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U.S. Tech Funding – What’s Going On?

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Re: U.S. Tech Funding – What’s Going On?

#61

Post by foobarqux »

patio11 wrote: post #52
foobarqux wrote: post #46

Earlier quoted context omitted.

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Why is that?

A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. [Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]

> A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%.

No, that's wrong. The investor loses nothing until the value declines to $500 million and then suffers linear losses afterward (i.e. if value is $100M then they lose $500-100=$400M).

Re: U.S. Tech Funding – What’s Going On?

#62

Post by boomzilla »

patio11 wrote: post #52
foobarqux wrote: post #46

Earlier quoted context omitted.

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Why is that?

A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%. [Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]

Uber has raised almost 6B. It's very unlikely their valuation drops to a few hundred millions as they must still have a few billions cash. However it's not impossible to see it drops to the 10B level or less if the economy tanks or they fail to execute, leaving little to the common shares. If I were an early employee at Uber, I would've been looking for anyway to liquidate my shares :), even if it that means shorting the NASSAQ.

Re: U.S. Tech Funding – What’s Going On?

#63

Post by anigbrowl »

lnanek2 wrote: post #33
nostrademons wrote: post #12

Earlier quoted context omitted.

That's the way capitalism has always worked - it is up to you to make deals that increase your overall level of happiness, and it's up to your counterparties to ensure that those deals also increase their happiness. In past years, instead of "VCs" the villains have been hedge funds, private equity, corporate raiders, giant conglerates, corporations in general, investment trusts, robber barons, and colonial empires. I…

This is basically what Capital in the 21st Century said too. People who reinvest money they make into making more money are getting richer. Those who spend it are not. Pretty straight forward.

Except that unless you are lucky, you're unlikely to become wealthy from just saving/investing ordinary income. You're both presenting it as if it were a simple choice between being frugal and engaging in consumption, but it's not.

Re: U.S. Tech Funding – What’s Going On?

#64

Post by nugget »

beambot wrote: post #55
nugget wrote: post #40

Earlier quoted context omitted.

How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Moreover, most of the institutions doing these late stage rounds and secondaries are the same banks and asset management firms that float the IPOs. One of the unintended consequences from SOX is the creation of this public-private funding environment where huge private firms and high net worth individuals can invest, but s…

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. It's substantial. If VCs get a 1x liquidation preference, then it's (effectively) a no-downside investment since Uber is worth (worst-case) $500M+. If they get >1x and are the last investor (most-preferred), then they are virtually guaranteed solid return. Late stage VCs know what they're doing and valuation is still onl…

I personally wouldn't call it substantial. You can quantify the value of the liquidation preference by looking at the difference between the value of the preferred shares and the value of common shares available on secondary markets. Once you have a company that owns its market, has healthy and growing revenue, etc, there is very little difference. This is what happened to Facebook and Twitter. I'm not familiar with Uber but I do track Pinterest and Airbnb and right now their common stock (no preference) sells for about a 10% discount to the latest preferred rounds. Square and Palantir, which people seem to have less faith in (for whatever reason), trade at a steeper but still not what I'd consider substantial discount.

Re: U.S. Tech Funding – What’s Going On?

#65

Post by foobarqux »

nugget wrote: post #64
beambot wrote: post #55

Earlier quoted context omitted.

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. It's substantial. If VCs get a 1x liquidation preference, then it's (effectively) a no-downside investment since Uber is worth (worst-case) $500M+. If they get >1x and are the last investor (most-preferred), then they are virtually guaranteed solid return. Late stage VCs know what they're doing and valuation is still onl…

I personally wouldn't call it substantial. You can quantify the value of the liquidation preference by looking at the difference between the value of the preferred shares and the value of common shares available on secondary markets. Once you have a company that owns its market, has healthy and growing revenue, etc, there is very little difference. This is what happened to Facebook and Twitter. I'm not familiar with…

Preferred shares have different terms, they don't all have liquidation preferences. Even if they do, the preference is worth much less once the stock appreciates significantly. For example, if I get a preferred with liquidation preference at some price P then that is worth far more than the same security once the price appreciates to 3*P (since it acts more like a common share, the value of the preference being reduced [since the chance of it being useful is less]).

And which secondary markets are those?

Re: U.S. Tech Funding – What’s Going On?

