As featured in TechCrunch.
Scrolling through reports of recent venture financings, the names of the firms involved has changed quite a bit over the past few quarters. Of note, hedge funds have entered the later-stage, pre-IPO investment arena in a meaningful way. Firms like Coatue Capital (Snapchat, Box), Valiant Capital (Pinterest, Evernote) and Tiger Global (One Kings Lane, Nextdoor) are not new to venture investing but appear to be ramping their pace and investing in some of the most sought after private companies globally. Similarly, several other hedge funds are entering the market and large, long-only fund managers such as T. Rowe Price (Pure Storage, New Relic) and Fidelity (Pinterest, MongoDB) seem to be increasing their activity as well.
As Leena Rao reported last month on TechCrunch, hedge funds often impress founders with their ability to move quickly and pay higher prices than VCs. Hedge funds clearly present a compelling option. So, for founders and early stage VCs, understanding why hedge funds are getting more active in the venture market and evaluating the pros and cons of taking their capital is worthwhile.
Motivations – why is this happening?
Although my firm, GGV Capital, has been outbid more than once recently by hedge funds, I think the involvement of hedge funds in the venture capital asset class, especially in the pre-IPO stage, is a healthy thing. Make no mistake – hedge fund managers tend to be some of the smartest and savviest investors. Although the prices they’re willing to pay may seem high sometimes, they routinely have sound motivations.
• One, many companies are going public later nowadays, so if a hedge or mutual fund waits until an IPO, the companies are now much more mature, often with their most rapid growth behind them. Growth investors, who want to catch those years when a company is expanding really fast, opening up unpenetrated markets and going global, are forced to invest in private rounds, rather than wait for an IPO.
• Two, the paucity of growth in today’s public company universe is leaving hedge and mutual funds with fewer options, driving their interest in faster growth IPOs, and in the financings one to two rounds earlier, while these companies are private, as well.
• Three, because the typical IPO hasn’t grown in size in many years, allocations are usually small, and even in the aftermarket, it’s hard to build a big position in newly-public companies. Most successful hedge funds and larger mutual funds need to build sizable positions (ie, many tens of millions of dollars) for it to make sense to hold a stock. Investing pre-IPO is a way for these funds to get a head start building a position.
Implications – what you need to consider
Given this new reality, what are the implications for entrepreneurs? There’s not a black and white answer. Many management teams and boards with whom I speak laud the benefits of taking money from hedge funds and/or mutual funds. For example, they often move quickly, saving companies precious time. Additionally, as public investors, their typical return expectations are lower than those of VCs, so, as mentioned above, they’re also often willing to pay higher prices and are less focused on deal terms than VCs. Finally, these funds are usually “hands off” investors, which is a positive for many companies, where there are already several VCs involved.
That said, hedge funds in particular tend not to invest with 5-10 year investment horizons. In fact, most hedge fund vehicles offer their investors quarterly redemption options. So, while most VCs will continue to support a management team that hits a rough patch or decides to double down on a new strategy, prolonging the time to an IPO substantially, hedge fund investors might be in a different position. If a hedge fund’s investors head for the door due to macro or fund-specific reasons, the funds need to raise cash. During such events, venture capital positions aren’t desirable and the same goes for long-only funds facing redemptions. In these situations, the 10 year vehicles most VCs invest from are naturally more patient, and can help reduce risk of shareholder consternation. Several hedge funds have attempted to remedy this issue by creating separate, longer term vehicles. This makes sense, and the test for these funds will come when the next big public market downturn occurs and fund managers feel pressure to deliver cash to their investors.
The verdict – get prepared
Entrepreneurs should be proactive in thinking through this trend. Leveraged in the right away, hedge and mutual funds can be terrific investment partners for the right companies. Yet, there will be cases specific to a company or generalized to the overall public markets that could impact a situation and change the cadence of the investor-founder relationship quite abruptly. As with any funding source, founders would be wise to run through these scenarios when evaluating financing options, even though we’re currently in an exciting up market. Things always change and do so quickly.
