Monday, January 26, 2015

Technology and the unbundling of commercial banks

A quick thought on this piece by how technology is unbundling commercial banking. Specifically:


On the loans front, startups are of two types (1) those that help companies find the best loan terms (marketplaces) and (2) companies that either directly or indirectly give loans to businesses using data and by connecting businesses to those with funds (alternative lenders)
Some examples of the first type include:
  • Fundera is an online marketplace that connects small businesses with funding providers
  • Creditera which helps businesses build and monitor credit and find the best loan terms Some examples of the second type include:
  • OnDeck which leverages electronic information including online banking and merchant processing data to identify the creditworthiness of small businesses in minutes
  • Funding Circle which is an online marketplace which allows savers to lend money directly to small and medium sized businesses
  • Square Capital which uses a businesses transaction history on Square to offer funds with payments tied to sales volume
  • Kabbage which leverages data generated through business activity such as accounting data, social media, shipping data, and other sources to understand performance and deliver financing options for small businesses instantly.
  • Biz2Credit which is a marketplace peer-to-peer lending platform
  • Lendio is a platform that helps small business owners find lenders and secure loans
The primary purpose of commercial banks, the function that makes them banks, is making credit evaluations. Any company which takes on that function without the accompanying risk if the loan is not paid off, is in a moral hazard situation which will ultimately create a credit bubble. I'm not sure which of these does that, but worth keeping an eye on.

Wednesday, January 21, 2015

Market Risk vs Technical Risk -- the VC industry

Absolutely outstanding piece on the history of the venture capital industry. The whole thing is worth reading just for the quotes across the decades, but I'll post the final two paragraphs here:
Saying VCs used to take high technical risk and now take high market risk is both an overly optimistic view of the past–the mythical golden age of heroic VCs championing the development of new technologies–and an overly optimistic view of the present–gutsy VCs funding radical innovations that create entirely new markets. Neither of these things is true. VCs have never funded technical risk and they are not now funding market risk. The VC community is purposely avoiding risk because we think we can make good returns without taking it. The lesson of the 1980s is that no matter how appealing this fantasy is, it’s still a fantasy.
People in the VC industry talk about the ’60s, when institutional venture capital took off. They talk about the ’70s, when iconic companies like Apple and Genentech were founded and the microcomputer industry emerged. They talk about the ’90s and the Internet bubble. They don’t talk about the ’80s; the ’80s are the missing piece of the puzzle. You can have lots of plausible theories about what venture capitalists as a class can do to get good returns, until you take the 1980s into account. Then you can only have one: the only thing VCs can control that will improve their outcomes is having enough guts to bet on markets that don’t yet exist. Everything else is noise.
The 1990s are not our map, the 1980s are. Don’t worry about irrational exuberance fueling a bubble, that is not what is happening. Worry about fear of risk. We know where that leads: once again straight into the ditch.
What's creating new markets?

Wednesday, January 07, 2015

Private market intoxication, Public market sobriety

From Sigalow:
The number of privately-held companies valued at over $1BN is at an all-time high.  There are currently 40 venture-backed start-ups valued at over $1BN in the private markets, and 27 of these companies are headquartered in San Francisco. Investors assume that each and every one of these Unicorns will have a successful IPO at many multiples of its current valuation.

In case you believe the public market will absorb these companies at a premium, here is a point of reference. There are only 71 publicly-traded technology companies headquartered in Northern California with a market cap of at least $2BN… and this list is declining at the same rate as the market in general. Meanwhile SF-based VCs have been minting similarly-valued companies, in the private markets, at a rate of one per month for the past two years.

Earlier this year one of my partners made the comment that we are witnessing “private market intoxication and public market sobriety.” I have been struggling to explain why this is happening, and I think the answer lies in a structural difference between VC investors and public market investors.
40 private market companies, valued at $1B+, all with expectations that they will trade at multiples of that ($3B+? $5B+?) when the number of such extant companies is only 71 in California?

(Note the weird math. Why are we limited the number of public companies at $2B valuations to California? Quick googling does not give me an answer -- please post in comments if you know. Let's assume the actual number is 200. So 40 companies out of 200 is 20%. An optimistic amount.)

This is the private market bubble I've mentioned earlier in my blog. The incentives in the VC industry mean they have to swing for the fences to justify their fees to LP, which means the asset class as a whole is likely to underperform. LPs will then either adjust their portfolio out of the asset class, or remain inside it betting they can  beat the odds as they continue to reach for yield in our current ZIRP environment.

Friday, January 02, 2015

2014 Tech retrospective

Fred Wilson posts a thoughtful piece on 2014. Some of my own reactions, and then what that might mean for this new year:
1/ the social media phase of the Internet ended. this may have happened a few years ago actually but i felt it strongly this year. entrepreneurs and developers still build social applications. we still use them. but there isn’t much innovation here anymore. the big platforms are mature. their place is secure.
By this, I think Fred mostly means that there will be no new social networks beyond Twitter and Facebook, and such ventures are not going to be funded. He does not include messaging apps in this category as he talks about their growth explicitly in his next paragraph.

I think 2014 was the year Facebook fully evolved into AOL 2.0 and that's where it's going to stay (at least on the web. Who knows if it will launch a true messaging app, or do anything interesting with Whastapp or Instagram or Oculus). But Facebook itself has become essentially those email our grandparents used to send to each other (and us) of jokes, news stories, etc. Young people do not use it to communicate any more.

On the messaging side, the social graph is in the phone's address book, which means switching from provider to provider is very easy. This is where the young people are, and also where families and friends actually communicate. I think the monetization model here is still unclear -- interruptive display ads have usually not done well in a 1:1 communication medium, but I don't see metered pricing or bundled plans working either above and beyond what the carriers already charge (and which, these apps are a reaction against, particularly Whatsapp).

To this point, I think the money Facebook's been making on mobile is driven by display ads for paid downloads, particularly games, as that market is very aggressive at acquiring users because of how Apple's app store works. Being in the top 10 generates a large amount of additional traffic, because customers look at the top 10 list when figuring out what to buy, so it makes sense to spend a lot of money to get your revenues to where they need to be to break into that list, and then spend to stay there. This spend goes directly to whomever can deliver installs, and right now Facebook is the best channel in that market.

If other online destinations start beefing up their paid install market as well, and most importantly, if Apple supports proper discovery (or an ad market) then we'll see what happens to Facebook's mobile revenues as competition and inventory begin to drive down mobile ad rates.