Venture Boom & Wall Street Gloom
January has been all gloom for tech on Wall Street, but there is still a boom in Silicon Valley. What are the implications for Venture investors and founders of startups? Let’s dig into valuations and trends in tech investing.
- A Tale of Two Markets
- Web 3 — The Fight Continues
- Investing in Web 3 — Too soon? or Too Late?
- Europe is an Asset
- Microsoft, Preparing for Web 3?
- Startup of the Week
- Tweet of the Week
I have avoided looking at my E*Trade account in 2022. I know it will not be pretty. My portfolio is made up of high growth recently public companies stretching from Snowflake and Cloudflare in cloud computing to Tesla, Rivian, Nio, and Li in Electric vehicles, and the Greystone Bitcoin and Ethereum Trusts in Crypto.
I have held most of the stocks for more than a year and they are having a terrible Winter. Google shows they lost about 20% of their value so far this year. Although they are collectively still up over 100% since I bought them.
I am one of the lucky ones. Peloton, which I do not own, looks like this:
It has declined by $137 from its peak a year ago. Many stocks are down well over 50%. Even Netflix is down 20%.
But then there is my own private company portfolio. I have shares in several venture-backed companies. InFarm raised $200m at a valuation of well over $1 billion recently. Miles closed an A round and will soon do a B. Around is prospering. Millicast grew revenue by over 300% in 2021. Kadence is booming as is Nodes & Links.
The gloom surrounding public market stocks — for me — is offset by the fact that I bought them early, and that I have private stocks doing very well.
But my 3 sons in their Robinhood accounts, are not so sanguine. And they are part of the vast majority of ordinary investors who are experiencing the re-pricing of tech stocks. Because they are not “qualified investors” they do not have the luxury I have to participate in the fast growth being experienced in the private venture-backed asset class.
Some of the readers of this newsletter are like me, and others are like my sons. This week’s curated articles focus on the discussion about venture capital and attempt to assess the impact of Wall Street on Silicon Valley. Hint, there really is not a major impact until a company approaches a public offering. Tomasz Tunguz has the lead article below.
We also re-engage the Web 3 discussion re-ignited by Prof Scott Galloway and Packy McCormack but now widely discussed in the mainstream media.
I have spent most of the week working on SignalRank – trying to build a way that will allow regular investors to participate in the growth of private companies. That work seems more important than ever this week. More in the Video.
A Tale of Two Markets
2014’s correction stalled and then reversed Series D round sizes for 2 years through the second correction in 2016. Public market investors are rotating out of high growth technology companies as the Fed’s policies of quantitative easing, asset purchases, and low rates abate.
The question on every software founder’s mind today must be, how will this affect the private financing markets? As a company’s scale approaches that of a public company, the greater the impact on their fundraising.
Power of the People
What’s In a Brand?
In the 1950s when brands had their Don Draper-drenched heyday people used brand recognition as a short-hand to recognize quality and trust. We drove our Ford Mustang to McDonald’s for a Coca-Cola.
Fast forward through Vietnam, Watergate, Chernobyl, the Gulf War, and #FreeBritney we’re all feeling pretty bummed out. Less than 35% of people have confidence in institutions and the default trust we gave to brands has been diminished.
More than ever we’re interested in following people that we can empathize with and idolize. The most followed accounts on Instagram are people like Cristiano Renaldo, Kylie Jenner, and The Rock. Some of the most recognizable people in the world are right up there with the most recognizable brands like Nike and Coca-Cola in their influence.
David Perell Nailed It
The “Writing Guy” on Twitter, David Perell, wrote a fantastic series of posts on what he calls “Naked Brands.” He walks through examples across basketball, fashion, and music but the core idea is this:
“Inspired by transparency, [popular influencers] have built loyal followings, and now, they are building companies. Successful influencers are perceived as genuine, sincere, and most of all, transparent. They differ widely from institutions built during the industrial era. Brands built during the late-industrial era garnered trust through mass marketing, as opposed to transparency. This is no longer a sustainable strategy.”