February 22, 2014
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As featured in TechCrunch.
Average valuations for venture-backed M&A deals typically come in a pretty tight range. According to the National Venture Capital Association (NVCA), in ’13 there were 377 total M&A exits of venture-backed companies with mean pricing of $161M. This compares with total deal count of 499 and 488 and mean pricing of $143M and $173M in ’11 and ’12, respectively.
Every once in a while, however, a $1B or even multi-billion M&A deal for a venture-backed, relatively young company pops up, such as the recent Nest/ Google announcement. These deals defy conventional valuation logic since the acquired companies are early in their revenue curve or sometimes even pre-revenue. Where do these billion-dollar deals come from and what factors are involved in their creation? Below I’ve identified three primary drivers that motivate acquirers.
Billion-Dollar M&A Drivers:
- Rocket Ship Riding – Sometimes a target achieves such incredibly fast early growth that acquirers become enamored with the potential for the future. Particularly in the consumer internet context, these companies are often pre-revenue, with growth coming in other key metrics. Facebook’s $1B acquisition of Instagram represents a good example. Facebook clearly saw Instagram’s growth as both a threat to its own popularity and an opportunity to continue to expand engagement among its core constituents. Price didn’t matter as much as this future potential. Google’s near $1B acquisition of Waze was similarly driven by the traffic app’s growing popularity and Google’s recognition that it could integrate Waze functionality into Google Maps, further enhancing its own product line.
- Fear of Losing Out – In addition to perceived potential, fear is also a very powerful motivator. Acquisition prices can be driven up to billion dollar levels when an acquirer develops the fear, real or not, that they might lose an opportunity, either to a competitor or to the target itself gaining enough traction that it will remain independent and become a threat to the acquirer over time. When Doubleclick was acquired by Google for $3.1B, Microsoft was widely rumored to be aggressively pursuing the deal as well. No matter that Doubleclick had been acquired by private equity firms Hellman & Friedman and JMI Equity for approximately a third that price just a few years earlier. The perception that the inventory Doubleclick controlled was extremely strategic gained footing in Google’s board room, similar to Microsoft. This led to the outsized outcome. When VMWare acquired early-stage Nicira for $1.3B, VMWare execs saw this as a move to protect their core server virtualization franchise and extend into network virtualization as well. When looked at from this vantage point, the price makes more sense.
- Lottery Pick on Draft Day – Innovation is rarely a core competency at large tech companies. In fact, executional excellence, at which large tech companies usually excel, often runs counter to the culture of risk taking required to spawn new, disruptive initiatives. Execs at large tech companies know this and it can be very frustrating. This can motivate the desire to bring in a team of people who are perceived to have skills and abilities to drive innovation that otherwise won’t occur. With this logic, acquisition price becomes a minor issue. Google’s recent $3.2B Nest acquisition must have been driven, at least in part, by Google’s desire to bring in a talented consumer hardware team, headed by Tony Fadell, that can innovate in the connected home area. This is a market Google has identified as important, but without a tiger team like the one from Nest, Google execs recognize they will likely never get from here to there.
Consideration and Considerations:
Although entrepreneurs who end up selling for $1B or more rarely begin their journeys thinking they sell their companies, there are several issues that should be considered carefully if this becomes an option.
- Cash vs Stock – With growing piles of cash on the balance sheets of many large tech companies, the ability to pay cash for some or all of the purchase price in billion dollar M&A is more common these days. Cash obviously removes any uncertainty with respect to the ultimate price. Stock prices can plummet, adding possible risk to a stock deal for entrepreneurs, their employees and investors. Especially if you’re being acquired as a lottery pick, expect acquirers to want you and your key team to stay for many years. The purchase price will highly incentivize you to stay, including stock vesting. Each entrepreneur has a very unique and personal situation and needs to weigh the pros and cons carefully.
