world is coming off bubble 2.0. this is still not fully being recognized (and so there is likely more room to the down side), although we are getting closer to full recognition and the correction has surely begun. not recognizing that companies were overvalued in bubble 2.0 is the same as saying they were worth it, and it’s the kind of thing an ungrateful spoiled brat does. in this regard, the argument the san francisco apartment association is making is legit.3. the media is not paid to tell facts or to be intellectually honest. rather they are paid to sell stories that create a desired emotional experience. anger over class warfare is an increasingly desired emotion. if silicon valley knew how to embrace this, they might not be as vulnerable to attacks from incumbents in the media. but alas, if they knew how to embrace it, they may have to spend more time talking about who pays for bubbles, and where goldman sachs got its money to inflate groupon, facebook, etc.
less is always more
except with love. and sex. and money. and oxygen. 🙂
Love and oxygen for sure
so true. One of the best aspects of Fred’s posts are that they are always concise.No one can ever say “TL;DR” on avc! (just learned that one)
Yeah, Fred’s posts can sometimes be long (to say the least), but they are totally worth reading. Good job @fredwilson:disqus.
I was saying the opposite, comparing to his contemporaries.Guest posts however are almost always dreadfully long, on most any blog. Because guests feel self-pressured to be “complete”.
parts of SV will jive with class discrepancies in lifestyle and concerns, aka third homes vs where a next mortgage payment or meal will come from. It’s the folks that make their fortunes out of dreams, a hefty dose of hardwork sprinkled with luck that can cross the divide and relate to the common man or woman because the grew up in a different world.
These high valuations are a double-edged sword. They send a message of legitimacy of the new business models of these companies. I think this is the real reason why the incumbents are jumping on this. Sure they get some flak for “being worth billions,” but the upside of that message is so much higher for customer acquisition, hiring, and future liquidity events.
As a separate topic, the issue you were discussing in the video is an interesting one. What I struggle with is why the distributors – Pandora, Spotify, etc. – are going to be able to extract a lot of margin here? As consumers we have a lot of places to get the music we want – iTunes, Pandora, Spotify, and a host of less well known others. Ultimately, we’re there for the music – not the intermediary. And the music industry – as it relates to the key artists at least – is pretty consolidated. It seems like the music industry – really the musician stars – have all the power here. There are a lot of places place to listen to Jay Z but there is only one Jay Z and he’s the one with the value and the power. Unless you’re a distributor on the scale of the Apple iTunes platform, it’s hard to see how you have a lot of leverage with the labels – folks whose product you are literally not in business without.
yup. that’s why we have invested in the truly two way systems, peer to peer models, where the users are creating some of, or all of, the value. i am still not sure that will be enough. but i feel better about it.
i think the distributor model — pandora, spotify, netflix, etc — needs to own the content too. one entity has to govern the whole economic spectrum. amazon is doing this well with kindle ebooks, a significant portion of their ebook sales come from authors who have enrolled directly with them rather than through a traditional book publisher. the music distributors need to do the same thing. my hunch is that this will be far more attainable if they take a niche approach; i.e. become the spotify of garage rock, and leverage dominance of that niche to gain the scale needed to dictate terms to all economic stakeholders. more to your point, i also believe there is an opportunity for someone to create a “roll your own spotify” type of thing and manage it for artists like jay-z or independent singer/songwriters. musicians increasingly do duets/collaborations for the joint marketing opportunity, and this is just an amplification of that.
If movie theaters are much of an analogy, being a distributor of other peoples content is difficult unless you have the leverage of a Comcast. Netflix has seen this. I like the niche and roll your own ideas.
Sometimes distributors capture the value, often because of stupid decisions made somewhere at some time.An interesting example is the airlines and the global distributions systems (Galileo, Amadeus, etc) i.e, the electronic reservations systems which online travel agencies pay a commission to in order to book flights.The world’s carriers pay $7 billion to the GDSs, while the collective profits of all global airlines are only $3 billion.
Out of curiosity – where does that data come from? The major GDS players have struggled in recent years and in the online travel world, the air part – vs hotels – is a meaningfully more challenging business than hotels, precisely because of “too much” consolidation at the airlines.
