Silicon Valley Stock Exchange and the Saints of Wall Street

A week ago, the news of the Long Term Stock Exchange (LTSE) backed by some of the biggest names in Silicon Valley emerged. The Elites in the valley, including
Marc Andreessen, Reid Hoffman and Peter Thiel have joined hands to set up a stock exchange where firms do not have to worry about “Short Termism”. It is seen as the tech world’s open war against Wall Street’s modus operandi.

Image Source

Some hail the move as a masterstroke. The features of the LTSE make it more attractive for investors who stick around longer with a firm. Voting rights are directly proportional to how long an investor held a firm’s stocks. But this is also a double edged sword as it makes founding teams too powerful. It could make bubbles bigger, and wave riders could get a smoother ride to exit.

Many questions come to mind when I think about where this could take us. Let us explore each one of them.

  1. Recent disasters of Uber and Lyfts – is Wall street better at identifying good business models?
  2. How long can patient capital be, errrr, patient?
  3. Does Wall Street need to be more tolerant of Visionary Founders?
  4. Growth vs Profitability conundrum – Won’t LTSE make profitability and a good business model rarer?
  5. Creation of monopoly – Good way to make money for businesses and investors? But what about the consumer?

Uber’s IPO earlier this month is arguably the worst opening ever as investors lost $650 Million on the first day. This also happened with Lyft and the stock hasn’t recovered yet. Analysts claim that the ride hailing business model is broken. Softbank’s stocks has taken a beating since then. Would LTSE have minimised the losses that Softbank made since the Uber IPO?

However, with investments (of ~25 Billion) in Ola in India, and Grab in South East Asia, SoftBank’s fund controls 90% of the ride hailing market in the world. One of them (Wall street or Softbank) is definitely wrong about the market and the business models in this space. Is LTSE needed to bridge this gap in perception of business models?

The question that immediately followed was, how long can Patient capital be patient? Early stage investors go largely with gut instincts, where as later stage and public market investors are generally more data driven. If all data points to continued losses (Uber’s Q4 2018 EBITDA loss was at $842 Million), should analysts still give the firm a thumbs up based on the market potential of the firm?

LTSE in this scenario could make Wall Street look good, if the intention was to stay long despite continued losses.

The other side of the argument is also valid. Markets have misjudged visionary founders. Michael Dell took his firm private at ~$25 Billion in 2013 and led the transformation of his firm. The firm has re-positioned itself, and it’s estimated valuation today is ~$70 Billion. When Tesla had pressure from the markets, Elon Musk, took to twitter and spoke about taking the firm private – and of course got into trouble with the regulators for doing so.

If LTSE went live, founders like Dell and Musk could operate in the public market more comfortably.

If LTSE went live, firms like UBER could keep growing and take more of the market, without having to demonstrate a sound business model underneath.

One of the approaches that private investors like to see is “Going for Growth”

If your growth plan doesn’t scare me, I do not want to invest in you” – That’s another famous VC one liner.

This approach has given rise to centralised tech monopoly over the years. Google, Facebook, Amazon, Uber are all leaders in their market segment. If LTSE backed them with public money, they have to worry less about profitability, if at all. They can continue with growth and their market conquest.

As an investor who is just looking for an exit, I would love this approach. But as a consumer, who cares about accountability and healthy competition, this is definitely not the way forward. The “Winner takes all” approach has made tech look like the new banking.

LTSE can be a boon to some visionary founders. If it had been announced during times of low liquidity in the market, it would have come across as a genuine attempt by proven Silicon Valley elites. It is coming at a time when market is rich with cash, and it feels like LTSE will make the bubble bigger, and the fall harder.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

How the Venture Studio model, borrowed from Hollywood, may finance the Blockchain Economy, replacing the current Fund centric model that drives Silicon Valley.

Hollywood.001

TLDR Hollywood & Silicon Valley both have proven models for harnessing ideas & talent to big profits. As we move from rock stars to film stars to code stars, the model from down south in LA is moving north to Silicon Valley and all places where tech ventures are created. This paradigm shift reduces the primacy of Finance in the Silicon Valley model, a trend accentuated by tokenized early stage equity. Two leaders in this paradigm shift are Consensys and Andreessen Horowitz. The emerging name is Venture Studio, replacing the names Incubator, Accelerator and Skunkworks from earlier waves of innovation

This update to The Blockchain Economy digital book covers:

  • How the Hollywood Film Producer model could apply to Venture Production
  • Venture creation is both a creative and a repeatable process
  • How Venture Studios reduce the primacy of passive capital
  • The role of talent in both models
  • From Incubator to Accelerator and Skunkworks to Studio
  • How Consensys created an early version of the Venture Studio
  • How Andreessen Horowitz is creating their version of the Venture Studio
  • Other Famous Venture Producers
  • Tokenised early stage equity is the game-changer that enable the Venture Studio
  • Why The Blockchain Economy requires creative non-conformists
  • Context & References

How the Hollywood Film Producer model could apply to Venture Production

The Hollywood Producer works from start to finish (aka full lifecycle in tech speak):

  • develops an idea (aka script). The Producer often own the rights to a book or story idea. Translation to Venture = develops a concept for a new venture. This period is often lengthy, with many ideas/concepts dormant for a long time until conditions are right – timing is everything. The idea that there is a tradeoff between concept/idea and execution is silly. You must have both and a Producer oversees both. 

 

  • Once a script is completed, the producer will lead a pitch to secure the financial backing usually about 25% of the budget; this is the “green light”that allows production to begin. Translation to Venture = find lead investor.

 

  • secures the necessary rights (for script, music etc). Translation to Venture = patents, trademarks or existing code (being careful that the open source is not restrictive).

 

  • hires the director. Producers rarely have creative or technical involvement. Translation to Venture = hires the CEO. The closest parallel to Producer in Tech Ventures is Chairman, in the sense that Chairman can hire/fire CEOs, but independent Chairman is unusual in early stage tech ventures. 

 

  • supervises casting. Translation to Venture = involved in talent hunting.

 

  • assembles a crew. Translation to Venture = involved in talent hunting.

 

  • oversees the budget. Translation to Venture = formal Board role.

 

  • coordinates the post production work (e.g editing, commissioning music, encouraging the film’s stars to plug the movie on talk shows). Translation to Venture = informal Board role (leveraging board director’s network).

 

  • The Producer often multi-tasks across several projects at once. Translation to Venture = those people listed as Co-Founder on multiple ventures.

In Hollywood, Producer is such a critical role that the credits often show many variants such as:

co-executive producers: executives or distributors who have a limited financial stake in the project.

  co-producer: works under the executive producer on casting, financing, or postproduction

line producer:  on the set at all times to supervise the budget but has little or no creative input.

Venture creation is both a creative and a repeatable process

That statement defies conventional wisdom in two ways:

– building a business is a creative act. We think of building a business as something requiring hard work, grit and lots of boring tasks – totally unlike the creative arts. I am indebted for the insight that this conventional wisdom is wrong to a post from the great VC, Fred Wilson of Union Square Ventures. As he recorded on his wonderful blog (AVC), he was on holiday in Paris, standing in front of an iconic painting and realized that venture founders are like painters, standing in front of a blank canvas and envisioning what should be there.

– the creative process is repeatable. Creative work require hard work, grit and lots of boring tasks  – and is a repeatable process. Let one of the most consistently creative (and funny) people on the planet tells us how in this video. John Cleese is unusual – a scientist  turned comedian and educational content entrepreneur who is obsessed with figuring out where creativity comes from. Watch the video to learn the difference between open mode and closed mode creativity. Open mode creativity is that flash of inspiration. Closed mode creativity is the hard work we call execution. Entrepreneurs and artists  know that creativity is also needed in closed mode. The plot or character idea may come in a flash of open mode creativity, but realising that idea requires further creativity and hard work in closed mode. It is the same in venture creation, where an execution step, such as improving funnel metrics, requires creativity as well.  The Hollywood Producer ensures that both open and closed mode creativity are done right.

How Venture Studios reduce the primacy of passive capital

Look at the credits at the end of the next film/movie you watch. You will see credits to all kinds of people, some with mysterious titles such as key grip, but you will be hard pressed to see or remember who financed the film/movie.

Now look at the tech venture success stories; they will often start with something along the lines of “XYZ BrilliantUnicorn, the HotABC Funded venture….” In the tech venture role, the VC Funds (“HotABC Fund”) have the starring role.

The role of Talent in both models

Talent is a word that made the leap from Hollywood to Silicon Valley, but the roles of talent are different:

  • in Hollywood, talent includes actors but also behind the camera folks such as director, writers, camera crew, set designers etc. Talent are free agents who contract for a specific film/movie. Talent employ agents to help them with this.
  • In Silicon Valley, talent  includes engineers but also marketing, sales, design, HR, finance, etc. The difference is that talent in the Silicon Valley model have to sign on for long periods as employees to get their equity upside. While increasingly free agent in reality, talent in tech ventures have to pretend that it is a 1950s  jobs for life world.