- Certainty of Closure – When an acquirer floats a very large acquisition price, the risk of the deal not going through to completion increases. Recognize that someone at your potential acquirer is probably staking her or his career on the decision to pay up to acquire your company. Its human nature to get cold feet. Pay close attention to who the acquirer is – what’s their reputation is for going through with acquisitions? what’s the status of the company right now? how powerful is the board and/or CEO and are they behind the deal? It’s not atypical for a target to go with a lower price from an acquirer who has a higher perceived certainty of closure versus other higher offers from riskier would-be acquirers.
- Fit and Alignment – For entrepreneurs, there’s no rule that you must accept an acquisition price once it hits a certain level. Many potential acquisitions don’t consummate because the perceived cultural fit and/or alignment on the future vision doesn’t completely align. Most entrepreneurs with whom I’ve spoken who have sold their companies (whether at billion dollar levels or lower) regret the decision later due to poor fit with the acquirer. It’s critical to get this right.
For many entrepreneurs, their own indomitable will doesn’t waver, even in the face of a billion-dollar M&A offer, and it’s go long and go big or bust. For example, Snapchat appears to be on this path, at least for now. For some others, the appeal of taking a billion dollar offer is high enough to veer off the independent path. Instragram went this route. There isn’t a right answer. But, recognizing the motivation of would-be suitors – be it rocket ship, fear of losing out, all-star draft picks, or some combination of the above – can help navigate the waters.
January 25, 2014
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As the year winds down, I’ve been thinking a lot about 2014. There are several trends I’m watching that should have profound impact on the venture capital landscape, in particular the growth stage (ie, Series B and Series C). These dynamics will also impact the IPO market. I’ll be writing about these trends in greater detail in ‘14:
(1) Here Comes China
Big, powerful Chinese technology companies are not only spending more time in the United States, but also staffing-up here.
These companies include the three big Chinese Internet companies (Tencent, Alibaba, Baidu), as well as the next most important players (Xiaomi and Qihoo).
These companies will be very active investing in and acquiring (mostly mobile) startups in the US in 2014.
The China influx will impact the venture capital business, M&A, and IPO scenes. These companies represent a brand new, well capitalized set of buyers and investors in tech.
(2) Hedge Funds As Tech Investors
Hedge funds (and mutual funds) are the newest actors in the pre-IPO investment stage.
What began as a trickle of hedge funds in venture this year will increase to a torrent in 2014.
Companies now stay private longer — as a result, they’ll seek private rounds to fund growth.
Hedge funds are structurally different than venture firms, and founders need to know the differences, which present both opportunities and risks.
(3) A More Serious Shift To The Cloud
Incumbent technology vendors face serious headwinds, caused by the rise in public cloud computing options.
IT spend will shift even further away from traditional technology capex spend to lower price opex with SaaS and cloud vendors.
Losses felt by incumbents are potential gains for startups.
Native mobile and cloud companies are surging ahead in this environment, stealing market share and exhibiting very high growth.
(4) A Wide Open IPO Window
Native mobile and cloud companies benefiting from the shift described above in #3 will continue to be viewed favorably by public market investors.
Expect several successful IPOs from mobile and cloud companies, especially those focused on the enterprise and SMB, in 2014.
December 22, 2013
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Leena Rao from TechCrunch and I recently discussed China, IPOs and and outlook for ’14 on her “Ask a VC” show.
December 21, 2013
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(above, GGV Partner Jixun Foo with Nimble Storage CFO, Anup Singh, at a recent GGV CEO Dinner)
This past Friday, GGV portfolio company Nimble Storage achieved a successful IPO, pricing at $21/share, 23% above the mid-point of its initial filing range, and closing at $33.93/share, 100% above the initial filing range mid point. We’ve been huge fans of the company since we first met CEO Suresh Vasudevan in ’10 and were delighted to join the company’s strong syndicate of VCs including Accel, Sequoia and Lightspeed in early ’12. With the strong public debut, its clear that public market investors are as excited as we are about Nimble’s prospects. Here are a few things we admire about the company:
Team. Before we invested, we extensively reference checked Suresh Vasudevan, the CEO, and the technical co-founders, Varun Mehta and Umesh Maheshwari (both from Data Domain). The calls were uniform in their conclusion that this was a very special team – the type of team that has the wherewithal and experience to build a multi-billion dollar company. Our experience as an investor in the company has only increased our conviction that this team, now fortified with strong additional executives such as Anup Singh, CFO, and Mike Munoz, VP of WW Sales, has the chops to continue pushing Nimble to new heights for many years to come.