Thanks. Interesting. I’m curious about the quality of that stat from the lobbying group but that’s interesting. Definitely counter to what I know about where money is in the segment of travel spend that is online where hotels dwarf flight 10:1.
i’m not sure if this gets to your point, and I am not an expert, but the way i understand it the online travel agent like priceline, expedia and others are making most of their money from hotels these days.the GDS (reservation systems) are galileo, amadeus, travelport. They pretty much make money whenever an ota or physical travel agent books a flight, i.e. any flight not booked directly through the airlines’ website.There was an interesting law suit with american airlines and sabre down in dallas that I think just settled about these issues as the airlines try to regain control over their own distribution
Maybe you should explain what a $1 billion valuation actually means, at the different stages of a startup.Anyone could buy 100 shares of a private company at a price that values it at a $1 billion. It doesn’t mean that company is worth as much in a market that lacks liquidity and it is not able or willing to absorb the supply at that valuation. This exact nature of private markets should bring much lower valuation than public markets usually do; hence the commonplace desire for an IPO exit down the road. Facebook was an exception.Any startup founder is a millionaire on paper after the seed round, but that paper doesn’t have the liquidity and convertibility of a currency.
yes, i should do that
Hiding or not hiding the valuations won’t impact how the media reports things. I think channels like this are important because it allows the public unfiltered access to the thoughts of people in the industry. The media sometimes will not report on things you say favorably or they lack the expertise in the area to properly report something. Blogs fill those gaps.However I think it’s important to touch on the substance of the criticism. Companies like AirBnB might still be babies in the startup world (or toddlers) but their publicity and quick rate of adoption means people will treat them like they treat other big players in the market. Consumers expect them to have these regulatory issues already worked out. They don’t have the room for mishaps in the minds of consumers that a new corner bakery has. Welcome to the NFL.
This post gave me a great idea. I am going to start a company and issue 1 billion shares and then sell one share for a dollar. Instant $1B valuation.
There are lessons on “how to be worth billions without being hated”, but it’s up to the entrepreneurs making those millions or billions to portray themselves or their companies favourably in society and business,– if they want to gain more sympathy than hate.Look at Bill Gates & Warren Buffet. They aren’t hated because they have been very transparent with their personal fortunes and how they are doing a lot of good. They are liked for that.If you want sympathy that lets you get away with your new fortunes, then try to be very transparent about what you are doing with it. In the case of AirBnB, they still have a chance to come out smelling like a rose, but it’s up to them.These companies must dissect their new fortunes in simple terms so that the reality is clearer than the speculation about what they are doing. As Fred said, the $2-3 billion valuations are just paper valuations that aren’t real and can go pouf quickly. What I’m more interested in knowing is how the $100 million raised is being used, and how much cash is the company generating. These 2 numbers are the more real numbers that determine a company’s strength.In the case of AirBnB for e.g, I’d like to know how much are the founders taking from the $100 million raised, how much is being allocated to operating the company, and what are they doing about making the T&C’s fine prints more visible so that their users don’t get in trouble like the New York East Village guy.
“Look at Bill Gates & Warren Buffet. They aren’t hated because they have been very transparent with their personal fortunes”Key takeaway is to use a portion of you money and spread it around to buy support and friends. Those friends will then be there to cover you and defend you as long as you don’t do something that is really horrible.The mafia was typically good at this. In addition the the killings, the bribes and what not, they spread around the cheer (stories of helping in the community could be urban legend but I tend to believe they are true because it makes common sense and shows street smarts).
The Spotify financing is one of those cases where participating and non-participating are completely different animals. In the case of non-participating, if the company sells for $1 billion, they get their money back. In the case of participating, if they company sells for $1 billion, then if the last round valuation was $3 billion, those last round investors get 33% returns, which isn’t bad at all. The people who invested in Slide’s last round learned this lesson the hard way.Personally, I’m not terribly confident that any company whose COGS are hovering around 100% will ever return back cash. And even if it does, there’s no guarantee that your round will be the last round, and the later round’s liquidity preferences will trump yours.
is fidelity trying to trigger reflexivity (the Soros idea) in the investor community with its investment in spotify?
Fred, I get your point. Very much so in fact. However, is downplaying private company financing details REALLY a great idea when the trend (also by tech startup finance community) is to get more and more private (and smaller time retail via crowdsource financing)? The solution you are seeking will take more than a we need to stop talking about this because more and more people should have the right to know the details if, in fact, our economy is going to let non-Accredited Investor types start ‘playing more in the startup’ space. Thanks, …
Since those in the media do not understand, how will they write something that makes sense? A way of giving the particulars needs to follow the “Money In/Out” over to some history of their performance matched against the money invested that looks forward.Then you can at least have a reference point in the future to go back to when doing some updated story. Last, remember nobody’s gonna cry for you when you’re busted.