The example that stuck with me the most was his description of the difference between the NFL and the NBA. In the NFL the focus is largely on teams and individual celebrity is more rare. But the NBA “encourages each athlete to showcase their individuality. The league encourages its athletes to assume vocal roles in politics, culture, and social action. It operates with an ethos of sincerity.”
The increased emphasis that people are putting on individuals creates an unbundling of power in these industries. “Individual personalities replace gatekeepers as the drivers of style and culture.” Where you traditionally had brands in fashion, studios in movies, and labels in music dictating what would rise to the top you’re seeing a massive breakdown in the power of gatekeepers and an emphasis on the individuals with whom people empathize most.
QED Investors’ Frank Rotman in breaking down the venture market today, determining how to compete today, and how QED makes decisions.
Listen now | Episode 68 This week I’m absolutely thrilled to bring you my conversation with Frank Rotman, Founding Partner of QED Partners, one of the top Fintech firms in the world. Founded alongside with Nigel Hoffman, QED has invested early in companies such as Credit Karma, Klarna, SoFi, and Nubank. They have $3B in AUM.As many of you that follow Frank on twitter, and if you don’t you should right away, you’ll know he’s one of the most insightful thinkers in the industry. As such, I wanted to take this opportunity to have a more global dialogue about the state of the venture market today, including a close evaluation from both a risk and return perspective.
To stave off national stagnation in a post-COVID world, technologists need to build companies that tackle America’s biggest problems head-on.
Two weeks before the start of our perpetual lockdown, The New York Times columnist and Substack writer Ross Douthat released “The Decadent Society,” a survey of America’s general apathy toward building a more dynamic future. While the book itself isn’t particularly surprising in its critique, the timing of its release was important: it was among the last public critiques of American stagnation before the world changed forever in March 2020. In the Before Times, Douthat noted four indicators of malaise in the Western world, some of which were magnified during the pandemic: institutional failure and loss of civic trust; economic and technological stagnation; declining birth rates and sterility; and mimetic, derivative culture. By April, many seemed hopeful that some of these trends might reverse — if anything could pull America out of its decades-long march toward decline, perhaps it was a global pandemic.
Almost two years later, it’s clear that the stagnationists were right about some aspects of American decline and very wrong on the ones most within our control. Institutional failure is the most glaring and far-gone aspect of American stagnation: look no further than the U.S.’s shoddy exit from Afghanistan and the associated $2 trillion of spend, and it’s clear that the military, the governmental institution with the highest degree of trust — before the Afghanistan withdrawal, 69 percent of Americans had a “quite a lot of confidence” in the U.S. military — has been damaged. Other institutions like public schools and the medical establishment have lost so much trust during the pandemic years that they could go the way of mainstream newspapers, plateauing into a distrustful malaise where only a fraction of the country cares about what they have to say at all.
But the major error of the stagnationists — claiming technological stagnation as a factor in American decline — revealed a countertrend that’s easy to miss if you’re not immersed in technology. Though the Manhattan Project and the Moon Landing happened when America was arguably at her most dynamic, the technology sector is the only sector of the American economy that has maintained its vibrancy, dynamism, and growth through innovation over the last 25 years. The top six companies by market capitalization in the U.S. are now technology companies, two of which were founded in the 2000s. In 1996, none of the top six companies were technology companies. Indeed, tech has been propping up all other sectors including the institutions that have lost all civic and public trust. In 2020, this fact became so obvious that there isn’t much of a counter argument: From the Moderna vaccine to the uninterrupted service of Amazon Prime, Zoom and Netflix, the scientific and operational excellence of consequential technology companies made up for the shortfall of our flailing governmental institutions.