Market. Great teams have a nose for big markets. That is most certainly the case with Nimble. The company refers to an $18Bn market opportunity that is still growing healthily. The company’s architecture and product line allow them to address all corners of this market from a strong competitive position. The early returns are very encouraging as well. Nimble has acquired over 2,000 customers since it launched product sales just a few years ago, and total bookings per account has grown from the initial purchase on average by over 2.2x within two years of the initial purchase.
Model/Metrics. Nimble is growing as fast as any systems company we’ve ever seen. Quarterly revenue is up over the past seven quarters from $8.2M to $33.4M in the October quarter. During this period of extremely rapid growth, the company has also invested heavily in R&D and Sales & Marketing. Despite this investment, the company has been able to sustain operating margin expansion and excellent gross margins. R&D as a percent of revenue is down to 26% year-to-date, from 55% and 29% in the two prior fiscal years. Similarly, S&M as a percent of revenue is down to 59% year-to-date, from 90% and 72% in the two prior fiscal years. Gross margins have been running at 65% year-to-date, at the high end of the company’s target range.
At GGV, we’re looking forward to a long and fruitful relationship with the team from Nimble Storage. We’re proud to be investors in the company and believe the future to be bright!
December 15, 2013
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One of the recent trends in the venture capital industry is that firms are building platforms. In the pursuit of a platform, many firms are staffing up in multiple functional areas, raising larger funds, investing across stage (all the way from seed to pre-IPO), growing both consumer and enterprise practices, and dabbling in geographies in which they haven’t had a long term presence. VCs routinely encourage their portfolio companies to focus, but, by trying to do everything, these firms are risking losing focus themselves. While there are elements of a platform approach that are appealing, with so many firms in the market, I believe it is important for partnerships to maintain focus to achieve success.
Emergence Capital stands apart from the noise in today’s market. For those who know, Emergence is a relatively small fund, consistently focused on early-stage software and cloud businesses. Over the course of various vintages, Emergence has stuck to its knitting, kept its fund size consistent, and quietly built up demonstrable competence and a deep network around the areas it cares most about. As a result, people know when to go to Emergence. Their signal is clear. While they don’t make the most noise, they’ve built a reputation as a highly-respected partner in any deal in which they participate.
Emergence was recently in the news, which prompted me to share my thoughts. A month ago Veeva Systems had its IPO and was very warmly received by the public market. Emergence led the one and only venture round in Veeva back in 2008. Earlier in his career, Emergence partner Gordon Ritter worked closely with Salesforce.com founder and CEO Marc Benioff, helping Benioff get Salesforce off the ground initially. Ritter then co-founded a cloud platform company with Benioff that ultimately was rolled back in to Salesforce to help form the force.com business. Veeva’s founder, Peter Gassner, took over as GM of force.com and got to know Ritter as a result. When he decided to start Veeva, Ritter and Emergence were the obvious choice venture capital partner – Ritter had already proven himself a capable and knowledgeable cloud executive. As a result, Emergence won the competitive deal and became the largest external shareholder in Veeva.
Today, after years of hard work by the folks at Veeva, Emergence’s stake in the company is worth well north of $1Bn, making this deal among the best ever done by a VC. I’m writing this because, as a VC myself, I have great admiration for the focus, steadiness, and precision of Emergence. Focus isn’t always easy because it means saying no to lots of “hot” trends that will fall in and out of favor, but as Emergence has shown with Veeva, focus can really pay off. At GGV Capital, where I work, we aim to do the same — to make China an integral part of our investment strategy, and to identify people and businesses that are “Going Long.” It is a competitive world out there, so at GGV, we need to be as focused on long-term independent businesses and China as Emergence is focused on SaaS and cloud.
