Pump And Dump VC Style: Kleiner Perkins’ Gambit To Shear The IPO Sheep

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

That was quick! Last November Snapchat was valued at $2 billion in the private VC market; by Q1 that had risen to $7 billion; and yesterday it soared to $10 billion. Gaining $8 billion in market value in just nine months is quite a feat under any circumstance - but that’s especially notable if you’re are a company with no profits, no revenues and no business model.

And, yes, that’s not to mention the “product”, either.  Apparently, Snapchat’s 100 million teenage and college users mostly swap pics of their private parts which vanish after 15 seconds - or so they think. In that respect, Snapchat’s business challenge may not be lack of “demand”, but whether its exhibitionist “customers” will be copasetic with sharing their 15 seconds of fame with advertisers.

Time will tell, unfortunately. In the meantime, however, its evident that Snapchat’s spectacular valuation rise is not about how to discount the potential value stream from monetizing dirty pictures. Instead, it reflects the crazy dynamics of late stage financial bubbles. And on that score, Wolf Richter has hit the nail squarely on the head, as usual.

As he explains in today’s post, Snapchat’s spectacular valuation run-up is just a new and more sophisticated form of “pump and dump”. In this instance, the venture capital firms involved have apparently invested trivial amounts of chump change in the two recent funding rounds in order to peg dramatically higher paper valuations in preparation for an imminent IPO. In numeric terms they have invested less than $30 million since last November, meaning that they have been able to leverage an $8 billion valuation gain at a ratio of 266:1.

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

To be sure, Wall Street has sponsored such market-rigging ploys since time immemorial. However, the true evil of rampant central bank money printing is that it vastly enables and amplifies such speculative ventures, while at the same time eviscerating the natural checks and balances against speculative manias which are embedded in honest financial markets.

Specifically, zero money market rates (ZIRP) for 68 months running have unleashed carry trade gambling in the financial markets like never before. That’s because professional Wall Street speculators can acquire risk assets and “fund” them on high leverage— through margin accounts, options trades or specifically crafted “structured finance” deals from their prime brokers—- at tiny interest rates. The resulting “spread” is bubblicious—especially when the Fed’s implicit “put” under the stock averages fuels a rambunctious “buy the dips” psychology among traders.

Under those circumstances—which are rampant at the moment—a gambler’s wildest dream comes true. The carry cost side of a leveraged gamble is pinned at close to zero by the solemn commitment of the central bank, while the asset value side of the trade ratchets ever higher owing to the endless bid of the dip buyers.

And its actually even better. The obvious effect of the Fed’s incessant market coddling since at least the days of the LTCM bailout in September 1998, but especially since Bernanke went all-in September 2008, is that the natural short interest in the stock market has been punished, bloodied, and destroyed. Consequently, downside insurance on speculative portfolios (i.e. puts on the S&P 500) is dirt cheap, meaning aggressive traders can protect themselves against an unexpected (and unlikely) plunge in the broad market while barely denting their gains from high flying momo stocks in favored sectors like social media or whatever happens to be the flavor of the week.

Needless to say, cheap downside insurance only enlarges and strengthens the bid for high flyers—-a dynamic that works wonders in the IPO market, especially. Accordingly, lunatic valuations have once again flourished in the new issues market as if its 1999-2000 all over again.

And like then, the resulting devil’s workshop environment incentivizes the smart money to concoct schemes to exploit the bubble—like yesterday’s 266:1 leveraging of Snapchat’s valuation. That this will end in tears for the “slow money” IPO sheep who show up for the shearing, goes without saying.

What needs remark, however, is the enormous damage that these kinds of financial deformations and distortions do to the real economy and the capitalist machinery of invention and enterprise. By all the historic evidence, Kleiner Perkins has been one of the greatest incubators of technological progress and business innovation in modern times.  Surely it has better things to do, therefore, than run a  crude 1920s style pump and dump scheme that will contribute nothing to society except painful losses for the retail investors who take the bait.

