By: Chris Tell at http://capitalistexploits.at/
The World Cup is on. I sat and watched a game on the weekend with my son. "Dad, that guy completely faked that fall. Couldn't the ref see that?"
My son who watches precious little television noticed immediately how many of the players were pretending to be hurt at the first available opportunity. Granted, he's been exposed to Rugby, where the idea that a grown man tapped gently collapses to the floor in pretend agony would be grounds for immediate suspension of all and any social engagements in the entire country for life.
PR has become such a part of the game of football that it's amounted to a bunch of grown men spending an inordinate amount of time pretending to be hurt in order to gain some favour. Soon they'll be recruiting from Hollywood instead of football clubs.
In the same manner as the hollywood inspired footballers, the venture capital world is currently paying inordinate amounts of money for software companies which are making a lot of noise. It's a spectacular time to be a noisy, preferably good looking entrepreneur with some solid "social connections" under your belt.
I'm AWESOME, do you hear!
When I look at a private equity deal I like to think of the problem the company is solving, and in solving that particular problem how they intend to make money. I was recently pitched a deal and when questioning the founder on what problem was being solved and how the company would generate revenues he flat out said to me "No, we're going for eyeballs first. We'll figure out how to monetize it later". Awesome… no thanks.
Wanna raise a bunch of stupid VC money? Start a tech related company, preferably build some sort of App, line up your current set of buzzwords. Social, optimization, scalable, engagement, viral and this one… thought leader. WTF is that? Most of the guys screaming to the world that they're thought leaders have neither led nor do they think. Do all the above and you're about ready to change the world… or if you get funded at least change your own world. A few million never hurt.
It is one hell of a show. Buy a ticket and watch it unfold.
Rdio just bought Tastemakerx for an "undisclosed" sum of money. This follows a frenetic pace of acquisitions in the tech space. Facebook's purchase of WhatsApp, like bestiality, was questionable. All reasonable valuation methods have been kicked into touch. They no longer apply.
As the CEO of one of our portfolio companies recently expressed to me:
Tastemakerx is the Kim Kardashian of startups… no talent, no intellect, no abilities or product just a great salesman, in the press, and nice to look at.
He makes a valid point and he should know as his company has incredible technology, a great team, experienced operators (former Viacom and Craigslist) but they aren't in everyone's face. Their metrics are stellar by literally every measure but they've not be out trying to win the popularity contest.
I discussed some of this with my partner in crime Mark and he sent back the following:
Google gobbling Songza and the slew of acquisitions this week prove it's just a popularity contest. PR and marketing. It's why Dave McClure is successful. He doesn't have a monopoly on good companies, he's just makes more noise than everyone else and is more obnoxious. Any PR is good PR. I'm not sure startups should be worrying about their technology any longer.
Just spend the money on marketing and flying around to industry parties. It seems to be the way to get the money and get acquired. It reminds me of the "infamous pop artist, Damian Hirst. The guy was a stockbroker and saw how much his dumb, rich friends were paying for really bad art. So, he decides he can do that! He goes and creates a bunch of talent-less crap and sells it for hundreds of thousands… now millions. Ah, but this ain't a bubble! LOL.
A personal story
In the late 90s I was working for a large investment bank. In order to protect the innocent we'll use a fictitious name and call it MP Jordan. We were, you may recall, smack dab in the middle of the dot com boom. I vividly remember one particular instance where two kids in their early 20s came in to pitch a deal. They wanted us to underwrite and take them public.
Their "company" amounted to a website that would advertise and sell auto-parts to online consumers such as the local grease monkey down the road. Their "value" lay in the website and payment processing facilities. Though I found it ludicrous, they actually placed a huge amount of emphasis on their "signed contracts" with distributors. What these guys had done was to obtain contracts from the suppliers of multiple auto parts saying "yeah we'll flog our stuff on your site", and why wouldn't they? They then got contracts from a half dozen London couriers to say "yeah we'll deliver the goods from A-B", and why wouldn't they? That this was considered to have any value was just nuts but those were heady days.
Here was a company which had never sold as much as a spark plug, had zero customers, and therefore zero revenue and best of all was looking for an IPO. We never did the deal. Were we smart?
Not really. An equally large investment bank, which we'll call Remmil Cynch to protect the innocent, led the IPO and these two kids walked away with more money than a Middle Eastern prince gets for his monthly allowance, which is a lot!
The bankers made a lot of money and the founders made a lot of money. Investors, on the other hand, got hosed… eventually as the company disappeared. In truth, the company didn't need to disappear as it wasn't really there in the first place. We called them vapourware companies. No assets, no collateral and no revenues.
That story and many like it have been told many times before but clearly they need repeating. The information is readily accessible. Heck, I just lifted the below directly from Wikipedia to show you how easy it is to educate oneself about this. Yet, here we are with investors making the same mistakes again.
- Boo.com - spent $188 million in just six months in an attempt to create a global online fashion store that went bankrupt in May 2000.
- Broadcast.com - Acquired by Yahoo! for $5.9 billion in stock, making Mark Cuban a multi-billionaire. The site is now defunct and redirects to Yahoo!'s home page.
- e.Digital Corporation (OTC:EDIG) - Long-term, unprofitable OTCBB-traded company founded in 1988 previously named Norris Communications. Changed its name to e.Digital in January 1999 when stock was at $0.06 level. The stock rose rapidly in 1999 and went from closing price of $2.91 on December 31, 1999, to intraday high of $24.50 on January 24, 2000. It quickly retraced and has traded between $0.07 and $0.165 in 2010. As of 2013, the stock continues to trade low, ranging between $0.12 and $0.19 a share.
