Exile From the Herd - Venture Crapital

Newsflash: Some Web 2.0 Companies are Over Valued

nospam@example.com (Mark Jeftovic) — Tue, 03 Jun 2008 11:31:38 -0400

I like Techcrunch a lot, and have always been proud that they're an easyDNS DNS hosting client, but sometimes I find myself shaking my head a lot as I scroll through their feed in my bloglines reader. The still pre-revenue Twitter just got something like a Q-round funding giving them a post-money valuation somewhere north of Canada's GDP and some of the A-rounds being announced stand less of a chance succeeding than bluetooth enabled salad forks.

While the current VC's of these deals may succeed in their own business plans (that of achieving subsequent fundings at ever higher valuations, or effecting a liquidation event where some large elephant with too much money takes the entire thing over), whoever ends up ultimately owning these start-ups at the highest valuation will never recoup that "investment" out of earnings from the venture.

With some of these Web 2.0 companies it's like trying to build a business plan and monetize a really hot knock-knock joke. It catches on like wildfire, soon everybody's telling it in the elevator or at the water-cooler. Your cab driver knows it and so did your waiter at lunch. And then some VC firm comes along throws 60 million into the pot thinking eventually people will pay to hear it, or that they can sell advertisements just before the punch line.

I don't see it happening.

The Grand Swindle

nospam@example.com (Mark Jeftovic) — Thu, 28 Feb 2008 22:17:34 -0500

LTCM, Bre-x, Enron, Subprime, oh my, will we wake up before the Visa IPO scam plays out?

Last week while I watched Orwell Rolls in His Grave and Enron: The Smartest Guys in the Room I began to experience the feeling that I was hearing the same story again, only describing a different setting and different characters. There was a great line by an obscure singer named Tony Carey which sums it up: "Nothing changes but the names, one more ace shot down in flames, in Tinseltown".

It seems to be happening on both macro and micro scales at all levels of our society: whether it's billion dollar hedge-funds imploding because they can't mark their bullshit derivatives to market, or some Hollywood glam-addicted celeb whose exterior life is coveted by the masses publicly unravels or dies with a whimper and a thud; the consistant theme of today's Zeitgeist is The Flameout. It's been happening for years, their intensity is quickening while their ramifications expand and compound and yet, we rarely learn a damn thing from any of them.

Continue reading "The Grand Swindle"

Are domain names recession-proof? Probably not, next question?

nospam@example.com (Mark Jeftovic) — Mon, 28 Jan 2008 14:08:03 -0500

I didn’t see the Fortune article Are domain names recession proof until the weekend, and being the author of the now infamous Domain aftermarket overdue for an asset repricing last year I feel somewhat obligated to comment on it.

There can be no doubt now that the recession is here. I went on record nearly a year ago that it was coming, so I nearly gagged when I saw Jim Cramer say something along the lines of “I told you all this was coming” over the Christmas holidays. So now it’s ok to say “recession” in polite company although the politicians and the pundits still try to soften it up by making sure they modify it with words like “maybe”, “slight”, “mild” and “possible”. Make no mistake, it’s underway and I think we’re far closer to the beginning of it than the end.

So, how will domain names fare in a recession? The Fortune article was upbeat:

Continue reading "Are domain names recession-proof? Probably not, next question?"

The Economy: Time to Panic? (Not yet, but wear diapers)

nospam@example.com (Mark Jeftovic) — Fri, 18 Jan 2008 13:23:17 -0500

As a child, my mother remembers peaking through a window into the bedroom of her grandfather, my great-grandfather, who would sit at a table frantically counting and recounting a few gold coins in a bag. He had gone off his nut, basically, and this was his obsession: emptying a few coins out of his bag and recounting them into it. I was told this tale at a fairly young age and had taken it as a cautionary tale against being miserly or otherwise obsessed with money.

It was only during a recent visit from my mom that I learned the other piece of my great-grandfather's story. He was rich, already a wealthy man before all that "Great War" unpleasantness. WWI ended and he had all of his wealth in (wait for it...) gold. What happened next is what broke the man. A business partner of his convinced him that gold was old news and about as valuable as it was ever going to get (A "barbarous relic" in today's parlance). My great-grandfather agreed he may be right and liquidated the vast majority of his gold bullion and coins into cash. This was in around 1920's Germany, better known then as "The Weimar Republic". Ask any halfway competent student of history about the Weimar Republic and they will all say the one thing it was remembered for the most: HYPERINFLATION.

What is the best possible thing to have oodles of during a period of hyperinflation? Gold What's the worst thing you can do with gold just prior to an episode of hyperinflation? Sell it for cash.

