Category Archives: Funding

For the last year everybody has been talking about “when will Zynga/Facebook/Groupon/etc have an IPO?”. Now, with recent IPO filings from Groupon, a successful IPO from LinkedIn, and musings of an IPO for Zynga, the news has to shift into a new speculative phase. So, how will the landscape of startups and tech companies, and the distribution of talent among them, change over the next year as all of these companies file for and complete their IPOs? (Warning: Everything below is speculative garbage. Actually, that warning probably belongs at the top of every one of my posts, and probably at the top of every blog…)

For one, I imagine a lot of the companies will lose large swaths of their core members to other endeavors. Think about it: If you are a 2-3 year employee of LinkedIn/Groupon/Zynga, you really hit the lottery when it came to stock options, but until the IPO your ability to cash out and actually make the money is severely limited. Maybe you could trade some on the secondary market, but the company strongly discourages that (for good reason), so the IPO may be the first time you can sell shares for astronomical prices. Plus, new startups will pay a premium for somebody who was at one of those successful companies from the beginning (Zynga project managers, for example, are highly sought after by social game startups, and I imagine somebody with institutional knowledge of Groupon or LinkedIn would benefit from a similar advantage). Google and Apple regularly see employees rise up through the ranks and then depart for smaller ventures, so its pretty likely that the new group of tech companies will see employees leave after their IPOs as well.

The real thing we don’t know is how IPOs by this group will impact the rest of the market in terms of venture capital, startup formation, and general investment in tech. It’s far too soon to tell how the larger market appreciated LinkedIn post-IPO, and although the IPO itself raised LinkedIn’s valuation quite a bit, the company now has to produce growth and profits for investors if that valuation is going to hold. Zynga seems a shoe-in to grow (unlike Groupon, they are wildly profitable despite their rampant growth), and with a likely IPO valuation in the $8-10 billion range, that would give Zynga enough cash to unify the social game front and buy up any sizable competitor. That sort of money behind Zynga will likely skyrocket valuations of other game companies – companies become more valuable in Zynga’s network, as the social/viral aspect of their games generates exponentially greater returns when the games benefit from display time on the screens of Zynga’s existing user base.

This post isn’t going anywhere, really, so if you are still hoping for a conclusion I apologize. My predictions are basically that Zynga will take over the world with an overvalued IPO. Because Zynga doesn’t actually need any more money, the IPO is driven by a desire to let founding members and middle management cash out (see Groupon). So shortly after the IPO, Zynga will lose tons of talent to now also overvalued smaller companies, who Zynga will be forced to buy up in the pressure to spend that IPO cash and grow. Maybe we shouldn’t call IPOs successful just because they raise a company’s valuation. There, let’s call that the conclusion.

This week, Forbes posted an article about all the “troubles” Twitter is having, and there have been numerous responses in the blogosphere (this one is the best, if it interests you). The more interesting take on “all of this”, as in, the possibility that us even caring about Twitter’s lack of revenue is a sign of a bubble, came from BusinessWeek. In summation, that article’s author feels that this tech bubble is worse than the tech bubble of the 2000s, because that prior bubble gave us infrastructure in the form of foundational technologies like Amazon, Ebay, Google, etc, whereas this tech bubble has focused on us buying stuff (Facebook monetizes through ads, Groupon, etc.).

First off, Amazon and Ebay just sold us stuff, so there’s hardly an argument that our focus on consuming goods has changed meaningfully from the last bubble to this one. Maybe Google was transformative in the way we did email, and they’ve done other interesting things with information more generally (google scholar, their book scanning project, etc.), but Facebook provided something very valuable in it’s social network, and that concept will live long after Facebook just like Google’s contributions to communication and information will survive them.

Second, the bubble of the 2000s was based on technologies that largely didn’t have business plans, and were just concepts regarding doing something online. Pets.com, for example, went public, spent $1.2 million on a Super Bowl commercial, never made a profit, and collapsed in less than a year. And that trend was actually rather common in the 2000s tech bubble. Today, Bubble-sayers tend to point to high valuations as a sign of a bubble, ignoring the fact that valuations mean very little in practice: it just impacts what share of the company VCs and angels get when they invest, and how successful the company needs to be to not have a down round. But it doesn’t indicate anything about the amount of money actually being invested, and very few of the web giants today have even gone public. Facebook and Zynga, as opposed to the non-revenue generating companies of yore, are extremely profitable, as is Groupon and other current “bubble” companies.

