Uncrunched

Seriously, you can set your calendar by posts about the tech bubble. Time machine back to April 2011 and you can watch the press about last year’s tech bubble, which I dubbed a “blubble”:

If you’re an early stage venture capitalist or angel investor there is no time like the present to declare a bubble, say valuations are out of control and predict the demise of the tech industry in the very near future. Since they’re in the business of buying low and selling high, any angle that suggests that the buy price should be even lower sounds great to them.

and

If there’s any evidence of said bubble all the press will eat it up.

This time it’s the press wringing their hands over the Instagram acquisition by Facebook. Nick Bilton at the NY Times even gets a Stanford business school professor to weigh in:

Professor Pfeffer said that through “the hideous recession” that America has suffered in the last several years, the Valley has applied increasingly incoherent valuations to companies.

“This is 1999 all over again, but this time, it’s gotten worse,” he said, referring to the last technology bubble to burst. “We’re back to companies throwing around funny money. The economic values don’t add up.”

He added: “These companies are simply being founded to be bought. With the exception of a select few, Silicon Valley has spawned no real companies over the past decade. Even now, as the value of eyeballs has gone down, people are buying concepts, not companies.”

I totally agree that whatever is happening right now is exactly like the late 90s, except not really at all. In my post a year ago and in my post next year, I’m sure, I wrote about how different things are. It’s all about public company valuations. P/E ratios in the 90’s were out of control. Today they’re extremely reasonable. From Chris Dixon:

Public tech companies: Anyone with a basic understanding of finance would have trouble arguing many large public tech companies are trading at “bubble valuations” – e.g. Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E). You could certainly debate other public tech stock valuations (there are a number of companies that recently IPOd that many reasonable people think are overvalued), but on a market-cap weighted average the tech sector is trading at a very reasonable 17 P/E.

In 2000 the world was driven by greed. No one bought into the valuations but they didn’t want to be the only guy on their block who didn’t make millions in the stock market. Today valuations are driven largely by profits.

Facebook’s acquisition of Instagram was driven by fear, not greed. It’s no different than when Yahoo tried to buy Facebook for a billion dollars seven years ago.

It’s about taking a competitor out at the knees before they have time to actually be a competitor.

That’s not a bubble. It’s just smart.

So when Bilton says directly “When this next bubble pops — and it will pop” and gets a source to say “This is 1999 all over again, but this time, it’s gotten worse,” I just shake my head.

Tune in again in April 2013 for the next installment of the blubble.

Swarms of micro-satellites are cool and all, but sometimes you just want to crack open a cold one. They say to only invest in what you know – and we know beer. I practically majored in beer in college.

Enter Churchkey Can Co., a new startup cofounded by Adrian Grenier (Entourage). They’ve paired a heck of a pilsner with a steel can that you open with an actual church key, that pointy thing you already have in your kitchen that you never quite knew what it was for.

The beer is amazing (they’re already selling it here in the Pacific Northwest and can’t keep it on the shelves), and the packaging is genius, combining a steel can (steel is recycled more often than aluminum) and the nostalgic feeling of old style packaging.

Watch the fun promotional video here.

More about this on TechCrunch. Look for it soon at bars and stores near you (a church key is included with every six pack).

For those wondering, the picture above is my partner MG Siegler lovingly cradling a can of Churchkey at a recent party in Seattle.

“While these arrests are a disappointment, TSA is committed to holding our employees to the highest standards.” – Randy Parsons, the head of TSA services at Los Angeles International Airport

Parsons is disappointed in the arrests. It’s too bad that he’s not also disappointed in the actual crime – TSA agents were smuggling drugs through the screening process.

At no point have I seen TSA agents being held to any kind of highest standard, either. 70% failure rates. Abuse of 4 years olds (that’s an article from today, by the way). Bribes. Theft.

I fly from Seattle to San Francisco a lot. TSA handles Seattle and it’s a mess. TSA agents are joking around, not paying attention, and get angry quickly. In San Francisco, where they use private security at a much lower cost, things are much more sane and much more professional.

It’s time the government got out of the business of abusing travelers and smuggling drugs through airports.

Business Insider published a follow up to my post yesterday on acqui-hires.

