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So, It Seems Like That Andreesen Dude Might Actually Know What He's Talking About, But I'll Still Spill His Secrets

Reggie Middleton's picture




 

I got into a Twitter debate with Marc Andreesen of Netscape (the inventor of the commercial web browser) and Andreesen Horowitz (the VC fund that financed Facebook, Twitter, Skype & Zynga) fame.

He spit out what was mostly common sense, yet still flew in the face of what is taught in school, most text books and by most B school teachers. Here's how it went down, first ten tweets are from Marc, the rest are from me or my followers...

Here's where I chimed in and started spilling the VC secret sauce beans.

When entrepeneurs get all happy because they're recieving what thier VC said was an $8 million valuation for their Series A found, of which they're giving up 20% for $1.6M (gross expenses), they are naively comparing this to the dollars recieved in a common stock financing. This is fallacious. The control premiums, dividend claims and liquidation preferences often built into the preferred offerings really bring the economic valuation way down. If anyone doesn't believe me, ask their VC to take common founders stock instead of preferred on VC steroids at the quoted valuation. Get back to me with those answers, I'll sit here and wait. 

Selling overpriced, negative real rate, Fed pumped up paper certificates in liue of cold hard cash basically does the same "price inflation thing" in the public markets. Now I know Marc invested in Facebook and made a ton of money, but the valuation that FB went to market at was simply a joke, see my mucho analytical rants - To wit:

pre-IPO - Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!

at the IPO - The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1 as well as The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

and post-IPO - On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available... as well as...

Now, that I've established how overvalued FB was (and how much money Marc made for his LPs), take a look at how much money FB really pays for a company like Whatsapp when it says it pays $19B...

I wrote on my blog...  The Man Who Correctly Anticipated Facebook's IPO Value Knows Why Whatsapp Was Purchased

So many people can't differentiate the difference between what amounts to a structural cost, or effectively a disguised fixed expense (like what is now much of Apple's marketing and sales expense) and true business investment and reinvestment (which is what you have seen in Google with YouTube, Android, Grand Central, Glass, Driverless cars, Fiber, balloons and drones). The academic use of DCF simply exacerbates this problem by compounding the smeared differences. 

Self expanatory...

Garbage in, garbage out! No?

To put it more verbosely - Most Accurate Apple Analysis Ever Pt 2, The Only Investor Accurately Calling To Short Apple Tells What's Next

Self explanatory...

And this goes back to that MBA education thing. Here's some more on the topic... 

Reggie Middleton Illustrates Pitfalls of American Education Using His 5 yr Old Daughter

  • How To Profit From The Impending Bursting Of The ...

    boombustblog.com/reggie.../6260-how-to-profit-from-the-impending-b...

    Jan 7, 2013 - Many do not think of their education as an actual investment, but if you put .... Academia is primarily interested in the first, Reggie Middleton is ...

    You +1'd this

  • How To Profit From The Impending Bursting Of The ...

    boombustblog.com/reggie.../6258-how-to-profit-from-the-impending-b...

    Jan 3, 2013 - You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 .... Latest from Reggie Middleton.

    You +1'd this

  • Calculate The Value & ROI Of Your College Education Now ...

    boombustblog.com/reggie.../6284-calculate-the-value-roi-of-your-colleg...

    Feb 12, 2013 - This is the 4th installment in the educationbubble series. This piece gets down to the ... About Knowledge How: College and University Education Valuation Software ..... By Reggie Middleton; Again, The Sell Side Analysts .

  • Which all brings us back to 
  • This debate all stemmed from my due diligence in deciding whether to approach venture capital firms for my UltraCoin "smart contract" startup. Since I plan to disintermediate the banking system, wholesale, I thought I better get some additional capital lined up. 

    That is a story in and of itself. I went to the crowdsourcing and Bitcoin community, and they really weren't feeling me. I then turned to my natural constituency, clients from my blog and of course we found Nirvana. 

    The board and the team that I'm building is outrageous, and I'm quite tempted to spill the beans right here. Alas, it's not quite time yet. As Marc said, its about... Who are the people, what are the products, and how big is the market. Well here 'ya go. 

    Contract and IP attorneys (all in one person) with over 15 years experience doing both!

    My team of financial analysts whom I've worked with for 7 years,

    The product - outrageous ZeroTrust, no counterparty risk, no credit risk, peer to peer financial asset trading with near real time settlement.

    A board of advisors containing some of the most successful people in politics, finance and technology!!!

    And how big is the market? Well...

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    Thu, 04/17/2014 - 20:32 | 4671496 MayIMommaDogFac...
    MayIMommaDogFace2theBananaPatch's picture

    Reggie is a trip.

    Thu, 04/17/2014 - 20:28 | 4671488 savant
    savant's picture

    "We need more entrepreneurs who post video montages of themselves with their shirts off...claiming that they are Nostradamus." <--Said nobody ever

    Thu, 04/17/2014 - 17:45 | 4670976 madtechnician
    madtechnician's picture

    Another posting by Reggie which will no doubt fly well above the heads of the ZH Flat Earth Society - Who are right now crawling down into their damp tin foil lined shelters , just getting ready to open up another old rusty can of food they bought from their favorite prepper web site , whilst fondling a few old silver coins in the candle light , waiting for the grid & internet to be shut down , still telling themselfs that if you cannot hold it in your hand then it cannot be real. Respect to you Reggie for still trying to educate these muppets.