Third, though in a way somewhat related to the last point, the public isn’t at risk in this bubble. Only a handful of companies have gone public in the tech/web market, and the big players are staying private. Private companies are limited in the sorts of investors they can have, and as such no company outside Zynga and Facebook have big investments from companies that are managing the public’s money. In the 2000s, it was a damaging bubble because many unsophisticated, average joe investors had money in those unprofitable, all-hype companies. Now, if the bubble bursts, only VCs lose.

We should stop worrying about his bubble thing so much.

I’ve previously mentioned seemingly excessive amounts of money going to startups and briefly noted that it didn’t seem like a bubble to me. Well chalk one up for team bubble: Color, a social photo sharing app, raised over $40 million (from Seqouia and Bain) before launching a product. It’s turning heads because the concept isn’t really that awesome, the team seems above average, and otherwise there’s no explanation for why this crew received more money for a 0 user product than most million user products can raise. The biggest writeup on the deal is on Techcrunch, and their analysis is pretty solid.

Since just about every perspective on this has already been mentioned in the super quick blogging echo chamber since Wednesday, here are my random comments on the situation:

Buying talent. A lot of the commentary on the deals note that it may have been premised on the idea that these founders, no matter what idea they were working on, were going to be successful. This is an argument usually made in support of a big ticket acquisition rather than an initial investment, but obviously if you are an institutional investor looking to get a solid return, you might see a team like this and think that any investment is worth it so long as the valuation stays below the value of the founders to another company. If the talent here is worth $100 million, which it might be close to, then getting in at a $40 million price is a pretty good deal. A strange way to think about investing in companies, but maybe not that unsound given the random nature of startups hitting big anyway. It’s like how the Knicks gave up a ton to get the right to pay Carmelo a max salary: when you get a chance to invest in a big talent, the price is basically anything reasonable. Even if the end result isn’t clear (the Knicks can’t play defense, Color doesn’t have a product), the talent might be worth it.

Buying cache. Bain Capital threw in $9 million in the deal. They’ve had almost no presence in the sillicon valley world, so maybe they just want to make some noise, and nothing made more noise than investing in Color at this moment. Probably won’t really improve their portfolio in the short-term, but it’s probably a strong play if they want to move into more startups. If not, then it’s a really odd move.

Sequoia knows something. This seems like a conspiracy theory, but maybe Sequoia, the one who made the largest bet on Color, simply knows something about the market or the team that changed their normal calculus on making investments.

Lot of talk around the good ‘ole web these days about whether there is a startup bubble, or a valuation bubble, or even if society has developed a fetish for startups. While people have considered these issues for a while (or maybe just since Groupon turned down a multi-billion dollar offer from Google), the real tipping point in the conversation seemed to be when Yuri Milner and Ron Conway offered all Y Combinator startups $150,000 on generous terms (convertible, no cap, no discount). This stood as evidence to many that the startup/VC ecosystem has gone out of whack, and the dreaded word “bubble” started to creep into the conversation.

There’s a great piece profiling Milner on Forbes.com right now, and it generally summarizes Milner’s basic strategy. [http://bit.ly/fVJ8CJ]. In case you couldn’t guess from his multiple, near-blind investments in Y Combinator companies, Milner is taking a bunch of stabs at low-cost high-risk bets. I think it makes a lot of sense that rich investors want to go to startups through VCs and, more increasingly, as angels. As the stock market has yielded bad to really bad returns, why not move in on cheap lottery ticket investments? With about 40 Y Combinator startups, it’s only a $6 million investment for potentially 5-10% in any of the companies that raise money in a venture round. With better systems for moving private stock developing over the last few years, Milner doesn’t even need to see profit from any of the companies to have his bet pay off: if one company is overvalued he can probably get out and recover at least a solid chunk of his investment, and if one of the companies turns into a lolapps or a playfish or an admob, he makes a great return. But that’s only half the story with Milner. He just made friends with the CEOs of 40 hot young companies, a pretty solid friend list for a guy who sits around watching multiple TVs as a means of gathering information about the US economy like Ozymandias so he can make smart internet investments (see the Forbes article, detailing his obsessive research habits). That’s probably worth the $6 million to him alone.

You could argue that Milner isn’t overvaluing these businesses, he is just counting on the market to overvalue them. Is that a bubble? Maybe. But more likely he is just counting on the information he can glean from these 40 companies to make him profit elsewhere, such as helping him decide what to do with the 10-20% he owns in Facebook, Twitter, Zynga, and Groupon through DST. Or think about it this way: if seeing these generous terms in seed funding pushes investors to want proven entities rather than offer deals on Milner’s generous terms, won’t that just drive up the price of stock in companies Milner already owns?