News Fix: TransferWise Takes Care of Early Investors, Employees


Transferring money across borders is a painful experience. Wire transfers can be slow and expensive. And the paperwork is extensive.

Western Union and MoneyGram are no picnic either. From the time it takes to transfer money, to the inconvenience of doing so, it’s not a pleasant experience.

And that’s the reason so many people are hopeful cryptocurrency will provide a long-term solution.

But fintech startup TransferWise isn’t waiting to see if crypto proves to be the ultimate solution. It’s disrupting the money transfer business right now. And with a valuation of $3.5 billion, it just became Europe’s most valuable fintech startup (CNBC).

TransferWise is lowering fees and making it easy and convenient to transfer money across borders for consumers. And because TransferWise could stay private for several more years, it’s also making it easier for early investors and employees to get some early returns on their investment.

TransferWise just completed a secondary share sale for $292 million. Vitruvian Partners, Lone Pine Capital and Lead Edge Capital bought stakes in TransferWise in a secondary share sale. The money raised by the secondary sale will go directly to TransferWise employees and early investors who wanted to sell some of their shares.

Hopefully, these secondary share sales will become a trend. Startups are staying private longer than they ever have. From 1976 to 1996, the median age of companies going public was 7.8 years old. That rose to 10.7 years for companies going public between 1997 and 2016 (Credit Suisse).

The reason startups can stay private longer now is that venture capitalists are willing to invest large amounts of money during a startup’s growth stage. And with all the money sloshing around private markets, this trend is just going to continue. TransferWise co-founder Taavet Hinrikus told CNBC he’s not planning on taking his 8-year-old company public soon.

“While we believe we’ll be a public company eventually, that doesn’t help us do what we want to do in the next couple of years,” he said.

Organized secondary share sales are a nice way to reward early investors and employees who invested in a vision before the proof was there. Hopefully, other companies will follow their lead.

Now to the News Fix.


Square looks to fill payments void: The marijuana industry sits in a weird legal place. Medical marijuana is legal in 33 states and Washington, D.C. Recreational marijuana is legal in 10 states and D.C. But because marijuana is illegal at the federal level, perfectly legal pot companies have difficulty accessing the banking system. Banks don’t want to violate their federal charters by doing business with pot companies. Some banks are so conservative that they even refuse business from hemp and hemp-based CBD companies. And hemp-based CBD is legal at the federal level!

If you don’t have access to the banking system, it’s tough to process credit and debit card payments. That really limits the industry.

Square is trying to change that. The popular payments company has rolled out a solution for companies selling CBD products. It’s an invitation-only beta program right now (Forbes).

We don’t know how many companies are participating in this trial. But if it takes off, it could be a game changer for the CBD space.

Massachusetts dispensaries get acquired: Canadian marijuana company Cannabis Strategies Acquisition Corp. has bought Sira Naturals, which operates three Boston-area medical marijuana dispensaries. Sira Naturals also has licenses to manufacture and transport recreational marijuana. The sale was approved by Massachusetts regulators this week (MassLive).


AI taking over sales: has figured out how to use artificial intelligence to give sales people the exact information they need to convince you to buy more stuff. Scary? Yep. But customers are lining up to use its service. Its clients have already closed $100 billion in sales using the platform. The startup just raised $60 million at a $500 million valuation (TechCrunch).

Arya Stark launches startup: The Fix is going to binge-watch the final season of Game of Thrones at some point this summer. But this story was too juicy to resist. Maisie Williams, who played Arya Stark in the series, has started a social networking and collaboration platform for content creators and talent (actors, actresses, etc.). The goal is to create new ways for talent to get discovered and projects to be made. The social network, named Daisie, already has 100,000 members. And the startup has raised about $3 million in funds from investors like Founders Fund, 8VC, Kleiner Perkins and Shrug Capital (TechCrunch).


Facebook’s “GlobalCoin” may launch next year: More leaks from the Facebook crypto project! Facebook is calling its new cryptocurrency “GlobalCoin” internally. And it hopes to begin testing it at the end of 2019 and release it for use in the first quarter of 2020 (BBC).

GlobalCoin lacks originality. But the scheduled release dates are interesting. By pushing to test the coin later this year, Facebook is showing an extraordinary level of commitment to this project. The social media giant isn’t just dabbling here. It’s going big on crypto.

Binance adding margin trading: Binance, the world’s largest crypto exchange by volume, is adding margin trading to its offerings (Cointelegraph). Margin trading, which involves using borrowed funds to trade an asset, appeals to wealthier investors and institutional investors.

And that’s your News Fix!

Have a great Memorial Day weekend.

Vin Narayanan

Senior Managing Editor, Early Investing

The post News Fix: TransferWise Takes Care of Early Investors, Employees appeared first on Early Investing.