It’s a little bit snarky, which is fine because it’s just the writer trying to find an angle to add his own thoughts. But there’s an interesting part at the end where Nicholas Carlson says “Also, remember, Arrington is a VC now, so he has a reason to spread mistrust about the competition.”

That seems like an obviously true statement – that I’m a VC so I may be inclined to spread FUD about other VCs to get a competitive edge.

But it’s not the case at all. And that’s why I like being a VC so much in today’s world.

I’ve raised venture capital a few times now for startups going back to 2000, and I’ve seen scores of other deals from when I was a corporate attorney before that and more recently blogging at TechCrunch. The industry has definitely changed over those 17 years.

A decade ago there were few organized angel investors. You grabbed what you could from the ones you met but pretty quickly you were hitting Sand Hill Road and asking for a Series A round. Everyone wanted a certain firm and asked them first. If they passed you moved on to the next ones, but those firms knew you had already seen their more famous competitors just by the fact that you were there – if the top guys had invested you wouldn’t be. Everyone had the same lawyers, too, and the gossip flew pretty freely through those lawyers. Lots of emotion and jealousy pervaded the industry.

If a company was hot they got multiple term sheets and they could maybe accept two firms. Usually though they just picked one. Competition was fierce. VCs routinely trashed each other and trashed companies that they couldn’t get a piece of. It didn’t seem all that fun.

That’s not the world I live in today. There’s still fierce competition at the Series A round level, although I see firms being much more willing to work together than they were a few years ago. When Google took money from both Kleiner Perkins and Sequoia, for example, it was a major news story. Today those types of deals are way more common.

At the angel/seed level though we haven’t seen any competition at all really. It’s not that there aren’t competitors out there, but we’re not trying to keep them out of deals and they aren’t trying to keep us out of deals. Exactly the opposite.

A typical seed deal is a million or so dollars. We like to invest a small fraction of that in deals. If we’re the first to look at a company and commit we then spend a great deal of time pitching other investors to join. We also don’t price rounds or negotiate terms, so we look for a firm or angel that does that.

Most of our deals though are brought in from other firms. Something they really like and want to get us involved. Our “competitors” tend to invest the same amounts as us so they aren’t taking whole deals, either.

This usually holds true for really hot deals as well. If there’s more money on the table than the company wants or needs, we always advise them to try to find a way to let people in. On more than a handful of occasions we’ve offered to invest less money than we want to in order to get other investors in.

This isn’t just us being awesome. It’s also in our best interest. More allies is almost always better than fewer for a company (the only exception being the very occasional investor who’s a huge pain in the ass to entrepreneurs and who is quickly steered out of the valley).

You’ll probably never see a deal where we’re the only investors. We rely on our competitors to bring us deal flow and they rely on us to do the same.

In fact there sometimes may be too much cooperation among investors. In 2010 I wrote about the Bin 38 thing. One thing we always have to be careful about when investing as a group with others is not to try to coordinate on pricing or other terms. That’s a big reason why we don’t negotiate terms and simply invest or not, a binary decision.

So, there’s no one I’m trying to cleverly trash with that post yesterday. It’s simply an interesting topic that isn’t being reported on much by the tech press.

Inside baseball warning, but I like writing about the things being discussed that the press never really picks up on.

Acqui-hires, if you aren’t aware, are the acquisitions of startups by large companies (usually Facebook, Google and Twitter) that are made primarily for the teams, not the products.

Every few weeks there’s a press report of an acquisition of some startup or another along with a rumored acquisition price that’s quite low, sometimes less than the amount of venture capital invested in the company. Those deals usually, but not always, have equity grants to key founders and employees that are often a multiple of the acquision price. Example – a recent deal had a rumored acquisition price of around $2 million plus stock grants to a few key employees of $15 million.

I’ve been fascinated with acqui-hires for years now. The first one in recent history I know about was Parakey, acquired by Facebook in 2007 (I talked about that deal here). But they’ve proliferated fast since then. Google, Twitter and Facebook all have dedicated “corporate development” executives who work closely with human resources and exclusively look for these deals.

Huffington Post has a summary of some of the acqui-hires over the years. Additional thoughts from me over the years here and here.

Lots of people (me included) think acqui-hires are just fine. It can be a last refuge of a dying startup with a star team, for example. And since these startups have few other options, investors are usually not in a worse position than they’d be if the company simply went out of business.

