On December 18th, 2014, the NetForum NY held its monthly breakfast. As usual the broad diversity of the attendees' experience resulted in a fascinating discussion, meeting our promise of deep peer-to-peer learning.
This meeting's objective was to answer several questions: Are we "technically" in a Bubble? Do we "feel" like we are in a Bubble? How does a company CEO behave armed with the answers to these questions?
The data does not support the case for a Bubble. PitchBook's Ben Diamond joined us and shared some his firm's research. (Available here and here.) The PitchBook data shows that over the last 10 years, median startup valuations have increased significantly across all stages -- in particular in the Seed and D+ rounds. However, we are only (!) seeing doubling or tripling in valuations from arguably low levels in the post-Nuclear Digital Winter of the early/mid-2000's.
The PitchBook data supports what pundits have called the "barbell distribution" of venture investment. The greatest percentage increases in valuations have been in the Seed and Late stages. The Seed world in in the throes of the Angelist, Incubator and Crowdfunding effects -- the influx of capital through these platforms is raising valuations and size of rounds. Late stage rounds are affected by the decision of late stage companies to delay going public until they are quite mature, effectively forcing institutional public market investors to invest in these late stage companies when they are still private (and thus enabling these companies to delay their IPO). (The NetForum's event at the NYSE covered this phenomenon.) PitchBook's data shows that the Valuation/Revenues multiple decreased of 2014 IPOs was significantly lower than 2000 IPOs -- an indicator that we are not witnessing Bubble pricing, at least not at IPO time and by comparison to 2000...
Another distinguished guest was Lou Kerner, who runs the Social Internet Fund and recently published his views on the current state of startup valuations. (Available here.) Lou's view is that we are not in a Bubble. One of the key data Lou points to in his analysis is the percentage of the total market capitalization of the S&P 500 represented by tech companies -- it is below the historical trend, and thus negates the argument that tech is over-represented in the index due to an inflated valuation.
Generally, NetForum members were split on answering the simple question "Are we in a Bubble, yes or no?" "Pockets of Bubble" is probably the most representative answer. All agreed that it is still very hard to raise capital for any startup, except for the exceptional ones. The Series A Crunch is very real and mid/late stage Walking Deads abound. Our members working for strategic corporates indicated that valuations on divisions they are selling are robust, including for the crop of companies that sell to PE firms -- usually these are the less sexy companies with good margins and perhaps less growth than the IPO crop -- with exit multiples at 10x to 15x EBITDA, and a return of the covenant lite debt deals. Members with visibility into the venture debt market indicated that venture deal size have ballooned with $5M deal sizes becoming the norm where $1M-$2M used to be the norm.
Market sentiment seems to be one of acceleration then, not of Bubble. The feeling expressed by many was that there was a lot of activity in the market, a lot of business creation, a lot of enthusiasm in the industry and even confidence as people are willing to step out and take risks. At the same, no one would say "this time it's different." As Lou reminded us, that's what they said before the last Bubble burst -- capitalism has ebbs and flows, so there is a down after the up (I am paraphrasing.)
Our members generally agreed that the valuations of private companies in their last round does not mean those companies are worth that value. Buying preferred stock with a liquidation preference is akin to buying an option -- as long as you are sitting at the top of the stack, you will get your money back and perhaps win the lottery. (My own comment: The management team, with common stock and options, has brought in the lottery players in the cap structure. If management does not hit the jackpot, they get nothing, being at the bottom of the stack...) Today, the market is again replete with funds willing to buy options at very high prices. The options are bought on proven management teams -- successful CEOs are at a premium now with capital providers looking for proven leaders to go mine new sectors for gold. One of our members working for a public company highlighted the negative premium of public companies -- private investors are buying expensive options on private unproven businesses while public investors are judging similar companies that happen to be public based on their cash flow and usually are not forgiving...
A revealing moment came when I asked the group: "if you are the CEO, and you just heard this discussion, what is your next move?" One of our CEOs stated that he had wished to grow his business conservatively but the availability of capital exposes him to the risk that his competition will raise more money that him and that will put him at a disadvantage. I believe that the unanimous view was "take the money now." Optimism aside, everyone had the same piece of advice: take the money now as who knows when the market will turn.
From my vantage point, in this my 20th year in the tech startup business, it is distressing to me that the private venture capital market is structurally irrational. Venture investing requires a suspension of disbelief and suspension of the rules by which every one else lives -- cash flow and profit margins not eye balls, engagement metrics and traction. Those of us in NYC live side by side with Wall Streeters who look at us as if we were the spoiled kids on the block with a sense of entitlement -- we are the innovators, we deserve to get money! Sand Hill Road is an anomaly and feeds this fantasy. The flavor of the day gets funded and probably overfunded. Overfunding leads to excessive risk taking -- usually getting ahead of the market and of customer demand -- to meet irrational expectations sold by inexperienced CEOs or CEO's who are pressured to go for broke. Eventually, it blows up and the good and bad gets hurt. Is this the best way to generate innovation and to solve the problems that merit solving, meet the needs that should be met? But that will be the subject of another NetForum breakfast... :)
Thanks to all the attendees. Share your views on this Blog, join the NetForum group on LinkedIn, or write to me.
Laurent
laurent@parkviewventures.com
Connect with me on LinkedIn
Follow me on Twitter
Request Access to the NetForum LinkedIn Group
(P.S. I have been asked why the meeting synopses only identify very few people by name. The events are private and our members express themselves freely knowing that everything is off the record. I summarize their views in my own words. Experts are invited to share views, research or opinions. They are mentioned by name.)
