Steve Blank shares an insider's perspective on how data and analytics are disrupting the art of venture capital investing. Is the era of "gut feel" VC coming to an end? What does the future of startup funding look like?
Venture capital (VC) funding has long been heralded as a critical engine for innovation and growth in the startup ecosystem. By providing early-stage companies with the capital they need to scale, venture capitalists (VCs) aim to drive the creation of disruptive technologies and groundbreaking products. However, there are growing concerns that the practices of some segments of the VC industry share unsettling similarities with the mechanics of a Ponzi scheme. Understanding these parallels is essential for investors, entrepreneurs, and stakeholders in the startup ecosystem.
Angel investing in startups is probably the most challenging form of investing there is. Having been involved with the Tech Coast Angels for the last 10 years I have seen 150+ companies funded and very few successes. One thing I have learned over that time is that about 90% of the investors in each company "didn't know what they didn't know". Why? Unless you are a full-time investor looking at business plans all day long or have some particular domain expertise, angel investing will turn into a charitable tax exercise for you.
Successful angel investments usually had these top 10 elements going for them:
Investors had to earn their right to be part of the investor syndicate and invest
Investor syndicates typically had less than 5 investors investing $50K-$250K each
The investor syndicate only had domain experts in the deal
The management team had worked on previous start-up successes and failures
The company had bootstrapped itself into a beta product and had to pay customers
Many angel investors may lack awareness or understanding of certain aspects of the investment landscape or specific industries. While it is true that angel investors, like any other group of individuals, may have knowledge gaps or areas of limited expertise, it's important to note that angel investors can bring valuable insights and experience to early-stage investments. Here are a few points to consider:
Diverse Backgrounds: Angel investors come from various professional backgrounds and industries. While they may not be experts in every domain, their diverse experiences can provide unique perspectives and insights. They often bring expertise from their own industries or successful entrepreneurial ventures, which can be valuable in evaluating startups.
Learning and Continuous Improvement: Angel investors, like any investor, should strive to continually learn and expand their knowledge base. Successful angel investors recognize the importance of staying informed about industry trends, market dynamics, and emerging technologies. They often engage in networking, attend industry events, and seek advice from mentors and experts to enhance their understanding.
Collaborative Approach: Angel investors often collaborate with other investors and industry experts during due diligence and investment decision-making processes. This collaboration allows them to leverage the collective knowledge and expertise of a group, mitigating individual knowledge gaps and increasing the chances of making informed investment decisions.
Subject Matter Experts: While angel investors may not be experts in every area, they often seek advice from professionals, mentors, or industry experts who possess specialized knowledge. They may bring on board advisors or consultants with expertise in specific industries or technologies to complement their own skills and enhance their investment decisions.
Learning from Failures and Successes: Angel investors gain insights through their past experiences, both successes and failures. By reflecting on their investment track record, they can learn valuable lessons and refine their investment strategies. This iterative learning process helps angel investors become more knowledgeable and informed over time.
It's important to recognize that while angel investors may not know everything, their participation in early-stage investments brings valuable financial resources, industry experience, and networks to startups. The key is for angel investors to be open to learning, seek expertise where needed, and engage in continuous improvement to make informed investment decisions. Similarly, entrepreneurs should actively seek out angel investors who align with their industry and domain expertise to receive the most value and support.
During his presidency, President Barack Obama implemented several initiatives and policies aimed at job creation and economic growth. Here are ten ways in which President Obama worked to create jobs:
Great Quote from VP of Global Marketing at Facebook Carolyn Everson.
"80% of the time users spend time on top 4 apps. .00087% of apps are actually used on a consistent basis." This quote was from the Keynote address at CES 2016.
This is why we don't develop apps. Apps are too expensive and no ROI.
In today’s digital era, mobile applications have become indispensable tools for communication, entertainment, work, and everything in between. The app marketplace is teeming with millions of options, each vying for a share of our increasingly limited attention spans. However, a startling revelation has emerged: less than 0.01% of mobile apps are used on a consistent basis.