On a personal level, I deeply respect the quiet resolve of the Emergence team. Simply put, it is the type of work we try to build into our culture at GGV. While we are a different firm on many dimensions — stage, focus, history — we value this approach to venture capital and bestow upon it a great deal of respect.
December 02, 2013
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Congratulations to CC Zhang, CEO, and his entire team at Qunar! GGV-portfolio-company Qunar had a very successful IPO and public market debut Friday on the NASDAQ. The company initially filed a pricing range of $9.50 – $11.50, raised it to $12-14 while on the roadshow, priced the IPO at $15 and closed Friday at $28.40, up 89% on the first day of trading. This strong showing indicates that public market investors are very excited about the prospects for Qunar, China’s leading online travel player. Similarly GGV’s outlook is driven by some key elements:
China’s Continued Rise on the Global Stage. While many other US venture firms who had previously established China-based operations were leaving the Chinese market in the few years post the global financial crisis, GGV doubled down on China. We believed then and still believe strongly that China’s economy will continue to thrive and grow, providing a fertile setting for our portfolio companies. We invested in Qunar in ’09 and the company has performed exceptionally well ever since. Although we don’t expect a straight line up, China’s domestic and international travel market should continue to grow for many years.
Mobile growth and China/ US convergence. GGV’s global team has been built to help our portfolio companies take advantage of the increasing inter-dependency of the Chinese and US economies. Our view is that mobile, which is so strong in both markets, will only continue to further tie China and the US together for entrepreneurs. Qunar is no exception. Mobile as a percent of traffic and usage is growing very rapidly with more than 100M app downloads to date, and although Qunar is focused on China’s domestic travel market, as Chinese people continue to travel abroad more frequently, expect Qunar to help serve this customer base. Mobile is also quickly changing how users in China and the US are planning travel, becoming more real-time and location-based. This mobile growth, coupled with an online travel market that’s still fast growing (33% CAGR expected for China in the next 3 years), is a combination GGV believes will provide exceptional opportunities ahead (and we’ve also invested in Hotel Tonight in the US and Tujia in China as a result).
“Qunar Model” – Strategic Partnership with Baidu. Qunar has done a terrific job building a strong brand in China. A majority of its traffic comes organically, as people know to visit Qunar for travel related queries. That said, the partnership with Baidu is powerful, making Qunar the default gateway to travel in China, and most of the public investors with whom I spoke about Qunar mentioned it as a very attractive element of the story. GGV Partner Jixun Foo, who led our investment and sits on Qunar’s board, was instrumental in bringing Baidu into Qunar as an investor and partner. Jixun was able to help spark and negotiate this deal, borrowing on the strong relationships he’s built from his days as a trusted venture investor and board member at Baidu. The “Qunar Model” is first of its kind in China, and now quickly are being borrowed by others in China. UCWeb (yet another GGV portfolio), which recently received investment from Alibaba, another GGV portfolio company, is another example.
Management’s desire to “go long.” CC Zhang, Qunar’s CEO, has been a terrific partner from day one of our investment. He knows his market cold and he has a strong vision for where he wants to take Qunar. Like GGV, he sees travel as a huge market opportunity in China. He believes he’s early in the game and expects many more years of exciting progress. We’re strapped in for the journey with CC!
November 03, 2013
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My partners and I are incredibly excited to announce that Hans Tung has joined GGV Capital as our newest Partner.
In sports, we’re constantly reminded that when given the chance, you should always draft the best athlete rather than someone who fills a specific position – just ask the Portland Trailblazers, who famously selected Sam Bowie in the 1984 NBA Draft, leaving Michael Jordan available for the Chicago Bulls with the following pick, because they didn’t believe they needed another shooting guard. In Hans, we’re getting a remarkable athlete. Hans is recognized widely as a top venture capitalist, known for his entrepreneur-friendly approach and his tremendous portfolio, including Xiaomi, China’s legendary mobile phone player, Forgame, which just went public on the Hong Kong Stock Exchange and carries over a $1Bn valuation, Vancl and eHi Car Rental.