Saturday, December 20, 2014
Sunday, November 23, 2014
THE PRIVACY POLICY. WHAT'S THAT FOR?
On November 20th, 2014, we held another thought-provoking NetForum event. This time we bravely tackled the subject of Privacy on the Web. I wanted to approach the subject from an unusual angle: examining the Privacy Policy. We see those words on pretty much all web sites and religiously ignore them. Yet, someone bothers to write these policies. What is this all about?
Before I share with you some of the learnings of our discussion, I wanted to mention that this morning one of our members sent me an email saying "I did not know that discussing a Privacy Policy could be so interesting." Indeed, I did not either but that's the magic of the NetForum events: getting the smartest people around to have an open conversation always takes you to unexpected place. Speaking of smart people, we were lucky to have guest experts: David Greenberg, a partner at GreenbergTraurig (no relation, who with his partner Margaret Isa Butler was our host) and Professor Joel Reidenberg, Founding Academic Director of Fordham's Center for Law and Information Policy and Microsoft Visiting Professor of Information Technology Policy at Princeton.
Privacy on the Web has been a hot topic for a long time. As it happens every time we pick a topic for the NetForum, it becomes hot (or hotter) news. Right after we sent the NetForum initial invite on the Privacy Policy event, Facebook announced a change to its Privacy Policy to make it more intelligible (http://www.washingtonpost.com/blogs/the-switch/wp/2014/11/13/facebook-rewrites-its-privacy-policy-so-that-humans-can-understand-it/) -- funny that a change in the Privacy Policy of a web site would make the news, the Chair of the FTC griped about lack of transparency in data collection (http://www.cio.com/article/2847414/ftc-chair-wants-clearer-disclosures-to-protect-privacy.html), and PEW researchers discovered that people don't really trust what web sites do with their data (http://www.nbcnews.com/tech/security/pew-privacy-survey-weve-lost-control-over-our-personal-data-n247346). But the prize goes to Uber that revealed uber-monopolistic tendencies by having one of its senior executives suggest that it should spy on a journalist critic by looking at the logs of her travels with Uber to embarrass her (http://www.telegraph.co.uk/technology/11237836/Uber-scandal-Worried-about-NSA-spying-Its-Silicon-Valley-billionaires-you-need-to-watch.html). Or does it go to TRUSTe, who gave its seal of approval to over 1000 businesses without conducting an audit (and failed to disclose it became a for profit business years ago) and had to pay a fine to the FTC (without admitting wrongdoing) (http://www.nytimes.com/2014/11/18/technology/ftc-penalizes-truste-a-web-privacy-certification-company.html).
While the Privacy Policy is that document that no one ever reads, it is the expression of what a web site or app says it can do, and promises not to do, with its users' data. It is the fundamental deal between a company and the people who use its products. The web economy runs on an implicit trust that has emerged between the user on his/her device and some pretty pictures floating on a screen saying "trust me." So, without reading the Privacy Policy, we believe it does not say anything egregious. We have an expectation that web companies adhere to some elemental standard of decency. Or perhaps, as PEW's research clearly indicates, we don't trust but click "accept" anyway...
We launched the discussion with the seemingly innocuous question "Why have a Privacy Policy?" What emerged is that some regulated industries (banking, health care, credit) are subject to Federal and State regulations that clearly delineate what they can and cannot do with user data. But for everyone else there are no legal requirements to have a Privacy Policy. California and New Jersey are leaders in data protection and developing rules but, generally, it's a free for all. One of our members, a former State regulator, opined that the patchwork of rules and non-rules would evolve into a national policy. One of our members from London observed upon hearing multiple references to the European model of Privacy regulation that in the UK you have to register your Privacy Policy and Terms of Use with a governmental body but that after doing so, he checked whether his competitors were doing the same, and they were not, in clear violation of the rules. One of our members runs a VC fund, after having run investment activities in a large multinational, and attested that Privacy Policy was never part of the investment due diligence checklist, but that today it really ought to be.
This led one of our members to ask "where do I start in figuring out what should my Privacy Policy be?" It really is a business decision not a legal decision. Having a Privacy Policy is expected as a good business practice by consumers. One of our members shared that his company ran A/B testing on subscription pages with and without logos of certification bodies (TRUSTe perhaps?) and references to the company's Privacy Policy and the testing clearly showed that the references to the Policy increased subscription rates on the pages. But another of our members stated that the Privacy Policy can get you in trouble too because you might be committing to do vague things that have no clear objective definition and that you do not have the systems in place to monitor and enforce. (Many thought that there was a business opportunity here...) Another member stated it does not matter anyway: put a Policy in place, don't do something stupid to clearly violate it and then pay a fine when slapped -- witness Google and Facebook's margins that have never been hurt by all their Privacy violations. Another member who was subject to an enforcement action while at a large multinational entertainment company recounted how that company had to audit thousands of artist web sites and ensure compliance with what the regulator determined the policy should be. The costs can add up.
One of our member has an app that shares data with Apple's Health App (which is really a new consolidator of health data fed from an ecosystem of apps that communicate with it). That new App which I have seen appear once I upgraded my iPhone to iOS 8 seems to be a potentially huge business for Apple, and a privacy threat too, and it caused some of our members who had been unaware of it to get quite exercised. Our member's app's Privacy Policy seemed pre-emptive. It reserved the right to do a bunch of things, like display ads, including geo-targetted ads, despite the fact it has no present plans to ever do so. Our experts agreed that many Privacy Policies are pre-emptive in that way, and it is the right thing to do.