This figure underscores a profound truth about user behavior and app utility. While the average smartphone user might have dozens of apps installed, only a tiny fraction of these are used regularly. The reasons for this disparity are manifold, involving aspects of user experience, app design, and market saturation.
The Overabundance of Choice
The sheer volume of apps available in app stores today can be overwhelming. Users are inundated with choices, leading to a paradox of choice where the abundance of options makes it harder for any single app to stand out. Consequently, even well-designed apps may struggle to maintain consistent usage as users flit from one novelty to another.
User engagement is a critical metric for app developers. A well-designed app that meets a clear need can still struggle with user retention. Factors such as app usability, relevance, and the user’s immediate needs play pivotal roles. Apps that fail to offer continuous value or that do not evolve with user preferences often see a steep drop in usage over time.
Moreover, the nature of the app itself can influence its retention rate. Utility apps, such as those for banking or productivity, might see higher engagement compared to entertainment apps, which users might use sporadically. This variability highlights the challenge of creating an app that not only attracts users but also keeps them coming back.
The Role of User Experience
A seamless and intuitive user experience is crucial for fostering consistent app usage. Apps that are cumbersome, slow, or difficult to navigate quickly drive users away. In contrast, apps that offer a smooth, engaging, and personalized experience are more likely to retain users over the long term. This underscores the importance of continual updates and user feedback integration in app development.
The Impact of App Fatigue
App fatigue is a significant factor in the low usage rates of most mobile applications. As users accumulate more apps, their attention becomes more fragmented, and the novelty of new apps diminishes more rapidly. This phenomenon often leads users to stick with a few core apps that they find indispensable, relegating others to the background.
Strategies for Enhancing Consistent Use
For developers aiming to increase the likelihood of their app being one of the few consistently used, several strategies can be employed. First, focusing on solving a specific problem or fulfilling a clear need can help differentiate an app from the multitude of alternatives. Second, investing in a superior user experience with intuitive design and regular updates can enhance user satisfaction and retention. Lastly, understanding and adapting to user behavior through data analytics and feedback loops is essential for maintaining relevance and engagement.
In conclusion, while the app marketplace is vast, the challenge of maintaining consistent user engagement is formidable. Less than 0.01% of mobile apps achieving this feat is a testament to the difficulties inherent in the industry. For app developers, the journey toward creating a consistently used app is fraught with challenges, but with a clear focus on user needs, experience, and engagement strategies, it is a goal within reach.
The Fed has created another bubble that will likely pop but this time all the hedge funds are all long the market and not short. Is the business environment REALLY getting any better with all the Fed Stimulus, QE1, QE2, or QE3? Not really if you ask me and it has created a phony sense of reality with the over-inflated equity markets. Historically, investors would value buying stocks based on that company making money. Today, investors are making stock purchasing decisions based on liquidity, yield, and price action. The Fed wants investors to chase equities and bonds higher so we feel wealthy and spend more. But their intentions to create inflation could have the opposite effect on those who actually create the jobs and invest.
Prop up all big crappy businesses (ie. Auto Industry & AIG) to protect middle-class jobs that will crush all disruptive and innovative start-ups. Bigger businesses are better than free market innovation and smaller more volatile companies. Free market capitalism does not work so let the Government call all the shots about what businesses succeed.
Obama's business plan for the USA might as well have been written by a 5th grader. His vision is incredibly short term, thinking that roads, bridges, and now runways (ooooh) will somehow create sustainable jobs? This is ridiculous since that was our business plan from the 1930s and has nothing do with wealth creation or capitalism. How does this help the United State create jobs and new companies that compete with China, Brazil, and Russia in a global economy? It does not and has nothing to do with technology, education, healthcare, or environmental innovation.
There is a huge disconnect and this is why IPO's, venture capital, start-up acquisitions are at its lowest levels in decades. The Democratic National convention should be a rude awakening for all start-ups and investors. Put your money and checkbooks away if Obama gets elected because it will be a market of big businesses getting bigger. Protecting middle-class jobs will be more important than letting start-ups innovate that create sustainable jobs and long-lasting companies.