- Freeinternet.com - Filed for bankruptcy in October 2000, soon after canceling its initial public offering. At the time Freeinternet.com was the fifth-largest ISP in the United States, with 3.2 million users. Famous for its mascot Baby Bob, the company lost $19 million in 1999 on revenues of less than $1 million.
- GeoCities - Purchased by Yahoo! for $3.57 billion in January 1999. Yahoo! closed GeoCities on October 26, 2009.
- theGlobe.com - Social networking service, that went live in April 1995 and made headlines by going public on November 1998 and posting the largest first day gain of any IPO in history up to that date. The CEO became in 1999 a visible symbol of the excesses of dot-com millionaires.
- GovWorks.com - Doomed dot-com featured in the documentary film Startup.com.
- inktomi - Valuation of $25 billion in March 2000.
- InfoSpace - In March 2000 this stock reached a price $1,305 per share, but by April 2001 the price had crashed down to $22 a share.
- Kozmo.com - offered one-hour local delivery of a number of retail items, from March 1998 to April 2001.
- Lastminute.com - IPO in the UK coincided with the bursting of the bubble.
- The Learning Company, bought by Mattel in 1999 for $3.5 billion, sold for $27.3 million in 2000.
- Lycos - Purchased by Spanish telecommunications provider Telefónica for $12.5 billion in 2000 to expand its Terra Networks online platform. It was sold in 2004 to Seoul, South Korea-based Daum Communications Corporation for $95.4 million in cash, less than 2% of Terra's initial multi-billion dollar investment.
- MicroStrategy - Shares lost more than half their value on March 20, 2000, following their announcement of re-stated financials for the previous two years. A BusinessWeek editorial said at the time, "The company's misfortune is a wake-up call to all dot-com investors. The message: It's time, at last, to pay attention to the numbers".
- Open.com - Was a big software security producer, reseller, and distributor, declared in bankruptcy in 2001.
- Pets.com - Former dot-com enterprise that sold pet supplies to retail customers before entering bankruptcy in 2000.
- Pixelon - Web streaming party that hosted a $16 million launch party in 1999 hosting celebrities such as The Who and the Dixie Chicks. Failed less than a year later when it became apparent that its technologies were fraudulent or misrepresented.
- Startups.com - "Ultimate dot-com startup" that went out of business in 2002.
- Think Tools AG - One of the most extreme symptoms of the bubble in Europe: market valuation of CHF 2.5 billion in March 2000, no prospects of having a substantial product (investor deception), followed by a collapse.
- Tiscali - Important Italian telecommunications company whose share price grew from €46 (IPO in November 1999) to €1,197 in four months. They fell to €40 afterwards in less than two months and have continued plummeting to well under 0.2 euros.
- VA Linux - A provider of built-to-order Intel systems based on Linux and other open source projects. They set the record for largest first-day IPO price gain; after the price was set at $30/share, it ended the first day of trading at $239.25/share, a 698% gain (9 December 1999). After that, its stock declined consistently. After several business transitions it became Geeknet. It provides the backdrop of the documentary Revolution OS.
- Webvan, Online grocer that operated on a "credit and delivery" system; the original company went bankrupt in 2001. It was later resurrected by Amazon.com.
- WorldCom, a long-distance telephone and internet-services provider that became notorious for using fraudulent accounting practices to increase their stock price. The company filed for bankruptcy in 2002 and former CEO Bernard Ebbers was convicted of fraud and conspiracy.
- Xcelera.com - Swedish investor in start-up technology firms that was one of the "greatest one-year rise of any exchange-listed stock in the history of Wall Street".
OK so that was then and this is now. We're smarter now right?
I present to you: Snapchat
Here we have some kid, Evan Spiegel to be exact, who got offered $3 billion by Facebook for a company with no revenues, no idea HOW or indeed IF it will ever make any revenue, and he turned the offer down. He was then offered $4 billion from Google and turned that down. My advice to this young extremely fortunate kid would be take the money and run. Is Snapchat even going to be around in another 10 years time?
Now I realise that I've never been offered a billion dollars for anything except in Zimbabwe but that's another story, so maybe Mr Spiegel proves me wrong and gets $20 billion for his creation, which, as far as I can tell, changes the lives of 16 year old teenage girls all over shopping malls across the United States but only for about 30 seconds, which is about the attention span of app happy youth. Or maybe, just maybe, investors start looking at the gadgets and string of Apps on their smart phones, and they begin comparing them to things like… oh let me see, food, infrastructure, healthcare, logistics, natural resources such as zinc, copper, coconuts, or that barbarous relic gold, and they begin to wonder to themselves… just maybe the next software iteration that tweaks a text message isn't actually worth billions of dollars and maybe, just maybe it's actually worthless.
I propose that venture capital firms are spending money in entirely the wrong places. Fully 37% of all VC funding is currently going into software deals. It has recently surpassed the figure achieved in the early 2000s. Remember when we had the last tech bubble.
In much of the developed world we're getting smarter phones and worse infrastructure. I'm shocked at how transportation and energy infrastructure is over 50 years old in most instances, and falling apart. But don't worry. You can always take a Snapchat of the potholes in your neighborhood and tweet it to your mates before updating your Facebook status.
"My friends are people who like building cool stuff. We always have this joke about people who want to just start companies without making something valuable. There's a lot of that in Silicon Valley." - Mark Zuckerberg