Fred, are elluding to going back to *proper* valuations and building sustainable businesses?! If so, I think you’re on the right track for getting the US back to a great country. But, I also think you’re messing with your own profession. And you know what happens when mess with the bull… You get the horns!
That should be “…are you elluding…” and “…when you mess…”
I for one have absolutely no sympathy for Pandora, Spotify or the music labels. In a way it’s kind of a baseball strike. I honestly don’t understand this business model. Both of these companies HAVE revenue. If they simply can’t afford to gain market share with their business model then re-tool.This idea that the government should interfere ‘just so I can stay in business’ is BS. Pandora chose to go public and with that sell to shareholders that just want their investment back. By now every tech company that goes IPO should understand this. Amazon is one of the few public companies that seem to get away of profits for growth.I fail to understand why people seem to think that music is anything but a luxury. A luxury that some (a small pct.) will pay for. Sirius Radio understands this and is happy w/the results. There stock is stable and it seems as the revenue is as well, even in a recession.Pandora in my estimation should just give up on a advertised model if the dollars don’t add up. Spotify as long as the investors are up for it, still have the luxury of acquiring growth in exchange for $$. Basically these companies are asking to grow on the backs of others, total BS.As for the labels, it is simply there choice. Convincing them what’s best for them is again, ridiculous.As far as valuations are concerned it’s a 2 headed sword. It may not be what it is sold at but it’s as close to an appraisal as possible. Successful internet companies use a mob mentality as a marketing tool. This is done with numbers, both users and valuations. Both get you press, which go to feed the IP address. It’s a system that has it’s rewards AND it’s costs…
I also want to mention that the VC’s along with the startups themselves using publicists have added fuel to the fire. Were exactly does the public get the news stating that Spotify is worth x amount of dollars? From the publicists that are funded by the VC’s. Every valuation makes it into some trade journal or blog.I called a publicists up one day inquiring what their monthly retainer was and if we could ‘work’ together. I ALMOST CHOKED TO DEATH! $30k a month, 3 month retainer upfront AND they had to ‘look’ at our company and SEE if it qualified..ARE u freakin serious? and you guys wonder how a startup can burn through so much cash..
“$30k a month, 3 month retainer”Certainly one of the reasons that PR firms have success is that they work as a filter for journalists.After all if you are a journalist (on a small salary) and you get approached by a top shelf PR firm you most likely know that someone has already cleared a certain hurdle and is believed in enough to be able to pay the large retainer fees required by a PR firm! Not to mention the parties and entertainment. As opposed to Joe Blow when they approach you on their own. Can be done of course (I’ve gotten on the front page of the WSJ and many times in the NYT all on my own) but a bit more work and strategy.Same way lobbying also works. And having a Harvard or Ivy degree. Filter.(Not directed at you btw): Welcome to the way the world works. Not going to get disrupted either.
Supermarkets are the same thing. Basically what goes in the store is now controlled by a few regional brokers in the surrounding area. I’m not bitching about the cost of a publicist, although shocking as it is, I understand their game.I’m merely suggesting to Fred that asking the media for help is ironic when the VC is funding what the media sees and says. VC’s starting investing in tech blogs a long while back merely for the purpose of increasing awareness, thus value..It’s fake value though since most tech blogs are read and written by insiders and not the outside world. Simply creates a virtual demand.
A great piece that reminds the difference between perception and reality. Whilst we often want to be seen as successful with our peers in technology, finance, startups sectors. We remind people who are not so fortuate possibly our users of the divide between us and this is more pronounced in a time of financial worries.. it also may be that users are becoming more interested in the actual company/organisation behind the software they use
A good reason for Air BnB hosts to get to know their neighbors …never miss an opportunity to bring your neighbors a bottle of wine, some nice baked goods, or some home brew 😉
No question people will certainly have a much harder time reporting someone if there is a reciprocity going on.
Talk about the irony of billion dollar oligarchs using a startup’s theoretical valuation against them.
I agree with you on the bragging part — I don’t think anyone on this Earth appreciates a bragger, especially in the financial world.
