The race to own and cash in on the best private companies

That Was The Week, #33


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Bill Gurley of Benchmark Capital fame is as mad as hell - at bankers like Morgan Stanley and Goldman Sachs. His claim is that they are stealing money from Venture investors and Company founders by under-pricing IPOs and allowing their clients to take value that rightfully does not belong to them.

The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year. This problem is getting worse every year, which led Barry McCarthy, the true pioneer of the Direct Listing, to deem the traditional IPO process “moronic.”

Gurley prefers Direct Listings and now SPACs (Special Purpose Acquisition Companies) to IPOs.

Andreessen Horowitz is not buying it. In a lengthy article written by Scott Kupor and Alex Rampell they confront Gurley directly without naming him:

There’s a popular narrative that evil investment bankers are intentionally underpricing traditional IPOs to steal from companies, lining banker pockets and those of their fatcat Wall Street clients. The proof is seemingly obvious: IPOs are 50x oversubscribed! The price explodes by 50 to 200 percent mere hours after the IPO, representing hundreds of millions of dollars in “money left on the table”! Proponents of this view believe the Direct Listing, or now the SPAC, is the panacea for these woes.
An IPO is far from perfect, but this narrative is almost completely false.

This all happened in a week where Snowflake, Asana, Unity and Palantir filed for IPOs and where Paul Ryan of Congress fame joined a "blank check" company, otherwise known as a SPAC. Also the NASDAQ applied to the NYSE to support Direct Listings (going public without a fund raise) to also raise capital.

There are now a very large number of SPACs. This leads Gurley to speculate that companies considering the SPAC path (path #3 as he deems it) will be able to use the competition between SPACs to drive great deal terms for their eventual merger with them.

For the uninitiated this debate is really important for bankers and venture investors. For founders maybe less so. As a founder who has done his fair share of IPOs and filings I can say that I always saw this as a simple funding event. But for investors and bankers it is more of a pay day. How much they get paid in the short term matters to them. For founders playing the long game the share price will likely be the same no matter the method of enabling it to trade. In general strong companies will IPO traditionally. Those that are even stronger - with a cash rich balance sheet, might Direct List. And slightly weaker companies will go the SPAC route. I personally do not have a strong opinion. What I do care about is the strength of the company and its likely future. Take Snowflake. It's revenues have been on a rocket-ship type growth curve. I will want to own its stock no matter the route it chooses. Palantir, not so much. And for those that SPAC, be careful to ensure you have the right growth curve and predictability to do well in the public markets.

The other big news of the week is that Epic is no longer a developer in the Apple ecosystem, having had its developer account terminated on Friday. Good for Apple on defending its right to be rewarded for aiding distribution of paid software.

Best Keith.

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This week's video is here:

Reads of the Week

Topic of the Week: Raising Cash and Going Public

Politics and Technology

Venture

Startups

Podcasts of the Week

Tweet of the Week

--Reads of the Week



New media platforms are enabling a new creator type: Digitally Native Vertical Creators

Stories by Eric Feng on Medium

  • And just like their retail DNVB counterparts, DNVCs are also building off a new wave of technology platforms that have democratized access to capabilities across the entire media product lifecycle for this new breed of content creators.
  • DNVCs then get to spend far more time focusing on engaging with their customers and building long term, direct relationships with that audience because of these enabling media platforms.

Newsletters and New Media Economics

The Diff

  • Paid newsletters are popular enough that the business is getting its fair share of is-this-a-bubble-or-what? pushback. One view is that newsletters are quickly becoming a saturated market. Sure, Andrew Sullivan can quit New York Magazine and instantly have a six- or seven-figure subscription income (the Substack leaderboard rounds the numbers a bit, but that range makes sense). But if every writer at NYMag quits, and they all charge $5/month, the cost of recreating the magazine is multiples of what it costs to subscribe. To get a year of Andrew Sullivan, you pay $50/year. To get a year of everyone-left-now-that-he’s-quit, you pay… $20/year for your first year, and $60 thereafter.
  • The math doesn’t add up—at least as long as consumption patterns are constant. And clearly they’re not. Paid media is subject to three pressures, which work in tension with each other to determine the optimal structure of a media company—whether it’s, at one extreme, a giant company with a flat cost for every conceivable piece of information, or at the other, a series of one-person companies with highly variable pricing. Those forces:
  • Bundling
  • Distribution
  • The convexity of knowledge

--Topic of the Week: Going Public



Going Public Circa 2020; Door #3: The SPAC

Above The Crowd - Bill Gurley

August 23, 2020: If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one. What are they, and do they matter right now? Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation. But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets.


