Frictionless Investments for Sophisticated Investors

Yesterday I asked a Silicon Valley angel investor what he thought of BitBox*.

According to AngelList, you are an investor in BitBox. is what I said.

Oh, he said. I’m sorry, I don’t remember what BitBox does. I must have thought they had a good team. AngelList makes it way too easy to invest in companies.

Apparently AngelList is the new Tinder, where you can flip around and make noncommittal investments from the comfort of your toilet seat.

AngelList’s frictionless investment experience reminds me of Robinhood, whose founders have been criticized for making trading *too* frictionless. After all, active trading generally leads to underperformance. But Robinhood’s founder says, Young people can afford to lose a few hundred dollars, that’s the equivalent of “Oh crap, I dropped my iPhone in the toilet.”

Robinhood’s progressive premise: If you are rich enough to afford an iPhone (and their app is iPhone-only), you can afford to lose all your money in the stock market.

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It’s the same rationale behind the SEC’s requirements for accredited investors: You must be rich enough to be able to lose a small fortune before you can be an angel investor.

If trading stocks on Robinhood is the equivalent of dropping your phone in the toilet, then I guess writing off an angel investment is the equivalent of, Oh crap, I dropped my Tesla Model S in the toilet.

Woops!

The proud new owner of this vehicle is an accredited investor
The owner of this vehicle is an accredited investor

*Company names have been changed.

Maybe You Shouldn’t Buy What You Know

The most popular stocks among young people: Amazon (AMZN), Apple (AAPL), Google (GOOG), Netflix (NFLX), GoPro (GPRO), Alibaba (BABA), Tesla (TSLA), Facebook (FB), LinkedIn (LNKD), Twitter (TWTR), Blackberry (BBRY). Trendy consumer tech stocks.

Stocks with Youngest Median Owners
Stocks with Youngest Median Owners

Old people are also buying what they know. That’s why they buy companies that sell life insurance and cancer drugs and sliced cheese.

Stocks with Oldest Median Owners
Stocks with Oldest Median Owners

This is what you have to look forward to as an old person. However, here are the stocks charted based on fair value (a combination of P/E, P/S, shareholder value, EBITDA/EV, FCF/EV).

value stocks

Each column represents the decile of a company’s valuation, and the numbers indicate the historical excess return by valuation for the last 50 years.

Old people are buying value stocks that historically beat the market. Young people are buying high-priced momentum stocks that are expected to underperform in the long run. Instead of following Mark Zuckerberg and Elon Musk, maybe kids should spend some time studying Warren Buffett.

See Also:
Why the Grandpa Portfolio will Crush the Millennial Portfolio –Millenial Invest

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Disclosure: I am long AAPL, BABA, GPRO.

The Disconnect Between Private and Public Company Valuations

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According to CB Insights, Dropbox has an irrational valuation because of a higher Price-to-Sales multiple than Box.

Why would you even compare the two? Box is a public company. Dropbox is a startup. A late-stage startup for sure, but the fact that it is still funded by private money puts it in a completely different asset class.

It’s irrational to value a private company using public-company metrics. By those measures, nearly every single consumer tech startup has a valuation of zero and their investors should go kill themselves.

Tech company finance looks something like this: Startups start up with venture money and are expected to deliver explosive growth. Many fail, some survive and continue to grow. One day, when the companies have grown into stable mature cash-flowers, they reward their venture investors by going public.

Public market valuations should reasonably be lower than private company valuations. After all, public investors are just cashing out the private investors who already rode out the exponential growth. That’s why it’s called an exit.

See Also:
The Dropbox Valuation Is Irrational –CB Insights

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Rich People Bitching about Bubbles

kpcb has women

I was having dinner at Kleiner-Perkins some weeks ago. It was an event for female engineers, hosted out of the goodness of their hearts, nothing to do with mitigating bad press from the Ellen Pao lawsuit, and KPCB is totally not sexist.

I asked a senior partner whether he was worried about overpriced startup valuations, given KPCB’s later-stage investments. How much upside could possibly remain? Maybe the prices could even fall before exit?

We’re not worried, he said. We have downside protection due to liquidation preferences.

What’s that?

Box is a good example. Coatue and TPG bought $150M worth of Box shares at a $2.4B valuation. Box went on to IPO at only $1.7B valuation. Coatue and TPG should have taken a loss, but no. Their term sheet included a ratchet, which gave the investors as many additional shares of common stock as needed to guarantee they would not lose money.

Coatue and TPG could have agreed to a valuation of a trillion. Who cares? The investment was upside-only*!

box ipo

This isn’t venture capital, this is a variable annuity. Allowing venture capital firms to self-value their investments is like inviting a bank to rate its own credit instruments.

Who makes up for the deficit if a company doesn’t actually exit at the magical made-up valuation?

We work through the cap table until all preferred shareholders are paid out. These are the people who put money into the company. The common-stock employees pick over whatever remains. Unfortunately, many startup employees end up with underwater stock options.

Employees aren’t even complaining about a tech bubble because they have catered lunches and on-site masseuses. Paper billionaires Evan Spiegel, Travis Kalanick, and Elizabeth Holmes are certainly not complaining about a bubble.

The ones bitching loudest about the bubble are the ones close enough to see the action, but not close enough to get invited to the party.

Sorry we didn’t invite you to the Sand Hill Exchange party round, Mark Cuban.

See Also:
How Preferred Stock Makes Employee Stock Less Valuable –StockOptionCounsel
Box Investors Make a Killing –BloombergView

*Okay fine, sometimes a billion-dollar company can completely implode, like Fab. And then nobody gets anything.

The State of Silicon Valley

scoble-shower-google-glass

Amazon loses $4B a year on shipping. That’s enough to pay for every single Uber ride in the last year. Amazon can’t win on retail alone, that’s why it’s throwing other shit at the wall like burner phones and talking doorstops.

Google Glass is a prophylactic ensuring you will not conceive a child cuz no one will get near you.

Google is struggling in a mobile world. Facebook is winning because it can track your identity better than Google.

Tesla is not an environmental car. It is an attempt to tell people that you can afford a $120,000 car.

The most important luxury brand is Apple. Luxury brands are able to go global faster because rich people all aspire to the same things.

Here are some iOS vs Android heat maps next to property price heat maps. Red areas show you where the iPhone users are. Green tells you where to find the less-fortunate.

iOS vs Android
Bay Area Housing prices
South Central is Android-first
Los Angeles
There’s a purple spot in Manhattan where people still use Blackberry. LoL
New York, NY

Reference:
Scott Galloway on the Four Horsemen: Amazon, Apple, Facebook, Google