Category Archives: investments

More bad news for Startups and Venture Capitalists

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More bad news for Startups and Venture Capitalists from the New York Times “bits” section about technology trends.    Not only is the number of IPOs falling (zero in Q2 of 2008), but it also the number of mergers or aquisitions of startups appears to be way off as well.

Venture capital folks look to the most favorable “liquidity event” and generally that is an IPO where they may realize tens or even hundreds of times their original investments.    Also favorable though generally offering less profit than an IPO is an aquisition or merger where other companies take over the startup without it going public.

I found this number very interesting and potentially alarming for Venture investors:  An average of 8.6 years from startup to IPO, the longest in some time.    Given that the present value of money is greater than future value, time horizons this long suggest, for example, that even a doubling of your VC money over that long period of time would represent only a “fair to poor” return compared to alternatives.   Given that most startups never go IPO anyway it would seem that the risk factor is going way up for these investments.

Facebook, Facebook Get Ya Facebook Shares at 80% off

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TechCrunch is reporting that an insider at Facebook is shopping his shares at 80% off the normally quoted (and probably absurd) 15 billion dollar valuation.   TechCrunch is also suggesting that even Mark Zuckerberg is willing to sell shares at a price consistent with a 6 billion valuation for the company.

Like Arrington, I’d also like to take one share of Facebook.  For me please add a Coke and a Cheeseburger.

The 15 billion never made any sense, and as it becomes clearer that social networking won’t monetize well their perceived value may quickly drop below a billion, though that would still be one heck of a payday for Mark Z and the gang.

Yahoo Google Agree to Thwart Microsoft and Icahn

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The Yahoo Microsoft Merger saga continues as Yahoo and Google have signed an advertising pact in the face of mounting new pressure on Yahoo to sell to Microsoft.     Carl Icahn, corporate mega-investor, has purchased a large stake in Yahoo and was preparing to force changes on the Yahoo board that have led to a Microsoft takeover.   Today’s announcement appears to leave the Microsoft deal in the lurch, though I’m not clear yet why Icahn can’t fight a proxy battle to get control of the company and then back out of the agreement.    Based on today’s news that is not part of his plan, though anything is possible in the rapid fire take no Microsoft prisoners battle where the Yahoo board appears more interested in thwarting Microsoft than doing good for Yahoo’s shareholders who today saw a drop of 10% in shares as another potential Microsoft deal crumbled.    Last year Yahoo rejected $40 per share, and a few months back they rejected $34.   One does not have to have much imagination to wonder how long it’ll be before they are rejecting $25.

An interesting investment question right now is whether Yahoo is priced low or high given all the new information.  If, for example, a new board will come in within a year or so it’s very possible that MS will make another aquistion offer well above current prices.  A new board would probably view this favorably.   If true Yahoo’s a good buy now.   However if the stubborness will continue for years it’s not at all clear that Yahoo can dig itself out of the profit and morale busting hole it’s been digging for several years while Google was eating Yahoo’s lunch and serving it back – free – to Google investors and employees. 

Disclosure:  I have Yahoo.   Which means I have 90% of the value I had this morning.

ASUS, eee PC, and cheap computing: Watch this company!

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I’m very impressed with my eee PC so far and it appears ASUS has a lot more cleverness in store including a 200 desktop and a larger ultra mobile computer in May.     This is an interesting play in that they are breaking ground in two computing areas that may have a lot of potential:  mobile internet computers for business and personal use and cheap desktops to capture the market of the millions who have one computer and want more or don’t have one at all.    The brilliancy here is that ASUS has set the price points so low that they are really no barrier to purchase.     Other UMPCs have been so expensive that the viability of buying one for the x/365 number of days a businessperson needs one was very limited, but at $300 for the cheapest eee PC  most traveling onliners can hardly afford to be without one until perhaps mobile phone technology creates usable keyboards and comfortably viewable screens. 

I recently wrote an analysis of the Airbook, suggesting it would have limited appeal.    Technically it is not a UMPC but it’s close, and I was also skeptical of much growth in the UMPC market.   However, as prices plummet things could change considerably as even school kids may start to sprout eee PCs as an alternative to tiny mobile phone surfing and higher priced, heavier, and clunkier laptops.   

ASUS appears to be a privately held Taiwan company, so … no stock available on public exchanges.

Yahoo Microsoft: Is the fat lady almost singing at $34?

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Henry Blodget is whining that the Yahoo Microsoft deal is back to where it started, but I think Henry’s wrong … again!     

I’m glad Henry was wrong about the rumor that Yahoo’s Q4 would beat expectations because it was part of the reason I bought YHOO then, and even though the stock dipped due to a bad Q4, it surged on Microsoft’s offer of $31 per share so I’m well in the black.   But now he’s wrong to say the deal is not almost done.  I think this Yahoo Microsoft merger is coming very soon to an internet near you.

Citibank Analyst Maheney upgraded Yahoo this morning, anticipating a boost in the MS bid to $34.   Hey, maybe he read my blog post of about 6 weeks ago where I suggested Microsoft raise their bid to $34?    

Unlike Henry, I think this is not back to where it all started at all!

Yang didn’t want to merge, now he sees it as almost inevitable.  Yahoo board wanted more, now they know anything past initial offer is gravy.  Part of the show was probably the board protecting itself against lawsuits from the unlucky minions who bought their Yahoo at $35+, some at over $100.