Other VCs aren’t as thrilled. Their counter argument (from a previous post):

Investors see themselves as being taken advantage of, providing capital for founders to essentially buff up their resume to get their dream job. When a company is acquired, they say, the value of stock grants should be considered acquisition value and divided up among all stockholders. If a founder leaves stockholders behind to take a lucrative side deal, they’re not acting ethically.

They haven’t been thrilled for years now, but something’s starting to change. There have been Bin 38-like whispers of some investors acting to fight back on these deals. A lawyer I spoke with says there are a variety of causes of action in an acqui-hire deal, all centered around the notion that there’s a lot of money going to some shareholders (founders/employees) but not others (investors). Specifically, the long standing notion of equal treatment of shareholders codified in California, Delaware and most other state corporations codes.

If deals are specifically being architected to give key employees very large payouts and investors very little, there are probably fraud, breach of fiduciary duty and other causes of action available to shareholders.

The cause of action is relatively straightforward – the deal as a whole would be considered fraudulent based on the fact that the team’s value is based largely on the fact that it has become a cohesive whole on the shareholder’s dime, and is worth far more as a group than the aggregate of the individuals.

No investor in her right mind would bring such an action, of course, because of the reputational fallout from doing so. I have heard of a couple of threatened and settled lawsuits, though, that never became public.

What’s really pissing off investors are the stories that get back to them. Statements made by high level executives like “fuck the investors, there’s nothing they can do” sound fine in a closed door meeting with an entrepreneur. It sounds less defensible in a deposition that becomes public.

I doubt we’ll see much of that, though, given the reputational issues I brought up above as well as the fact that most investors honestly aren’t angered by these deals.

But what I do believe we’ll start to see are clauses being added to investment contracts that are designed to change these deals. Specifically these clauses would force all deal consideration around a deal – including stock options and stock grants to employees – to be pooled and distributed pro rata among all shareholders.

This would likely kill many of these acqui-hire deals, since the stock grant portion of the deal is a compensation expense to companies. That means the government is paying for a sizable chunk of these acquisitions. Any attempt to pool the consideration and distribute away from employees would not only suck for employees, it would no longer be a tax expense for companies. That would make these deals some 50% more expensive to the buyers. Obviously employees wouldn’t be thrilled to lose most of that compensation to investors, either.

Ultimately the market will decide if these clauses stick, but when there’s a downturn (and there’s always a downturn around the corner) onerous clauses often find their way into deals, and can eventually become “standard.”

We would never ask for a clause like this at CrunchFund, and would counsel our companies only to consider it as a last resort. Additionally we would often counsel companies we’ve invested to take these types of acqui-hire deals when offered, if it’s in their best interest.

But in the meantime, it would probably be a good idea for the buyers out there – specifically Facebook, Google and Twitter – to consider toning down the anti-investor rhetoric in these meetings. They’re injecting a lot of emotion into a difficult issue, and that doesn’t help anyone in the long run.

The notion of legalizing gay marriage is working its way steadily through the federal courts and, so far so good. The courts continue to like the idea of ending discrimination against homosexuals under the same constitutional clauses that helped the civil rights movement in the last century.

You’d think the various states would just sit still for a while until the Supreme Court has its say on the matter. But no. North Carolina, which I’m guessing is just north of that other ridiculous state that I wrote about repeatedly in 2009, is going to jump in anyway.

On May 8 North Carolina voters will be asked to vote on a constitutional amendment banning same sex marriages. The amendment would read in part “Marriage between one man and one woman is the only domestic legal union that shall be valid or recognized in this State.”

Not to bring up the good ol’ days of southern glory, but you’d think that just this one time these people from the Carolinas would hit the pause button before doing something that will justify all the jokes.

This is the state, after all, that had a constitutional ban on mixed race marriages until…1971. In my humble opinion, citizens a hundred years from now will look back at these constitutional amendments banning same sex marriages and have a very similar icky feeling to the one that you will have reading the below:

All marriages between a white person and a negro, or between a white person of negro descent to the third generation inclusive, are hereby forever prohibited.

This is largely a party issue, although it shouldn’t be. The Democrats have as much to be ashamed of here as the Republicans (Clinton signed the 1996 Defense of Marriage Act).