That's what my great-grandfather did and he spent the rest of his days a crazed pauper with OCD. For some reason that story really, I mean really resonates with me on a lot of levels. If I believed in re-incarnation, I would say "I'm that guy, and this time I'm going to get it right goddammit. "

When I flipped past Larry King's show last night and the headline was "The Economy: Time to Panic?" I realized just how badly spoiled we are here in the west.
Continue reading "The Economy: Time to Panic? (Not yet, but wear diapers)"

The web 2.0 VC Roadmap, as blogged by Rick Segal

nospam@example.com (Mark Jeftovic) — Tue, 30 Oct 2007 16:35:25 -0400

Just kidding Rick, I saw one of your posts the other day and couldn't resist For those unfamiliar, Rick pens one of the premier VC point-of-view blogs at Post Money Value

The CEO is way smarter than I am
The CEO has built a team of people way smarter than he is
The CEO has assembled an advisory board of incredibly smart people who just "get it". They're brilliant. Doc Searls, Rick Scoble, Seth Goodin, and Guy Kawasaki. Just to name a few.
The CEO works 16 hours a day, 7 days a week and is driven by total passion and intensity. He doesn't draw a salary and drives a 1983 Lada. He donated his founders shares to charity and his family hasn't seen him in nearly a year.
The first three funding rounds all took place at successively higher valuations.
The developers are amazing. You should see the mashups these guys are cranking out. They came up with a very neat facebook application that's going to be just killer!
The guy we brought in to replace the CEO made the company very attractive for subsequent funding rounds.
The revenue projections look very promising.

And then....
We sold the company for $400 million, a great exit. Congrats to all involved.

or
Microsoft buys a 0.25% stake for $200 million, valuing us at 800 billion dollars, not bad for a pre-revenue venture with oodles of mindshare.

More on panic containment and let the good times roll

nospam@example.com (Mark Jeftovic) — Wed, 15 Aug 2007 12:17:05 -0400

I watched with bemusement the talking heads on BNN this morning, as is my habit since CNBC has been swapped out for a movie channel on my digital cable feed (a better value, I find). They were describing how "normalcy" is returning to the European financial markets and how other sectors are positioning for a "decoupling" from the financial sector being dragged down by the subprime sludge and credit tightening.

So all is well again, all it took was about a half-trillion dollar Hail Mary from Central Banks the world over and we're all supposed to either go back to buying houses with nothing down, no income, no visible means of servicing the debt and an adjustable rate mortgage to boot. Either that or we buy packages of these mortgages bundled together of other people doing exactly that and we're supposed to call it "investing". In any case, the talking heads obliquely referred to this last week of cratering stock markets as a "buying opportunity" that hedge funds will surely position for.

Continue reading "More on panic containment and let the good times roll"

Canadian PPT hard at work

nospam@example.com (Mark Jeftovic) — Tue, 14 Aug 2007 11:38:14 -0400

Background: the sky is not falling. Subprime woes will be confined to the subprime market, the contagion will not spread to other financial sectors. In fact, this is a non issue, there is even this video of Jim Cramer telling you as much last month, so it must be true.

Oh, then what happened?

Continue reading "Canadian PPT hard at work"

Wave of private equity IPOs the final stage of distribution?

nospam@example.com (Mark Jeftovic) — Tue, 03 Jul 2007 23:17:31 -0400

First Blackstone went public, not to be outdone, the Carlyle Group decided to follow suit, and now KKR is jumping on the band wagon.

If the first part of '07 could be characterized by an orgy of private equity deals (subprime woes aside), and it looks like the back half of the year will be all about private equity IPOs (does that make them public equity funds?)

Continue reading "Wave of private equity IPOs the final stage of distribution?"

I don't get the new "New Economy" (2.0)

nospam@example.com (Mark Jeftovic) — Fri, 26 Jan 2007 15:51:51 -0500

Back in 1999 I was walking around in a mental fog because I was coming off of a multi-year bender and had recently stopped drinking, smoking and,uh, other related recreational vices. At the time I was worried I was going to die from boredom (turned out not to be the case at all. My life has been more exciting and fulfilling since I cleaned up than I ever could have imagined, but that's another story...)

So I decided to start daytrading. I took out a $1,000 cash advance on my VISA card and opened an E-trade account. By March 2000, it was worth over $9,000 and I thought Warren Buffet was a pussy. I keep that E-Trade account open to this day as a reminder. It's worth $200 now.