The other big difference for talent is that upside participation in Silicon Valley means equity which means exit via either trade sale or IPO. This makes talent vulnerable to financial engineering by Funds that are harmful to the interests of talent. In Hollywood, upside participation is primarily revenue share. That revenue share is variable and tied to the success of the venture/movie, which makes the upside a bit like equity, but it is not dependent on exit – only on value creation.

Big powerful interests in both models can give a raw deal to talent, but Hollywood has a longer tradition of talent being able to negotiate good deals.

From Incubator to Accelerator and Skunkworks to Studio

Incubator was the venture creation model popular during the Dot Com era.

Accelerator is the current model, as investors of all types ran away from the early stage risk of incubators, with hundreds of accelerators attempting to copy the Y Combinator success.

Skunkworks is a proven model of innovation within big companies aka intrapreneurship. This model pre-dates incubators and accelerators. Skunkworks usually operate with a small elite team removed from the normal working environment and given freedom from management constraints. The term originated during World War II by Lockheed Martin, but the most famous skunkworks was how Steve Jobs developed the Macintosh computer; other examples include Google X Lab and Microsoft Research.

The model for both incubators and accelerators have a graduation event, when the incubator and accelerator role is finished.

Hollywood Studios operate more like the skunkworks, taking responsibility until the product has delivered its value.

How Consensys created an early version of the Venture Studio

When Joseph Lubin made a fortune from Ethereum, he could have done anything. He chose to put a lot of his capital and energy into Consensys. I had the great pleasure of meeting him and his early team very early in the history of Consensys.  My impressions at the time (recorded here on Daily Fintech) were that I was seeing something radically new that I did not really understand:

“Last week I left the smart Manhattan offices to head to northern Brooklyn to visit Consensys. This was not a colorful developer pampering office. Yes, we sat around a conference table that doubled as a ping-pong table; but this was clearly a bootstrapped operation full of bright people fired up by changing the world not by the trappings of success. I had trouble finding the office because there was no logo on the door; I went through a coffee shop to get to their offices. This neighborhood was still in the early stages of gentrification.

Around the ping-pong table (ahem, conference table), developers were as comfortable talking about the finer points of derivatives clearing and compliance as they were discussing developer tools. Big Wall Street firms could feel comfortable here despite the decor.

Yet they were also developing consumer-facing applications.

It is hard to put a label on Consensys. All of these fit:

Consumer app developers

Enterprise IT developers

Core Ethereum developers.

Venture production studio.

Custom solution vendor.

Consultants.”

That same “how do we label you” issue hit the early Hollywood Production Studios, as they moved from a few creative people to a big business with lots of employees. It is easy to write off Consensys; after the fall in ETH price that meant some reassessing of the business model many headlines talk about the rise and fall of Consensys. Pioneers get arrows in their back.  I suspect that future headlines will talk about the rise and fall and rise again of Consensys. Even if not, Joe Lubin will have changed the course of history by creating a new model and a new type of company at the heart of a new protocol based ecosystem.

How Andreessen Horowitz (A16V) is creating their version of the Venture Studio

Andreessen Horowitz (A16Z) is massive force in the global Silicon Valley ecosystem. They are one of the few new Funds to break into the Top Tier in the last decade. Yet they still act like outsiders, making big bold moves that disrupt the game that they are already masters of. “Disrupt your own game before somebody else does” is easy to say, but very hard to do and A16Z is actually doing it.  A16Z has made two prescient moves that position them well for this new model that is emerging:

  • Full execution team means they are active not passive investors. They have the resources, not just cash, to help ensure that the ventures they invest in are a success. This is like the Hollywood Studio.
  • A16Z recently became an SEC registered RIA, giving them the ability to invest in cryptocurrency assets. This means A16V can win in the Blockchain Economy. A later section of this chapter describes why tokenised early stage equity is the game-changer that enables the Venture Studio. A16Z has signalled their determination to ride the next wave of innovation even if if disrupts the Fund model that makes them money today. 

Other Famous Venture Producers

  • Peter Thiel – co-founder of multiple huge ventures from PayPal to Palentir.
  • Richard Branson – using his insight, personality and brand to take on massive broken markets, with external financiers along for the ride. Branson is the closest to the Hollywood model.
  • Steve Jobs – most famous for Apple but also NeXT and Pixar.
  • Jack Dorsey – both Twitter and Square. 
  • Elon Musk – most famous for PayPal, Tesla & SpaceX, but also Neuralink, The Boring Company & OpenAI.