Nobody is crying for you when you are worth billions. So be careful what you wish for and what you disclose.We have a few companies that have kept their fundraising valuations private, at great difficulty and effort. They have done it for reasons like this. They believe it is nobody’s business, other than their own, how they have raised capital.Appears to be a contradiction with one of the points that you were making yesterday, which I took issue with, as far as business and transparency. My comments (which you seemed to agree with?) was that it’s a matter of degree and totally depends on the circumstances and situation. This is certainly an example of one of those situations. And part of my point is that if you don’t have the knowledge, experience or time, to think about all the angles to something, it’s normally a better strategy to not be so open. (Better to be thought a fool than to open your mouth and remove all doubt). I doubt that people who are doing their first startup (sometimes needing adult supervision as the story goes) are able to understand all the consequences of their actions. And they might not listen to advisers either.http://www.avc.com/a_vc/201…I remember in my first business buying an expensive car in my fifth year in business that I always had wanted. I specifically didn’t let any employees know about the car. I knew that while it was important that they thought we were doing ok, I didn’t need them to see a new car and then decide the time was ripe to get a raise. Now of course there are times when you want people to see you are successful (showing the car to the bank person I dealt with turned out to be a good idea) and showing off a car at the country club if you are in certain business is a good idea and in many cases. So the degree of transparency strictly depends on the situation. In the case of AVC and USV no doubt that there are benefits to people knowing the success of the firm as it attracts deal flow and has star power.I wouldn’t say that it’s a non-starter that airbnb has these issues and is being attacked because they are a “billion dollar company”. I could easily make the argument that that success is also a good thing as well. But there are times to be quiet and times not to be quiet and all angles need to be considered. This is no one answer that fits all circumstances.
Yup, certainly AirBnB getting mentioned in pretty much every “tech startup” discussion I have with anyone is a good thing for them.
Here’s my point. We, the tech/startup/VC world, are not doing ourselves any favors by bragging about the big valuations we are raising money at. We are in fact doing ourselves great harm. Because it makes us look like spoiled brats who are being fed with a silver spoon.Well from everything I read and observe many are spoiled brats. And there is no question that when what someone is doing gets associated with a big number, it will attract plenty of positive attention that gives them star power to attract business, employees, press attention to name just a few things. So it’s definitely not all negative.That attention is a door opener. Steve Job’s star power allowed him to cut deals that the guys from other companies wouldn’t have been able to do. Same with Gates. Getting press attention because of your valuation will help with getting your phone calls returned and with wannabees wanting to do business with you. It will also generally help with lawmakers because if they have heard of your company there is certainly a halo around you that is normally a benefit. So it’s all not just target on your back.People are obsessed with rankings, lists, money and everything. The person who gets on 60 minutes, or written up in the New York Times, isn’t necessarily the person with the best book or the most critically acclaimed movie, many times they are the person who brings in the biggest numbers. Large numbers are always interesting.
Speaking as one who frequently will pull charters filed in Delaware or elsewhere to get at what those documents reveal about venture preferred stock financings (and they do reveal a lot, much more than the typical CrunchBase profile or media reports pass along), I do think it is important for entrepreneurs and emerging companies to be able to pick apart how others are structuring their deals, pricing them, loading them up – or not – with restrictive covenants. I don’t think transparency is at all bad in these respects. But I am persuaded by something you say in your post, Fred, about what numbers truly are pertinent to what the investors think about company values. The bit where you say, “The $3bn valuation is nonsense. That’s not what they are betting on. They are betting that the company is worth at least its total liquidation preference…” My own analyses (and blog posts) on emerging company preferred stock financings always look at those numbers, and it may be I should put first focus on liquidation preferences. (Entrepreneurs, of course, also focus on the aggregate preference, added up for all rounds, as it represents an “overhang” on the potential value of the common stock.)
Hi Fred – I thought it was really interesting how you used flattening of CD sales and MP3 sales as a signal for growth in other forms of online music.Is this something you knew intuitively because you’re into music or becuase that is something the founders of turntable.fm brought up when pitching USV?
I knew it because I read a lot about the music business
ah, the old “reading about stuff” trick
One thing I always wondered is that why media fails to recognize that [lofty] valuations are point in time estimates. A lot changes (for good or bad) at a later stage of the company. Having spent a decade on wall street, I’ve seen so many corporates coerced into making wrong decisions just because they have to do something to live up to a pie-in-sky number conceived early on.