The prevailing trend of the 2020s is not that we’re destined for decline. It’s that the technology sector is augmenting and improving the functions of institutions that we used to trust, especially those in the realm of government. Indeed, I believe the only way to reverse the course of stagnation and kickstart nationwide renewal post-Covid is through technologists building companies that support the national interest. I call this American dynamism: it’s the recognition that seemingly insurmountable problems in our society — from national security and public safety to housing and education — demand solutions that aren’t simply incremental changes that perpetuate the status quo. These problems demand solutions from builders — and it’s never been more vital that startups tackle these serious American problems.
Crypto.com, a popular cryptocurrency exchange, has extended its venture arm’s fund size to $500 million as it looks to more aggressively back early-stage startups to help the nascent ecosystem grow, following similar moves by rivals Binance, Coinbase and FTX.
The broadening of Crypto.com Capital comes less than a year after the Singapore-headquartered firm unveiled its maiden fund of $200 million. The fund, unlike those of many of its rivals, has no LPs (meaning, it’s fully financed by the firm’s balance sheet.)
The maiden fund, whose individual checks run up to $10 million in size, has been so far deployed to back about 20 startups including YGG SEA, multi-chain crypto portfolio tracker DeBank, cross-chain token infrastructure Efinity and Ethereum scaling solution Matter Labs.
Crypto.com will continue to focus on backing early-stage startups, said Jon Russell, who joined the firm as a general partner this month, in an interview with TechCrunch.
With the fund, Crypto.com is broadly focusing on gaming, decentralized-finance and startups innovating on cross-chain solutions. But he cautioned that the industry could change and expand, as it has in recent years, to areas “we don’t know about,” hence the firm is keeping an eye out on everything.
Web 3 — The Fight Continues
The advertised decentralization of power out of the hands of a few has, in fact, been a re-centralization of power into the hands of fewer
I didn’t anticipate how much I’d appreciate a @Jack of fewer trades. Key to progress is class traitors: Generals warning of a military-industrial complex, product managers who narc on mendacious management, and tech leaders who violate the Silicon Valley code of the white guy — never criticize each other or your noble missions to save the world. Jack Dorsey has drawn his sword and taken aim at colleagues attempting to centralize control and gain from the promise of decentralization. Specifically, “web3.”
What is web3? It’s a hazy/vague term describing a crypto-powered internet, and a font of yogababble. Its promoters would say something akin to:
Web3 is a decentralized version of the internet where platforms and apps are built and owned by users. Unlike web2 (the current web), which is dominated by centralized platforms such as Google, Apple, and Facebook, web3 will use blockchain, crypto, and NFTs to transfer power back to the internet community.
Sounds good. Most of us buy the down-with-Facebook-and-Google narrative. Cut out the middleman, and we all win — especially the little guys. The dispersion of theaters, doctors offices, and bank branches to our homes, smart speakers, and phones offers enormous potential to provide elemental services with reduced friction. Smart contracts could, among other things, reduce agency costs and iron systemic biases out of the process. That’s the promise of decentralization. But does the music match the words?
The Web3 Debate
Rebutting Prof G’s Web3 Rebuttal
On Friday, everybody’s favorite Professor sent out a piece titled, simply, Web3.
I didn’t receive it. I don’t subscribe. But my dad forwarded it to me, with an “uh oh…”
Uh oh is right. I should have been nervous about opening it. I’m very long crypto. But I wasn’t even a little bit nervous, because I had no doubt what side the Prof would be on and what kind of piece he was going to write. And that’s exactly the piece he wrote.
Now I don’t want this to be a “dunk on the Prof because he’s always wrong” piece. My friend and Party Round CEO Jordi Hays proclaimed that “shitting on Galloway is played out,” and I tend to agree. I didn’t even want to respond.
But then I noticed that he misquoted me and misrepresented things I was involved in. Then I looked a little deeper and found errors and misdirections galore.
The Professor’s piece was a lazy regurgitation of other peoples’ arguments with some key inaccuracies, intentional or accidental. Hundreds of thousands of people read, listen to, and even pay to learn from him, and normally it’s not my problem… but if he’s going to accidentally pull me into this debate anyway, let’s debate.