In Defense of the IPO

Andreessen Horowitz, Alex Rampell and Scott Kupor

There’s a popular narrative that evil investment bankers are intentionally underpricing traditional IPOs to steal from companies, lining banker pockets and those of their fatcat Wall Street clients. The proof is seemingly obvious: IPOs are 50x oversubscribed! The price explodes by 50 to 200 percent mere hours after the IPO, representing hundreds of millions of dollars in “money left on the table”! Proponents of this view believe the Direct Listing, or now the SPAC, is the panacea for these woes.

An IPO is far from perfect, but this narrative is almost completely false. To understand why first requires taking apart the IPO process, how stock markets work, and what the “price” of a stock means. You can’t fix or improve something without understanding how it works and what’s broken.




Former House Speaker Paul Ryan Starts Blank-Check Company

WSJ

Paul Ryan, the consummate Washington negotiator, is trying his hand at another kind of deal making, jumping into the rush on Wall Street toward blank-check acquisition companies. The former House speaker will serve as chairman of a vehicle known as Executive Network Partnering Corp., which will seek to raise roughly $300 million in an initial public offering, people familiar with the deal said.


A faster, easier, cheaper way of going public

Fundings & Exits – TechCrunch

  • The New York Stock Exchange has gotten approval from the SEC for a new type of direct listing, one in which the company going public can sell a bloc of shares during the normal price discovery process.
  • It was a good week for our scheduling change, with the main episode of the show coming to you on Thursday afternoon versus Friday morning.

By the Numbers: Are Tech IPOs Worth the Hype?

Visual Capitalist

  • Initial Public Offerings (IPOs) generate massive amounts of attention from investors and media alike, especially for new and fast-rising companies in the technology sector.
  • But when you peel away the hype and examine investor returns from tech IPOs more closely, the reality can leave a lot to be desired.

Quick S-1 Teardown: Snowflake

Matt Turck

  • We’ve had the pleasure of hosting Snowflake’s former CEO, Bob Muglia, a couple of times at our Data Driven NYC event of the years (see videos below), and it’s been really fun to watch the company grow.
  • While they offer 30-days trials, they don’t use much of the GTM tactics that are increasingly regarded as necessary for rapid market expansion for enterprise companies: bottoms up, free tier, open source Consumption-Based Pricing model : Snowflake has a different take on pricing, as they believe that standard SaaS (subscription) business model “often results in customers paying for unused software.

Sequoia strikes gold with Unity’s IPO filing

TechCrunch

  • Today after much anticipation, video game engine Unity filed its Form S-1 with the SEC as it prepares a roadshow to go public in the coming weeks.
  • While Sequoia did indeed get in early with the video game platform, what’s been key for it over the years has been buying up additional shares through growth investing, as well as buying out common shares, presumably from earlier investors, employees and perhaps founders as well.

Startups Weekly: Will future unicorns go public sooner?

TechCrunch

  • In this scary new decade, founders who aspire to succeed on the scale of Airbnb and Palantir may see public markets as a less risky way to reward shareholders and fund future growth?
  • The public markets are staying receptive to tech IPOs, and tech unicorns are trying to recover from pandemic damage, polish up their financials, and head back towards the starting gates.

--Politics and Technology


WSJ: Mark Zuckerberg used a private Trump meeting to hurt TikTok

Engadget

Mark Zuckerberg may have used a private meeting with Donald Trump to push for the US to attack TikTok, writes the Wall Street Journal. During his visit to Washington DC late last year, the Facebook CEO made both public speeches and private exhortations about the threat posted by its rival.


TikTok executive says it has 'multiple paths' to stay alive in the US

Engadget

Multiple companies have expressed interest in acquiring TikTok’s US business since President Trump issued an executive order earlier this month requiring the app’s Chinese owners to shutdown operations in America.


TikTok Proved Silicon Valley Is Done Innovating

Marker — Business News and Articles for Startups and Leaders - Medium

  • ️ TikTok and Silicon Valley’s innovation drought ️ The Buy/Sell/Hold Analysis About a month from now, TikTok — the Chinese-owned, video-sharing phenomenon — must sell its U.S. operations.
  • Each week, our writers Steve LeVine and Rob Walker make sense of the most important developments in business right now — and give them a Buy for clever moves or positive trends, a Sell for mistakes or missed opportunities, or a Hold if they’re noteworthy but too early to call.

