Friday, January 15, 2016

"Uber Is Raising More Money From Rich People" (Al Gore and Snapchat do cameos)

This is a very bad sign.
Venture Capitalists will use the dumbest money they can find to get a late round to bump the valuation as high as they think they can get away with. More* after the jumps.

First up, Izabella Kaminska at FT Alphaville yesterday:

Guessing Uber down to six decimal places
A nice scoop for Bloomberg on Uber’s potential private market valuation, as per documents provided to potential wealthy investors in the ride-hailing business by Morgan Stanley and Bank of America. Of note:
“Given the Company’s sustainable competitive advantages, large market opportunity, and growth prospects of the Company, the Investment Team believes that the pre-money equity valuation for the Company of $62.5 billion or $48.772228 per share is reasonable,” the offering says.
No concrete financials per se, but there are a number of perturbing risk factors presented for the yet-to-be profitable business.

What we now know thanks to the documents:
  • The company is incurring significant costs, including legal fees defending its independent contractor status.
  • If jurisdictions deem Uber an employer this would constitute a material adverse effect on its ability to operate its business.
  • Uber’s model probably doesn’t work if it’s forced to reimburse expenses, allow for worker unionisation, abide by tax withholding and reporting obligations, abide by hourly wage laws, offer worker rights like holidays, provide medical/worker insurance or follow pension fund obligations. (Wowsers!)
  • Uber’s profit margins can’t handle increasingly competitive markets....

And today, BloombergView's Matt Levine:
Would you invest in Uber at a $62.5 billion valuation without looking at its financial statements? I don't mean, like, reading every word of the notes; I mean, you don't even get "basic financial data such as net income and official annual revenue figures." Sound good?

Obviously it sounds a bit dumb when you put it like that. Or, not obviously, not obviously at all: Morgan Stanley and Bank of America Merrill Lynch are offering their rich private-wealth clients just that opportunity, as Bloomberg's Julie Verhage reported yesterday, and presumably those clients don't all think it's a dumb idea. It's all in the tone of voice, the emphasis. "Do you want to invest in the hottest of all the unicorns before regular people can?" Sign me up! "Do you want to invest in a private company at a $62.5 billion valuation, but we can't tell you anything about it?" Errrmmm.

But you can say it other ways, too. Like: "Do you want to invest in the T. Rowe Price Media & Telecommunications Fund?" Because last month Bloomberg reported that Uber had "closed investments from Tiger Global Management and T. Rowe Price" as part of a round done at the same $62.5 billion valuation it's seeking from private-wealth investors now, and T. Rowe's latest quarterly holdings disclosure lists about $17 million of Uber stock in its Media & Telecommunications Fund. That disclosure was only released today, meaning that if you bought shares of the fund over the last month, you already invested in Uber at a $62.5 billion valuation not only without seeing the financials, but without knowing you were buying Uber at all.

Of course, less than half of one percent of your T. Rowe investment went to Uber. (I also assume that T. Rowe's managers got to look at the financials. ) Morgan Stanley is offering Uber by means of a new investment vehicle, sort of a one-stock mutual fund called New Riders LP,  with a minimum investment of $250,000 and a minimum net worth of $10 million; Merrill wants at least $1 million from people with at least $100 million. So you could put a somewhat higher percentage of your net worth into Uber through these vehicles than you could through T. Rowe. But, you know. If you're being offered these deals, you are rich. Live a little....
...again, MUCH MORE

*Way back in 2008 we noted the VC's of Silicon Valley were using a very shady private placement bundler called Advanced Equities to top off deals at very high valuations:
Venture Capital: "Garbage In...
...A late-stage venture funding outfit is foisting junky startups on investors--much to the benefit of the Sand Hill Road crowd....
By 2010 the 'bloom' was coming off the rose of greentech/cleantech--one of our headlines that year was Is Kleiner Turning away from Cleantech? Speculation Abounds--so naturally that's where Advanced gravitated:

The Company you Keep: "Bloom, Fisker and Serious Materials Raising Cash from Advanced Equities":
... AE's pitch is that they allow high-net-worth individuals (i.e., wealthy people) to participate in the high-risk, glamorous world of venture capital investing. Despite a sometimes-shaky reputation, AE is aligned with a number of top-tier VC firms, such as:
  • Apex Venture Partners
  • Benchmark Capital,
  • ComVentures
  • Khosla Ventures
  • Kleiner Perkins Caufield & Byers...
By March 2012 the game was unraveling and we were doing the old British-nature-show-where-the-lion-is-circling-the-wildebeests bit: "Sadly now, there can be but one outcome":
Al Gore (and Kleiner) no Score? Advanced Equities Execs Under SEC Investigation for 2009 Private Placement

Finally, on November 12, 2012:
Phi Scamma Jamma: Late Stage VC Investor Advanced Equities Shutting Down (Bloom; Fisker etc.)
That's a wrap.

These guys would do middle-of-the-alphabet rounds (H-round, N-round etc.) that the Sand Hill Road crowd owned at 1/20th the valuation. They invested private placement style for accrediteds, giving the original VC's a nice bump in valuation while the AE principals got to act like they were in with the in crowd.

We were dubious as far back as 2008.
After the principals were hit with attention-getting fines, the last straw came when they were ordered to make a recission offer to some of their Fisker investors.

Recissions are brutal for that type of operator, they are not ordered when investors are making money hand-over-fist and tend to be accepted rather quickly by the investor and/or their counsel....
There was one final echo.

In August 2014 Kleiner Perkins was apparently unable to find anyone to perform a needed top-off for Snapchat so Kleiner itself put in $20 mil at a $10 billion dollar valuation. Our comment:
It appears that Kleiner Perkins are using their own pocket lint to bump valuations now that Advanced Equities is no longer around.
In November 2015 our headline was "Another Day, Another Unicorn Dies A Little: 'Snapchat stake marked down by investor Fidelity'".