Welcome to Debate Club
At the risk of making myself seem unimaginably cool: I debated competitively in high school and college, and actually just started a Debate Club in NYC when COVID hit.
In Parliamentary debate, the kind we did at Debate Club, there are two teams — the Proposition and the Opposition — who debate a resolution. The resolution might be something like “General AI should have fundamental rights.” The Proposition defends the resolution and the Opposition tries to poke holes in it.
The two sides go back and forth making arguments, concluding in a rebuttal from each team summarizing the debate, reiterating their points, and trying to make clear why their side won. If you want to read the rules, I wrote up a stripped down version for Debate Club.
A dispute over “web3” in the cryptocurrency industry was publicly exposed in a Twitter spat between Jack Dorsey and Marc Andreessen. Here’s what it’s all about.
By Ephrat Livni
Jan. 18, 2022
“You don’t own ‘web3.’ The VCs and their LPs do.”
Jack Dorsey tweeted this esoteric salvo in late December, not long after he stepped down as the head of Twitter to focus on advancing his Bitcoin ambitions. The post, swiping at the power held by venture capitalists and their limited partners as they try to reorganize the internet around blockchain technology, an effort known as web3, soon set off a public feud among members of the Silicon Valley ruling class. The dispute over what many herald as the next arena of technological revolution has drawn increasingly hard lines. Elon Musk is with Mr. Dorsey; Marc Andreessen is his enemy.
The web3 revolution, backers say, promises the democratization of commerce and information by building a better internet on blockchain networks — distributed ledger systems that form the basis of Bitcoin and other cryptocurrencies. It theoretically would cut out traditional middlemen and gatekeepers, letting users transact directly and have a greater stake in the programs they use.
But Mr. Dorsey has a different view. “It will never escape their incentives,” continued his post about the role of venture capitalists in web3. “It’s ultimately a centralized entity with a different label.”
If you find these messages mystifying and wonder what’s at stake, you are not alone. These billionaires are debating the future of the internet, a tool we all use, in a new language that few of us understand. Let’s decipher the code.
Investing in Web 3 — Too soon? or Too Late?
Planned fundraising illustrates how Silicon Valley firms are fuelling boom in cryptocurrency start-ups
Miles Kruppa in San Francisco
Andreessen Horowitz plans to raise up to $4.5bn for a new set of cryptocurrency funds, aiming to more than double the amount it raised less than one year ago in a sign of the growing frenzy surrounding digital assets. The Silicon Valley-based venture capital firm told investors last week it planned to raise up to $3.5bn for its latest cryptocurrency venture fund and up to $1bn for a separate fund focused on seed investments in digital asset start-ups, said people briefed on the discussions. Andreessen plans to finalise the new funds by March, one of the people said. The firm declined to comment. Andreessen is known as one of the leading VC firms in Silicon Valley, having previously been an early investor in Facebook, Twitter, Airbnb, Stripe, Coinbase and a host of other leading technology groups. If successful, Andreessen’s haul would easily surpass any other funds raised to make early bets on cryptocurrency start-ups. The move signals how top VC firms are increasingly piling into crypto, fuelling a boom that has spawned hundreds of projects aiming to displace traditional finance. Investors normally balk at VC firms that try to raise money so quickly and in such large quantities, preferring funds to remain small and focus on performance.
However, Andreessen and other tech investors have recently had little trouble raising billions of dollars from large institutions for bets on cryptocurrency projects, flooding the sector with unprecedented sums.
Paradigm, a firm led by former Sequoia Capital partner Matt Huang and Coinbase co-founder Fred Ehrsam, raised $2.5bn in November for what was then the largest cryptocurrency venture fund.
In the past year, venture capital firms with dedicated crypto arms like Andreessen Horowitz and crypto specialists such as Paradigm have gobbled up some of the hottest startups in the industry. Benchmark’s approach has been more of a nibble: The blue-chip VC firm has invested in just two new crypto startups during the same period.