The problem is capitalism is happening 100x faster than ever before and many Democrats are too stupid to get out of the way. What would the auto industry look like today if we let GM go bankrupt? We might have fewer jobs but better & cheaper cars? Companies like Tesla might actually be an industry leader. Think about all the companies that wanted GM to fail? That's capitalism and preventing capitalism goes against American ideals. Democrats call it a "zero-sum" game. But no . . . the Government decided that GM is better.
Failure is good for business so they can be restructured. GM was a huge shareholder cram down without restructuring by a shareholder (aka Gov't) with unlimited money. Some call this a Ponzi scheme because the cram down shareholder (Gov't) can print unlimited money and prop up the stock in the free market. GM has the same union problems and will ultimately fail soon as smaller companies slowly catch up to compete. Obama just delayed innovation in another decade. Slower change is better? F that.
This goes without mentioning that the capital cycle needed to start new companies is broken because of faulty taxation assumptions. Millionaires and billionaires (limited partners in VC, Private Equity, and Hedge Funds) need to be incentivized more to invest more. Raising taxes on capital gains will kill the capital cycle flow back into companies drastically. Making the pie bigger is a far better solution than redistributing money through higher taxes. Mediocrity will soon become the middle name of the USA.
Our Government is too big and needs to be restructured as well.
What is the difference between a vertical incubator and a start-up accelerator? First, let me preface my opinions by stating that, most entrepreneurs and investors don't have a clue about how much competition exists or have any appreciation for how long it takes to build a business. Every entrepreneur and investor should always assume that 1,000 companies are doing the exact same thing and assume it will take five to ten years before the business reaches critical mass.
I would like to take you through a simple math equation for determining the fair value of Facebook before its IPO filing tomorrow without comparing growth metrics. Here are my assumptions when comparing Facebook, while using Google as the benchmark. Google's annual revenue is $37 billion with a market capitalization of $188 billion currently as of January 31, 2012.
Google's annual display ad revenue from Double Click is only $5 billion + they have $32 billion of additional revenue sources. That means if Google only had the display ad business similar to Facebook their valuation would be 1/8 or less or around $25B. Here is the scary part when you start to look at Facebook's proposed IPO valuation of $100B with 88% of its revenue coming from one source.
Facebook simple valuation equation based on current estimates:
Google Market Cap = $188B at $580 per share
Google Total Annual Revenue = $37B
Google Display Ad Revenue = $5B
Facebook Market Cap = $100B
Facebook Total Annual Revenue = $5
Facebook Display Ad Revenue = $4.8
Facebook Fair Value Equation = ($37 / $5 = .135) x $188 = $25B
The latest news sources reported that Facebook's annual display ad revenues were around $3.8B in 2011 and so I will assume this revenue number has grown to $5B in 2012. $5B in annual revenue for Facebook is 1/8 the size of Google's at $37B. Facebook has 88% of its revenue coming from display ads only which is not very diversified if you ask me. Keep in mind this does not factor in growth rates but they cannot be that dramatic to change my valuation estimates.
The rigged stock market will undoubtedly become a key issue in the 2012 Presidential race. The Obama administration will promote the fact that the stock market is up almost 100% since he took office in 2008. Mitt Romney is going to attack the fact that the market is up 100% but so is the unemployment rate, which went from 5% to 10%. Pick your poison. The Federal Reserve's balance sheet is bloated and helped to rig the stock and bond market game. How will it end in the next few years and what is the best path to long-term free market prosperity and organic economic growth in the U.S.?
The stock market has become a rigged game in the last few years. It is being propped up by the Federal Reserve and Ben Bernanke's team by printing unlimited dollars to buy futures and bonds in the open market. Bond prices are artificially low in order to encourage people to spend and not save. However, the smart people running big corporations are sitting on hoards of cash earning 0%. Its because the market has been propped up in a phony way and there is no organic growth. Executives are expecting a stock market crash of grand proportions that will wipe out all of the Government businesses that have been propped up. Cash will be king in the future and there will be no safe havens. It's just a matter of time before the huge "House of Cards" bonds and stocks all fall at the same tim,e wiping out the wealth that has been artificially created.