Web advertising and third-party data brokers obviously seeped into the conversation, it being NYC, the capital of AdTech. Our AdTech experts were unequivocal: most publishers only sell a fraction of their inventory and they dispatch user data to third party data brokers who create aggregated profiles and feed them into exchanges. Once the publisher pushes the data out to the brokers, they lose control over the data and what happens to it, and the user has no idea where that data went and who is doing what to it. AdTech experts tell us that the data is anonymized and therefore poses no Privacy risk. Perhaps. However, when Target targeted a teen-age girl that it had properly guessed was pregnant with discount coupons for diapers sent to her (and parents') home, it created a big Privacy issue... http://lightyears.blogs.cnn.com/2012/04/20/data-its-how-stores-know-youre-pregnant/ An very intriguing concept was mentioned by a member from the financial services industry. His company is a large repository of data, among other things, and when it send data out it gets contractual commitments -- downstream commitments -- with very strict usage restrictions. No one was aware whether such strict requirements existing in the world of advertising data exchanges. Probably not, again because the data is anonymized. But there is a good thought here...
In closing, I must say there were lots of interesting ideas that came up from the intersection of practitioners from various business sectors all looking at one issue that crosses over all their businesses. Since all our discussions are off-the-record, I merely summarized things as I understood them. NetForum members can continue the discussion on this blog, can join the LinkedIn Group and since each event's attendees get each others' email addresses the conversation can continue off-line as well.
Thank you all for attending.
Laurent
laurent@parkviewventures.com
Connect with me on LinkedIn
Follow me on Twitter
Request Access to the NetForum LinkedIn Group
REMEMBER TO SAVE THE DATE OF DECEMBER 18TH FOR THE NEXT NYC NETFORUM ON THE SUBJECT OF VALUATION: "HOW MUCH IS THIS STARTUP WORTH ANYWAY?"
ALSO, THE INAUGURAL NETFORUM LONDON AT BLOOMBERG ON DECEMBER 8TH ON THE SUBJECT OF STRATEGIC VENTURE CAPITAL: "YOU JUST CLOSED A STRATEGIC VENTURE INVESTMENT, NOW WHAT?" PLEASE CONTACT ME IF YOU WOULD LIKE TO ATTEND OR HAVE SOMEONE YOU KNOW ATTEND.
Before I share with you some of the learnings of our discussion, I wanted to mention that this morning one of our members sent me an email saying "I did not know that discussing a Privacy Policy could be so interesting." Indeed, I did not either but that's the magic of the NetForum events: getting the smartest people around to have an open conversation always takes you to unexpected place. Speaking of smart people, we were lucky to have guest experts: David Greenberg, a partner at GreenbergTraurig (no relation, who with his partner Margaret Isa Butler was our host) and Professor Joel Reidenberg, Founding Academic Director of Fordham's Center for Law and Information Policy and Microsoft Visiting Professor of Information Technology Policy at Princeton.
Privacy on the Web has been a hot topic for a long time. As it happens every time we pick a topic for the NetForum, it becomes hot (or hotter) news. Right after we sent the NetForum initial invite on the Privacy Policy event, Facebook announced a change to its Privacy Policy to make it more intelligible (http://www.washingtonpost.com/blogs/the-switch/wp/2014/11/13/facebook-rewrites-its-privacy-policy-so-that-humans-can-understand-it/) -- funny that a change in the Privacy Policy of a web site would make the news, the Chair of the FTC griped about lack of transparency in data collection (http://www.cio.com/article/2847414/ftc-chair-wants-clearer-disclosures-to-protect-privacy.html), and PEW researchers discovered that people don't really trust what web sites do with their data (http://www.nbcnews.com/tech/security/pew-privacy-survey-weve-lost-control-over-our-personal-data-n247346). But the prize goes to Uber that revealed uber-monopolistic tendencies by having one of its senior executives suggest that it should spy on a journalist critic by looking at the logs of her travels with Uber to embarrass her (http://www.telegraph.co.uk/technology/11237836/Uber-scandal-Worried-about-NSA-spying-Its-Silicon-Valley-billionaires-you-need-to-watch.html). Or does it go to TRUSTe, who gave its seal of approval to over 1000 businesses without conducting an audit (and failed to disclose it became a for profit business years ago) and had to pay a fine to the FTC (without admitting wrongdoing) (http://www.nytimes.com/2014/11/18/technology/ftc-penalizes-truste-a-web-privacy-certification-company.html).
While the Privacy Policy is that document that no one ever reads, it is the expression of what a web site or app says it can do, and promises not to do, with its users' data. It is the fundamental deal between a company and the people who use its products. The web economy runs on an implicit trust that has emerged between the user on his/her device and some pretty pictures floating on a screen saying "trust me." So, without reading the Privacy Policy, we believe it does not say anything egregious. We have an expectation that web companies adhere to some elemental standard of decency. Or perhaps, as PEW's research clearly indicates, we don't trust but click "accept" anyway...
We launched the discussion with the seemingly innocuous question "Why have a Privacy Policy?" What emerged is that some regulated industries (banking, health care, credit) are subject to Federal and State regulations that clearly delineate what they can and cannot do with user data. But for everyone else there are no legal requirements to have a Privacy Policy. California and New Jersey are leaders in data protection and developing rules but, generally, it's a free for all. One of our members, a former State regulator, opined that the patchwork of rules and non-rules would evolve into a national policy. One of our members from London observed upon hearing multiple references to the European model of Privacy regulation that in the UK you have to register your Privacy Policy and Terms of Use with a governmental body but that after doing so, he checked whether his competitors were doing the same, and they were not, in clear violation of the rules. One of our members runs a VC fund, after having run investment activities in a large multinational, and attested that Privacy Policy was never part of the investment due diligence checklist, but that today it really ought to be.