So here’s the thing. Free central bank money corrupts free markets absolutely—-that should be more than evident by now. But owing to the dense economic fog on her Keynesian windshield, Janet Yellen and her band on money printers in the Eccles Building remain clueless as to the  monumental corruption that is being injected into financial markets by Fed policy.

Would that Yellen should at least read Wolf Richter’s excellent post on the present moment’s most spectacular example of that. Better still, perhaps a trip back to San Francisco  where bubble opulence ricochets thru the entire economy would be in order. She might discover that the median housing price has soared to more than $1 million; and that none of the inhabitants of the “labor market” that she is so vainly attempting to revive even qualifies for a standard mortgage.

By Wolf Richter At Wolf Street

How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!

It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off.

But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.

But the investment was an ingenious move.

For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.

Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.

To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.

Inflating Snapchat’s valuation by $8 billion with a few millions dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.

The hope is that the IPO market remains “healthy” long enough for investors to be able to unload hundreds of these companies at crazy valuations. The hype surrounding these valuations is creating more enthusiasm about IPOs in a self-reinforcing loop. The hope is also that the broader stock market continues to soar so that potential acquirers can print more overvalued shares to acquire more overvalued startups so that the exists can come about. Under the motto: after us the deluge.

The deluge will wash over retail investors.

While it’s possible that one or the other startup might become the next Facebook or Google, there are only a few Facebooks and Googles, but there are many startups whose business model and permanent lack of profits will eventually bring them down to reality, either in the portfolios of retail investors, or as a write-off by the acquirers, whose shares are also stuffed into the nest eggs of retail investors. Along the way, Wall Street extracts fees from all directions. That’s the Wall Street money transfer machine. It smells like a rose when all stocks go up, but when the tide turns…. OK, that won’t ever happen.

With fundamentals and economic realities having become totally irrelevant these days, economists are reassigned to tout stocks. Read…. Economist: Stocks No Longer Risky, Will Go Up ‘Steadily’

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Dewey Cheatum Howe's picture

Saves the DOD contract officer the time of writing up an IDC contract and putting it up for bid.... Just like with facebook.

_disengage_'s picture

Not exactly the same thing this post alludes to, but same assholes behind them both:

In March 2011, Ntrepid won a $2.76 million contract from the U.S. military for "online persona management."[2] The contract was for the creation of technology which would allow for blogging activities on websites, exclusively outside of the United States, to "counter violent extremist and enemy propaganda."[6][8] It would allow for one operator to anonymously create and control up to ten personas from one computer.[3] Each persona would have a background, history, supporting details, and cyber presence that is consistent from a technical, cultural, and geographic standpoint.[9]

The project is overseen by U.S. Central Command (Centcom), whose spokesman Commander Bill Speaks stated that the operation would be carried out in Arabic, Farsi, and Urdu.[2]

The project is thought to be connected with Operation Earnest Voice.[2]


Save_America1st's picture

in the end...one of these days....they'll all just be a bunch of CYNK's

0b1knob's picture

< Venture Capital

< Viet Cong



What is the first thing to pop into your mind when you see the initials VC?   Its a generational thing.

The Phallic Crusader's picture

Leo Noah Katz and David Kravitz are gonna get paid, son!

Squid Viscous's picture

wait - Lenny's dad created another talent-less media sensation? 

blu's picture

My only regret in life was having invented the Internet.


Atomizer's picture

Why? Can you imagine life without it? Toying with the US propaganda stories would be mundane. Life without the interweb is like a cat performance without YouTube. 


NoDebt's picture

No offense to the Tylers, but the internet ruined everything.  You think outsourcing things half way around the globe could have been accomplished so easily without it?  You think the NSA, CIA and others could have such vast powers to spy on everyone without it?  

And what did you get in return?  A spiffy iPhone, all the free porn you can watch and a rapidly declining standard of living for you and every generation that follows you.

That it was invented by the government (DOD) should come as a surprise to no one.