Yes, the United States can print endless amounts of money in order to create inflation and promote growth. The experts think we can grow our way out of the debt crisis and reduce the current 100% debt-to-GDP ratio that has doubled under the Obama administration. However, the austerity in Europe is nothing compared to what we might see in the U.S. if Mitt Romney gets elected and the Federal Reserve money printing press is halted. It will be painful in the short term but the long term gain for my kids and grandchildren will be tremendous. The U.S. Government must feel the pain of overspending and let the free markets take over their bloated and egregious spending habits. Don't forget Mitt Romney has been a private equity / restructuring guy in the private sector and will have the biggest turnaround project of all time on his hands once he pulls the Fed plug.
Mitt Romney knows that a healthy economy will grow through organic investment and capitalism at the local level. In healthy economies, the Venture Capital & Private Equity industries thrive and so do quality IPO's that foster the cycle of wealth that has built the foundation of the United States. However, the recent financial crisis has led the Government to step in and act as the market "Big Brother" to prevent big investors from losing money. The VC industry and private equity industries are shrinking drastically because large LP's (limited partners) have no incentive to invest with below 0% annual returns due to overbearing Government regulations. We all know in healthy free markets there are winners and losers. However, now the losers are being prevented from losing and this is not capitalism. Bailouts have been preventing huge bankruptcies and progress towards creating new and more efficient businesses.
Thousands of banks should have gone out of business and so should have many of the auto companies like General Motors. Restructuring and bankruptcies are all part of the free market cycle and we have yet to go through it on a large scale downturn. The 2009 downturn was prevented by the Government by double its debt load in the trillions and now the next recession could be even worse and deeper.
In summary the only thing that is going to help the economy in the long run build a foundation of growth that is sustainable is if the Government simply gets out of the way. We investors are all "Big Boys" and taking loses is part of the game. Trying to impose regulations on the financial services industry to prevent loses only restricts the free market capital flows and prevents investors from doing anything. We need investors to be excited about investing and now restricted. These two bills / laws need to be repealed by the next President and then you will see healthy organic investment growth come back to the private sector.
Thanks to Marry Meeker for putting out this slide on her latest Awesome Web 2.0 presentation about the "State of the Web". This slide struck me the most as a concern for investing in the future of technology. Until the US Government cuts spending by 50% and gets out of the private sector way we are going to be in stagnant economy for a long time. This slide is telling me a few things need to happen before our economy has even a chance of turning around. In Wallstreet terms, I think we need the great capitulation of Government spending in order to right the private sector economy. I will not get too excited about private sector investing until the following questions are answered . . .
Should US Government spending crash like the stock market?
Will industries that rely on Government spending be crushed?
Has the Federal Reserve lost all credibility with the markets?
The VC industry shrunk by 80% in the last decade so why not the Government?
Rising interest rates might actually be good for the "real economy"?
Are currency wars are going to get even more intense?
Is the US the new emerging market carrying highest investment risk?
Where & when will the next tech industry boom (ie jobs) come from?
Is the Obama administration trying to kill capitalism vs government spending?
When will kicking the Government debt can down the road STOP?
Should US Government Spending Crash Like the Stock Market?
In recent years, discussions around government spending in the United States have often been juxtaposed with the volatility seen in the stock market. The notion of a “crash” in government spending, akin to the dramatic drops experienced by stocks, has sparked considerable debate among economists, policymakers, and the public alike. But should government spending, a critical component of national economic stability and growth, be subject to such volatility?
The Nature of Government Spending
Government spending encompasses a wide range of activities, including public services, infrastructure development, defense, and social welfare programs. Unlike the stock market, where investments are traded with the hope of capital gains or losses based on market conditions, government spending is typically designed to support economic stability, promote growth, and address societal needs.