Anyway, at the time I remember walking around the warehouse district where my office was thinking about "the new economy". I just couldn't wrap my head around it. A lot of the companies trading on the stock market weren't making any money. A lot of the start-ups getting funded had no prospects of revenues. "Aha" I thought. "I guess what it's about now, is the stock price and investment flow". Companies didn't make money by selling stuff at a profit, I realized, they made money by raising it in the capital markets!

It was one of the many moments I stood on the precipice of a major epiphany, had I thought it through properly I probably could have done well, but once again, I missed the point. My mind couldn't make the critical leap to where it needed to get in order to profit handsomely ("Aha! We're in the middle of a bubble! START SHORTING STUFF") and knuckled under to the flawed, murky newspeak "I guess that's how things work now. This is a new paradigm for wealth building. The old rules don't apply at this new, permanently high plateau of the New Economy", and I went along with it. Silly me.

Well lightning does strike twice. Here we are and the DOW is reaching new highs daily while insider selling outpaced insider buying 55 to 1 last month (this ratio has been higher than 30 to 1 for over two years). The new Kook-aid (that was a typo for Kool-aid but I think I'll leave it), is "Web 2.0".

Continue reading "I don't get the new "New Economy" (2.0)"

5 VC gambits start-ups should watch out for

nospam@example.com (Mark Jeftovic) — Wed, 20 Sep 2006 15:32:09 -0400

I wonder if I'm the only person blogging about VC who has never had a VC investment? Over the years I've signed two term sheets:

Term sheet #1) Before easyDNS had it's first customer, we had a fully functional platform ready to launch and VC interest. The deal never happened, and the night it fell through I went home to my apartment and cried like a baby murmuring "We're so fucked" over and over to myself.

Why I thought that, I guess comes back to pure naivety. I simply didn't know better then than to think the start-up cycle included "funding" as a mandatory component. Besides, it all seemed so ...glamorous and it seemed then that we were going to miss out on all that glamour, fame and fortune.

Times change.

Term sheet #2) I was seeking funding for the buyout of my partners and it seemed the VC's were the last house on the street. I had already been to the vendors, the banks, the BDC and a couple angels and just couldn't quite piece together the funding I needed. On a complete and utter fluke, with all systems go and both sides committed to the deal, it blew up for what can almost be described as "clerical reasons".

When I got the phone call I was surprised at how it felt: it was an enormous release. I felt like I had just dodged a bullet and in retrospect I think that moment is the single, luckiest life-defining moment for me. Not a day goes by I don't thank my lucky stars that that second termsheet fell through. In the end I had to Plan-B it, and that is the single best thing that could possibly happened in my business career thus far. But that's another story.

It was quite the education that I picked up in both of those funding processes, in no particular order, here's a few "VC Tricks" I had the good fortune not to learn the hard way...

Continue reading "5 VC gambits start-ups should watch out for"

When are "exit plans" necessary?

nospam@example.com (Mark Jeftovic) — Tue, 04 Jul 2006 23:13:03 -0400

My last post led me to think about "exit plans". When we started easyDNS back in the late 90's, I thought "exit plans were for wimps". It made no sense. "Before you even get started, you're supposed to have an exit plan". It smacked of dotcom bubble thinking and that was something we were all hoping to avoid.

Over the years, the lack of an exit plan came back to haunt us. As it turns out, I think I now know when exit plans are necessary:

When there is more than one shareholder
When any kind of external investment occurs or is sought
When you're actually executing against a business plan

We never did have a unified exit strategy and whenever opportunities, offers or traps presented themselves, the lack of a unified plan amongst the partners pretty well derailed "liquidation events" before they ever got rolling. I think that overall we came out ahead as a result and this lack of planning ended up saving us from what were probably company-ending blunders. We got lucky in that respect.

But when the time finally came for the partners to really evaluate our life paths with respect to the business, we probably would have been better served to have agreed on an exit strategy going in and revised it over the years as our circumstances changed.

Now that I'm the sole shareholder in the business, there is no exit strategy, and I don't foresee one in the future. I'm grateful to be where I am today and wouldn't want to live my life any other way. The business for me isn't a job, it's a lifestyle (that dreaded L-word VCs despise) and I'm not executing against a rigid plan that calls for targets, milestones and an eventual liquidation event.

While I don't exactly expect to my daughter to take over the business (she is after all, only four months old and may want to do something else with her life) I like to think I may likely still be running easyDNS in 20 years, even though we may not be in the DNS business anymore (by then who knows what things will look like, computers may use some sort of quantum foam to find each other).

When you're fortunate enough to be able to write your own ticket, you don't need an exit plan and I think if you dwell on one you run the risk of "building to sell" or trying for a "quick flip" and even hardcore veteran investors and VCs think that is an unsound approach.