TikTok sues the US government over upcoming ban

Engadget

Specifically, TikTok says that it has already gone to “great lengths” to show a commitment to the US market, noting that its key personnel are all Americans based in the US, thus not subject to Chinese law.


Walmart Joined Microsoft’s Bid for TikTok

The Information

Microsoft and Walmart jointly bid to acquire TikTok's U.S. business, according to a person involved in the situation. The software giant brought the e-commerce company into the deal to provide a platform to support digital sales on the platform, this person said.


Apple Terminates Epic's Developer Account

9th5Mac

As previously warned by Apple, Epic’s App Store account has now been terminated due to the Fortnite developer knowingly violating App Store policy. Epic Games still had a few apps available for iOS aside from Fortnite, and they were all removed today.

Fortnite for iOS was updated earlier this month with a new option that allowed users to purchase in-game items directly through Epic’s payment system instead of using Apple’s In-App Purchases. Once Apple removed Fortnite from the App Store, Epic Games started a public campaign and a legal battle against Apple, which led the Cupertino-based company to announce that it would terminate Epic’s developer account.

That’s exactly what Apple did this Friday, August 28. As first noticed by John Voorhes from MacStories on Twitter, the App Store now shows an alert saying “this app is currently not available in your country or region” when you try to access Epic’s profile or any of their apps through a direct link, such as this one from Infinity Blade Stickers app.


Daring Fireball

  • But the “emergency” is entirely of Epic’s own making…it knew full
  • benefits of the App Store without paying or complying with

Apple court filing claims Epic's 'Fortnite' setup is like shoplifting

Engadget

Apple has asked a court not to temporarily reverse the App Store ban the company issued to Epic Games shortly after it broke its developer guidelines by accepting direct payments through Fortnite (via Axios).


News Publishers Join Fight Against Apple Over App Store Terms

WSJ

  • In a letter to Apple Chief Executive Tim Cook on Thursday, a trade body representing the New York Times, the Washington Post, The Wall Street Journal and other publishers said the outlets want to know what it would take for them to get better deal terms —which would allow them to keep more money from digital subscriptions sold through Apple’s app store.
  • “The terms of Apple’s unique marketplace greatly impact the ability to continue to invest in high-quality, trusted news and entertainment particularly in competition with other larger firms,” said the letter, which is signed by Jason Kint, chief executive of the trade body, Digital Content Next.

--Venture


The use of placement agents for Emerging fund managers

Stories by samir kaji on Medium

  • From our report in late 2018, nearly 70% of capital going into Fund 1 offerings are from family offices or high net worth individuals.
  • The appetite for untested entrants is typically lukewarm at best, and managers must cast a vast net to successfully raise a fund (generally 200–500+ LPs during a Fund 1 process).

Introducing The Diversity Rider Program

Crunchbase News

  • Investors who sign up/commit to the program will pledge to embed a specific boilerplate rider language into their standard term sheets, creating an opportunity among their firms and all founding teams to identify and expand diversity.
  • Crunchbase is supporting the initiative with the goal of highlighting both emerging check writers and firms who have signed up for the Diversity Rider as part of our Diversity Spotlight program.

Why the shift to online commerce is here to stay

On my Om

  • Michael Sivak, of Sivak Applied Research, took data from various sources and estimated that during the second quarter of 2020 , inflation-adjusted e-commerce sales in the US were up 43.3 percent compared to the same three months in 2019.
  • More concrete confirmation came from Amazon saw its revenues go up 40 percent year over year to $88.9 billion.

Sutter Hill strikes ice-cold, $2.5B pre-market return with Snowflake’s IPO filing

Fundings & Exits – TechCrunch

  • Outside Sutter Hill, Redpoint has the best multiple return profile, given that it only invested $60 million in these later-stage rounds while still maintaining a 9.0% ownership stake.
  • In addition to Sutter Hill, Sequoia also got a large slice of the data computing company: its growth fund is listed as having an 8.4% stake in the coming IPO.

Snowflake’s S-1 Filing Reveals Fast-Growing Revenue And Slowing Losses

Crunchbase News

  • In February, Snowflake raised $479 million in a round of funding, which gave the company a $12.4 billion valuation.
  • The San Mateo, California-based company, which is backed by investors including Sequoia Capital and Dragoneer Investment Group , has raised at least $1.4 billion in total funding, per Crunchbase.