Source: Early Investing

Bitcoin Offers All the Benefits of Gold and None of the Drawbacks

Bitcoin is often described as “digital gold.” It’s a handy analogy to describe how bitcoin has become an alternative store of value like gold – an asset whose worth (theoretically) won’t substantially decrease over time.

The best thing about this analogy is that it’s more than a casual comparison. Bitcoin and gold are actually very similar.

Because gold has been around for centuries, it’s hard to imagine a world where gold wasn’t valuable. But that world existed.

Gold didn’t emerge from the ground with a sign saying “Look at me, I’m valuable.” Human beings decided gold was valuable. As civilization evolved, people settled on gold as a form of payment. It could last for centuries without losing its key physical attributes. It was scarce. And it was shiny.

At some point, human beings decided gold was too limited in supply and too cumbersome to be used as a primary form of payment. So gold-backed money became the norm. Then almost 50 years ago, the U.S. severed the dollar’s relationship with gold. Most of the world followed suit. Now money is just money. And gold is just gold. Gold’s supply has no effect or impact on the global economy. And gold remains valuable because human beings say it is.

For an alternative store of value, gold has a little bit of volatility – just like bitcoin. But gold’s volatility is measured in years, not months or days. In 1976, it was trading around $488 per ounce. In 1980, it was trading north of $2,200 per ounce. In 2001, it was trading around $385 per ounce. In 2011, it was trading around $1,970 per ounce. And it’s currently trading around $1,277 per ounce.

Bitcoin is following a similar path to gold. Bitcoin was created in the wake of the 2008 financial disaster. And people decided bitcoin, like gold, was valuable.

People wanted a financial system where you couldn’t keep printing money to get out of debt. They wanted a scarce asset (there are only 21 million bitcoins), but on the internet. They wanted sound money for the digital age, easily transferred around the world and difficult to manipulate.

And much like gold, bitcoin has become an alternate store of value. When people lose faith or confidence in their economy, they move money into bitcoin – much like they do into gold. In Venezuela, people have more confidence in bitcoin than they do the local currency.

The similarities between gold and bitcoin are uncanny. So when gold bugs like Peter Schiff slam crypto, I have to roll my eyes.

Gold and bitcoin are really not that different. The two biggest differences between them are time and portability. Gold has had centuries to burnish its reputation as an asset, but it isn’t portable. Bitcoin has been around for only 10 years, but you can transfer it anywhere in the world quite easily. You can even program it!

And bitcoin is here to stay. It has a growing user base that believes it has intrinsic value. The number of people holding on to bitcoin for the long haul is constantly rising. And its fundamentals are sound.

In 10 years, gold bugs won’t be arguing about whether bitcoin is viable. Instead, they’ll be wondering how much of their portfolio should be in bitcoin.

And if you get in on bitcoin now, you’ll reap the rewards for your early investment.

Keep hodling.

Vin Narayanan

Senior Managing Editor, Early Investing

The post Bitcoin Offers All the Benefits of Gold and None of the Drawbacks appeared first on Early Investing.

Source: Early Investing

The Institutional Crypto Investing Tide Is Rising

Crypto prices are up big this year. Bitcoin is up 108% on the year. A big reason for that is the institutional money that’s beginning to flow into crypto.

So who are these institutional investors jumping into crypto? It’s a pretty big tent, including global investment management firms like BlackRock, endowment funds like Yale’s, big and broad investment service companies like Fidelity, hedge fund outfits like Bridgewater (it has $87 billion in hedge funds), crypto-specific hedge funds like General Crypto, and venture capital (VC) firms like Tiger Global Management.

VC Firms Leading the Charge

In the months following the 2018 crypto crash, mainstream media portrayed crypto as an asset class about to meet its demise. But behind the scenes, VC firms were already funding its comeback. They began putting large sums of money into startups building technological solutions using cryptocurrencies and blockchain technology.

VC firms invested a little more than $1 billion in crypto in 2017. In 2018, they poured $5.6 billion into companies building the basic plumbing needed for the commercialization of crypto and blockchain technologies.

Chart - Venture Capital Flows

Well-known VC investors, including Marc Andreessen (of Andreessen Horowitz), Benedict Evans (of Andreessen Horowitz) and Fred Wilson (of Union Square Ventures), openly discussed the transformational potential of blockchain technology.

Meanwhile, big legacy tech companies with venture arms decided to get in as well. In 2017, companies like Microsoft invested less than $500 million in crypto and blockchain projects. In 2018, they invested a record $2.4 billion across 117 deals.

Chart - Bets by Big Business on Crypto and Blockchain Soar

This year is shaping up to be at least as big as 2018. Venture capitalists believe the crypto/blockchain investment opportunity is massive. And that current technological problems involving speed, scale, security and interoperability can be overcome.

These VC firms are used to making big bets on technology and high-tech startups. But buying and trading cryptocurrencies is outside their bailiwick.