Some are CEOs of the ventures they help to create, others are content with a big % of equity and a corresponding Board role. What they all have in common is a brilliant entrepreneur who attracts capital like bears to a honey jar. Some may put in their own capital, but their signalling/brand value is far more important than their cash. Many have Hollywood connections, most notably Peter Thiel moving to LA and Steve Jobs with Pixar and now Elon Musk aiming to bring Silicon Valley and LA physically closer with The Boring Company.

The institutional stage is coming. This is like the early Hollywood history, when a few big swashbuckling  personalities created institutional studios.

The Silicon Valley model is already institutional with a few Top Tier VC Funds, most notably Sequoia Capital, managing the leadership succession across multiple generations. The Sequoia Capital WhatsApp deal, where they financed all the rounds themselves from an $8m investment in 2011 to a $19,000m exit in 2014, is like a Hollywood Studio that takes all the risk & reward. 

Tokenised early stage equity is the game-changer that enables the Venture Studio

Imagine a movie that took 10 years to get to the box office. Yes there are some outliers like this (Avatar took 10 years), but they are exceptions that prove the rule. This does not count what can be decades, when an idea lies dormant (ie not spending any money) because the timing is wrong or some key piece is missing. Yet, early stage venture investors typically have to wait over 10 years before getting a return. Tokenised early stage equity, whether IEO or STO, is the game-changer that enables the Venture Studio model to flourish. The time to liquidity is now much closer to the time to create a movie/film.

Why The Blockchain Economy requires creative non-conformists

The book called Originals: How Non-Conformists Move the World describes  how leaders champion new ideas and fight groupthink. The Blockchain Economy will be a bigger shift than even the disruptions that drove Hollywood and Silicon Valley. Every market is up for grabs in the Blockchain Economy. Entrepreneurs are restricted only by their imagination. Capital is far less of a constraint. There is plenty of capital in the world and Blockchain ventures require less capital for 3 reasons:

  • the crashing cost of building technology thanks to open source, APIs. offshoring etc. This well documented mega shift pre-dated Blockchain.
  • there is no need to invest in massive centralised data centers, because the users provide the servers in a decentralised network.
  • marketing costs are reduced because early users are motivated to evangelise because they bought Tokens (either Utility or Security or both).

Context & References

Why the Blockchain Economy won’t be financed by ye olde artisanal VC funds.

The 4 wrenching leadership pivot gates that entrepreneurs face.

 

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

$100 Billion++ , is Softbank’s Vision fund blinding the market?

The tech IPO market is having a bonanza year so far and NASDAQ hit an all time high in April. However, confidence in the tech giants and their ethics in dealing with consumer data is perhaps at rock bottom. Cheap money is causing ballooning valuations. With Zoom, Pinterest, Lyft, Slack, Uber, WeWork all going for the big day at the market, are we witnessing a repeat of the dot com boom and bust?

Image Source

The other question to ask is “Is Technology the new Banking?”. As they say, “Follow the money” to catch the bad guys in crime stories. The other way to look at it is, when people make good money, they are often portrayed as the bad guys. The world loves to see them fall. Behavioural and philosophical points aside, several market trends are shouting out for caution.

Analytics company Intensity’s April prediction puts the chances of a recession happening in the next 18 months at 98.9% and in the next 24 months at 99.9%. They are expecting a recession to happen in October 2019. Out of curiosity, I went through all their previous months’ predictions, to check for consistency. The confidence levels had increased steeply between Aug-Sep 2018, and have stayed high since.

Irrational exuberance in the markets is on display yet again. The Crypto bubble burst two years ago, but didn’t cause much of a pain as the market cap was not big enough. But with tech stocks driven by late stage VCs like Softbank, we have more to lose.

Global debt levels are at an all time high at $244 Trillion, and almost everyday economists are writing about a crisis triggered by debt markets.

One of the key trends over the last two years in the VC industry is the rise of late stage venture funds. Softbank led the boom, with Sequioa and others following up with relatively modest sized funds to catch “Unicorns” before their big day in the public markets. The strategy is to get in, pump the firms with steroids and fatten them up for the markets to consume. In the process, make some huge multiples.

Softbank’s investment timeline: Source, Crunchbase

Some stats around the Softbank fund

  • $100 Billion to invest
  • ~$70 Billion deployed so far in about two years,
  • $15 Billion more
  • $10 Billion in Uber and $5 Billion in WeWork
  • Improbable, NVidia, Grab, Kabbage, Flipkart, Oyo, Slack, PingAn, Alibaba and more recently OakNorth are some big names in the porftfolio
  • $45 Billion from Saudi’s Sovereign Wealth Fund represents the biggest investor in the Softbank Vision Fund.

