Venture capital by Bill Janeway (part II)

In a remarkable new series of videos, Venture Capital in the 21st Century, Bill Janeway describes the value and challenges of technology innovation. I mentioned in my last post the perfomance of venture capital, his third video.

The first video, Investing at the Technological Frontier, describing the radical uncertainty of innovation and how it contributes to economic development.

In the second video, What Venture Capitalists Do, he further develops his thoughts that I summarize through a few screenshots below. (They are self explanatory and you should certainly listen to Janeway if you are curious or intrigued).

The 4th video, The Failure of Market Failure, opens the debate of state intervention and private speculation. This important topic has been largely debated by Mariana Mazzucato and you will find additional posts under tag #mazzucato.

Evaluating Venture Capital Performance by Bill Janeway

I must admit I did not know Bill Janeway. I should have, given his long expertise in venture capital. His recent contribution was mentioned by many including Nicolas Colin and on a personal note, friends from IMF. They just mentioned to me 8 videos which seem absolutely brilliant: Venture Capital in the 21st Century.

I just watched the third: Evaluating Venture Capital Performance | #3 | Innovation in the 21st Century. Here are the slides.


Janeway reviews the performance of Venture Capital firms and recent changes in the venture capital market. He starts by summarizing the stylized facts of venture capital returns (highly skewed, very persistent, and correlated with the stock market). VC capital increased rapidly in the late 1990s, peaking in 2000. VC returns have since settled down, with longer holdings and fewer IPOs. But with the climate of zero real interest rates since 2008, new unconventional investors (private equity, hedge funds, etc.) have waded into venture financing directly, hunting for the high returns of the next big tech giant. A “Unicorn Bubble” has developed as a result, where dubious firms have been financing their growth by selling illiquid securities at inflated prices to deep-pocketed investors with little expertise or control over the entrepreneur. This may have implications on the long-term link between venture financing and technological innovation.

I just copied a few screenshots:

Venture capital is highly skewed and follows a power law, just like startup success models.

Venture capital returns are highly correlated to those of Nasdaq as shown above and below, so… ?

Good VCs are good and bad VCs are bad.

So…

“The message here to limited partners is very clear.
A blind allocation to venture capital, just allocating a fixed proportion to venture capital runs the major risk of what’s known as adverse selection.
The funds you want to invest in, the persistently successful ones, don’t need your money.
The ones who want your money are the ones you want to avoid.”

GAFAM do not suffer from the crisis (part II)

Yesterday I published data in Tesla, Google and Facebook do not suffer from the crisis. and after linking my post to the usual Twitter, LinkedIn and Facebook, one of my readers (thanks Manuel!) told me it would be fun to add Uber as a comparison. I said I would if/when I find the time and then thought why not AirBnB, Apple, Amazon, Microsoft?

I could only compile data about revenues of these firms and I think it is striking enough:

I wrote yerterday the growth rate was above 100% (doubling every year) in the early years declining to around 40% (doubling every other year) then to 15% (doubling evry five-year). Here are the growth rates of these old and new Titans. It begins again with 100+% for all of them. Too early to say about the future of Uber and AirBnB.
The three others of the GAFAM.
– Microsoft even had a 50% growth in its second decade, Amazon was closer to 30% and Apple struggled with 20%.
– In their 4th decade, Microsoft had an average grwoth of 10% and Apple 30%.

OK Manuel?

Tesla, Google and Facebook do not suffer from the crisis.

This may not be surprising and it has been said in the media. The GAFAs have generally benefited from the Covid crisis. So, as I was independantly doing in the recent years, I looked again at the growth of Google and Facebook as well as Tesla.

[As a reference here are past articles:
– Are GAFAs threatened? Their growth is still steady: www.startup-book.com/2019/12/28/are-gafas-threatened-their-growth-is-still-steady/
– Facebook Finally Files For $5B: www.startup-book.com/2012/02/02/facebook-finally-files-for-5b/
– Google vs. Facebook: www.startup-book.com/2010/11/12/google-vs-facebook/]

And here are my udpates abour revenue, income and employee growth of Google, Facebook and Tesla:

Revenues and profits are in millions of $. What is undoubtedly the most striking is the similarity of the growths of the three actors and of course the fact that all these numbers are considerable, not to say extraordinary.