This led one of our members to ask "where do I start in figuring out what should my Privacy Policy be?" It really is a business decision not a legal decision. Having a Privacy Policy is expected as a good business practice by consumers. One of our members shared that his company ran A/B testing on subscription pages with and without logos of certification bodies (TRUSTe perhaps?) and references to the company's Privacy Policy and the testing clearly showed that the references to the Policy increased subscription rates on the pages. But another of our members stated that the Privacy Policy can get you in trouble too because you might be committing to do vague things that have no clear objective definition and that you do not have the systems in place to monitor and enforce. (Many thought that there was a business opportunity here...) Another member stated it does not matter anyway: put a Policy in place, don't do something stupid to clearly violate it and then pay a fine when slapped -- witness Google and Facebook's margins that have never been hurt by all their Privacy violations. Another member who was subject to an enforcement action while at a large multinational entertainment company recounted how that company had to audit thousands of artist web sites and ensure compliance with what the regulator determined the policy should be. The costs can add up.
One of our member has an app that shares data with Apple's Health App (which is really a new consolidator of health data fed from an ecosystem of apps that communicate with it). That new App which I have seen appear once I upgraded my iPhone to iOS 8 seems to be a potentially huge business for Apple, and a privacy threat too, and it caused some of our members who had been unaware of it to get quite exercised. Our member's app's Privacy Policy seemed pre-emptive. It reserved the right to do a bunch of things, like display ads, including geo-targetted ads, despite the fact it has no present plans to ever do so. Our experts agreed that many Privacy Policies are pre-emptive in that way, and it is the right thing to do.
Web advertising and third-party data brokers obviously seeped into the conversation, it being NYC, the capital of AdTech. Our AdTech experts were unequivocal: most publishers only sell a fraction of their inventory and they dispatch user data to third party data brokers who create aggregated profiles and feed them into exchanges. Once the publisher pushes the data out to the brokers, they lose control over the data and what happens to it, and the user has no idea where that data went and who is doing what to it. AdTech experts tell us that the data is anonymized and therefore poses no Privacy risk. Perhaps. However, when Target targeted a teen-age girl that it had properly guessed was pregnant with discount coupons for diapers sent to her (and parents') home, it created a big Privacy issue... http://lightyears.blogs.cnn.com/2012/04/20/data-its-how-stores-know-youre-pregnant/ An very intriguing concept was mentioned by a member from the financial services industry. His company is a large repository of data, among other things, and when it send data out it gets contractual commitments -- downstream commitments -- with very strict usage restrictions. No one was aware whether such strict requirements existing in the world of advertising data exchanges. Probably not, again because the data is anonymized. But there is a good thought here...
In closing, I must say there were lots of interesting ideas that came up from the intersection of practitioners from various business sectors all looking at one issue that crosses over all their businesses. Since all our discussions are off-the-record, I merely summarized things as I understood them. NetForum members can continue the discussion on this blog, can join the LinkedIn Group and since each event's attendees get each others' email addresses the conversation can continue off-line as well.
Thank you all for attending.
Laurent
laurent@parkviewventures.com
Connect with me on LinkedIn
Follow me on Twitter
Request Access to the NetForum LinkedIn Group
REMEMBER TO SAVE THE DATE OF DECEMBER 18TH FOR THE NEXT NYC NETFORUM ON THE SUBJECT OF VALUATION: "HOW MUCH IS THIS STARTUP WORTH ANYWAY?"
ALSO, THE INAUGURAL NETFORUM LONDON AT BLOOMBERG ON DECEMBER 8TH ON THE SUBJECT OF STRATEGIC VENTURE CAPITAL: "YOU JUST CLOSED A STRATEGIC VENTURE INVESTMENT, NOW WHAT?" PLEASE CONTACT ME IF YOU WOULD LIKE TO ATTEND OR HAVE SOMEONE YOU KNOW ATTEND.
Sunday, October 26, 2014
The Rise of the Peer to Peer Conferences, Launching NetForum London and Schedule for NetForum NYC
Dear Friends and Colleagues:
- The NetForum is expanding to London and will have its first event at Bloomberg on December 8, 2014! Read all about it below.
- Also, the next NYC NetForum is November 20 -- save the dates for the next 6 NYC NetForum events and check out the list of topics below.
- My thoughts on why people are flocking to Offline Networking events like the NetForum. Hint: it's all about real relationships.
After 2 years of Start-Up mode, the
NetForum is getting more structured. But we are not changing
anything to the format that really creates the magic of NetForum
events: small group around one table having an off-the-record
discussion about challenges and opportunities facing tech startups of
a certain size and maturity. The attendees are a mix of CXOs of tech
startups and Corp Dev/Corp Strategy execs in larger companies. I
originally called this “Peer-to-Peer learning” when we launched
despite the fact that not everyone were peers. But considering the
intense interest by strategics in the start-up universe, I think the
call was prescient. There is a lot that the small companies and the
big companies can learn from each other, and the right way to do it
is in a conversation among peers, not some big lecture hall. I am
glad you voted your agreement by attending the NetForum and I count
on your continued presence and contribution as we roll-on.