However, both Uber and WeWork have struggled to demonstrate a sustainable business model inspite of their rise. The Growth vs Profitability conundrum remains, and these two might well be case studies on how not to spend VC money, if (when?) their “Going-Public” goes sour.

The Softbank Vision fund could also be a case study of “How not to do Venture Capital”. As a late stage Venture Capital investor, they have an opportunity to look for firms with robust business models and help them go public.

One bright spot is their investment into OakNorth, a UK based Fintech, who tripled their profits in 2018.

The strategy with firms like WeWork or Uber should have been to identify where the business model needed tweaking and pivoting. That could be achieved with $100 Billion in the bank. As a fund with so much capital, they have a responsibility to make healthy VC investment decisions. Not just for their investors, but also for the markets.

I am sure Softbank will make handsome multiples when some of these shaky businesses go public. However, the success these firms managed with private money, would be hard to replicate in the stock market. If a few of them fail, that would trigger pain.

There is enough negative PR about the tech industry’s lack of ethics, diversity and how they manage data monopoly. Creating a bubble, riding it and exiting it before a market crash might just make Tech the New Banking. Softbank might have accelerated that process.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Unravelling the Unicorn Madness – as the Silicon Valley bug bites London

A Unicorn is a tech startup that has grown past $1 Billion in valuation. The term “Unicorn” to refer to these firms was first coined by Aileen Lee, a Silicon Valley investor, in 2013. Since then the count of Unicorns has increased to about 300 at the start of the year. Silicon Valley has boasted 9 of the 29 Fintech Unicorns across the world.

Image Source

This week, the news on the streets is that London would go past Silicon Valley in the Fintech Unicorns tally. London already has 7, and there are a good few companies in the pipeline raising funding to get past Silicon Valley’s 9. Let us look at the irrational exuberance of the London Fintech market and the funding it received.

London received 39% of European Venture Capital funding. The revenues of Fintech firms in London increased from $100 Million to about $230 Million in the last 12 months. Fintech in London is also the fastest growing job sector. Monzo and Tandem got headlines earlier this week due to their new funding rounds. Monzo is receiving capital from Y Combinator and a few other Silicon Valley investors, and Tandem has closed an £80 Million funding round.

However, this is just how growth has manifested itself. There are some fundamental changes to the Venture capital mindset that has caused this Unicorn madness. There are abundant sources of funding these days. The number of platforms that a tech startup can leverage to get funding is increasing on daily basis.

Incubator and accelerator programs inspired by the successes of Y Combinator, Seedcamp etc., are numerous. There are several entrepreneurs who have exited and started to give back to budding start ups as Angels. This used to be the case in Silicon Valley, and London’s entrepreneurs are no different. Over the last 12 months, I have come across atleast 20 firms that have received angel funding from founders of more established or exited tech firms.

Family Offices and even Pension funds these days make direct investments into the tech startup world. Many of them shy away from traditional Venture capital model due to the fees involved.

That has increased the flow of capital directly into private tech firms. Also, the size of late stage funds like Softbank’s fund, and Sequioa’s $8 Billion fund means, firms are adequately funded at a later stage too.

If all these options weren’t enough, in the UK, we have the EIS/SEIS schemes that offer very attractive tax benefits for investors into tech startups. Most HNIs and UHNIs are keen to ensure they utilize these tax schemes. Crowdfunding platforms help, and more recently, the ICO and STO methods of raising capital globally have had their effect as well.

Apart from these financing options, the monopoly that some of the Silicon Valley start ups have taken in their markets, is now used as a model of growth. Once the product market fit is identified, firms these days throw money at growth – crazy growth. This results in market dominance, and that itself becomes the barrier to entry for competitors.

Gone are the days where technology, business models, and even operational excellence differentiated the great from the good.

This growth often means, firms have no respect for operational excellence, or very little intent on achieving a viable business model. They only focus on growing fast, raising more at higher valuations and achieving a Unicorn status. Even VCs these days are judged based on the Unicorns in their portfolios.

This growth at any cost and irrational valuation models had caused the dot com bubble to burst about 20 years ago. And this is definitely not another “the recession is coming” post. But it is important to understand that Unicorn status doesn’t mean much anymore. For an early stage angel investor, an increase in valuation from say $2 Million pounds (when they invest) to when the firm hits $1 Billion in valuation, makes a big difference. But in the broad scheme of things, this is just an artificially created tag often used for branding.

Investors and firms riding this wave of irrational exuberance need to time their exit right. If the correction blindsides them, it may be another financial crisis. It’s sad that London’s Fintech has gone down this path that Silicon Valley firms have traveled for years. It’s superficial and doesn’t feel right.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).