Yup. I made that point in the billboard talk using Zynga as the example
I agree, however entrepreneurs often bath in the glory of seeing their name in lights, however thats a short term view. It’s mostly Tech Crunch’s fault. Like Rock stars, many Entrepreneurs want to be seen on stage and Tech Crunch et al. is that stage however other than having your name in lights, what is the purpose of announcing these things? All it does is make your competition more aware of your secrets and the reality is that it’s not your customers reading these announcements, your competitors so the net result of this publicity is negative. If you have a strategic plan and a good idea and are working toward growing your customer base, why tell the world about it? Tell your customers about it! Focus on trade specific publications and tell them how great your product is. Your customers don’t need to know what your company is worth. All they need to know how much more THEY will be worth if they use your product!!
Airbnb has left themselves wide open for attack because they provided a terrible level of service in this particular case. This is inexcusable if they are a $3 billion company or a $3 company. Collecting a commission while ignoring existing laws and subjecting your suppliers to legal action is not innovative or adding value. There are risks operating in regulated industries. Successful companies deal with, change or overcome existing regulations. Ignoring regulations and dumping the risk on your suppliers is not a long term strategy to add value.
Fred, question about AirBnB specifically. Is it pushing rents up in New York?From the perspective of a renter with several roommates in New York, I’ve recently been hearing about people calculating the rent for their new roommates while taking into account the break even mark should they rent the place on AirBnB. This might just be anecdotal but I’ve heard a few friends talk about it and another encounter it when he was looking for a place.
I haven’t been active in the rental market in NYC for 20 years so I don’t have a good feel for it
I read the post and your comments fred … it sounded like the following to me and I think you are damn right … “Leave the couple alone until the baby is born … don’t telecast what is happening in the bedroom and make a porn out of it”.
That’s a nice summary 🙂
@fredwilson:disqus just when I think my level of respect for you couldn’t go any higher, you write yet another incredibly insightful post. Sincere praise aside, doesn’t the disconnect between the startup world and the rest of the world deepen when investors fund companies with no proven revenue model. I know you espouse “Build something that users value, and the money will eventually come” (e.g. Foursquare) and you have been very right with your own investments, yet this same thesis results in the rest of the world failing to understand why a company with zero or minimal revenues should be worth anything at all.
At my own company, we are beginning to build a new product a la Pinterest, and we have been debating whether to charge from day one. I saw a founder write about this somewhere the other day, but we have decided to incorporate paid products right from Day One and make this transparent to our users so that they don’t feel later like we slapped a business model on their face. We may well be wrong about our approach, but it’s something we’ve come to strongly believe in as a part of explaining to the outside world (and my own mother) why what we’re doing is a worthwhile endeavor.
That is certainly a factor. But time reveals all.
Makes sense.Best advice I ever heard re: Exits/M&A/etc when asked re: valuations/worth – after lots of deliberation and analytics, “Well, that’s all bullshit, actually – basically, it’s worth what someone will pay for it.”
Bond + option? Probably not since pref stock would stand below debt, bonds and other creditors. So the investment’s risk is a bit higher than what you are suggesting (think GRPN for a potential scenario).Why not just say that this is a pref. stock investment under unknown conditions that will command a much lower valuation than the one which is implied by the media?
Because most of these companies have no debt
Late to the party here.Interesting discussion.What I feel is often wrong with these discussions is the asymmetry of the madness. So if the labels want to say to Pandora and Spotify that there’s no way we are going to give you a break – as you are worth $3B or $1.2B or whatever – then they ought to accept the corollary – which is that if they are worth $3B say – then they should be willing to merge on an equal valuation basis with Spotify.To me it is like the estate tax issues you see. You own a building and the government says it is worth $20M and therefore you owe $7.5M in taxes on it (simple math $20M in value less a $5M estate deduction at 50% tax rate – lots of assumptions here but bear with me). So what do you have to do? You have to sell the building beause you don’t have the $7.5M sitting around. So if the government is saying that the building is worth $7.5M – shouldn’t that same government be willing to buy it at the same price? Or take a fractional interest in the property at the price they are holding the other side to.It really is all just negotiating tactics.This year Pandora wil pay roughly $200M to the labels at a roughly 50% of revenue rate. XM/Sirius wil pay roughly the same $ amount but at an 8% rate. Not sure on Spotify, but it is a large number as well. All together, these guys pay over $500M in fees to the labels perhaps approaching $600-$700M with all the other players thrown into the mix. Against that, you have the terrestrial radio industry who pays 0% royalties to the music industry – despite having a revenue base of over $15B per year.the problem lies in the fact that in order to even the playing field, royalties on the radio industry would have to be brought up to about 4% – which would mean that the slowest form of music distribution (radio) would be paying the same as the fastest form of distribution growth (digital) so the future looks less bright – and the labels don’t like the digital services because they lead to fewer sales of music – so there is even less incentive to lower rates on digital. Heck in the not too distant past – record labels bribed stations to play their songs (Payola) – and this became illegal.So it’s not about who is worth what. It is about who is worth what to whom.
