Oct 27/15 – Linkin Park is looking for some VC limited partners

2015-10-27 9am EDT  |  #Bono #Silicon Valley #Snoop Dogg #tech #U2 #Unicorns #VC

In 1985 a young up and coming Irish band stepped on stage at the Live Aid concert and took their place in rock and roll history. Until that point U2 was a good band, but that concert cemented their reputation as a great band. Young people today only know U2 as the old dudes who cluttered up their iPod with their shite songs, but back in 1985, they were about all cool as you get.

During the U2’s Live Aid concert, lead singer Bono wandered down towards the crowd, and spent an unscheduled amount of time dancing with fans. Their version of the song Bad ran for a shocking 14 minutes. It went so long that U2 could play only two songs instead of three. When they got off stage Bono’s bandmates were furious. But that’s kind of like getting mad at the lion for eating an antelope. Bono is an arrogant jackass that thinks he knows better. The trouble is, usually he does. After Live Aid, U2 went on to be the biggest band of the 1990s and 2000s. Their staying power has been impressive. They still fill stadiums and their success over the years has been immense. U2 has the highest grossing tour of all time, and another one of their tours is in the top 10.

Love or hate ’em, you can’t argue about U2’s success.

U2’s triumphs makes the next part of this story all the more amazing. In the mid 2000s, Bono set up an investment group to invest in technology companies. Of course, he did. He is a globally renown rock star – why couldn’t he also be a world class stock picker? After stumbling badly with his attempt to save Palm (for my younger readers – google it – they used to make phones), in 2009 Bono bought 2.3% of Facebook. That single investment has made U2’s Bono more money than in all of his years working as a musician.

Think about the absurdity of that fact for a moment. One of the most successful musicians of our generation has been better off investing (speculating) in a Silicon Valley company. Bono should just quit touring and set up a VC fund.

Wait, that’s already been done. Last summer the band Linkin Park decided to reinvent themselves as a VC firm.

The firm, which focuses on “investing in early-to-growth-stage consumer-focused companies that align with the band’s ethos of connecting people and innovation through tech and design,” already has investments in Lyft, Shyp, Robinhood and Blue Bottle Coffee.

To be clear, we are still in the music business, but creating and selling music now plays more of a supporting role in our overall business mix. As we get ready to headline a five-city stadium tour of China this summer, we are also planning to meet with technology companies, consumer brands, and venture capital firms to discuss opportunities for partnership. Of course we’ll play the shows and meet with fans, as we’ve always done. But along with continuing to make great music, today’s Linkin Park is now better positioned to operate in the ever-evolving cultural and business landscape.

Linkin Park’s touring is just a way to get out and do some networking on the technology scene…

And the story of rockers turned VC wouldn’t be complete if we didn’t include Snoop Dog’s Casa Verde capital.

Casa Verde is an early investor in Eaze, a California startup that promises to deliver medical marijuana to your door in less than 10 minutes. We probably shouldn’t count Snoop though as he keeps insisting he wants all of his dividends delivered in “product.”

Back up and think a little bit about the idea that rock stars are so attracted to the torrent of money flooding through Silicon Valley they are becoming VCs. Rock stars! If there was ever a more easy money industry, I don’t know it. How lucrative does the tech startup scene have to be to lure those guys away?

The more I read about Silicon Valley, the more I realize we are in another bubble. I know many don’t like to say that word out loud, but I have no hesitation. This whole scene is absolutely ridiculous, and if there was ever a flashing warning sign – the fact that rock stars are giving up their careers as musicians to become VCs is compelling.

But we are not limited to this anecdotal WTF data point. There are tons of VCs who are sounding the alarm bell. Recently Mark Suster, a general partner at Upfront Ventures, wrote a great piece that went through the absurd valuations.

To give you some perspective of how quickly we’ve created a “subprime Unicorn market” (as Michael Moritz called it) consider that in the last 18 months in the US alone we’ve gone from 30 privately held technology companies worth more than $1bn (already considered high by some) to more than 80 companies just 18 months later. Either we’ve discovered magical beans and elixir or perhaps we’ve gotten ahead of ourselves on valuation. Here is a chart to show you the median valuation of late stage private tech companies compared to traditional growth rounds of capital led by VCs and also vs. the public markets.