We can do better. Imagine how you’d feel if someone told you that you couldn’t marry because you’re different than they are. This is exactly wrong.

News broke yesterday about the big round of financing raised by Silicon Valley based Skybox Imaging. CrunchFund participated in that round.

This is about as far from your typical TechCrunch-covered startup as you can get. It’s not a quirky new online business model or social application that may or may not take off. They’re building real satellites and they’re getting ready to launch them into space.

Why do we like Skybox so much?

Because they’re building a desperately needed imaging platform for a new generation of business and other applications. To put a satellite into space costs hundreds of millions of dollars today. And just one satellite in a network isn’t all that interesting. GPS, for example, uses more than 30 satellites.

To create a useful network of imaging satellites for near real time applications you need dozens of satellites in orbit and sharing information. That’s cost prohibitive for all but the most powerful world governments.

Unless you find a way to get an orders of magnitude decrease in cost.

If a company was able to do that, and put a satellite into space at a small fraction of the current cost, they’d likely be able to lock down a number of high profile customers for a variety of previously cost-prohibitive applications. Confidentiality agreements and U.S. export regulations might prohibit that company from disclosing much, or any, of that information.

But investors would obviously have access to that information. You can draw your own conclusions as to why the company is hiring big data engineers in droves, and why Canaan Partners, Norwest Venture Partners, Khosla Ventures, Bessemer Venture Partners and CrunchFund might want to put some $90+ million into that startup.

That’s why.

I was cruising around Facebook one day a couple of months ago and came across photographer Richard Wood via a mutual friend, Kat Armstrong.

Richard photographs events and weddings for hire (he’s a regular in the Seattle tech scene), but he also creates his own art with other photos, and some of them are spectacular. His website is here (click on “categories” to see some of his cityscapes and other non-people photos).

I bought a print of the photo above from him to go on a previously blank wall (actually, it’s 39 different photos compiled). The print is massive – six feet long – and is perfect for the room because the other wall is floor to ceiling windows looking out at trees. The last thing I wanted on the inside wall was another nature scene. And Seattle, especially at night, is striking.

You can contact Richard at kapchur.us or his facebook page (linked above) if you want to get one of his prints. Or hire him for a tech event. He does amazing work.

Some of you may have read Sarah Lacy’s post today stating that I’m no longer on the board of Pando Daily.

This wasn’t a complete surprise to me, the company notified me last week that they weren’t happy that I and MG Siegler (my partner at CrunchFund) were going to speak at TechCrunch Disrupt this coming May.

Part of the reason that I’m speaking at Disrupt is that I have a contractual commitment to do so as part of my break with them last year, which Sarah knew about before our involvement in Pando. But MG and I are also speaking there because we still love TechCrunch. And we both speak at many other conferences as well.

I’m thoroughly confused about how and why this happened. Obviously much of the communication I’ve had with the company the last week is private and confidential. I will share this email that I sent to Sarah this morning, though:

Where exactly do we stand? Last week Andrew said there was no way for us to continue to be involved if I (and MG?) speak at Disrupt. Later there was talk of a need for an apology to make things right. I’m not sure where your head is at Sarah and there’s no rush from our end, but I’d like to settle things eventually. We’ll do what’s right for the startup.

I still think the world of the Pando Daily team, which includes many ex-TechCrunchers (here’s what I wrote when they launched). I wish them the best and I look forward to continue reading the site.

Ultimately none of this matters. A startup is a stressful thing and entrepreneurs need to make quick strategic decisions on how to move forward in an ever evolving environment. Even when I’m being thrown out, I support the entrepreneur. If Sarah feels that they’re better off without our involvement, I support her completely. Our friendship goes back years and years. It can, I hope, withstand this hiccup.

We used to see this a lot with MySpace hires, where new execs would come on board having never used the product.

I think Twitter’s new PR Chief Gabriel Stricker is a great PR exec from my past interactions with him. But the man went through the entire interview process without ever actually having sent a tweet (here’s his account)?

From Reuters: “Former Google spokesman Gabriel Stricker is moving to Twitter to lead its communications team, he announced Wednesday via his first-ever tweet on @gabrielstricker.”

Huh. That would have been a nonstarter for me.

Update: Someone sent me a message saying Gabriel used to have a private Twitter account, so the Reuters story isn’t accurate.