All the high-minded hope that the internet would lend a voice to the voiceless and democratize everything for the greater good was a load of fucking horse shit.  It's the greatest tool ever invented to enslave everyone on the planet to an ever smaller group of oligarchs.  Fuck the internet.

logicalman's picture

Pretty much any technology can be used for the benefit of everyone, or a few.

The few control most technologies, so guess what?

Fuku Ben's picture

All chump change compared to the Fed fiction

Joebloinvestor's picture

If CYNK was possible, anything is.

Yet PM's don't do a fucking thing.


disabledvet's picture

Your gold is very valuable if Europe is plunging into a deflation that makes the the US Great Depression look like a "mild downturn."

Buy yourself a Castle! "Replete with serfs, peasants and other forms of indentured servants."

TheSecondLaw's picture

Wait.  Wait.  And then wait some more.  They also serve those who stand a wait. Patience partner.  Slowly, slowly catch the monkey.

Save_America1st's picture

it's not about what the PM's are valued in shit dollars or any other shit currency. 

It's about how many ounces you have in your stack after monetary reset occurs.  So don't worry what the price is, was, or will be...just keep steadily converting the fiat you can afford to convert into as many ounces as you can while you still can.

That's the secret to this whole game, "folks".  Just keep stacking.  I don't believe there's much time left to do so...at least not inexpensively like we can now or could in each of the previous 2 decades if we had been smart and doing so.

But in the short remaining number of years we might have left before the change comes...at some point we're going to look at 20 buck silver then like we look at 2 buck silver now.  And don't we all wish we had stacked 10's of thousands of ounces of 2, 3, 4, or 5 bucks silver now looking back???? 

Well that ain't nothing compared to what it will be after the reset.  We won't give a fuck what dollar value could be placed on our ounces.  We'll be trying to figure out how many acres we can buy with so many ounces.  Or we may be able to convert into a precious metals backed currency as a way of commerce.  Or even whatever the newest crypto-currency will be at the time. 

I doubt it will be Bitcoin just because it was the first one and there are so many.  There will be more and more better cryptos that will be invented and used world-wide.  Our PM's will be valuable in many ways...but not in terms of shit dollars or any other shit pieces of paper.

But a silver dime one day soon might buy you 50 rolls of real shit paper!  haha...and everyone needs a good stash of that stuff when the SHTF ;-)

Speaking of silver dimes....get you some now, bitchez, if you haven't already.  Silver Constitutional coins are available at very low premiums once again...this is a good near bottom indicator.  Silver coins (pre-1965) are easily available and premiums are low which shows that some people are rolling over and making their stash available even at these insane low prices. 

Be a contrarian....take advantage of it....stock up on pre-1965 coins.  They're Constitutional money, they will never be worth zero like paper will, and they're already in fractional denominations which will be much easier to use for small items and goods in the times when it will be near impossible to break up an ounce of silver with any "change".  You'll have to buy in serious bulk quantities just to spend an entire ounce of silver. 

This year might be the last time to have this opportunity.  I sense very bad things in 2015 just like many of you all do, and the paper prices might be allowed to skyrocket once again like they allowed it to in 2011.  Once the banksters have looted as much physical as they can they're going to flip things 180 degrees and let it run to the moon to try and shake us long holders out of our physical stashes for piles and piles of their fiat shit paper.  Don't do it!!!  Keep holding on no matter what insane price they let it run too. 

Once they get as much of the "stacker's stash" as they can with their inflated fiat, that's when the end will come and the reset will occur.  Those with their stacks in tact through all of that will come out the winners on the other side.

Just sayin'.  Or I could be wrong and we could just all go and blow it on hookers and blow in Vegas ;-)  fuck it!  haha

Yen Cross's picture

     When this cesspool market full of methane blows, it's going to burn faster than a tinfoil gum wrapper from the ISS re-entering Earths atmosphere...

SAT 800's picture

Amazing, isn't it"? We had "PetsRus.com" in 2000, and they didn't learn a damn thing. It's deja vue all over again.

armageddon addahere's picture

They learned plenty. Every year they think up better methods of vacuuming the pockets of the suckers.