A “crash” in government spending could mean a sudden, drastic reduction in expenditure. Such a scenario could have profound implications, potentially leading to economic contraction, increased unemployment, and diminished public services. In contrast, the stock market's fluctuations, though significant, do not usually have the same broad, direct impact on the daily lives of citizens.
Economic Stability and Growth
One of the key roles of government spending is to act as an economic stabilizer. During economic downturns, increased government spending can help stimulate demand by funding infrastructure projects, providing unemployment benefits, and supporting businesses through subsidies or loans. This fiscal policy tool is crucial in mitigating the effects of recessions, making a sudden crash in spending counterproductive to maintaining economic stability.
In the stock market, investors often react to a variety of factors including corporate earnings, geopolitical events, and economic indicators. These reactions can lead to market volatility, which, while sometimes alarming, does not typically affect the broader economy in the same immediate and comprehensive manner as a sudden reduction in government spending might.
The Risks of Drastic Cuts
A crash in government spending could lead to several negative outcomes. First, it could undermine public confidence in economic stability. Consumers and businesses might cut back on spending, leading to a slowdown in economic activity. Second, critical services such as healthcare, education, and infrastructure development could suffer, exacerbating social inequalities and reducing quality of life for many citizens.
Moreover, a sudden reduction in spending could also impact the stock market negatively. Investors might fear that reduced government expenditure could lead to lower economic growth and profitability for businesses, potentially leading to a decline in stock prices. This interconnection underscores the importance of stable and predictable government spending policies.
The Balance Between Fiscal Responsibility and Economic Support
While the idea of a crash in government spending is concerning, it is also essential to consider the need for fiscal responsibility. Excessive government spending without corresponding economic growth can lead to unsustainable debt levels, potentially causing long-term economic challenges. Therefore, a balanced approach is necessary, where government spending is sufficient to support economic growth and stability, while also being mindful of long-term fiscal health.
Conclusion
In conclusion, while the stock market's volatility can be a source of short-term concern, the concept of a “crash” in government spending is fundamentally different and potentially far more damaging to the economy and society at large. Instead of aiming for a drastic reduction in spending, a more prudent approach would be to ensure that government expenditures are aligned with economic needs and fiscal sustainability. By striking a balance between stimulating growth and maintaining fiscal responsibility, the US can better navigate the complexities of economic management and ensure a stable and prosperous future for all its citizens.
There is an argument to be made the Apple's $319 billion dollar market cap and its' publishing, advertising, software, retail and venture capital ecosystem of entrepreneurs and companies might be more influential on the economy than the Federal Reserve's interest rates controlled by Chariman Ben Bernanke. Here are 10 reasons why:
1) History has shown that the economy only grows when there is an ecosystem of technology that creates jobs & Apple has fueled the growth of tech which has created millions of jobs Worldwide.
2) Ben's 0% interest rates have had no effect on whether millions of consumers Worldwide have made emotional Apple purchasing decisions. Two thirds of the US economy is based on consumption and Apple is driving it.
3) Ben Bernanke is an academic that relies on historical data to make reactive decisions when economic history rarely repeats itself.
4) Steve Jobs relies on his vision to shape the future of the technology industry and millions of people are affected based on these decisions.
5) The stock market always needs a leading growth stock story like AAPL in order for investors to get excited and put money to work in the market. The Nasdaq 100 indexQQQQ is 20% based on Apple and thus 99 other stocks are directly affected by how AAPL trades.
6) 0% interest rates over the last few years have done nothing but create a bond market and real estate bubble which does nothing for capitalism and growth.
7) Steve Jobs has created wealth for millions of entrepreneurs who have started companies to feed off the Apple ecosystem.
8) Ben Bernanke has put billions of dollars in the hands of bankers and bond fund managers to prop up the stock market and create a false sense.
9) Foreign countries who invest in US Treasury Bills, like China, are not happy that the US is intensionally keeping interest rates low thus devaluing the dollar. The Dollar cannot be devalued forever in order to finance the future and thus a long term bubble is forming if it were to rise suddenly.