Yet we see clear evidence of institutional investors trading crypto. So who is currently buying the cryptocoins themselves?

The Rise of Crypto Hedge Funds

Since the crash, crypto funds and crypto-related companies (like miners), in addition to a few dozen very wealthy individuals and family offices, have traded bitcoin and other cryptocurrencies.

According to a report by consultancy PwC and investment firm Elwood, there are around 150 active cryptocurrency hedge funds. Fred Wilson says there are “maybe 100 token funds in the U.S. and 100 in Asia.”

Henri Arslanian, who oversees cryptocurrencies at PwC, says it’s very early in the game. “The crypto hedge fund industry today is probably where the traditional hedge fund industry was in the early 1990s.”

The number of funds is surging. A Crypto Fund Research report documents 90 crypto hedge fund launches in the first three quarters of 2018. That number is expected to reach as high as 120 this fiscal year.

A Sign of Things to Come

Coinbase launched its custodial service for institutional investors 12 months ago and has signed up 70 institutions since. The custodial service just crossed $1 billion in assets under management.

In the grand scheme of things, $1 billion isn’t huge. But it’s a strong start. Coinbase CEO Brian Armstrong says that these institutions are also interested in staking, voting and doing governance on-chain. And he sees interest in altcoins growing.

Now that the prices of bitcoin and most other cryptocurrencies are once again climbing, institutional interest in the coins and the technology will only accelerate.

Good investing,

Andy Gordon

Co-Founder, Early Investing

The post The Institutional Crypto Investing Tide Is Rising appeared first on Early Investing.

Source: Early Investing

Medical Marijuana States See Major Drop in Opioid Prescriptions

Chart - Medical Marijuana States See a Decline in Opioid Prescriptions

Chart - Medical Marijuana States See a Decline in Opioid Prescriptions

In the late 1990s, pharmaceutical companies began promoting prescription opioids as a treatment for pain. Pharmaceutical companies and medical organizations assured doctors that there was a very low risk for addiction. So doctors began prescribing them at higher rates.

Fast-forward to today. Prescription opioids are now known to be dangerously addictive drugs.

According to the latest CDC data, which was collected in 2017, more than 47,000 Americans died that year from opioid overdoses, including prescription opioids. And about 1.7 million Americans suffered from substance use disorders related to prescription opioid pain relievers.

The crisis would likely be worse if it wasn’t for medical marijuana. Medical marijuana, as we’ve reported many times before, has the potential to treat a long list of medical conditions, including pain, epilepsy and others that are often treated with opioids.

By 2017, 29 states had legalized medical marijuana. And that year, nearly every state that legalized medical marijuana saw a decrease in opioid prescription rates from previous years. Today we’re going to look at three states in particular.

Our chart shows the opioid prescription rate per 100 people in New York, Massachusetts and Minnesota in 2010 (pre-medical cannabis legalization) and 2017 (post-legalization). And the difference is stark.

Massachusetts legalized medical marijuana in 2013. From 2010 to 2017, its opioid prescription rate dropped 41%. Minnesota, which legalized medical marijuana in 2014, saw a 31% drop. New York also legalized medical marijuana in 2014. Its opioid prescription rate fell 25%. New York’s 2017 opioid prescription rate was the lowest in the country.

New York has been building on this progress. In 2018, New York lawmakers authorized the use of medical marijuana to treat opioid addiction.

Enlisting medical cannabis in the fight against the opioid crisis is a smart move – not just for patients, but for the government too. Researchers from the University of California San Diego and Weill Cornell Medical College discovered that medical cannabis was associated with a nearly 30% reduction in Schedule III opioids received by Medicaid patients.

“[I]f all the states had legalized medical cannabis by 2014, Medicaid annual spending on opioid prescriptions would be reduced by $17.8 million,” the study projected.

This is why medical cannabis legalization is a no-brainer. Legalization means fewer patients are forced to settle for addictive (and sometimes ineffective) drugs with nasty side effects. More patients are able to turn to cannabis as a safer option. And the government saves millions of dollars.

Medical marijuana is making a difference. The reduction in opioid prescription rates is a sure sign of that.

Good investing,

Allison Brickell

Assistant Managing Editor, Early Investing

The post Medical Marijuana States See Major Drop in Opioid Prescriptions appeared first on Early Investing.

Source: Early Investing

Mailbag: Explaining Convertible Notes and Cowardly Politicians

Cartoon Mailbox

Q: Why is it so hard to legalize marijuana? The voters all seem to want it. Even some governors want it. But the votes in state legislatures are never there. Why not?

A: You’re right. Voters want to legalize marijuana. A recent CBS poll found 65% of voters support legalizing marijuana. Yet in the 10 states that have legalized recreational marijuana, nine did it through ballot initiatives. Only Vermont passed legislation legalizing it.