Typical of Silicon Valley startups, the growth is often above 100% in the early years decreasing to about 40% after a few years and still above 15% after 20 years. This means respectively doubling the numbers every year, every two years and every five years.

The Plague Year – Leadership and Courage according to The New Yorker


I have regularly mentioned here articles by great magazine The New Yorker even if not directly related to the startup or innovation topics. The New Yorker publishes long and deep analyses which often take at least 30 minutes attention. Recently, it published a 40-page article requiring hours… it is about Covid and the USA: The Plague Year – The mistakes and the struggles behind America’s coronavirus tragedy written by Lawrence Wright, published online on December 28, 2020 and on paper in the Jan 4-11 double issue.


Picture from Tyler Comrie

The reason I decided yersterday to blog about it is a short section close to the end: Pottinger’s White House experience has made him acutely aware of what he calls “the fading art of leadership.” It’s not a failure of one party or another; it’s more of a generational decline of good judgment. “The élites think it’s all about expertise,” he said. It’s important to have experts, but they aren’t always right: they can be “hampered by their own orthodoxies, their own egos, their own narrow approach to the world.” Pottinger went on, “You need broad-minded leaders who know how to hold people accountable, who know how to delegate, who know a good chain of command, and know how to make hard judgments.”

You should try to read it, it’s really mesmerizing, but this short section reminded me of French philosopher Cynthia Fleury and her book “La fin du courage” (The end of courage). You may want for example to read To be Brave is sometimes to Endure, sometimes to Break up which I find quite close to what is written above.

The largest technology companies in Europe and the USA in 2020

I regularly look at the largest technology companies in the USA and Europe and obviously this year, I had the impact of Covid in mind. Here are the tables I build once a year (and that you could compare to the ones published in January 2020 here or in 2017 here.

I am adding below their PS (price to sales, ratio of market cap to revenues) and PE (price to earnings, ratio of market cap to profits when positive) as well as the growth of the market cap. and revenues. There are 3 new companies I had not studied last year (Airbnb, Paypal and AMD) for which the growth is therefore not mentioned.

There would be many comments to give btu I will be fast:
– The GAFAs are the clear leaders, 4 of them are trillion dollar companies. Facebook is a little surprinsingly not as impressive and Tesla is appearing on top.
– The COVID did not have a big impact, not to say it had a positive impact on technology companies (in financial more than in economic terms)
– Again, looking at averages we see Europe is lagging in market caps, employement, sales and profits by factors close to 10…

The Age of Founders – Again!!

As an interesting coincidence, I was mentioned twice in a few days a recent research about the age of founders:
– Colleagues from IMF – the International Monetary Fund – mentioned to me this morning an article from The Harvard Business Review published in 2018: Research: The Average Age of a Successful Startup Founder Is 45 by Pierre Azoulay, Benjamin F. Jones, J. Daniel Kim, and Javier Miranda.
– Just before Christmas, I had a debate with French economists about the age of founders, and they mentioned to me Age and High-Growth Entrepreneurship by Pierre Azoulay, Benjamin F. Jones, J. Daniel Kim, and Javier Miranda.

The same authors, the same messages… In a nutshell: “It’s widely believed that the most successful entrepreneurs are young. Bill Gates, Steve Jobs, and Mark Zuckerberg were in their early twenties when they launched what would become world-changing companies. Do these famous cases reflect a generalizable pattern? […] Our team analyzed the age of all business founders in the U.S. in recent years by leveraging confidential administrative data sets from the U.S. Census Bureau. We found that the average age of entrepreneurs at the time they founded their companies is 42. […] But what about the most successful startups? Is it possible that companies started by younger entrepreneurs are particularly successful? Among the top 0.1% of startups based on growth in their first five years, we find that the founders started their companies, on average, when they were 45 years old. […] These averages, however, hide a large amount of variation across industries. In software startups, the average age is 40, and younger founders aren’t uncommon. However, young people are less common in other industries such as oil and gas or biotechnology, where the average age is closer to 47. […] In light of this evidence, why do some VCs persist in betting on young founders? We cannot definitively answer this question with the data at our disposal, but we believe that two mechanisms could be at play. First, many VCs may operate under a mistaken belief that youth is the elixir of successful entrepreneurship — in other words, VCs are simply wrong. Though it is tempting to see age bias as the leading explanation for the divergence between our findings and investor behavior, there is a more benign possibility: VCs are not simply looking to identify the firms with the highest growth potential. Rather, they may seek investments that will yield the highest returns, and it is possible that young founders are more financially constrained than more experienced ones, leading them to cede upside to investors at a lower price. In other words, younger entrepreneurs may be a better “deal” for investors than more experienced founders.”

