Party Like it’s 1998!

So there I was, reading the announcement of the Skype IPO filing and scratching my head.  After all, a $100 million offering doesn’t sound like all that much when the current investors bought in at a $2.75B price a little while back.  How tiny a share of the company were they going to offer?  Two percent?  Three percent?

And after all, don’t you need some float for institutions to be interested?  And indeed, some industry watchers had previously speculated that the company might seek to raise a much larger offering: think north of a billion (one beeeeeeeeellllion dollars – said with pinky to corner of mouth.)  I was even bouncing it around with a banker buddy who suggested that institutional public market investors today demand 10-20% of the shares to be floated as part of an initial offering; if he saw a random company executing a $100M offering, he’d said his guess of the total market cap would be in the $500M-$750M range.  There’s no way that’s the case with Skype, particularly if they company is doing a couple of hundred million a year in “adjusted EBITDA” (also known as EBBS, Earnings Before, ahem, Bad Stuff.)

Now in fairness, I’m neither an investor in any fund that invested in Skype, nor am I a banker, so there may be a backstory to which I’m not privy.  And who knows: that $100M offering amount may even be a placeholder for another, larger, offering amount.  But the lunchtime conversations here in Silicon Valley keep coming back to the modest offering size.

But for me, it’s a case of deja vu all over again: it’s all about the magic of the thin float.  You see, I still bear scars from having been a fundamentally-oriented equity analyst at a hedge fund of sorts in the late 90s.  During that time, it was almost impossible to perform fundamental analysis and keep a beta-neutral book.  There was just so much liquidity in the system that things like sector rotation and technical factors almost always trumped hard-nosed, Graham and Dodd, old school analysis.  Try adding any short names to the portfolio!  If something had a whiff of broken-ness, it was cheap and anything that was cheap was an acquisition candidate for firms flush with cash and inexpensive public currency.  It seems that all of one’s short sales would get bought at a premium, wrecking performance.

And then, starting in earnest in 1997, the emerging tech firms got in on the action: pretty soon bankers figured out that floating only a tiny portion of a company set the stage for the stock to jump as retail investors would gladly pay up in the after-market, just to get in on the new, new thing (and the banks proudly touted their post-IPO performance in their pitchbooks).  Things didn’t catch fire for fundamental reasons, they burst into flame because the thin float acted as both the ignition source and the accelerant.  Just ask the guys at the who priced at $9 and opened in the $80s.

And once the price got fixed at a certain level, existing holders could trickle out their shares at inflated prices.  Of course, as we all know, that strategy worked until it didn’t.

Now, let’s be clear.  I’m not being crabby about Skype.  I’m keen for them to have a successful offering (if for no other reason, because their recent announcement of expansion plans in Palo Alto is probably good for my home value.)  But if we learned any lesson from the late ’90s (and, more recently, the late ’08 action offered a similar lesson on the downside,) it’s that stock prices are only vaguely related to fundamentals; it’s supply and demand that sets the price.  Maybe Old Man O’Malley’s Brooklyn wisdom had something to offer the public markets: “youse guys would pay twenny bucks for the last slice of dollah-fitty pizza at tree-toity in the morning when youse got your drink on . . .”

Summertime . . . (and micro-VC)

It's been a slow summer on the blogging front . . . but I've got a couple of posts on better articulating a fund's value proposition and surmounting fundraising challenges that I'm going to put up right after Labor Day.  I'm just trying to be helpful . . . providing a public service and whatnot.

In the interim, I thought I'd share an iPhone pic that I took at a July 4th concert not far from St. Johnsbury, Vermont.  Of course, that town is named for Hector St. John de Crevecoeur, author of the seminal 1782 work, Letters From An American Farmer.  In that book, de Crevecoeur famously asks: "what then is this new man, this American?"  His answer presages the two centuries of progress that followed:

"Here individuals of all races are melted into a new race of man, whose labors and posterity will one day cause great changes in the world. Americans are the western pilgrims."


