Benner on Tech: The Venture-Risk Bubble
People are Talking About…
For some time now, venture investors have been talking about the high prices they’re seeing (and sometimes paying) for late-stage investment rounds. You know, the funding rounds that have pushed valuations at or above $1 billion for more than 50 U.S. companies. Bill Gurley has been vocal about the dangers of these rounds.
Gurley will go down in history as one of the investors who didn’t get totally swept away by the “this time it’s different” madness. In his latest post, he debunks the idea that the companies that are raising megarounds today are anywhere near an initial public offering (or a successful business) just because they can sell stock at high prices. And when people don’t recognize this difference, they’re taking on a tremendous amount of risk without really knowing it.
Some have argued that each of these companies would already be public in a prior era. Buying into such a notion is dangerous. … Very few of these companies are at a point where they could or should consider being public. Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Understanding these differences is crucial to understanding the true risks in this large private-round phenomenon.
Lots of companies can sell their shares for lots of money because liquidity and hype allow them to do so. The early investors see their paper value rise and the late-stage investors write in all sorts of guarantees and preferences into their deals so they’re protected if something goes wrong. With all of these factors in play, it’s easy to forget that risks abound.
Gurley cites Fab as his example of late-stage investing risk, but venture investors worry that there are more down rounds or other sorts of disappointing deals to come for private companies including Jawbone and Square.
Raising a lot of money isn’t necessarily good for the companies, either. Startups with big price tags have the added pressure of creating billion-dollar businesses rather than just working businesses. Union Square Ventures partner Albert Wenger notes that entrepreneurs often forget that when they raise money at a huge valuation and then have to build something that’s worth that amount or more before they can look for more funding. He calls this the post-money trap, and he warns that this blind spot isn't just a problem in the late-stage rounds that Gurley mentions.
** Related: Khosla Ventures’ Keith Rabois talks about why a lot of late-stage companies aren’t going public. He cites many reasons, including the idea that their businesses aren't all that strong.
Medium founder Ev Williams says his company is more than a platform for longform, in-depth work. It’s for bloggy, ultrashort content, too.
Pebble raised $1 million on Kickstarter in under an hour for its new smartwatch, Business Insider reports. It hit the $1 million mark faster than any other project on the crowdfunding platform.
Reddit says you have to have permission from people before you post their nude photos or videos of them having sex, the New York Times reports.
Toro, a startup that promotes apps on Facebook, was acquired by Google, TechCrunch reports.
Uber is hiring in China as its rivals merge, Bloomberg reports. In a recent column, I argue that Uber must stay in China to preserve its image as a globally successful brand, even though it has no chance of winning in that country. The Wall Street Journal says that Uber and Lyft are making their investors pick sides.
Yo has pivoted from an app that says “yo” into a media play of sorts.
Silicon Valley’s most high-profile trial began yesterday with opening remarks from attorneys representing Ellen Pao and Kleiner Perkins, Bloomberg reports.
People and Personnel Moves
Thomas Rothman will succeed Amy Pascal as co-chairman of Sony Pictures, the New York Times reports. Rothman was previously an executive at Sony’s TriStar label.
Jeff Sandquist has stepped down as Twitter’s global head of developer and platform relations, Re/code reports.
Bask Iyer will be the new chief information officer at VMware, replacing Tony Scott, ZDNet reports. Iyer was previously the CIO at Juniper Networks.
** Hewlett-Packard’s stock plunged after it lowered its outlook for the year, Bloomberg reports.
** Comcast’s quarterly earnings missed analyst estimates, Bloomberg reports. The company said it will increase its quarterly dividend, and that its deal to buy Time Warner Cable will likely close.
The company worked with chipmaker ARM to create an Internet-of-Things starter kit, BBC reports.
The company is removing Google and Facebook chat from Outlook.com e-mail, the Verge reports.
Anthem says that 8.8 million to 18.8 million non-customers could have had personal data compromised when the company has hit by a huge cyberattack this month, Reuters reports.
The U.S. State Department is offering a $3 million reward for the Russian hacker Evgeniy Bogachev, who is wanted by the FBI.
Gemalto confirms that it was hacked by the NSA and Britain's GCHQ, but that its SIM encryption keys were not stolen.
News and Notes
Hillary Clinton warned the tech industry that it’s going backwards on key issue such as women in the workplace and called on the industry to elect more women to its boards, the Financial Times reports. She made her remarks at the Lead on Watermark Silicon Valley Conference for Women. Afterwards she did a Q&A with Re/code editor Kara Swisher that you can watch here.
European policy makers want to create privacy standards that all companies must adopt in order to sell products in the region, the Wall Street Journal reports.
The FCC will likely approve its net neutrality proposals this Thursday, the New York Times reports.
The BlackBerry Classic goes on sale this week.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.