The age of founders has been an interesting topic here as you may check with tag #age. In particular I wrote
Data about equity of 600 startups in April 2020
The Age of Founders of Start-ups – Again! in April 2019
Age and Experience of High-tech Entrepreneurs in June 2014

What you will find in common between this recent research and my posts is that there is variation with the field. I am not sure this new research looks at the first entrepreneurial activity and it would make sense as their emphasis is towards experience. I also had different answers about the impact in value creation in my research with this striking illustration:

All this drives me to a second line of thinking:
– the importance of creativity: check #creativity.
– the importance of experience: I had a piece of research with strange results many years ago about serial entrepreneurs. The end result my be counterintuitive. Check #serial entrepreneur

I will not really conclude but say in the end it depends… except by mentioning Galenson‘s work about conceptual and experimental innovators: “Experimental innovators work by trial and error, and arrive at their major contributions gradually, late in life. In contrast, conceptual innovators make sudden breakthroughs by formulating new ideas, usually at an early age. […] Experimental innovators seek, and conceptual innovators find.” from Old Masters and Young Geniuses. This could be an answer to the authors’ question on the choice of VCs: they would be looking for conceptual innovators.

A major update : data about 700+ startups

I regularly compile data about startups, mostly when they file to go public, when I can use their IPO prospectus (typically S-1 or 424B4 documents on Nasdaq). Thanks to a rush of IPOs this year (despite the covid) but also by revisiting older filings thanks to Jay Ritter great database of 11000+ IPOs since 1975, I could recently increase my own (much smaller) database of cap tables to 716 former technology startups (from 600 startups last April). This is a 20% or so increase, so it is quite a major update. Here is the document of all individual cap. tables:
Equity List – Lebret – Nov2020

You may prefer to download the pdf. And before reading the rest of the post, you may be interested in the analysis of the 600 startups last April : Updated data in equity of 600 (former) startups.

I will not go into the details of the data analysis, which would no doubt be similar to the 600 startups of last April. You can find the new stats beginning page 729 of the pdf. The evolution of the figures by period of 5 years is striking. It undoubtedly shows in part the evolution of the importance of technology but also the influence of venture capital in growth strategies. For better or for worse as I said in my previous article and as Philippe Labouchère said very well in Le Temps: These mega-investments that distort reality (Ces méga-investissements qui déforment la réalité).

Don’t be misled by the drop in the 2015 period. These very young companies who filed to go public are mostly biotech companies which have sligthly different dynamics. The IT companies which will file in the next years will be interesting to analyze: we’ll see if the trend continues or collapses…

One final element. Out of the 716 companies, 274 have been acquired and 383 are still public. The average M&A value is $3B and the median is $600M (remember the statistics of startups are not gaussian but follow a power law, a kind of “winner takes all” situation). Here is the list of the main acquirers:

How Venture Capitalists Are Deforming Capitalism

This is the title of a great article from the not less great New Yorker, dated November 23, 2020 and written by Charles Duhigg:

How Venture Capitalists Are Deforming Capitalism,
Even the worst-run startup can beat competitors if investors prop it up. The V.C. firm Benchmark helped enable WeWork to make one wild mistake after another—hoping that its gamble would pay off before disaster struck.


Illustration by Golden Cosmos (from the New Yorker article)

I am infringing copyright here and hope the magazine and author will forgive me. But the illustration says so well what the author describes! Yes, for a few years now, venture capital has become a crazy money spending machine.

I already posted blog about VC crises as over time the activity as evolved. From frugal investors in technology in the 60s and particularly in the 70s (Apple, Microsoft,..) and 80s (Cisco, Sun, …) The internet “bubble” was not the first period of hubris, there was one in the early eighties with tons of PC clones. But the real hubris came with the social media. Today, startups raise hundreds of millions of dollars before going public and experience huge, huge losses even at IPO as you may want to check in my 600 startups analysis (and it will be probably even worse in my 700 startups analysis to come). Here are past articles:

September 2020: Theranos, the (not so)-Silicon Valley biggest scandal ever – https://www.startup-book.com/2020/09/12/theranos-the-not-so-silicon-valley-biggest-scandal-ever/