Harry DeMott is dropping some serious truth folks. Well played!
Would it be sensible to simply disclose liquidation preferences as well? I think it would be very interesting to know such detail, and might make people realise that the go-go VC deals are not as outlandish as they appear.
Anyone want to buy 1 share of my company for $1 at $1 billion valuation? You never know, I might be able to double or triple that..
If you have worked in digital music for any amount of time, this is not a ‘new angle of attack,’ and I’ve thought for years that there’s an unspoken-but-palpable tension between startups seeking out-sized valuations and labels seeking to extract out-sized terms via music licensing. And it played out writ large with Napster v1.I watched recently an early reel of a forthcoming Napster documentary, it has footage of Hillary Rosen’s comments going back to 2000. If you hear the inflection in tone she uses when she says ‘They are building a *business*…’ — you can hear forcefully her punctuation of the word ‘business’ — she almost spits out the word.And there has been an evolution in how some early-stage firms in music have since approached the terms they extend to labels: They offer them equity.Rhetorical: What if Airbnb offered equity to the San Francisco Apartment Association?Fred’s last paragraph above says ‘there isn’t much we can do about it,’ but my view is that where anxiety or tension exists, ask if those issues can be remedied via terms that allay whatever is behind those anxieties/tensions.My other, unrelated thought is that this makes a stronger case for crowd-funded avenues for raising early-stage capital, assuming the disclosure requirements can keep certain valuations out of the public eye for a longer period of time.But if out-sized returns via high valuations is what is *at issue,* remedy that.
giving them equity is required but does absolutely nothing to relieve the tension. trust me on that. i’ve lived it.
There is a great conversation on hacker news about how the tech media is somewhat to blame in its glorification of ‘getting funded’. Maybe there’s something the tech industry can do to turn the ship around, so to speak, on tech reporting?http://news.ycombinator.com…
“But it is worth taking the time to downplay the numbers around a financing and focus instead on what it means (more jobs, better products, financial stability).”Mr.Wilson (Fred) states that more jobs are created when such companies are created and get valued etc. Maybe a few jobs get created but by and large most of the companies USV invests in, USV invests because they expect to make a 10x return on their investment, they don’t invest becuase the companies are creating jobs or create financial stability. They may invest because of a better product but that is not primary or secondary even, the primary objective is to make a calculated investment with a very high probability of a 10x return. For the VC world in general the time period from 2005 onwards have been better than ever, they can spread out smaller amounts of capital ( reduced risks) while increasing the probability of a 10x return. In Baseball a batter with a 0.300 average is considered solid gold. In the VC world a 0.300 return is similarly considered solid gold.As Yossi Vardi generally states VC’s can play the game of averages better today than ever.I think the incumbents in any industry will find ways to protect themselves, be it the Record labels or the Apartment Association. I bet VC’s would also fight it when some upstart makes it easier and more transparent for raising capital and VC’s are unable to get the terms they like. That is par for the course..
I don’t look at valuation, I look at profitability. IMHO, Spotify and Pandora should charge users the $0.25 it costs to stream a song and then some.
I wonder if the article like that NYT piece on AirBnB was planted.
Don’t also forget the fact the gals/guys working at the apartment associations or old world organizations are also working really hard trying to change things in their own right. It all comes down to people.
How can a company keep their fundraising valuations private?
first step is not to raise money from anyone or any firm located in California. the reporting requirements in California are way more detailed than anywhere else.
It’s good to hear investors state the importance of the deal termsGreat data here https://vcexperts.com/vat/c…Actual terms & conditions of venture financings (straight from the legal docs), as well as pricing of the preferred & common issuances.