After we launched the NetForum, I
started getting invited to join other very expensive ($15K-$25K per
annum) “Peer to Peer” events (or Leadership Councils or whatever
people call them). I attended one such event and was struck at how
many people were signing up. One would think it is counterintuitive
that in the age of professional networking platforms people would
actually join offline networking events. Isn't LinkedIn enough? 300
million people right there for you to connect with. Why do you need
to meet them face to face? Just improve your profile with a pretty
picture, add a few more interest groups to your profile, publish some
clever content that would establish your “credibility” and get
people to “trust” you as an “expert.” And voila, wait for
the money to flow (say the LinkedIn gods).
I know that it is working for some
people but what about the rest of us? What I do observe more
generally is that the Content Marketing phenomenon and the ease of
access to anyone online has devalued both content and online
relationships – if everyone is doing it (sharing prodigious amounts
of content produced by their social media managers, and tapping you
on the shoulder every time you post something, etc.) then it's not
really authentic anymore. I recently read a post from a consultant
who makes his living by training people to use LinkedIn, and he was
saying “I think my LinkedIn contacts are too numerous to be of any
value.” Another factoid came to my attention from a Hotel Industry
newsletter that I get (never unsubscribed to it after working on an
online travel deal 4 years ago!): hotels are forecasting a banner
year in conferences for 2015. Lastly, regarding conferences, anyone
been to Dreamforce this past month? 150,000 people attending a
conference about a SaaS platform in SFO... Remember that Sheldon
Adelson, #10 Richest Person in the world in 2014 according to Forbes,
made his first $500M by selling COMDEX to Softbank in 1995, in what
(I think) was Softbank's first major foray in the US tech space. (If
you don't know what COMDEX was, well...).
All right, what's my point? When it
comes to making important business decisions, nothing replaces in
person relationships. It's that simple, business is based on trust
and relationships, and accepting your LinkedIn invitation is just the
beginning of the journey. It has to be followed by in person. I was
just reading Matrix Partners' David Skok's blog for entrepreneurs and
his annual SaaS survey. He reports that the churn rate of clients in
SaaS subscriptions is higher for e-commerce transactions (i.e self
serve and pay) by a huge margin over sales done by inside sales, and
the stickier clients are those sold by field sales. He does not say
why but I will venture to suggest that it's because it's harder to
cancel when there is a relationship than when you dealt with a
computer. It's all about relationships.
But it's hard to develop relationships
when you are sitting in a lecture hall being lectured to. And during
the lunch break, you only get to meet the person to your left and
right. At happy hour, you talk to people you already know. It's all
very inefficient.
That's where NetForum comes in. We do
small events. We (try to) do them frequently. The topics are
usually suggested by members (all you need to do is send me an
email). Everybody gets to join the conversation and talk about
something they know about (other than their current product
offering). There is time before and after the event for in person
interactions. And I introduce anyone who wants to anyone else on the
spot or after. All this in 90 minutes with breakfast. I have never
been involved in anything that generates so much “customer
satisfaction.”
Let me turn to NetForum London. The
man behind that is my former and now again partner Raj Singh.
(http://www.linkedin.com/in/rajsingh).
Raj has done it all – worked at IBM when the Web was born, then at
Booz Allen, then went to the investment side as a partner at
Investcorp (and even with Parkview for a little while), then went to
the start-up side and even did consulting for governments on how to
stoke innovation ecosystems. London has recently caught the start-up
fever, with Strategic-Startup hook-ups happening everywhere. So we
thought that the NetForum formula would add value to the London
ecosystem. The first event is at Bloomberg on December 8, 2014. The
event will cover the hot subject of the day: “The Day After the
Closing of a Strategic VC Investment – What Now?” Basically,
what's the plan for this strategic investment, and how to execute it.
Raj will send invitations to his network there but do let me know if
you have colleagues in London that should be part of the NetForum
there (send me a note and I will have Raj add them to his list.) We
are going to always let everyone know about the events in both cities
so that people can attend everywhere they are. Again thanks to
Bloomberg for hosting and helping organize the event.
And now finally back to NYC NetForum.
Apologies to some of you who mysteriously got dropped from the
invites. I switched email clients and I lost the old mailing list,
had to rebuild it. I have been really busy too. In 2008, Parkview
invested in Reachable (www.reachable.com)
and in 2013 I became interim CEO and finally permanent CEO.
Reachable provides a SaaS solution to enterprises that want to
accelerate sales, business development and fund raising by leveraging
their own graph of enterprise relationships – basically a private,
enterprise “who knows-who-solution” based on big data analytics
and professional data from our strategic partners, including S&P
Capital IQ... So, running a startup in a hot market while managing a
boutique merchant bank with VC investments and providing Corporate
Innovation Investment Strategy and M&A advice to clients is
demanding but quite interesting. My partners really helped out.
Here are the
dates for the upcoming events (all Thursdays):
11/20/14, 12/18/14, 1/22/15, 2/19/15,
3/19/15, 4/23/15, and 5/14/15. Save the dates.
And these are the subjects that we
tested on some of you and that resonated well and thus will become
NetForum discussions:
- The Chinese Giants Have Landed. Alibaba, Tencent, and others are investing, buying companies, and establishing US beachheads. Market expansion, or search for innovation? Is your company a target for a Chinese strategic investor?
- The Valuation Game. What is this company worth? What are the factors that influence your valuation and what can you do about it? You should understand how the game is played before you get burned.
- Privacy. Are you doing enough to protect the Privacy of your users? Or are you exploiting the fact that they really don't care? Is Privacy a business imperative or just a slogan?
- Internet of Things. Does it affect you? Is it an opportunity or a threat? Can you quantify its impact on your business?
As always, we like to balance
perennials and hot subjects. Keep the ideas coming and let me know
if your company has expertise on any of these matters and wants to
contribute a subject matter expert to the discussion.