April 2016: Is the Venture Capital model broken? – https://www.startup-book.com/2016/04/26/is-the-venture-capital-model-broken/

January 2016: Is Silicon Valley crazy (again)? – https://www.startup-book.com/2016/01/28/is-silicon-valley-crazy-again/

January 2011: Is there something rotten in the kingdom of VC? –
https://www.startup-book.com/2011/01/27/is-there-something-rotten-in-the-kingdom-of-vc/

At this point read carefully what venture capital was according to the author of the article: From the start, venture capitalists have presented their profession as an elevated calling. They weren’t mere speculators—they were midwives to innovation. The first V.C. firms were designed to make money by identifying and supporting the most brilliant startup ideas, providing the funds and the strategic advice that daring entrepreneurs needed in order to prosper. For decades, such boasts were merited. Genentech, which helped invent synthetic insulin, in the nineteen-seventies, succeeded in large part because of the stewardship of the venture capitalist Tom Perkins, whose company, Kleiner Perkins, made an initial hundred-thousand-dollar investment. Perkins demanded a seat on Genentech’s board of directors, and then began spending one afternoon a week in the startup’s offices, scrutinizing spending reports and browbeating inexperienced executives. In subsequent years, Kleiner Perkins nurtured such tech startups as Amazon, Google, Sun Microsystems, and Compaq. When Perkins died, in 2016, at the age of eighty-four, an obituary in the Financial Times remembered him as “part of a new movement in finance that saw investors roll up their sleeves and play an active role in management.”

But some famous experts of innovation are quoted about the current situation:

Steve Blank: “I’ve watched the industry become a money-hungry mob. V.C.s today aren’t interested in the public good. They’re not interested in anything except optimizing their own profits and chasing the herd, and so they waste billions of dollars that could have gone to innovation that actually helps people.” and his answer to the crisis is quite strong: “The first time you see a venture capitalist prosecuted for failing to uphold their duty as a board member, you’re going to see Silicon Valley transform overnight. All it takes is one V.C. doing a perp walk and everyone gets the message—you’re responsible, you have a legal duty, and if you do things that are bad for society you’ll be called to account.”

Martin Kenney, the professor at the University of California, Davis, said, “Obama loved Silicon Valley and V.C.s, and Trump craved their approval.” He went on, “Regulators have been totally defanged from doing real investigations of venture-capital firms. I think people are finally waking up to the damage the tech industry and V.C.s can do, but it’s slow going.” Today’s V.C.s, “money-losing firms can continue operating and undercutting incumbents for far longer than previously.”

Josh Lerner, a professor at Harvard Business School: “Proclaiming founder loyalty is kind of expected now.”

A Harvard Business School professor, Nori Gerardo Lietz, noted that the document exposed WeWork’s “byzantine corporate structure, the continuing projected losses, the plethora of conflicts, the complete absence of any substantive corporate governance, and the uncommon ‘New Age’ parlance,” the S-1 was “misleading, and probably fraudulent.”

I will finish my post with a quote mentioned by Bruce Dunlevie, the partner from Benchmark who was one the WeWork boardmember, a task he did not handled perfectly even if not that badly. Nothing to add. “Power tends to corrupt, and absolute power corrupts absolutely.” Lord Acton and the rest of the quote (not mentioned in the article) is “Great men are almost always bad men…”

Covid-19 Startups : BioNTech and Moderna

Yesterday I posted about Airbnb IPO filing here and in a few weeks or months I will update my 600-startup cap. tables to 700. A major upgrade. In the mean time, even if I am not a specialist at all of biotechnology I study some startups of the field from time to time. You can check the tag #biotech for example or a post about Crispr startups. It would have been difficult not to notice recently two other startups which went public recently, Moderna in 2018 and BioNTech in 2019, because of Covid19. Look at their recent stock history when they annouced a vaccine against the virus:

Maybe have a quick look at their cap. table below but first some comments: Moderna had been founded in the Boston area in 2009 and BioNTech in Germany in 2008. Their revenues (and losses) were large at time of filing. A lot of venture capital (which owns 60% of both startups), many employees. Not young founders (46 and 60 at Moderna, 41, 43 and 64 at BioNTech). You can add any comment you want, if any…

In reality, these figures are not that different from those of the giants of the digital world in yesterday’s post, except one maybe, the founders’ age.