Regarding the called out comment about AirBnB, this is a facile bit of rhetoric. It doesn’t matter how much a company is worth — if something is illegal or harmful to others, it will get scrutiny. The valuation simply means it gets more media attention, and that’s a cost of doing business.AirBnB, like any company which walks a fine line on regulatory issues, should be held accountable for problems. It matters not whether the regulations make sense to you or me, but it isn’t right for one party to be subject to all the negative consequences while the guy building a business that leverages their naivety gets off scott-free. We don’t let companies that make unsafe baby products off the hook (whether there have been reported incidents or not), nor should AirBnB get a free ride because they are a cool tech company.Here are some facts:- many people have successfully rented places to stay through AirBnB- many people have successfully rented their places out through AirBnB, legally or not, and with problems or not- there is economic value in unused or temporarily vacated accommodations- some tenants and homeowners have fallen on tough times and are desperate for cash- many people disagree with the laws governing temporary accommodations and/or don’t believe there are safety issuesNone of this is relevant. Fellow tenants and neighbors did not sign up to live in a neighborhood of transients. They lose when you win. The individual in this story (like most tenants) signed a lease that prohibits him from subletting for short periods and without the landlord’s permission, like everyone else in the building. Because of that, it doesn’t matter if 99% of the people in the building would also rent all or some of their units out through a service like this. The one person who doesn’t agree has a reasonable expectation that all tenants in the building are known to the landlord and have been through some vetting. In a single family neighborhood of houses, same deal. I wouldn’t be happy about seeing a stream of unknowns staying at my next door neighbor’s house, and I know they’d call the police if they saw the same thing happening at mine. The tenant may have been stupid, but AirBnB is willfully capitalizing on his stupidity and building a business of questionable ethics on the backs of many like him.The point of all this is not to criticize AirBnB’s business model (although I guess I am), but rather their ethics, their social responsibility and the business risk that they offload to both their customers and all those who wouldn’t dream of using their service.If you want to be an entrepreneur and change the world, you have to accept the risks — legal, environmental, economic, timing, social, political — all of them. And, you have to be accountable. If you choose to break the rules, you fight the fight, and live with the consequences. That’s the responsible thing to do.Every startup is challenging some status quo. Man up. Deal with it. There will be people, companies, institutions and bureaucracies that disagree with you, and there may be negative externalities that you aren’t paying for. And none of that has anything to do with your valuation.And, the truth is, they aren’t worth the valuation until they’ve properly accounted for and dealt with the associated risks of breaking the law. That’s just the way it is. Napster had lots of users too, before they got closed down.And Fred is absolutely right. Nobody is crying for you when you’re worth billions. But they also aren’t crying for you if you are worth a pittance and stepping on their toes.
I think a key challenge with any new digital media product is consumers seem to have trouble attributing a monetary value to – and are thus unwilling to pay for – media that is uncoupled from some type of physical medium – whether physical product (CDs, paper magazines, books, headphones, phone) or experience (concert, bar, etc.). Music is perhaps the first trouble child inasmuch as it is relatively easy to trade, stream and listen to, but many consumers balk at paying a reasonable $10/month for incredible non-owning access, but are willing to pay $5 for a cappucino, $12 for a cocktail, $130 for a monthly mobile bill and $400 for an iPhone – without batting an eye. And $650 for a ticket to the Stones. For those of us who have tried to move from free to $1.99 for an app, we understand the pain: consumers often balk at such low prices as being unreasonable.Isn’t it remarkable that so many young consumers will happily pay $300 for Beats headphones – something of a status symbol (and physical product) – but balk at a fee for for the very ‘product’ that they enjoy through the headphones? As much as I enjoyed Turntable early on, it strikes me as needing to answer this challenge: where’s the money going to come from? Not from consumers given their behavior thus far. Maybe the tide will turn as the Napster generation grows older. We can only hope, right?I wonder if books and movies will suffer a similar fate over time, as they become more “uncoupled” from physical manifestations. I’ve heard Hulu, a pretty ridiculously awesome product, is challenged as a premium service; I’m unclear how Netflix is transitioning as it tries to move beyond DVDs. It seems that publishers – both magazines (Conde) and newspapers (NYT) – have taken it squarely on the chin, not only from consumers unwilling to subscribe to digital versions, but from advertisers. Consumers might only see the value in that which they hold – the iPad or physical magazine – but not in the content itself. Perhaps this is just a natural cognitive bias.