The mania has spread to the point where non-traditional buyers of private tech companies have overwhelmed the market.

Mutual fund companies and hedge funds are seeing the same outstanding returns as the rock stars, and they are chasing.

“People say they’re concerned [about rising valuations] yet they continue to put money into” startups, said Danielle Morrill, chief executive officer of Mattermark, a U.S. firm that tracks deal data in private markets.

And the most interesting part about this phenomenon, is that the private market stage has been driven up to such high valuations, these companies are having difficulties floating their companies in the public markets at these elevated levels.

More and more of these ‘unicorns’ are finding peak valuation to be in the final stages of the private market.

We are in another tech bubble, there is no way to deny it. You have all the signs. Absolutely ludicrous housing appreciation in Silicon Valley. Look at this 1600 square foot 1954 charmer in Palo Alto – yours for the steal of $2.45MM.

Then we have shady financing terms. Have a look at the “hot” new IPO Square’s last round’s clause:

The institutional investors in Square’s most recent round of private financing, completed in the fall of last year, were guaranteed a return of at least 20% in the IPO, the filing showed. This will hold true even if the company prices its IPO at a lower valuation than in that private round.

The investors, including the private equity firm Rizvi Traverse and an arm of JPMorgan Chase, will benefit from a provision they negotiated that is known as a ratchet. Increasingly common in startup financings, ratchets are promises that investors will be issued additional shares if the company’s IPO prices at a disappointing value.

In Square’s case, investors bought $150 million of stock last year at a price of $15.46 per share, giving the company a reported valuation of $6 billion. What the numbers didn’t show was that investors had secured provisions to significantly limit their risk of losing money.

Now, if the IPO doesn’t translate to 20% gains for these late-stage investors, Square has promised to issue them enough additional shares to create that return, the filing shows.

When companies start “guaranteeing” returns, you know the greed is running thick.

Step back and look at this madness logically. Do you think it can go on forever? When have you ever seen Wall Street not take a good idea much too far? Do you think this is the smart money getting in at this point?

Or is the smart VC money (like Mark Suster) writing blogs about how stupid the valuations are and sitting on their hands?

At this point you might say, so what? Bubbles go on longer than most ever imagine. And you would be correct.

Yet I am seeing some fraying at the edges that leads me to believe the time for caution is upon us. The graph above that highlights the increasing difficulty of companies to go public at higher valuations than the private markets are assigning is extremely telling. We can argue all day about forecasts, but the price doesn’t lie.

And the price is slipping. Recently some big mutual fund companies marked down their private holdings in a couple of famed ‘unicorns’:

The Takeaway

BlackRock and Fidelity mutual funds have cut the valuation of their Dropbox stakes in recent months, new disclosures show. The funds paid $19.10 a share in January 2014 and now value those shares between $13.06 and $14.46 apiece.

Two of Dropbox’s largest mutual fund investors have marked down the value of their holdings in the company by a little over 20% in recent months, the funds disclosed in recent days.

While the reasons for the markdowns aren’t clear, they could reflect the funds’ faltering confidence in the company, valued at $10 billion at its last fundraising early last year. Dropbox’s core business of providing online storage is rapidly being commoditized as Google, Apple and Amazon all offer competing services at lower prices. Dropbox also looks pricey compared to rival Box, which is public and valued at $1.4 billion, despite being expected to generate between half to three-quarters of Dropbox’s estimated revenue this year.

These late stage private tech stocks are only suppose to go one way – up. For the first time in a long while, the price is going the other way.

In the coming quarters we might get a 1998 style final push higher if the Federal Reserve panics and eases. But we are getting closer and closer to a real accident in these tech stocks. Timing the end of the bubble is obviously difficult, but there is no doubt in my mind we are in another tech craze that will end badly.

If you feel differently, then I hear Linkin Park is looking for some limited partners for their latest fund…

Thanks for reading,

Kevin Muir

the MacroTourist