You will be receiving your invitation
to the first event on November 20 shortly. Let me know if you want
to add anyone from your London team or a London friend to our London
event list.
Thanks for the emails with ideas and
suggestions!
Best,
Laurent
Sunday, September 8, 2013
Human Capital -- the New Reality. (Have you felt it too?)
The NetForum will meet again on September 26th at 830am to continue our peer-to-peer conversations about the most topical subjects for executives charged with scaling Digital Economy businesses, whether they are CEOs of Expansion Stage companies or corporate executives in charge of strategy, corporate development and revenue generation in large media, technology, and other Web-transformed businesses. Our host will be General Assembly, and we will meet at their 902 Broadway location, on Level 4 (that's in NYC for all my out of state readers!)
Our topic of discussion will be "Human Capital -- the New Reality. Have you felt it too?" Like an earthquake that is unexpected, the disruption in the world of Human Capital is everywhere. At the NetForum, we will ask "Did you feel it too, and HOW BIG IS IT?"
Some trends are continuing their slow march -- the hold that large enterprises have on their employees is diminishing. It's not just that employee mobility (voluntary and involuntary) continues to rise. I think that close observation would lead one to think that perhaps the social contract that is at the foundation of corporations is being rewritten. The great economist Ronald Coase (who passed away this month at 102!) helped us understand how a "contract" between various resources (including labor) led to the emergence and stability of corporate organizations. In my mind, the analysis is still very useful but the contract is being recut. Initially, I think it was the corporations who rewrote the deal by beginning to reallocate their purchases of labor to multiple locations -- essentially price shopping now that the cost of doing so became manageable. But labor reacted to this with the advent of the Web by learning to sell its capabilities better. The Web flattened the world, and networked it like never before, lowering the cost for labor to shop for work. In Coasian terms, the transaction costs that formed the basis for corporate existence were lowered dramatically, forcing a rewriting of the corporate social contract, and corporations will never be the same.
The rules then are changing. What employees expect from their employers is changing, and what employers are expecting is changing too. Some things won't change. Most people do expect that getting a job is essentially an insurance policy, a respite from having to market oneself everyday to fund one's life. And employers do expect that people hired will be around at least to finish the tasks they were asked to perform when hired. But how to get from these minimal expectations to creating a Good Job, where the employees come, stay and are fulfilled and thus motivated, and where the employers feel they would do everything they can to keep these employees as opposed to recycling them for cheaper labor, that's the question!
And to do this when you are at the epicenter of the earthquake, in places like Silicon Valley or Sillicon Alley, where the ambitions and dreams of highly skilled employees, their access to superior information, and their demands for transparency collide with the reality of VC funding or public markets, customer demands, and hyper-competitive markets, is even harder. But that is exactly what the members of the NetForum are doing day in, and day out.
So, let's see how we do it.
Laurent
P.S. After the event, as I always do, I will post an anonymized synopsis of the event as a comment to THIS post. (So click on the comment button right below to see it, after the event.)
Our topic of discussion will be "Human Capital -- the New Reality. Have you felt it too?" Like an earthquake that is unexpected, the disruption in the world of Human Capital is everywhere. At the NetForum, we will ask "Did you feel it too, and HOW BIG IS IT?"
Some trends are continuing their slow march -- the hold that large enterprises have on their employees is diminishing. It's not just that employee mobility (voluntary and involuntary) continues to rise. I think that close observation would lead one to think that perhaps the social contract that is at the foundation of corporations is being rewritten. The great economist Ronald Coase (who passed away this month at 102!) helped us understand how a "contract" between various resources (including labor) led to the emergence and stability of corporate organizations. In my mind, the analysis is still very useful but the contract is being recut. Initially, I think it was the corporations who rewrote the deal by beginning to reallocate their purchases of labor to multiple locations -- essentially price shopping now that the cost of doing so became manageable. But labor reacted to this with the advent of the Web by learning to sell its capabilities better. The Web flattened the world, and networked it like never before, lowering the cost for labor to shop for work. In Coasian terms, the transaction costs that formed the basis for corporate existence were lowered dramatically, forcing a rewriting of the corporate social contract, and corporations will never be the same.
The rules then are changing. What employees expect from their employers is changing, and what employers are expecting is changing too. Some things won't change. Most people do expect that getting a job is essentially an insurance policy, a respite from having to market oneself everyday to fund one's life. And employers do expect that people hired will be around at least to finish the tasks they were asked to perform when hired. But how to get from these minimal expectations to creating a Good Job, where the employees come, stay and are fulfilled and thus motivated, and where the employers feel they would do everything they can to keep these employees as opposed to recycling them for cheaper labor, that's the question!
And to do this when you are at the epicenter of the earthquake, in places like Silicon Valley or Sillicon Alley, where the ambitions and dreams of highly skilled employees, their access to superior information, and their demands for transparency collide with the reality of VC funding or public markets, customer demands, and hyper-competitive markets, is even harder. But that is exactly what the members of the NetForum are doing day in, and day out.
So, let's see how we do it.
Laurent
P.S. After the event, as I always do, I will post an anonymized synopsis of the event as a comment to THIS post. (So click on the comment button right below to see it, after the event.)
Sunday, June 2, 2013
Corporate Venturing
We will be having our next event on June 20th
centered on Corporate Venturing. We had surveyed members to see which corporate
strategy topics were of most interest to them and Corporate Venturing came to
the top of the list. There has been a resurgence of Corporate Venture Capital,
and this time it is not just isolated with Tech and Pharma companies
(Automotive, Consumer Products, Manufacturing, Oil & Gas companies are all
entering) and there has been significant growth in cross-industry investments
(somewhat driven by multi-industry sweeping innovations such as clean-tech).