10) Apple's stock (AAPL) has the largest market cap in the World at $319 Billion and if it were to lose value quickly it would take down a lot of hedge funds, pension funds who have jumped on the bandwagon of wealth creation and could be destruction if we are not careful.
Get well Steve! We need you and Google to keep all entrepreneurs and investors excited about the future. Technology NOT energy should be the basis of the World economy in order to leave a better place for our kids.
The Fed has spent most of the last two decades artificially inflating and deflating the stock market whenever they feel the economy needs a boost or is getting overheated. They know what they do has no direct effect on the economy but its a quick fix and doesn't provide any organic growth. Today, the only weapon the Fed has is the so-called wealth effect by driving the stock market up so people feel wealthier because interest rates are at 0%. The stock market went up 80% in 2009 so investors should be spending 2.4% extra of the entire value of the stock market, which is about two percent of GDP. Here is a great video explaining the boom and bust cycles and is a warning to all entrepreneurs to stay current with stock and currency markets because it now directly affects you even if you are a small business. Maria Bartiromo sits down with Jeremy Grantham who has made some incredibly good predictions over the last few years. Has the Fed lost control of the bond market?
The new $600B of quantitative easing goes into the banking and corporate sector of the economy who is largely sitting on the largest cash balance in business history. They don't need the money at all and it's not the sector of the economy who is going to take our unemployment rate down from 10-15%. Those who need the stimulus money the most, small business & private investors, can't get it. Seeing a company like General Motors go public again makes me want to puke. I can think of 100 other companies who deserve to be public companies before GM and that creates far more future value, jobs and innovation in our economy. GM going public is simply private equity, government money, and investment banker Ponzi scheme.
I was an apart of one of the largest business boom cycles in the late 1990s and there were a lot o great things about that time the US Government, FDIC, and Fed have forgotten. Investors were pouring money into Venture Capital funds that were providing funding to companies who were providing real long term jobs and creating new markets of innovation. Much of this money came from the Government in the form of FDIC subsidies and they made lots of money for taking this risk. Once the bubble burst and hedge funds drove the market 80% lower there was no optimism or money left in the VC industry to spark new growth. The VC industry has shrunk drastically in the last decade and almost 80% of the VC funds not based in Silicon Valley are virtually out of business (aka "the living dead funds").
Capitalism in general is kind of a Ponzi scheme but it can be done organically if the IPO market is fair and open. Capitalism also works when Government regulatory agencies stay out of our way and don't favor big business monopolies. I think if $100B in stimulus for struggling VC funds this would create another boom of optimism that we need. The Fed and FDIC should also consider an Emergency Fund to fund to solve the overweight population epidemic that is slowing the US economy down. Here are a few other ways President Obama could help create jobs.
I heard an interesting investment thesis yesterday on CNBC that obesity is a major reason for our poor economy. The analyst said that fighting obesity with new health and wellness companies could add nearly $1 trillion dollars to our economy and create lots of jobs. While at the same time taxing fat and food companies that are responsible for putting this in our diets. Southern California would undoubtedly be the leading region of the US where outdoor activity and fitness are embedded in our everyday life. When you travel East or to the Midwest, you begin to really notice how the Country has changed in the last 10 years. Kids are fat and parents are lazy.
Over the last 10 years, Venture Capital has become increasingly more specialized and VC funds have become much smaller. The idea fund size in my opinion is around $25-$100M in order to accommodate smaller funding rounds. Health and wellness companies have been criticized by almost every VC fund over the last decade because they are thrown into the category of lifestyle businesses. I think this could soon change if the US Government and Wall Street decide they want to take some companies public and a few private equity groups start looking to buy companies.