    Thu, 04/17/2014 - 15:52 | 4670649 delivered
    delivered's picture

    Somewhere, eventually, and in the end, a company must produce profits and cashflow. Back in the dot.com era, the smoke and mirrors lasted about 5 to 6 years before this concept hit home (from about mid 1990's to early 2000). Today, the concept of real profits and real cash flow have taken second position to easy/cheap money. That is, the "potential" of a concept/business is given more consideration than the actual results. This is a very common occurence in bull markets where the future tends to be emphasized and the dreaded "non GAAP" financial statements or proformas are relied on more than ever. Just ask yourself how prevelant the use of non-GAAP financial statements or proformas are used by all types of companies in today's market (especially techs). You'll see it everywhere and it has reached a point where GAAP based financial statements are of little importance (a scary trend indeed). So remember this key concept about accountants/financial types when asked one simple question - What does 2+2 equal? During periods of high levels of optimism, the answer is "hope" (i.e., what do you hope it is). Then as optimism fades and is replaced by realism, the answer is "want it to be". Then as realism fades to survival, the answer is "need to be". And then as survival gives way to doing anything one can to keep a busineses open (and potentially crossing the line with fraud), the answer is "has to be". My point is that valuing a business on just potential and hope is a sure fire way to quickly lose money. At somepoint, you must get the correct answer from asking the simplest of questions which balances hope and potential with reality, competition, system shocks, etc., etc., etc.

    But to one of the key concepts of this article, I would agree that a business starts with three basic concepts. What's the product, what's the market potential, and what's the management team? This is the fundamental starting point of all business plans. But I would also caution that without proper execution, especially on the marketing and operational side of life, a great business idea will vanish as quickly as a fart in the wind. The masses are often blinded by MSM with highlighting the successes of the likes of FB, Twitter, and others. What people don't realize is just how many start-up businesses fail within the first three years and are thrown out with the trash. So while potential (with the team, product, and market size) is great to have, execution is essential to have.

    Also, I would like to confirm RM's point on securing capital in early stage businesses with preferred equity. Preferred equity is vastly different than common equity given the board/voting control features usually established, liquidation preferences, anti-dilution features, first money out options, tag along and drag along rights, dividends, etc., etc., etc. Anyone who thinks their common equity has the same value as preferred equity is sorely mistaken. In fact, this is often one of the primary reasons why common stock options, when granted, can be valued at a rate of 20 to 40% below the preferred equity share prices. Not even comparing apples to oranges here (rather apples to grapefruits).

    Overall, a very good article by RM as using DCF methods can be limiting when valuing certain types of businesses, especially when the potential earnings are so far in the future. Just ask the biotechs how this works as these companies usually take 10 years and a billion dollars to get products to makret. But again and in the end, real profits and cash flows must be generated at some point to support valuing a business. And if the profits are going to take longer to produce then when valuing a business, two other questions must be asked. What financial resources are available to the company to make it to being cash flow positive? And maybe more importantly, just how significant are the competitive barriers to enter the space? Let's face it, the longer it takes will require much higher levels of capitalization and very strong barriers to entry (as there's nothing worse than proving the market potential only to have a major player enter and take the space by throwing a better management team and better products at a very large market). Maybe the 3D printing space will bare this out as once the likes of HP enter, the game will certainly change for the early leaders.

    Thu, 04/17/2014 - 14:58 | 4670419 Zero Govt
    Zero Govt's picture

    '..a disguised fixed expense (like what is now much of Apple's marketing and sales expense) and true business investment and reinvestment (which is what you have seen in Google with YouTube, Android, Grand Central, Glass, Driverless cars, Fiber, balloons and drones).'

    All of Goofy's investments are profitless (expensively pointless)

    Reggie, ever the accountant (moron who can't do maths), charts his own demise.. bye bye Rooster

    Thu, 04/17/2014 - 15:14 | 4670486 Reggie Middleton
    Reggie Middleton's picture

    Right! I bet you wish you were "profitless" like YouTube and Android, no? Get a clue and troll elsewhere!

    Fri, 04/18/2014 - 20:26 | 4674492 Zero Govt
    Zero Govt's picture

    Reggie dear, Apple is the most profitable company ever ...Google's accounts, which as you know but as you're clear as crystal on Goofy's Goon Squad payroll won't spill the true horrors of their losses, nor their methodology for hiding all the bleeding red ink

    you are a professional accountant afterall.. initials C.R.O.N.E.

    you'll do anything for money, the most Enron-like professiona ever (close call with lawyers i must admit!)

     

    Thu, 04/17/2014 - 14:26 | 4670276 0b1knob
    0b1knob's picture

    "Marc Andreesen of Netscape (the inventor of the commercial web browser)"

    Netscape was derived (with permission) from the Mosaic browser.  So by "inventor" you mean he basically renamed it.

    Thu, 04/17/2014 - 15:21 | 4670514 Reggie Middleton
    Reggie Middleton's picture

    I said "commercial" browser. How many companies did you know that ran Mosaic? Netscape was the first commercial implementation of the browser (and the webserver, for that matter) that I know of.

    Thu, 04/17/2014 - 15:17 | 4670498 delivered
    delivered's picture

    Inventor is a very hazy/loose concept. McDonalds founder Ray Kroc I believe saw the concept for the drive through fast food idea and simply saw its potential before everyone else. Give him some credit but certainly wasn't the real inventor. Same goes for the use of icons on the computer screen as I believe Xerox actually invented this (but didn't capture the potential). So Gates at Microsoft and Jobs at Apple really leveraged this idea (and everyone knows how these stories ended). The concept of inventor versus exploiter is often very thin as it is usually the exploiter that makes out in the end. Just ask all of our friendly politicians who have really figured out how to exploit the masses. Better yet, look to Wall Street as then certainly didn't invent the Ponzi skeem but they sure know how to exploit it.

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