Many of our members are seeking CVC funding, while others are contemplating
forming a fund within their corporations. The discussion will seek to
understand how Expansion-Stage companies should engage with corporate venture capital
funds. What’s the best way to secure funding and build a long-lasting strategic
relationship, go to the corporate venture group or try and find the right
business unit/division manager to be your “champion”? We will also examine what
it takes to set up a successful corporate venture fund. How do you create a
culture that embraces external innovation as opposed to viewing it as a threat
to internal R&D? How do you maintain post-investment support from the
organization to ensure you are creating value? How do you measure the success
of a corporate venture? Oftentimes the strategic value can be as much, if not
more, important than the financial returns of the investment. We will also
examine some emerging trends in Corporate Venture, such as the move to earlier
stage investments as seen by the growth of corporate incubators. To ensure that
we have as engaging and thought-provoking of a discussion as possible we will
be doing something new this time around. We will be conducting primary research
by interviewing experts in the field beforehand. We want to talk to both corporate
venture capital professionals and members of startups that have received corporate
funding. If you or anyone that you know fits the bill, please reach out to Raj
(araj14@gsb.columbia.edu) and we
will schedule a 30 minute interview over the next 1-2 weeks. We will also post
a summary of our discussion after the event.
IPO! What IPO???
The fifth NetForum meeting took place on May 2nd,
2013. The topic of discussion was “IPO! What IPO???” It is no secret that the
IPO market for technology companies has basically vanished. Why is that? Is our community less daring,
less ambitious? Are we creating companies of lesser value? Or are the public
market investors basically not buying it, saying come back when've got
something that we can believe in? Are the VCs not interested in IPOs, do they
just want quick flips? Or are the strategics snapping up IPO-worthy companies
so that they are not letting enough companies go public? These were the questions that were discussed
during another lively discussion. NetForum members were joined by two
individuals who are in the heart of the IPO action, Jon Robson, CEO of NYSE
Technologies, and Scott Cutler, EVP NYSE EuroNext and Head of its Global
Listings Business.
The number of Tech IPOs in the last 5 years is small
compared to past periods, and dwarfed by the number of Tech IPOs during the
DotCom Boom. What does that mean?
Members agreed that you needed to look at the dwindling
number of IPOs since the DotCom Boom in the right context. The DotCom Boom years were an anomaly and we
should not compare any other period to that period. The number of Tech IPOs is steadily
increasing again, with larger IPOs and more of them. There is still a proper IPO window for
meritorious companies.
However, the public markets are not for the unprepared. Public markets reward predictability –
companies that don’t have their act together, namely can’t forecast how well
they will do 2, 3, 4 quarters out at any time will have a hard time in the
after-market. Accordingly, these
companies will have a hard time going public.
The drafters of the JOBS Act attempted to lower the regulatory burden on
smaller issuers to create an easier pathway to the public markets to earlier
stage companies (not to be confused with early stage startups!). There are numerous benefits of going public,
namely the liquidity for investors, and the currency for acquisitions.
The discussion on the predictability of performance led us
into a discussion thread that was especially fascinating. We had numerous executives of Web companies
present, with experience stretching to Web 1.0, significant fund raising track
records, and even public company experience.
And we flirted with the notion that perhaps tech companies were
inherently not well suited to the public markets! Bluntly said, if the public markets want
companies that can tell them how they are going to do in 6 or 12 months and
beyond, well, tech companies with short product cycles, business models that
are “evolving” and lots of competition from all directions are inherently not
capable of meeting the bar.
So, who is aiming for IPOs?
Several NetForum members stated that venture and private equity funds
investing very large sums of money at very high valuations are supporting
companies that have no choice but to aim for an IPO. The buyers for these companies become few and
afar as the valuations increase such that only the public markets can provide
liquidity to the investors.
In some way, however, the late stage investors are not
creating a problem but solving one (or perhaps creating a problem by solving
another). Late stage investors can be
seen as “competitors” to the public markets in providing capital to high growth
companies. Some of the big names in the
tech sector that went public in the 80s and 90s raised sums on the public
markets that are smaller than many late stage rounds today. (Intel raised $6.8M in 1970, Microsoft raised
$61M in 1986, even translated in current day money this is smaller than late
stage rounds in companies like Square and Twitter, and many others). The late stage investors are providing expansion
capital and even hard currency for acquisitions to companies that need them –
whether these are companies who could have gone public and gotten this capital
from the public markets, or they are companies who could not have gone public
due to the higher bar previously discussed.
If indeed the markets expect companies to be able to predict revenues
and profits accurately, then the companies that are raising these big rounds
really may not be able to go public and raising the big rounds is just a
logical next step in their lifecycle as maturing companies.
So does this mean that tech companies that go public now are
mature businesses by necessity? Claims
that Facebook was a mature business at IPO abounded at that time. It is certainly hard to continue to grow
exponentially when one reaches a certain scale.
Yet, many companies that go public become large job creators, with
LinkedIn being a point in case. Other
pointed out that the IPO discipline forces companies to rein in expenses,
especially R&D for the sake of R&D.
The broader point was again that there is plenty of capital available to
finance the high growth phase of successful companies, so that by the time they
go public they have more mature financial profiles.