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Speaking of great changes in the world, here's a link to a Q&A at PEHub on micro-cap VC I did this morning:


Q&A on Micro-VC Funds, With Someone Who Actually Invests In Them

We’ve spent a lot of time lately discussing micro-VCs, including last week’s news on Floodgate ($73m fund close) and 500 Startups (new $30m fund being raised). So I spent some time discussing the phenomenon with Chris Douvos, who invests in mico-VC funds through his role as a managing director with The Investment Fund for Foundations:

How long have you been investing in micro-VC funds, or super-angel, funds??

We’ve been active in this space since around 2005, and have invested over time in several of the archetypal managers.

Who are those archetypical managers?

Well, the main one is someone we actually haven’t given money to: Ron Conway. He’s created a fantastic ecosystem. But we’ve backed some of the people who have taken types of things he does and refined them a bit. For example, one of our earliest investments was in First Round. We think those guys have brought an aggressively thoughtful approach to the challenges of investing in seed-stage companies.

I love the O’Reilly AlphaTech guys, whose differential is that they’re leveraging the larger O’Reilly ecosystem. In the case of O’Reilly or First Round or Floodgate, they’ve created brands around themselves that magnetizes interesting people. That helps them punch above their weight.

How do you define a micro-VC fund?

I was at a Silicon Valley Bank shindig the other day, and people were talking about segmenting the space. “Who is a super-angel compared to a seed-stage VC, etc…”

To me, what initially attracted me to the space is that it was about people who had found that the arithmetic was on their side. They were recognizing some really meaningful trends at certain types of startups – capital efficiency and the fast cycling of ideas at IT/Internet companies – and were typically people with some sort of entrepreneurial background with a bit of investing experience thrown in.  They saw a capital gap that they could fill by being nimble in the sense of traditional angels, but also bring a level of activity and DNA-setting that was the hallmark of more institutionally-focused funds.

The idea wasn’t necessarily to supplant VCs, but to be a value-added early processor of companies. The startups would be far better off for having this earlier participation, and then traditional VCs would bring their own skills to the table.

[remainder after the jump]

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A Dollar and a Dream

Anyone remember Curtis Sharp? A long time ago, Curtis won a $5 million New York Lottery jackpot and he spent the rest of the 1980s sashaying around New York in bespoke suits and bowler hats attracting crowds wherever he went. Curtis was the Man. Charismatic and impish, Curtis was the Toast of the Town.

I once saw Curtis at a Yankee game and the aura around him was palpable. He was Electric. People just wanted to touch Curtis. Maybe some of that luck would rub off.

That afternoon, a few rows behind us, a drunk kept yelling at no one in particular: “You can’t win if you don’t play!” I thought that the guy was pretty creative for exhorting the listless Yanks (it was 1989, after all) to get in the game by using the Lotto marketing slogan within earshot of Curtis. I appreciated the confluence.

I think of Curtis often . . . around my shop, I’ve started calling Curtis the patron saint of LPs who invest in venture capital funds. Don’t get me wrong, I love VC. We continue to find extraordinary people doing venture investing in extraordinary ways.

It just strikes me that when you push some LPs to articulate why they have outsize venture commitments when history shows that only the smallest slice of the business has rewarded the faith, they throw out New York Lottery slogans with Ivy League veneer. They use words like “optionality,” and “asymmetric payoff.” They might as well be mimicking the catchphrases from the Lotto TV commercials: “Hey, you never know,” or “All you need is a dollar and a dream.”

They just want to be Curtis: The Guy That Beat The Odds.

I hope that everyone makes loads of money and I never root against anyone. That’s bad karma. I do find myself asking, though, how many LPs who invest in venture firms are committing the fallacy of composition: Some people have made fabulous returns in venture, therefore venture will provide fabulous returns. But hey, as they say: you can’t win if you don’t play.