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Silicon Valley Stock Exchange and the Saints of Wall Street

A week ago, the news of the Long Term Stock Exchange (LTSE) backed by some of the biggest names in Silicon Valley emerged. The Elites in the valley, including
Marc Andreessen, Reid Hoffman and Peter Thiel have joined hands to set up a stock exchange where firms do not have to worry about “Short Termism”. It is seen as the tech world’s open war against Wall Street’s modus operandi.

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Some hail the move as a masterstroke. The features of the LTSE make it more attractive for investors who stick around longer with a firm. Voting rights are directly proportional to how long an investor held a firm’s stocks. But this is also a double edged sword as it makes founding teams too powerful. It could make bubbles bigger, and wave riders could get a smoother ride to exit.

Many questions come to mind when I think about where this could take us. Let us explore each one of them.

  1. Recent disasters of Uber and Lyfts – is Wall street better at identifying good business models?
  2. How long can patient capital be, errrr, patient?
  3. Does Wall Street need to be more tolerant of Visionary Founders?
  4. Growth vs Profitability conundrum – Won’t LTSE make profitability and a good business model rarer?
  5. Creation of monopoly – Good way to make money for businesses and investors? But what about the consumer?

Uber’s IPO earlier this month is arguably the worst opening ever as investors lost $650 Million on the first day. This also happened with Lyft and the stock hasn’t recovered yet. Analysts claim that the ride hailing business model is broken. Softbank’s stocks has taken a beating since then. Would LTSE have minimised the losses that Softbank made since the Uber IPO?

However, with investments (of ~25 Billion) in Ola in India, and Grab in South East Asia, SoftBank’s fund controls 90% of the ride hailing market in the world. One of them (Wall street or Softbank) is definitely wrong about the market and the business models in this space. Is LTSE needed to bridge this gap in perception of business models?

The question that immediately followed was, how long can Patient capital be patient? Early stage investors go largely with gut instincts, where as later stage and public market investors are generally more data driven. If all data points to continued losses (Uber’s Q4 2018 EBITDA loss was at $842 Million), should analysts still give the firm a thumbs up based on the market potential of the firm?

LTSE in this scenario could make Wall Street look good, if the intention was to stay long despite continued losses.

The other side of the argument is also valid. Markets have misjudged visionary founders. Michael Dell took his firm private at ~$25 Billion in 2013 and led the transformation of his firm. The firm has re-positioned itself, and it’s estimated valuation today is ~$70 Billion. When Tesla had pressure from the markets, Elon Musk, took to twitter and spoke about taking the firm private – and of course got into trouble with the regulators for doing so.

If LTSE went live, founders like Dell and Musk could operate in the public market more comfortably.

If LTSE went live, firms like UBER could keep growing and take more of the market, without having to demonstrate a sound business model underneath.

One of the approaches that private investors like to see is “Going for Growth”

“If your growth plan doesn’t scare me, I do not want to invest in you” – That’s another famous VC one liner.

This approach has given rise to centralised tech monopoly over the years. Google, Facebook, Amazon, Uber are all leaders in their market segment. If LTSE backed them with public money, they have to worry less about profitability, if at all. They can continue with growth and their market conquest.

As an investor who is just looking for an exit, I would love this approach. But as a consumer, who cares about accountability and healthy competition, this is definitely not the way forward. The “Winner takes all” approach has made tech look like the new banking.

LTSE can be a boon to some visionary founders. If it had been announced during times of low liquidity in the market, it would have come across as a genuine attempt by proven Silicon Valley elites. It is coming at a time when market is rich with cash, and it feels like LTSE will make the bubble bigger, and the fall harder.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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Innovation Capital, monzo, silicon valley, tandem, unicorns, venture capital

Unravelling the Unicorn Madness – as the Silicon Valley bug bites London

A Unicorn is a tech startup that has grown past $1 Billion in valuation. The term “Unicorn” to refer to these firms was first coined by Aileen Lee, a Silicon Valley investor, in 2013. Since then the count of Unicorns has increased to about 300 at the start of the year. Silicon Valley has boasted 9 of the 29 Fintech Unicorns across the world.

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This week, the news on the streets is that London would go past Silicon Valley in the Fintech Unicorns tally. London already has 7, and there are a good few companies in the pipeline raising funding to get past Silicon Valley’s 9. Let us look at the irrational exuberance of the London Fintech market and the funding it received.

London received 39% of European Venture Capital funding. The revenues of Fintech firms in London increased from $100 Million to about $230 Million in the last 12 months. Fintech in London is also the fastest growing job sector. Monzo and Tandem got headlines earlier this week due to their new funding rounds. Monzo is receiving capital from Y Combinator and a few other Silicon Valley investors, and Tandem has closed an £80 Million funding round.

However, this is just how growth has manifested itself. There are some fundamental changes to the Venture capital mindset that has caused this Unicorn madness. There are abundant sources of funding these days. The number of platforms that a tech startup can leverage to get funding is increasing on daily basis.

Incubator and accelerator programs inspired by the successes of Y Combinator, Seedcamp etc., are numerous. There are several entrepreneurs who have exited and started to give back to budding start ups as Angels. This used to be the case in Silicon Valley, and London’s entrepreneurs are no different. Over the last 12 months, I have come across atleast 20 firms that have received angel funding from founders of more established or exited tech firms.

Family Offices and even Pension funds these days make direct investments into the tech startup world. Many of them shy away from traditional Venture capital model due to the fees involved.

That has increased the flow of capital directly into private tech firms. Also, the size of late stage funds like Softbank’s fund, and Sequioa’s $8 Billion fund means, firms are adequately funded at a later stage too.

If all these options weren’t enough, in the UK, we have the EIS/SEIS schemes that offer very attractive tax benefits for investors into tech startups. Most HNIs and UHNIs are keen to ensure they utilize these tax schemes. Crowdfunding platforms help, and more recently, the ICO and STO methods of raising capital globally have had their effect as well.

Apart from these financing options, the monopoly that some of the Silicon Valley start ups have taken in their markets, is now used as a model of growth. Once the product market fit is identified, firms these days throw money at growth – crazy growth. This results in market dominance, and that itself becomes the barrier to entry for competitors.

Gone are the days where technology, business models, and even operational excellence differentiated the great from the good.

This growth often means, firms have no respect for operational excellence, or very little intent on achieving a viable business model. They only focus on growing fast, raising more at higher valuations and achieving a Unicorn status. Even VCs these days are judged based on the Unicorns in their portfolios.

This growth at any cost and irrational valuation models had caused the dot com bubble to burst about 20 years ago. And this is definitely not another “the recession is coming” post. But it is important to understand that Unicorn status doesn’t mean much anymore. For an early stage angel investor, an increase in valuation from say $2 Million pounds (when they invest) to when the firm hits $1 Billion in valuation, makes a big difference. But in the broad scheme of things, this is just an artificially created tag often used for branding.

Investors and firms riding this wave of irrational exuberance need to time their exit right. If the correction blindsides them, it may be another financial crisis. It’s sad that London’s Fintech has gone down this path that Silicon Valley firms have traveled for years. It’s superficial and doesn’t feel right.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).