And already this year, the state legislatures (and governors) in New York and New Jersey have stumbled badly in their efforts to legalize marijuana. And the jury is still out on Illinois’ efforts.

So why exactly is this so hard?

Let’s start with age. The current generation of politicians in power came of age when marijuana was considered a gateway drug to things like cocaine, heroin and meth. Nothing could be further from the truth. But that’s the environment they grew up in.

Attitudes are changing slowly among this generation. But few are truly vested in the cause.

Some of them now believe marijuana should be legalized… but for different reasons. Some are interested in the tax revenue marijuana would provide. Some are more interested in the social justice component of legalization. Others fully support medical marijuana but believe recreational marijuana is a bridge too far. And many are unapologetically opposed to legalizing any form of marijuana. So while the rest of the country is ready to legalize pot right away, many of these politicians are not. And they’re the ones in charge.

The second factor is cowardice. Because many of these politicians are uncomfortable with the idea of legalizing marijuana, they consider this a “tough vote.” In political parlance, a tough vote is one where the voters could punish you at the ballot box if you’re on the wrong side of the issue. These politicians understand that the bulk of voters are for legalizing marijuana. But the politicians themselves don’t strongly believe in the issue. And they don’t think their voters believe it in either (despite reality). They’re convinced they’ll be voted out of office if they vote to legalize. As far as they’re concerned, if the voters want to legalize marijuana, they should do it themselves through a ballot initiative.

What these politicians don’t understand is the voters elected them to office to make the “tough calls.” Ducking the issue is an extreme form of cowardice. And every one of them should be ashamed.

The third factor is a nasty political environment. Because legalizing marijuana isn’t a priority for most politicians, they can hold legalization legislation hostage while they fight over other things. This is especially true if the state’s governor is trying to legalize marijuana.

Take New Jersey for example. Legalizing marijuana was a priority for Gov. Phil Murphy. The legislature knew that. But because the legislature and Murphy were at odds over a variety of other issues, it held the legislation to legalize pot hostage and ultimately didn’t vote on it. The legislature didn’t want to give Murphy a win (even though they’re all from the same party). Instead, it’s forcing the voters to legalize it on their own through a ballot referendum next year.

If politicians actually did their jobs, there would be no need for voters to force the issue with ballot initiatives.

+ Early Investing Senior Managing Editor Vin Narayanan

Q: How do convertible notes work? And more importantly, how does the discount work? The way I read it is, I divide my investment (let’s say $2,000) by the initial public offering (IPO) price (let’s say $10 per share), which means I receive 200 shares. Not sure how the 20% discount works in there. Is this correct?

A: Whoa. I hate to say it, but your math is way off. I don’t want anybody investing in the early rounds where convertible notes (or simple agreement for future equity notes, which work along the same lines) are offered without understanding how they work. I’m going to give you a quick lesson on how to figure out the number of shares you’ll receive, share price and discounts. And I’m going to keep it as simple as possible.

Convertible notes come with a valuation cap, which is the most you will ever have to pay for your shares. They can also come with discounts, usually in the range of 10% to 20%. That’s the discount at which your shares convert to equity in a future round (usually the following round, but the startup can choose later rounds). Companies use convertible notes to avoid selling their shares at extremely low prices.

Here’s one scenario: If a company is raising a seed round but is off to a slow start, instead of selling its shares at, say, $3 million, it offers a convertible note at, say, $6 million with a 15% discount. Assuming that it plans to convert the convertible note at the next round, this cap of $6 million is the most you’d pay. Even if the company jumps to a $10 million valuation, you’d still pay only up to $6 million. Only investors who get into the following round would have to pay the $10 million. Paying less is your reward or incentive for investing at the seed round rather than at the next round (usually Series A).

Let’s take a second scenario. Suppose this company’s valuation increases to $4 million. You obviously want to pay the lowest price. So you would use your 15% discount on the $4 million price, which comes to $3.4 million. Your reward in this scenario is getting 15% off what other investors pay in this round. No matter how I rejigger cap and valuation numbers, that 15% is your minimum discount.

Now let’s calculate your number of shares. Here’s the formula: (investment amount divided by valuation) multiplied by the number of shares outstanding. So let’s add a little more information to the mix. You invested $1,000. And the company had 500,000 outstanding shares (this is the total number of shares outstanding at the convertible note round).

In the first scenario, your investment of $1,000 will get you 83 shares – or $12 per share. (Here’s the math: [$1,000 / $6 million] x 500,000.)

In the second scenario, your investment of $1,000 pockets you 147 shares, or $6.80 per share. (Here’s the math: A 15% discount on a $4 million valuation is $3.4 million. So next is [$1,000 / $3.4 million] x 500,000.)