Asana Files To Go Public on NYSE

Crunchbase News

  • For the year that ended on Jan. 31, 2020, the company reported $142.6 million in revenue, a nearly 86 percent increase from the $76.8 million it generated in revenue during the same period the year prior.
  • Project management software startup Asana’s S-1 is finally here , as the company prepares for a direct listing on the New York Stock Exchange.

Palantir and the great revenue mystery

Fundings & Exits – TechCrunch

  • The Exchange spent a lot of time digging into e-commerce venture capital results this week , including notes from some VCs about why e-commerce-focused startups aren’t raising as much as we might have guessed.
  • The Exchange will have a full breakdown of Palantir’s numbers Monday morning, but I think what Palantir coverage over the years shows is that when companies decline to share specific revenue figures that are clear, just presume that what they do share is misleading.

Apple’s Best Times Are Behind It. For Real This Time!

Monday Note - Medium

  • Even as Jobs’ historic Apple 2.0 turnaround launched the company towards new heights with a string of successes — the iPod, the Intel Macs, the iPhone and the iPad — the doomsayers weren’t deterred.
  • As Bill Gates recently said , referring to Apple and other companies of its size: “If you are as successful as I am, or any of those people are, you deserve rude, unfair, tough questions.

Tencent: The Ultimate Outsider

Not Boring

Packy McCormick / Not Boring: A deep dive into Tencent, its history, core businesses, investment portfolio, and Pony Ma's “outsider CEO” characteristics that led to its success — Tencent is the most important company that many Americans know the least about.


--Startups

Valuing Early Stage Equity: An Optimism-Weighted Approach

Medium - David Erlich

  • Valuing Early Stage Equity: An Optimism-Weighted Approach If you’re looking for the worksheet and want to skip reading the associated post, you can find it here .
  • If you’re reading this, you may already have an offer from an early-stage startup and are looking to understand the value of the equity portion of your comp package.

Restream Lands $50M Series A, Launches New Streaming Broadcast Center

Crunchbase News

  • The new Restream Studio enables customers to broadcast live content from the cloud to millions of viewers across more than 30 social platforms simultaneously, including Facebook, LinkedIn, Twitch, Twitter and YouTube.
  • This year, due in part to needs related to remote working, the company’s growth has increased three-fold and now includes more than 2 million content creators streaming 7.5 million broadcasts per month, he added.

MIT CSAIL grad launches machine learning platform with $10M Series A

Enterprise – TechCrunch

Manasi Vartak, founder and CEO of Verta, conceived of the idea of the open source project ModelDB database as a way to track versions of machine models while she was still in grad school at MIT.


Palantir targeting 3 class voting structure according to leaked S-1, giving founders 49.999999% control in perpetuity

Fundings & Exits – TechCrunch

  • This allows a founder with 5% of the company through these special shares to control a majority of a company’s voting authority.
  • As is typical with most modern tech IPOs, the founders of the business are looking to create multiple voting classes of stock in order to protect their voting power even while their total ownership of the company diminishes.

7 Signs a CEO Isn’t Really Going For It

SaaStr

  • But let me share what I’ve learned are signs an entrepreneur likely won’t be going for it / won’t build something big.
  • Talks a lot about selling the company for “say, $20m-$30m”. This is a very logical thing to think about. But selling your company for $20m-$30m isn’t consistent with raising VC capital or going big.
  • A lot of immature language from the CEO, especially on social media. This I’ve found to be a big flag in B2B/SaaS. You have to carry yourself as the CEO you want to be in 2–3 years, and act with that level of professionalism. Including on social media, etc. CEOs that act immature on social media I’ve found often don’t go that far. Great CEOs don’t think the world is out to get them. Then tend to be realistic but positive-sum folks.

--Podcast of the Week


SaaStr Podcast #364 with Figma Head of Sales Kyle Parrish

SaaStr

  • I think the last thing that was one of the most successful moves that we made is like a leadership team out there, we started realizing that back in 2013, I think it’s very different today, the hiring market wasn’t as mature for some of the talent, the caliber of talent that Dropbox was looking for at that time.
  • When I got back, he connected me with Dylan and the team over there, and after first thinking that self-serve was the only path for them, they realized they were starting to get some serious traction with large enterprise companies and wanted to build a sales org, and asked me to take the role.

--Tweet of the Week