When multiple stakeholders are involved, part of playing nice with others is coming to an agreement over a unified exit strategy. Again, while you don't want to get too distracted over it (arguing over whether "the buyout number" should be 20 million versus 50 million is pointless if you haven't earned a dime yet), it should probably be done sooner than later.

One way to get it done early, without wasting too much time over it, is to create some basic "shape of deal" criterea and a formula to serve as a simple screen going forward.

Example exit strategy formula: Any buyout has to be a share sale versus an asset sale, be all cash and be a minimum 2X revenues or 7X earnings.

If your business gets anywhere off the ground, offers of some shape or form will come. Most of them will be distracting snipe hunts and a waste of time. Without a basic screening formula you and your partners may waste precious time and energy arguing over it, but with the formula you can quickly evaluate it and if it comes up short simply dismiss it and get on with running the business.

Shareholder Agreements for Start-Ups

nospam@example.com (Mark Jeftovic) — Fri, 09 Jun 2006 14:05:18 -0400

If there is a single piece of advice I can give to anybody starting out down the entrepreneurial path with a few friends or partners, it is this: get independent legal advice before you sign your shareholder/partnership agreement.

This document will be the most important legally binding contract in your life, especially if you succeed. My first time through for me was a lesson in what not to do. We had a VC term-sheet before we even launched, so we had to incorporate quickly and we made some serious errors:

we grabbed the nearest lawyer instead of asking around for a good one.
he pushed what he called "a standard cookie cutter" agreement in front of us and assured us "it was fine for our purposes"
we didn't each seek outside legal counsel
we signed it

Years later, when serious money was involved and trouble inevitably followed, we each had a rude awakening when we took it to real lawyers (now that we could afford them) and found out what we had actually signed on for. ("Complete bag of shit" is how my lawyer usually referred to it).

This was a clear cut case of springing for a few extra bucks up front would have saved ten's of thousands down the road, not to mention months of grief. Fact was, I was too cheap and too timid to spend 500 bucks on a couple hours of competent legal time at the beginning. Had I done so, and then had the balls to return to the table and say things like "The shotgun clause needs to be reworked", "There's no easy way out of this" or "This thing handcuffs us together for life and I don't want that", for a bit of awkwardness, time and money we would have prevented enormous problems later.

I consider the first shareholder agreement I ever signed the most expensive (albeit educational) mistake I've ever made.

CAT5 "perfect storm" shaping up in the financial markets?

nospam@example.com (Mark Jeftovic) — Sun, 28 Aug 2005 21:48:53 -0400

Speaking as a guy who believes it is inherently impossible to predict things like stock market crashes, earthquakes and alien invasions, I'm getting numerous signals today that are food for thought on their own and ominous in aggregate.

On one hand there is Hurricane Katrina which is barrelling down on New Orleans, and if it hits can cause a lot more damage and fallout than we're accustomed to seeing from hurricanes, even bad ones. Apparently there's only been three other CAT5's in history and tonight Stratfor Global Intelligence sent out a breaking news report titled The Geopolitics of Katrina. Stratfor's core business is meticulously researched analysis, they are not in the "breaking news" business. The last time I received a breaking news alert from them was about 10 hours before the Iraq War II started, telling readers that bombers had been spotted departing from bases in Europe.

The economic effects from a full-on Katrina hit on the oil refinaries and ports of Louisiana could be hard hitting. In fact the overnight oil price has already spiked past $70/barrel as I type this (gold is up a couple bucks an ounce in fairly short order as well).

This combined with the fedspeak out of Jackson Hole this weekend make for an interesting couple weeks ahead. The speeches contained a couple of startling nuggets once you remove the circular, double-talk which the Fed carefully crafts to glaze over as many eyes as possible while bluffing at an appearance of transparency. Greenspan pronounced the housing bubble all but "ready-to-pop" in that understated hocus-pocus which is his trademark:

"The housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while some house price increases will slow and prices could even decrease".

Which is nice non-threatening way to state that the housing bubble which has been fueled entirely by reckless credit expansion is about ready to pop.

Govenor Donald Kohn waxed philisophic on the pitfuls of financial derivatives and had this to say:

The risk is that private agents overestimate the ability or willingness of central banks to damp volatility in asset prices or the economy, or that they fail to appreciate that future policy actions depend on an imperfectly predictable economic outlook. But developments should have partially alleviated some of these concerns. Investors have had an opportunity to observe that policy actions in 1987, 1998, and 2001-03 cushioned the economy, but they did not stop major declines in the prices of equity in 1987 and 2001 or of risky credits in 1998. Short-term rates have risen substantially in the past year, reducing the profitability of "carry trades" without triggering an unwinding that drove long-term interest rates higher or widened risk premiums. And expectations that policy tightening would remain gradual over the near-term have not stopped long-term rates from fluctuating substantially in response to incoming data; the movements of future or forward rates out the yield curve after surprises in data have been at least as large since 2003 as they were before.