Whenever the company IPOs, you have enough information to calculate your profits. Just calculate your gains per share (IPO price minus your share price) and multiply by the number of your shares. If your startup is bought out, do the same thing. The company will let you know the buyout price per share. Just be aware if the company doesn’t do either, your shares are not liquid and you can’t cash out. That’s part of the risk you take when investing so early.

This is why investing in many early-stage startups makes sense. Investing in just one or two doesn’t.

+ Early Investing Co-Founder Andy Gordon

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Source: Early Investing

News Fix: Long-Term Stock Exchange Gets SEC Approval; Bitcoin Google Searches Spike

Couple of People Looking at Cell Phone

The Fix loves IPO day. It has everything. The pomp and circumstance behind startup founders and CEOs ringing the bell to open trading. Jim Cramer and his squeaky voice getting all excited. Early employees wondering if they’re about to become millionaires. Early investors wondering just how much money they made. The anticipation of that first trade hitting the market. Very few things are more exciting than IPO day.

The one thing that the Fix hates about IPO day is the overreaction to success or to failure. A great IPO doesn’t necessarily mean it’s a great IPO market. It means investors really liked the company making its debut.

Conversely, bad IPO performance doesn’t mean IPOs are dead. Or that there’s no appetite for IPOs. It simply means investors weren’t buying what that company had to sell.

The most recent example of this type of thinking is Uber. Uber priced its IPO at $45 per share. Trading opened at $42 a share. Earlier this week, Uber traded at an all-time low of $37.10. And as of this writing, it’s trading at $42.94.

It’s fair to say that was not a good IPO for Uber. But it’s unfair to say tech IPOs are dead. Or that investor appetite for tech IPOs is waning. Those are the sorts of inferences that get the breathless media – and investors – into trouble.

Uber lost $1.8 billion in 2018. Until Uber’s other business lines (Uber Eats, Uber Freight, etc.) substantially increase their revenue, its pathway to profitability lies in either charging riders more money or replacing drivers with autonomous vehicles.

So investors have every right to be worried about Uber. Just like they had every right to like the fact that Zoom, another tech company that IPO’d this year, was profitable. Zoom priced at $36 per share. It’s currently trading at $83.28. That’s a successful IPO.

Investors liked Zoom’s profits and future. So its stock went up. Investors didn’t like Uber’s pathway to profitability. So its stock went down. Don’t believe any of the crazy stories in the media telling you tech IPOs are in trouble. That’s simply not the case.

If you really want to blame someone for Uber’s disappointing IPO, blame the investment bankers. When the Morgan Stanley underwriters realized they had priced Uber shares too high, they began shorting the stock (CNBC).

Now to the News Fix.


New Jersey voters will decide on weed: The New Jersey Legislature gave up on trying to legalize recreational marijuana this week. Even though Gov. Phil Murphy ran on legalizing marijuana and the leaders of the legislature are members of his own party (Democrats), the legislature was unable or unwilling (depending on your point of view) to pass legislation to legalize pot. Instead, the issue will be placed on the ballot next year for voters to decide (

Former NFL players becoming serious cannabis investors: Calvin Johnson, Rob Sims and Eugene Monroe are part of a growing cadre of former NFL players founding and investing in cannabis companies. Johnson, the former star wide receiver for the Detroit Lions, has a particularly unique story. He discovered the power of medical marijuana when he used a CBD topical to treat his swollen ankles when he competed on the TV show Dancing with the Stars. Johnson said the relief the CBD topical gave him turned him into a true believer (Detroit Free Press).

Cincinnati area getting its first medical marijuana dispensary: The dispensary will be located in Lebanon, Ohio, which is about 30 miles northeast of Cincinnati. It’s expected to open next week. The dispensary’s retail neighbors seem excited about the additional foot traffic for the strip mall. But it remains to be seen whether customers will be excited about the $480 per ounce price tag (WLWT).

If you’re thinking that’s expensive, you’re right. Sounds like Ohio needs more people growing medical marijuana.


New stock exchange gets regulatory approval: The tech industry, along with a lot of economic watchers, has been frustrated with the short-term focus of the stock markets. Many believe that stock markets force companies to be so focused on short-term results and performance that they neglect innovation and their long-term health.

That’s why legendary tech investor and venture capitalist Marc Andreessen has banded together with other tech investors to create the Long-Term Stock Exchange. The SEC recently approved the formation of the exchange. It could launch later this year. And one of the rules it’s considering is NOT listing companies that have tied CEO compensation to short-term financial performance (CNBC).

CrowdStrike gets ready to join the IPO party: CrowdStrike threw its hat into the IPO ring this week. The cybersecurity firm is currently valued at $3 billion. CrowdStrike was founded in 2011 and has raised $481 million to date (MarketWatch).

State gets money, but employees still have to wait: When a startup goes public, its employees usually have to wait six months before they can sell any of the stock they own. But they have to pay taxes on their windfall the day the company goes public. That means states like California have already received more cash from this year’s spate of tech IPOs than the workers who made the IPOs possible (San Francisco Chronicle). That just doesn’t seem fair.