On rare occasion, the best athlete also happens to fit the position you’re looking to fill. The Indianapolis Colts hit the jackpot with the first pick in the 2012 NFL Draft, selecting Andrew Luck, and in so doing, filling their biggest need – the quarterback position, with the best player to come to the NFL in the past decade (sorry Russell Wilson and RG III). Similarly, for GGV Capital, growing China & US convergence is the cornerstone of our strategy. As the world grows increasingly mobile and new billion dollar industries bloom, Hans joins at a time when the opportunity to continue to help the world’s best entrepreneurs grow from the US to China and from China to the US to build global leaders is at its peak. Hans’ experience with and familiarity in both China and the US is truly unique, and we look forward to working together with Hans to help a new crop of entrepreneurs build great companies.
Stay tuned. The future at GGV Capital looks bright, and with the addition of Hans, we’re more excited than ever.
October 21, 2013
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As published in TechCrunch.
As excitement grows for the upcoming Twitter IPO, the federal government shutdown and pending debt ceiling issue looms large. There are some in silicon valley who believe that the current innovation cycle, powerfully led by mobile and cloud computing, will overwhelm any public market dislocation caused by Washington DC ineptitude. After all, Twitter and other highfliers such as the rumored 2014 IPO class including Dropbox, Palantir, AirBnB and Box, are growing fast, operating in huge markets with big and slow-moving incumbents and beginning to show business models that will generate meaningful profit. This has been the recipe of success for LinkedIn, Splunk, Workday, ServiceNow and even Facebook, where IPO investors have done extremely well.
Recent history suggests, however, that in times of macroeconomic disruption, even the strongest of companies can see their IPO price get hit hard. One good way to assess the severity of a market dislocation caused by external events is the VIX, a measure of the implied volatility of the S&P 500. The chart below plots the VIX relative to IPO pricing over the past three years. As you can see, during periods when the VIX spikes due to external events, the implied IPO pricing discount increases sharply. For example, during the late summer / early fall ’11 period when US debt was downgraded after the failed debt ceiling negotiations followed quickly by the Greece-led Euro crisis, the VIX spiked and IPO pricing discounts went from an average of approximately 20% down to over 50%. Similarly, when the fiscal cliff led to the automatic federal spending cuts in early ’13, the VIX sharply increased, sending ensuing IPO discounts up to over 30%, from a range of 10-20% in the months prior.
Should the mess in Washington go unresolved over the coming several weeks, a clear risk for Twitter is that the VIX spikes up. If this happens, recent history suggests that Twitter will be forced to price its IPO well below levels it could otherwise achieve.
While this situation, if it transpires, will cause Twitter to either raise less capital or suffer more dilution than it would have otherwise, all is not lost. Aftermarket performance of the IPOs that have priced in the last three years doesn’t appear to be highly correlated to IPO pricing. In fact, as you can see from the chart below, some IPOs that price at steep discounts perform quite well in the ensuing 30 day period. For example, IPOs that priced in mid ’12, during the height of the macro concerns in Europe, were done at steep discounts, yet these IPOs were up 15-32% on average in the ensuing 30 days. More recently, IPOs priced at a steep discount during the “taper talk” of this past summer, but this class also performed very well in the ensuing 30 days. So, while Twitter may face IPO headwinds if Washington doesn’t come to its senses soon, a buying opportunity may follow.
Whatever happens, Twitter’s long term stock price trajectory will have everything to do with its operating performance and the market around it, and very little to do with how its IPO fares.
October 14, 2013
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Below you can watch my conversation with Emily Chang, host of Bloomberg West, on the growing threat of cyber crime and our recently announced investment in AlienVault.
September 07, 2013
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