That is not to say that we have nothing to worry about. As I already noted, Alan Greenspan, himself, has often been concerned about market complacency--as recently as his latest monetary policy testimony. People may well perceive the economy as more stable than it is or central banks with greater power than we have to smooth the economy or to foresee our own actions.

Which, as George Ure notes, sounds like a nice soft way to tell the financial bankers in fedspeak/doublespeak: "If the derivatives blow up, don't assume we (the Central Bank) will be able to fix it".

These long-winded innoccuous sounding pronouncements sound unimportant, barely comprehensible and boring. They are carefully crafted to appear to be just that. They are not. These statements are analyzed six-ways from sunday by hordes of financial analysts and trillions of dollars worth of assets and perhaps more importantly, derivatives of assets, will slosh around the global economy based on their conclusions.

Any one of these factors on their own could make things interesting. All of them coming together in one shot could be pretty wild.

It's scary....

nospam@example.com (Mark Jeftovic) — Thu, 23 Jun 2005 15:22:12 -0400

I'm watching Larry Kudlow tear apart some senator on CNBC about the hysteria over the Chinese bid for Unocal. I'm agreeing with every word he says. Wow.

Larry is right, if the US are the champions of the free market, then they have to always champion it, not only when its in their interests to so, but when somebody else plays the same rules to their own advantage.

Right now, the US is making three demands on the Chinese:

1. Keep taking US dollars, even though their value is being deliberately watered down by rampant credit and monetary expansion.

2. Revalue the Yuan. In other words: while we ramp up the printing presses and devalue our currency, we want you to keep taking more of it.

3. Take more and more of this US paper, but whatever you do, don't use any of it to buy anything of value to us. Especially energy.

That isn't the type of environment mutually healthy trading relationships are made of. As Warren Buffet opined earlier today, if the US is going to keep consuming more than they're producing to the tune of 2 billion a day, then they have to be prepared to sell off valuable assets. What else are the trading partners going to do with enormous piles of US dollars which are rapidly losing value?

On other fronts my Fedex $75 Puts expired worthless on friday and today they warned and plunged over $6 a share. As the old adage goes: "The graveyards of Wall St. are littered with the bones of those who were too early".

So long and thanks for all the...chaos

nospam@example.com (Mark Jeftovic) — Thu, 02 Jun 2005 21:43:52 -0400

I've often wondered how Dave Lewis'Chaos-onomics could be so overlooked among the contrarian/libertarian/goldbug crew. I can best descibe him as an "economic philosopher" of the highest calibre, but what do I know? Large swaths of his writing simply go over my head. I don't have the philosophical let alone economic background to understand a lot of it.

Yet in his columns I recognized something rare in this day and age. Something informed, not only from a deep repository of a well read individual but from his experience in the financial markets and his first hand accounts of financial hinge moments like the Asian Crisis. Contrast with the unreasoned, biased cheerleading of a Kudlow or the appalling non-thinking drivel of a Cramer , Dave Lewis' columns were grounded in an authenticity and depth of knowledge unheard of in mainstream financial commentary.

And now, it's over. Lewis has announced in his swan song post that he set out to research Peak Oil two months ago, wound up doing some philosophical soul searching, and arrived at the conclusion not to bother with it anymore:

I am reminded of Thomas Kuhn's arguments in The Structure of Scientific Revolutions these days as I watch the dance of politics and economics, particularly the view that such transitions, from paradigm to paradigm, are not graceful. I am also reminded of the waning stages of any great ethical faith and Capitalism, like representative government, was, in my view, such a faith. In the early stages only a few believe but their belief is strong and pure. Then the faith is diluted but spread to many. In the later stages the faith is assumed, by which I mean, to use chivalry as an example, initially Knights aspired to be chivalrous, and in later periods, as that age was ending, they were merely assumed, by themselves more than by others, to be so. That the United States is often considered to BE a Capitalist economy, rather than an economy which aspires to follow those tenets suggests to me that faith in that system among the powers that be is virtually non-existent. If the powers that be don't believe in Capitalism as ethic to allocate resource any more, why should I waste my time thinking about the world in that paradigm. Of course, I could be wrong and all is well. In either case, regular commentary on the lines I had been following seems pointless.

It's a shame. I hope he'll keep his writings up, he has stated he will keep a closed mailing list going.