More people are Googling bitcoin: One popular metric for measuring interest in a topic is search engine traffic. And with crypto prices rising again, more and more people are searching for bitcoin on Google and Baidu (China’s Google). Google searches for bitcoin are closing in on 2019 highs. And bitcoin was recently one of the top trending search items on Baidu (Invest In Blockchain).

Microsoft building a decentralized identification tool: Microsoft is building a way to pass login credentials through the bitcoin blockchain. Right now, when you use Facebook or Google to log on to another site, Facebook and Google own that login information. With Microsoft’s new tool, the user would own that information – and the data associated with it (CoinDesk).

Mobius changes his mind: Warren Buffett and Charlie Munger of Berkshire Hathaway fame haven’t changed their minds about crypto (they don’t like it). But legendary investor Mark Mobius has. Mobius, co-founder of Mobius Capital Partners, used to call bitcoin a “real fraud.” He now believes “bitcoin and other currencies of that type are going to be alive and well” in the future (Forbes).

Mobius says he isn’t ready to invest in bitcoin. But if prices keep going up, maybe he’ll change his mind. (He won’t. But it’s fun to think about.)

And that’s your News Fix.

Have a great weekend.

Vin Narayanan

Senior Managing Editor, Early Investing

The post News Fix: Long-Term Stock Exchange Gets SEC Approval; Bitcoin Google Searches Spike appeared first on Early Investing.

Source: Early Investing

The Transition From Private to Public Markets Isn’t Always Pretty

Successful startups need to give customers a significantly faster, cheaper, more convenient or just plain better experience than what they’re used to. In venture capitalist circles, the experience must be at least 10 times faster, cheaper or more convenient in order to invest. Otherwise, powerful legacy companies with vast amounts of marketing dollars and customer loyalty could still win out against a startup’s superior user experience.

Seeking these successful startups is part of an early investor’s playbook. But just because a company thrived in the private markets doesn’t mean it will succeed in the public markets.

In the private startup markets, hypergrowth companies are rewarded with higher and higher valuations. But things can fall apart when these startups enter the public markets, often with a big splash and a high initial public offering (IPO) price.

One of the first problems these post-IPO companies encounter is slowed growth. In some cases, like Uber’s, the growth slowdown happens even before these companies launch their IPOs. Without profitability or fast growth, the IPO hype surrounding these companies can fade quickly.

Another reason things fall apart: Startups tend to issue IPOs when investors are paying high prices for similar stocks and their valuations are peaking. No wonder the average IPO – according to a recent Fortune report – underperforms otherwise similar stocks by 7% to 8% in the three years following the offering.

These are some of the reasons why I’ve never been a big IPO fan. My colleague Adam Sharp and I have talked a lot about how the bulk of a company’s growth now happens in the years before it IPOs.

Legacy companies don’t like IPOs either. A Journal of Financestudy shows firms experience a 3.3% decline in sales growth and a 2.9% reduction in profitability during each of the three years following an IPO in the industry.

But that doesn’t explain why entire industries see their stock prices (and profits) decline following the typical IPO.

Take Uber’s recent IPO, for example. It unleashed new technology and competition in the ride-hailing markets – a good thing for customers. But it’s not such a good thing for legacy taxi and limo companies. And with Uber’s stock price scuffling, the entire ride-hailing industry is now a danger zone for investors.

This is more typical than you may realize. Success breeds success, whether it’s in the private or public sector. Pre-IPO startups compete against each other not only for customers but also for investment dollars. And the ones that attract the most investment dollars deploy those funds to grow their customer base. It’s a virtuous cycle where a single company usually emerges head and shoulders above its competitors.

But once this company joins the public sector, the cycle tends to break down. A large startup in terms of revenue in the private sector often becomes a small company in the public sector. The Fortune report says that when firms go public, they typically have a market share of less than 1%. Just as importantly, they stay small. Most increase their market share by less than 1% in subsequent years.

In the meantime, competition ratchets up. When startups with compelling products enter the space, legacy companies respond with new products and strategies. Two months after Blue Apron’s IPO, Amazon purchased Whole Foods. Blue Apron’s price has plunged 92% since then. HelloFresh went public later the same year. Its price is down “only” 18%.

Thanks to increased competition, customers now have more choices than ever. And they’re more likely to exercise that right to choose. So previously loyal customers have become easier for competitors to steal.

It’s true that competition is what makes free markets work. But fierce competition can hurt profitability across an entire industry. And it can keep investors from knowing who the winners and losers will be.

Observers accuse the pre-IPO startup world of being unpredictable and chaotic. But I’d argue the opposite: It’s the post-IPO world where technology disruption wreaks the most havoc among companies.