Barring a Q1 miracle that would recalibrate Yahoo prices without help of MS bids, I think the fat lady is now almost done singing on this deal.

 Disclosure:  long on YHOO

Compete.com sale a champagne moment? Not at ~8% per year return it’s not.

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Update:  Silicon Valley Insider is reporting that there is an additional 75MM in the deal as an “earnout” over the next several years.   That may make this deal sweeter than it appears at first.

At first glance you’d think the sale of website COMPETE.com, which measures web traffic, for 75MM must have been a big payday for a lot of folks.   However as Venture Beat notes some 43MM of venture capital had been poured into  COMPETE over the past 8 years.  

Assuming most of this came at the beginning of the cycle, and assuming most of the 75MM is going to the VCs, the return on this VC investment would be a very modest 8-10%.    If the founders and workers also had a decent stake in the sale this return could be lower – approaching what the VCs might have realized with long term CDs over the same time period.     Break out the champagne?

I’ve noted before the dirty little secret of many “successful” venture capital deals – they often make a very modest return when time is factored in properly.   In fact it appears that *most* VC deals lose money for the players.    Data is sketchy, and obviously only the winners are happy to share the details making it very difficult to analyze this since many (most) of these deals are not in the public record.  

Sure there are VC winners like Fred Wilson and Jeff Clavier, both very clever VCs who blog some of the details of their failures and successes.    However I think this is not typical, as Jeff even suggested here at the blog some time ago.

Googling the Comscore click metrics = indigestion

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The Google / Comscore clicking clash is really an interesting story from a lot of angles.     Comscore’s recent report that came earlier this week about Google pay per click metrics sent Google stock into something of an immediate tailspin, losing Google tens of billions in market capitalization as soon as the report came out.   However, today Comscore is claiming their report does not directly support the ideas that Google click ads are in trouble and that the recession is going to kill online ads. 

Comscore notes the two concerns others express from their findings:

1) a potentially weak first quarter outlook for Google, and
2) an indication that a soft U.S. economy is beginning to drag down the online advertising market.

And then says their report does not directly support these conclusions:

While we do not claim that these concerns are unwarranted, we believe a careful analysis of our search data does not lend them direct support. More specifically, the evidence suggests that the softness in Google’s paid click metrics is primarily a result of Google’s own quality initiatives that result in a reduction in the number of paid listings and, therefore, the opportunity for paid clicks to occur. In addition, the reduction in the incidence of paid listings existed progressively throughout 2007 and was successfully offset by improved revenue per click. It is entirely possible, if not likely, that the improved revenue yield will continue to deliver strong revenue growth in the first quarter. Separately, there is no evidence of a slowdown in consumers clicking on paid search ads for rest of the US search market, which comprises 40% of all searches.

I’m still digesting the larger report but it seems to suggest that Comscore sees *no reason whatsoever* from their data to assume Google will have a bad first quarter, and if I’m reading them correctly they are effectively saying there is reason to think the quarter’s earnings will *improve* because the revenue per click is improving and paid clicks are increasing?   Confusing because these are the almost exact opposite of the conclusion made by market watchers based on the same data.

Microsoft Fined 1.4 billion by European Union – market yawns

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Despite a record fine of 1.4 billion dollars by the EU for failing to share code, Microsoft’s stock price dropped just a tiny bit today – a drop not even clearly associated with the ruling.     Given that the fine represents only a fraction of a percent of Microsoft’s capitalization and that it removes some uncertainty from the always massive MS legal equation it is probably reasonable to assume the market had pretty much fully incorporated the EU instability into the price of Microsoft.

The BBC Reports

The Price of Danger: $500,000,000

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Microsoft just picked up Danger, inventor of the Sidekick mobile device and overall very clever mobile company founded by Andy Rubin who is now working for Google on Android and Open Handset Alliance stuff.

Om Malik is quoting the price as 500MM after what his reasearch showed was 225MM in past injections of capital.   

Although at first glance everybody thinks these deals make huge money for everybody associated with them, this is not the case.   As we’ve noted before average VC deals  *lose money*, and more importantly you always need to factor time into these equations to make sense of the profitability of a deal.

In this Danger sale people made out well, but depending on when the big money was invested it’s not clear anybody had a spectacular return here unless the big money came in very recently (I don’t know if it did or not).

Why would MS want this company?   As with the Yahoo aquistion and as MS has done for so long, they are trying to gain a huge foothold in key markets by buying up a key company in the space.    I’m expecting some competition for the Google/Dell phone to be announced soon.

       

Microsoft PE=16, forward PE=13!

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Wow.    As Yahoo rebuffs them and Microsoft shares continue to take a beating from  what appears to be Yahoo aquisition unhappiness, the PE of this mega company is looking nothing short of spectacular.    Some would argue that Microsoft is slowly dying due to the massive changes in the way people and businesses use software, but it’s foolish to think Microsoft’s prospects are dim under the current conditions.   In my view they are simply making too much money, and remain a key player in a key industry, to deserve this low market valuation.  

If the Yahoo merger happens the PE at MSFT will take a hit, but it would clearly remain well under 20, a very modest PE for a company that still has significant growth potential.

But, I guess like other investors I’m a herd animal and fearful, so I won’t be buying MSFT….quite yet.

Disclosure:  Long on Yahoo, no Microsoft position.