#66

Post by nostromo »

thorfish wrote: post #3

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is…

It's another case of the cure (Sarbanes-Oxley) being worse than the disease (another Enron).

Re: U.S. Tech Funding – What’s Going On?

#67

Post by narrator »

mahyarm wrote: post #57
narrator wrote: post #51

Here's my current map of where the money is coming from and going to. Fed buying trash MBSs with QE -> Investment Banks -> Stock Market -> Big Tech Companies -> Acquisitions -> Venture Capitalists -> Tech Companies -> Startup Employees -> San Francisco Landlords and Fancy Toast Restaurants.

And the landlord step is further accelerated by the overseas wealthy using sf real estate as a secure bank account compared to their home country and hedge funds buying up stock as an investment step. NIMBYs then leverage it further by constraining supply.

The "overseas wealthy" is the trade deficits we've been running for the past 30 years slowly trickling back into the U.S asset markets. We were able to export our inflation for 30 years and it was all piling up in foreign central banks as treasury bills. Now, with very low interest rates, it is going into any asset that's not a bond. If the dollar index starts to go the wrong way, watch out, that little stream of overseas dollars buying into U.S assets is going to become a flood.

Re: U.S. Tech Funding – What’s Going On?

#68

Post by nostrademons »

anigbrowl wrote: post #63
lnanek2 wrote: post #33

Earlier quoted context omitted.

This is basically what Capital in the 21st Century said too. People who reinvest money they make into making more money are getting richer. Those who spend it are not. Pretty straight forward.

Except that unless you are lucky, you're unlikely to become wealthy from just saving/investing ordinary income. You're both presenting it as if it were a simple choice between being frugal and engaging in consumption, but it's not.

There's more than that implicit in my comment. If you're the sort of person who views wealth as a scorecard rather than a means to consumption, why should you care whether you end up becoming wealthy or not? You'll be too busy making money to spend it. And if you're the sort of person who views wealth as a means to consumption, then of course you'd like to be wealthier, but, well, you know how to achieve that.

(In actuality, the distinction isn't binary - most people desire both consumption and accumulation of wealth, in different proportions. But that reinforces the meta-point I'm trying to make, that money is a means to make choices about your life, and what makes those choices meaningful is the fact that there are constraints in the first place.)

Re: U.S. Tech Funding – What’s Going On?

#69

Post by Moshe_Silnorin »

nostromo wrote: post #66
thorfish wrote: post #3

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is…

It's another case of the cure (Sarbanes-Oxley) being worse than the disease (another Enron).

>Sarbanes-Oxley

We'll never be rid of it. Like copyright law, It's crystallized into a self-perpetuating incentive structure. Everyone knows it's stupid, no individual has much incentive to try and change things. The ability to restore to a previous state is essential in the design of institutions, one lacking in our current governments. This is a very hard problem, but I'm hopeful prediction markets may be able to help with this in future governmental structures.

Re: U.S. Tech Funding – What’s Going On?

#70

Post by nugget »

foobarqux wrote: post #65
nugget wrote: post #64

Earlier quoted context omitted.

I personally wouldn't call it substantial. You can quantify the value of the liquidation preference by looking at the difference between the value of the preferred shares and the value of common shares available on secondary markets. Once you have a company that owns its market, has healthy and growing revenue, etc, there is very little difference. This is what happened to Facebook and Twitter. I'm not familiar with…

Preferred shares have different terms, they don't all have liquidation preferences. Even if they do, the preference is worth much less once the stock appreciates significantly. For example, if I get a preferred with liquidation preference at some price P then that is worth far more than the same security once the price appreciates to 3*P (since it acts more like a common share, the value of the preference being reduc…

The most active secondary markets I see today are the broker dealer successors to Frank Mazzola/Felix Advisor type outfits who use company approved (or tolerated) LLCs to vacuum up stock from ex employees who want liquidity. You have to find them or be referred to them and then they will periodically pitch you inventory as it becomes available. Chris Sacca is doing the same thing but it looks like a venture fund and (as far as I know) he holds to IPO, where on the east coast it looks like a private equity fund and they will allow intra-fund exchanges between old and new investors. Very little transparency in this market and probably the perfect breeding ground for the next Bernie Madoff style Ponzi scheme (not Frank or Chris who are both legitimate).
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