There is plenty of money being spent on bits on on the internet
Spotify & Daniel Ek;http://www.guardian.co.uk/t…
I have a hard time crying for founders who are already rich (by most people’s standards; due to founder liquidity) and stand to get extremely rich while knowingly and willfully treating their customers like legal guinea pigs. In the case of Airbnb, the company is putting its “hosts” at risk for eviction, fines, liability lawsuits and more. Similar concerns apply to companies like RelayRides, Lyft, etc.Despite the common refrain among the tech set, not all regulation is bad. Yes, there is a whole lot of bad legislation and regulation out there. (See: California Prop 65 warnings which are so ubiquitous that they’re worthless.) But some was put in place to protect consumers, prevent discrimination and provide livable communities. If you whine about regulation without understanding the underlying rationale, you deserve to be treated like a spoiled brat.Regulators have to think about how enabling people to hail cabs with smartphones will affect minorities, the disabled and disadvantaged. If you’re smart, you’ll come up with real answers to those questions before they’re askedRegardless of all that, a big part of the problem is that companies don’t focus enough on marketing, PR and government policy. When you’re dealing with the big boys like the real estate lobby, taxi companies, hotel industry, you need to be thinking about the public policy game. As the Internet becomes a bigger part of our daily lives and tech companies go deeper into fields like medicine and financial services, there will be more such battles.On the media front: the sad reality is that too many journalists rely on external validation by VCs and other investors because they don’t fully understand the business models. Besides, funding posts get lots of clicks and are easy to crank out compared with deep analysis. (Which few people really want.)
I’m not that worried about that.What I like about the ‘value’ discussions around product and company building here is that the target is always value.What’s your business model? Start with customer value. How much should your charge? What’s it worth to the user.As long as wealth is connected, at least emotionally, to creating value, all’s well. When it looses that connection all is whacked out.
Same can be said for a decade of music startups whose stories all ended badly
this is the reason why I wanted to talk about business ethics
But so often those laws only exist because they were lobbied for by the incumbent industry. The moral argument here is not so black and white.
#downvoted. in a world where government is corrupt and immoral, the lawbreaker is the saint. prior examples: jesus christ, mahatma gandhi, rosa parks.
“I think most people in SF would frown on a company knowingly, publicly flaunting pollution laws”Similar in concept to the difference between white and blue collar crime.Many parents would be horrified to find out that their child committed a traditional blue collar crime (petty theft, burglary, assault) but would certainly be more understanding if the same child was charged with a traditional white collar crime (insurance or financial fraud, tax avoidance etc.) In certain communities of course there is no stigma at all on blue collar crime or even “going away”. It’s accepted.Your number #3 is probably the argument that would play well with most of the population that wouldn’t buy into the fact that there is any harm being done. Victimless crime so to speak. (Which I don’t agree with either there is harm.)Notice the similarities in how people view white and blue collar crime differently. White collar crime is more “victimless” since the victim is everybody or at least spread over everybody (and to a certain extent that is true since the effect is somewhat diluted as opposed to concentrated on a single individual).I mean we live in a society where, with a straight face, people can somehow make Mitt Romney look bad for not paying “his fair share of taxes” because he theoretically took advantage of whatever tax laws there were out there to get the lowest tax rate possible. Just like anyone does. Just like I do. Just like you do. Only schmucks pay more than they are required to by law. That’s who we want as President. A schmuck.”AVC Community conversation about startups knowingly, willingly breaking the law”That would never happen. People will simply rationalize what is being done and categorize it as being “different” because of the circumstances. Same way lunatics that argue about holistic cures do when confronted with reality. They simply change the metrics of measurement “you didn’t follow the directions” to attempt to win the argument. (Close to your #3 – the law is wrong so it’s ok to break the law).
Very few brokering value props will have long term staying power, it feels ( Etsy, Über ).
+1 for downvote transparency
All governments are corrupt at some level (power corrupts …), but not that corrupt. Regulations exist for reasons (not just to protect incumbents, although that is often a negative consequence), most often to protect the public. You can point to a few saintly examples where breaking the law is justifiable and the right thing to do, but I think it false and aggrandizing to put Kalanick and Chesky in the company of Christ, Gandhi and Parks. On balance, I think both AirBnB and Uber are doing at least as much harm as good.This coming from one who believes strongly in righteous civil disobedience.
I agree Charlie. Why is it that people can’t take 5 minutes to read? I love Mark Suster’s posts and he gets busted on for being too long….what I want is less numbers more volume.
I agree with the senior commenter from Pennsylvania as well as the senior commenter from Maryland (who works in Delaware).Details and nuance always matter. The entire “minimalist” thing bothers me to no end. There are no shortcuts. Numbers can always be arranged in a way to attempt to win an argument. Politicians do that frequently. So can words of course but at least constructing an argument shows effort whereas highlighting some number appears much easier.