Atomizer's picture

Put option lingers in the air. 

Squid Viscous's picture

isn't it similar to twatter, and insta-gram, pinterest, face-fuck etc... so making money from socially inept losers is now a trillion+ industry, run by some slimy, greedy kikes in S.F. and NYC - who coulda seen that coming?  

disabledvet's picture

"If it looks like a duck and quacks like a duck...

Takes a lot to say no to these things as many a Facebook shareholder discovered. With very little in the way of "market police" right now Caviar Emptor indeed.

There are two types of corrections in a bull market...the "1998 which leads to the 1999 moonshot" and the "1928 which leads to the the 1929 Crash."

I still maintain the problem is a failure to have a debt liquidation ala...aka?...2008...although obviously if you ask the Lehman folks they'll beg to differ.

In other words TBTF has led to excessive debt creation which has slowed growth which in turn has caused an irrational fear of inflation which has...and of course we all now know the routine as German 10 year Bund rates plunge below one percent.

I still think the Fed is giving away "free money" through the massive carry in the Treasury yield curve. I don't believe equities are in a bubble but any hard correction in that space could hammer certain debt instruments...especially if there is a scandal of some sorts "when the ride goes out."

Forget "QE"...the whole point of financial bubbles is to get people addicted to them. Hence "Too Big To Fail" to begin with.

If US treasury yields start to suddenly plunge "on no news whatsoever" I would become very worried. A lot of "assets" at nose bleed levels here and the market is always a superior "information clearance facility."

Squid Viscous's picture

is there any way you can say the same thing, or even less because it's mostly garbage, but with less words, please?

Atomizer's picture

Perhaps this will become a undeletable new OS Apple application tracking information.

Squid Viscous's picture

umm, wtf does that mean? you forgot your meds again?

SmittyinLA's picture

Did AlGore sever his relationship with KPCB?

I noticed they're still paying a toll to Colin Powell. http://www.kpcb.com/teams/strategic-advisors


The Whale is still there http://www.kpcb.com/partner/al-gore

NOTaREALmerican's picture

Bah,  that's what people on said about Twitter, and look at the reality now.   You can't even have a simple revolution, invasion, or coup without twitter.  

Snapcat will soon become an indispensable part of all future revolutions, invasion, and coups also.    

My recommendation is Strong Buy.

(Subscribe to my Free Newsletter).

buzzsaw99's picture

the fed is pleased

Notsobadwlad's picture

"But owing to the dense economic fog on her Keynesian windshield, Janet Yellen and her band on money printers in the Eccles Building remain clueless as to the monumental corruption that is being injected into financial markets by Fed policy."

I would not assume that they are clueless, but intead; corrupted, complicit and culpable for the fraud.

One only has to recall Greenspan's famously stated opinion of fraud. The Fed embraces capitalistic crony fraud and the subjugation of the masses to monetary enslavement.

Kenos Housing's picture

And Jessica Alba's diaper company is now worth $1B ;-)   These all have to be signs of a top... 



mendigo's picture

As Ive heard said about some US military aircraft:

You could get a stone to fly if you bolt enough horsepower on to it.

e.g. Facebook.

SilverRhino's picture

They're called helicopters and F4 Phantoms.

Peanut Butter Engineer's picture

Everybody want to have a chance to hold a hot potato, but nobody wants to be the last person holding them except for retail retards but I hope those Sheeps will learn soon before they get totally fleeced.

moneybots's picture

"So here’s the thing. Free central bank money corrupts free markets absolutely—-that should be more than evident by now. But owing to the dense economic fog on her Keynesian windshield, Janet Yellen and her band on money printers in the Eccles Building remain clueless as to the  monumental corruption that is being injected into financial markets by Fed policy."


That is what they would have you believe.

youngman's picture

just wait till Alibaba hits the market..that will be priced more than our GDP

AdvancingTime's picture

Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place.

It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More on this subject in the article below.