Good investing,

Andy Gordon

Co-Founder, Early Investing

The post The Transition From Private to Public Markets Isn’t Always Pretty appeared first on Early Investing.

Source: Early Investing

KKR Shifts From Leveraged Buyouts to Pre-IPO Startup Investing

KKR On Phone Screen

As one of the first companies to use leveraged buyouts (LBOs), KKR helped write the private equity (PE) LBO playbook. KKR’s hit list includes the buyouts of RJR Nabisco in 1988 and TXU Energy in 2007. The latter is the biggest LBO in history.

How LBOs Work

It’s pretty simple. You buy cash-rich, legacy companies for remarkably little cash up front. Most of the buyout price is converted into debt that goes on the company’s books. You make your return by containing costs while not destroying the company’s ability to pay off its loans.

The strategy has had its share of controversy and is not without risks. Firing employees is the go-to move for constraining costs. Companies sometimes struggle to pay off their heavy debt and ultimately go out of business. And it could be argued that the strategy works better for the investors than it does for the takeover targets.

In fact, it’s worked exceedingly well for KKR. The giant PE firm has amassed assets worth about $98 billion, making it the fourth-biggest PE firm in the world.

Greener Pastures

Evidently, though, KKR’s astounding success didn’t prevent its billionaire founders – Henry Kravis and George Roberts – from noticing greener pastures. In 2016, Kravis and Roberts decided KKR needed to focus on a new area – investing in pre-IPO growth-oriented companies.

PE covers a lot of ground. So, technically, both leveraged buyouts and venture capital (VC) are part of the PE investing universe.

But it’s a strange pivot in many ways. LBO investors and VC investors target companies at opposite ends of the spectrum. In the LBO corner, you have established, profitable companies with slow growth. In the VC corner, you have mostly unprofitable companies that are growing rapidly. LBO investors seek cash-rich companies. VC investors seek companies looking for big cash infusions. LBO firms load companies up with debt. VC firms offer an alternative to bank loans.

I’m much more interested in what this pivot says about the pre-IPO space than the LBO space. But let me say that I don’t, by any means, think this spells the end of LBOs. KKR’s main business will continue managing its flagship $14 billion North American buyout fund.

KKR’s pre-IPO growth fund raised $711 million and is managed by a 20-person team spread across Silicon Valley, New York and London. So far, the team has invested in 11 tech startups, using about 90% of the $711 million. It’s still looking for another company or two to round out the portfolio.

Not Too Old to Learn New Tricks

KKR is a rarity in the investment landscape. Large financial firms are typically slow to recognize and even slower to act upon new trends. But eventually some, like KKR, do.

So why did a traditional PE company start messing around with high-growth, but unproven, startups?

KKR had an extremely profitable way to squeeze money from slow-growth legacy companies, but writing $50 million or $100 million checks from a $14 billion fund stopped moving the needle. At the same time, it began noticing meaningful growth slipping away from the public markets. Here’s how KKR managing director Vincent Letteri describes it…

When I started at the firm a dozen years ago, the average company stayed private around 6 1/2 years before they went public; today that number is around 11 years. So you’ve seen this shift in value creation from what traditionally used to happen in the public markets now happening in the private markets, and we [KKR] didn’t have a pool of capital to invest in those companies.

KKR wanted a piece of that action, so it created its pre-IPO Next Generation Technology Growth Fund.

Smart Business

Let’s be clear here. The pre-IPO space doesn’t need KKR to legitimize it among institutional investors or give it needed liquidity. But it does provide KKR a very different kind of investment opportunity for its wealthy clients. It allows KKR to take advantage of a “shift in value creation” from the public to the private markets.

Is it risky? Somewhat. KKR could have played it safe and stuck to its strengths. And nobody would have questioned it. Instead, it is carving out a position in markets with tremendous upside. And it’s given itself an escape route, in case the public markets quicken their demise.

I don’t think that’s risky business. I think that’s smart.

Good investing,

Andy Gordon

Co-Founder, Early Investing

The post KKR Shifts From Leveraged Buyouts to Pre-IPO Startup Investing appeared first on Early Investing.

Source: Early Investing

2020 Halving Will Bring Bitcoin’s Inflation Rate Down

Chart - Shaving Off Inflation

Chart - Shaving Off Inflation

We’re a year away from the next bitcoin halving, which means the new supply of bitcoin will be cut in half for the third time… and bitcoin’s inflation rate will be cut along with it.

Today’s chart shows how bitcoin’s inflation rate has decreased along with each halving. It went from more than 50% before the first halving in 2012 to around 10% before the second halving in 2016. After the second halving, it dropped to around 5%. It’s currently at 3.8% and is projected to drop to 1.8% once the third halving occurs in May 2020.

This is one of many beautiful things about bitcoin. It’s designed to have a decreasing inflation rate. And unlike fiat money, there is a limited supply, and it can’t be printed at will by the government.