This is one reason I think the health and wellness category could emerge as a new investment category that could garner lots of FDIC or government subsidy money. Are there any funds out there that have the thesis? If there are I want to know about them because exercise is a passion of mine. The types of companies a specialized fund would look for would be the following:
1) Running, triathlon, and race organization groups (Marathons, Ironman, 10K Races)
2) Health Food Manufacturing, Distribution & Marketing Companies
3) Exercise Equipment Manufacturing, Distribution & Marketing
4) Adventure & Health Travel Marketing and Organizations
5) Natural supplements and vitamin companies. No drugs allowed
6) Internet publishing - coaching, counseling, advice, therapy
7) Physical therapy, employee health, and chiropractic groups
8) A healthy diet and meal marketing & distribution
9) Software & mobile applications
10) Restaurants (maybe)
"Quantitative Easing" from the Federal Reserve just sounds like another theoretical way to pump up the markets and the economy when they can't drop interest rates any further than 0%. $2 Trillion dollars of Qualitative Easing has already gone into the banking system and what has it done for you and me? What is another $600B going to do? Absolutely nothing.
It really makes me sick to hear that $600 billion dollars is going to be pumped into the banking system when these are the same "bone heads" along with the Hedge Funds that got us into the mess. What is the last time you heard a story about a Bank giving money to a company that really needs it? All bankers do is lend money to companies who don't need it because they are risk averse. All these morons do take your money and the Feds at 0% and "try" and lend it at 5-15%.
Venture Capital and small business is what drives the US economy and this sector of the economy is still being overlooked. Organic growth is the ONLY thing that will get the US out of this recession and create jobs. Why not give $100B dollars to some VC Fund Managers or Private Equity Groups at no cost and require them to invest it in the next 12 months? I guarantee you they will get a return on this investment. The Venture Capital industry has shrunk drastically in the last decade and I think this is the sole reason why we are still in a recession and will be until politicians recognize this. VC fund managers cannot raise money from LP (Limited Partners) because the returns have been horrible as a result of the IPO market being virtually closed. Sometimes I think the Federal reserve spends too much time listening to politicians and not enough time in Silicon Valley, Boston, New York, Chicago and Los Angeles where new ideas are created and organic growth is created.
It has been a long 10 year drought of no IPOs and sub par M&A activity that has stifled the startup, venture capital and angel investment community throughout the US. Finally it appears that the public markets are starting to look for new investment opportunities and are welcoming fresh new companies into the public stock trading world. Skype, Green Dot (Tech Coast Angels get 110X return), Tesla Motors, Demand Media, Linked In, Zynga, Glam Media, Gilt Groupe and Yelp all have very disruptive business models. All of these companies have been courted for M&A opportunities by existing public companies like Google, Microsoft, Yahoo, Apple, Research in Motion, Nokia to be purchased. However, smart and patient investors realized that they could achieve greater shareholder value by holding out and going public.
Startup Investment Cycle
One huge government obstacle that stifled startup investing over the last 10 years was Sarbanes Oxley. This new financial regulation created a decade of virtually no IPO's and caused thousands of private companies to think twice about going public due to the high costs. Has Sarbanes Oxley done anything to protect shareholders in public markets? No, but accounting firms like PWC and Deloitte have sure benefited.
Another obstacle that prevented many companies from going public was the lack of interest from the large investment banks to take companies public. This was largely due to distraction and focus as proprietary trading and packaging mortgages like securities (CDOs) became a fad to make lots of money. Investment banks make most of their money off of commissions and spreads. When spreads are large the buyer and seller both lose. It will be interesting to see if companies truly will follow the old school "road show" to do an IPO or if they will take the route that Google did many years ago and have a blind auction. The blind auction is in the best interest of the company if there is enough investor demand for the IPO as it creates a fair market price for the stock and you get fewer pump and dump investors.
So what does the renewed interest in IPOs and liquidity for investors mean? The early stage startup and venture capital industry thrives off of a healthy and short investment cycle which depends on a final outcome (M&A or IPO). The startup investment cycle can take only a few years during boom times and as long as 10+ years during slow business cycles. When investors get their money back plus a multiple return on their investment they are incentivized to put this money back to work in new startups. There are many tax incentives that encourage this but I believe their should be more. I expect to see the increased IPO activity and liquidity have many long term positive effects on new startups for years to come as the stock market is begging for new currency. Use the products of these companies and buy some some shares at a minimum (especially Skype). Here is my list of Skype IPO 10 reasons to buy.