That limited activity doesn’t reflect a lack of interest: Benchmark general partner Sarah Tavel, in an interview with The Information, said she now focuses almost all her time looking at crypto investments. And while Benchmark will never do the dozens of deals inked yearly by some rivals given its relatively small size, she said its “superpower” — helping build Snap, Twitter, and other Web 2.0 companies that remain prevalent today — will give it an edge with the new wave of crypto startups.
In an interview, Benchmark general partner Sarah Tavel elaborated on her views about the evolving crypto market for venture capitalists — and where the premier early-stage investor fits in a landscape crowded by multibillion-dollar funds and specialist VC firms.
She also talks about the prospects for decentralized autonomous organizations, the blockchain-based groups favored by crypto enthusiasts that allow members to buy a piece of the organization and vote on how it operates; where more-traditional startup structures play a role in Web3; Benchmark’s view of tokens; and VC Twitter debates. (Read related story: Benchmark’s Approach to Crypto Takes a Page From Web 2.0)
Web3 is being hyped as a game-changing paradigm shift that will enable new ways for creators to monetize their content. What are the problems that must be solved before this brave new world of tokens can emerge?
Europe is an Asset
Funding into Europe’s startups in 2021 grew by more than 100 percent year over year. So who were the investors that put the most money to work into European startups?
Funding into Europe’s startups in 2021 grew by more than 100 percent year over year with increased funding at every stage, per Crunchbase data. So who were the investors that put the most money to work into European startups?
The firms that led or co-led with the most funding into European startups broadly mirror the trends we see in global venture capital, Crunchbase data shows. Growth equity firms that led or co-led rounds with the largest dollar commitments include London-based SoftBank Vision Fund as well as Tiger Global Management and investment bank Goldman Sachs, both headquartered in New York. Their investments include Trendyol, Revolut, Starling Bank and Contentsquare among many others.
Of the 13 firms that led or co-led rounds into European startups at more than $1 billion with at least five portfolio investments, three are venture capital firms. These are U.S.-based Sequoia Capital, which established a European HQ in 2020, Berlin-based Target Global, and Index Ventures from Switzerland.
As recently as 2020, not one of these firms led or co-led fundings $1 billion or above into European companies.
Breaking down European VC’s remarkable year
Few could have predicted the heights to which Europe and Israel’s venture capital market would reach in 2021, with capital invested surpassing €100 billion for the first time. A glut of outsized rounds and an increase in late-stage capital — which now accounts for 70% of total deal value — led to record numbers in 2021, as well as the continued participation from foreign and nontraditional investors.
PitchBook’s 2021 Annual European Venture Report examines the key drivers that led to such a bumper year, breaking down activity across dealmaking, exits and fundraising, as well as regions.
- Despite expectations at the start of 2021 that investors would be more risk-averse, first-time rounds spiked to new highs as VCs became more confident in Europe’s venture ecosystem.
- Exit value more than tripled the previous record from 2018, totaling €142.5 billion, as investors and founders rushed to capitalize on favorable market conditions.
- Although European VC funds swelled in size in 2021, the number of vehicles created sunk to its lowest level since 2013.
Microsoft, Preparing for Web3?
Tech giant acquires publisher of games including World of Warcraft and Candy Crush
Microsoft is to pay almost $70bn to buy Activision Blizzard, the publisher of mega franchises including Call of Duty, World of Warcraft and Candy Crush, in the biggest ever takeover in the tech and gaming sectors.
Microsoft said that the $68.7bn (£50.6bn) all-cash deal — which dwarfs its previous biggest, the $26bn takeover of LinkedIn in 2016 — will “provide the building blocks for the metaverse”. It is the biggest deal in tech history, eclipsing the $67bn paid by Dell to buy the digital storage giant EMC in 2015.
Startup of the Week
A 22-year-old Indonesian college student has become an overnight millionaire after his joke selfie NFTs went viral online.