We need a stable, scarce asset like bitcoin now more than ever. Global debt has grown to more than $240 trillion – more than three times the size of the global economy. The U.S. alone accounts for more than $22 trillion in debt.

Fortunately, bitcoin was created as a kind of antidote to excessive debt. As Andy Gordon wrote:

[Satoshi Nakamoto] understood that it was a fool’s game to trust fiat currency or the big banks that leverage and manipulate said currency… or to trust the biggest manipulator, protector and benefactor of money: governments.

I have no way of knowing for sure, but I suspect Nakamoto’s disinclination to trust big government, big banks, and misused and abused fiat money predated 2008.

And when the financial crisis of 2008 came perilously close to becoming an “extinction event” for U.S. and overseas banks, it probably confirmed his worst fears.

If excessive debt was the disease, then he created bitcoin as the cure.

Bitcoin can also act as a hedge against inflation… or as a lifesaver. Countries with disastrously high inflation rates turn to bitcoin as a stable currency. One economist in Venezuela – which saw inflation hit almost 1.7 million percent last year – said bitcoin saved his family.

So what else does the halving mean for bitcoin? Historically, bitcoin’s price experiences a major rally about a year after a halving – but the run typically begins at least a few months before. So a number of analysts are predicting major price spikes.

We’re long-term holders here at Early Investing, so we’re not overly concerned with short-term price movements. But we certainly wouldn’t mind seeing a price rebound.

Bitcoin is a scarce and valuable asset. We expect the halving to have a significantly positive impact on its price.

Good investing,

Allison Brickell

Assistant Managing Editor, Early Investing

The post 2020 Halving Will Bring Bitcoin’s Inflation Rate Down appeared first on Early Investing.

Source: Early Investing

Mailbag: Vetting Startups and Preparing for Fidelity’s Crypto Trading Service

Q: How much due diligence do equity crowdfunding sites do before listing a fundraising round?

A: It varies… more widely than you think.

I was just on the phone this week with a portal executive. This portal basically lets anyone who fills out an application and jumps through the required hoops list on its site. So the quality of its offerings varies widely.

The majority of the portals we work with take a more thorough approach. It’s the system I prefer. They make sure the companies are legit. The make sure the founders are NOT bad actors. And they look at startup decks to determine if they’re compelling investment opportunities. Some portals claim they turn away 98% of applicants. Some portals even reject startups they rate highly if they believe the company’s valuation is too high.

We really appreciate everything these portals do to make quality startups available to us. It’s not an easy job, and they do it very well. Our favorite portals, in no particular order, are Republic, Netcapital, SeedInvest, MicroVentures, Wefunder and StartEngine.

When browsing startup portals, I suggest you read the Q&As between readers and founders. They have a lot of useful information.

After the portals list their vetted startups? That’s where we come in. And we vet some more.

A big part of that process is talking to the founders. You can get their basic story from the portals. But we prefer to grill them with a few dozen additional questions. This allows us to draw our own conclusions.

Remember, not all the startups that are listed on these sites are created equal. Some are better than others. And some are much better than others. Those are the ones we do our best to identify for our First Stage Investor members.

+ Early Investing Co-Founder Andy Gordon

Q: What’s going on with Fidelity offering crypto? Can I buy it in my retirement account?

A: Fidelity is offering cryptocurrency trading services through its new division, Fidelity Digital Assets. Starting out, it’s targeting “institutional” investors only. So the target market is professional investment firms (pension funds, endowments, wealth managers, etc.).

Fidelity will be buying, selling and storing bitcoin only (initially) for these clients. Fidelity Digital Assets has been operating with a “select group of clients” for a few months now and will soon open up its doors to the broader institutional world.

Fidelity is one of the largest financial firms on the planet, with more than $2.4 trillion in assets under management and $6.7 trillion in customer assets. It has one of the best reputations in the business, and we’re thrilled that a company of this caliber is branching out into the crypto world.

Fidelity Digital Assets will bring an unprecedented level of legitimacy to crypto (in the eyes of institutional investors). We expect the firm’s new division to contribute significantly to demand for crypto assets, which should be very positive for price action.

On top of this, institutional investors tend to have a long-term perspective, so it’s likely that once they buy bitcoin, they’ll hold on to it for a long time. This should contribute to price appreciation and aid stability over the long run.

So no, you can’t buy bitcoin in your Fidelity retirement account (yet). But it’s opening the world of crypto up to institutional investors, and that’s extremely bullish for owners of digital assets. And I suspect that in the not-so-distant future, you will be able to easily add crypto assets to your retirement accounts at Fidelity (and elsewhere).

However, by that time, the price is likely to be significantly higher than it is today.

+ Early Investing Co-Founder Adam Sharp

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Source: Early Investing