We did address the psychological or ego element of wanting
to go public. There are still “dreamers”
out there, some said. The term was not
meant to denigrate foolish people but to acknowledge that there are CEOs of
companies who want to change the world, who believe they have a game changing
technology/product/something, and for them staying the course till the IPO is
an imperative. These could be contrasted
to CEOs who are running their companies to make money for their investors and
themselves, and have been around the block a few times, understand the risks
that need to be confronted day in day out, and who don’t think about the IPO as
much as about building a good business everyday. Perhaps these are the
“realists”?
We ended on a high note, on the NYSE floor just in time for the opening bell for the IPO of ING.
We ended on a high note, on the NYSE floor just in time for the opening bell for the IPO of ING.
Founder CEO vs. Professional CEO
The fourth NetForum meeting took place on March 14th,
2013. The discussion centered around a hot issue in the world of fast growing
Web companies: the respective roles of the Founder CEO and the Professional
CEO. This issue touches one of the
foundational elements of any business, the management, but is of particular
relevance to fast growing companies because they can run through growth stages
very quickly -- very often there is no time to allow a founder to retire, or
mature, and a transition to a professional CEO if not done perfectly can cause
the business to miss a beat and just collapse.
Investors will not fund a business without a strong management, or the
ability to install one quickly, and strategic buyers always look to secure the
continued participation of key employees in a M&A transaction to ensure
they are not buying a company devoid of its creative motor. Jamie McGurk, the
in-house Corp Dev/M&A partner at Andreessen Horowitz in Menlo Park, joined
the group to share his insights on the topic.
His role is in line with Andreessen's public stand that they prefer to
deal with founder CEOs (http://bhorowitz.com/2010/04/28/why-we-prefer-founding-ceos/)
and that THEY, as a firm, need to mold themselves to work with founder CEOs.
Andreessen Horowitz (“AH”) was founded to be the model VC
firm that Marc Andreessen and Ben Horowitz wished they had had as an investor
when they were founders at Netscape and Netops.
This is in contrast to the traditional VC firm with a small number of
General Partners, each sitting on multiple portfolio company boards and each an
island of knowledge and contacts, without the institutionalization of
information sharing across the firm and without a way to systematically add
value to portfolio companies in all the areas where they need help. AH has 70 professionals in HR, Sales
Operations, PR, Corporate Development, Research, and of course Investment, that
are geared to generate deal flow, analyze it, deploy capital, help companies
recruit human capital, generate sales, do deals, raise money and exit. In the Private Equity sector there is a trend
now towards “operationalizing” – meaning adding to the PE firms people with
operating experience who can add value to businesses to complement and
potentially supplant the much maligned number crunchers. These are similar ideas in parallel fields
challenging the status quo, until they create a new paradigm…
Studies showed that within 3 years of an investment, VCs had
replaced somewhere between 50-70% of CEOs.
Some CEOs have the self-awareness that they are not the right person for
the job, either because that’s just not who they are, or because the job
outgrew them, so they have asked to be replaced. Many around the table supported this idea,
having experienced it first hand or having seen it in their companies or in
companies in which they had invested.
An issue that was brought up is that sometimes the
rank-and-file knows that the CEO is not the right person for the job but no one
on the Board is doing anything about it.
A comment that was made by a serial CEO is that his experience was that
VCs were leaning over backwards not to replace the CEO and that sometimes the
Board acted too late. So instead of there being an evil plan to go in and
replace the CEO, there could be an opposite predisposition, a reluctance to
take action when needed. Investing in
good people and helping them become good CEOs could work but failing to either
a) truly help a CEO that is doing poorly or b) replacing him or her fast is a
breach of a Board’s fiduciary duty. But one
can understand why group dynamics can prevent 5-7 people working as a group to
eject one of their own from his or her seat…
Another question that came up was whether the founder-led
companies actually produce better results for investors. There is data that indicated that founder-led
CEOs generated better IRRs than those led by professional CEOs. The data was challenged by some of our
members on the basis that it was inherently biased. Basically, if you have a great company led by
a great CEO, why bring in a professional CEO?
Hence, the professional CEO hiring may be an indicator of sub-optimal
performance compared to the ideal case of the founder who gets it all right and
rides into the sunset. This makes sense as
any CEO change causes a disruption and a loss of institutional knowledge, so
the mere fact of replacing the CEO, especially a founder CEO, is a high-risk
endeavor and it can take a while for everything to settle down. If it works out, the professional CEO brings
a productivity boost that should make up for the disruption caused by the CEO
change. But sometimes it does not.
Participants discussed the fact that the founder is often
the embodiment of the company and it is hard for someone new to come in and
become all of that. Yet, it was pointed
out that it is an absolute requirement, that the CEO of a startup, founder or
not, must convince the team that he or she is now the soul of the
business. Professional CEOs who come in
to replace a founder may never have that credibility, or may need to work extra
hard to acquire it.
The discussion shifted from a focus on Founder CEOs to
“founding teams.” Several people work
together to start a company and over time, someone emerges, a natural born
leader and becomes the unmistakable CEO.
Sometimes, the founding CEO develops the awareness he is not the right
person to do the job as it has evolved and gets a new CEO to replace him. Reid Hoffman wrote a nice blog on his
experience bringing Jeff Weiner to run LinkedIn, describing it as bringing a
new founder, even if he was not the founder.
Members discussed the importance of securing the
participation of founders when they are still CEOs in the context of corporate
M&A. Members who have responsibility
for M&A for their companies discussed the importance of making a proper
transition that captures that knowledge base during M&A transactions.
There was also a discussion of Richard Branson, an
illustrious founder CEO, who is the embodiment of his company to the outside
world. Many wouldn’t have hired Sir
Branson when he got started but that he has done a great job understanding the
need to surround himself with great talent, allowing him to remain and succeed
as CEO for so long.
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