Archive for September, 2014

Marc Andreessen Sounds Warning on Start-Ups Burning Cash


Marc Andreessen, a venture capitalist.
Marc Andreessen, a venture capitalist.Credit Chip Somodevilla/Getty Images

Fretting over a possible downturn in Silicon Valley is now a mainstream pursuit.

Marc Andreessen, the prominent venture capitalist, took to Twitter on Thursday to warn against excessive spending by start-ups that have attracted capital from investors. Companies that spend money on fancy offices or too many employees, he said, could be in trouble when the market turns.

Mr. Andreessen is one of several technology insiders to recently raise such concerns. DealBook reported in August that, with capital flowing freely and start-up valuations soaring, some start-ups were raising cash as an insurance policy against leaner times. Bill Gurley, a partner at the venture capital firm Benchmark, warned in an interview with The Wall Street Journal that “no one’s fearful, everyone’s greedy, and it will eventually end.” Fred Wilson, a partner at Union Square Ventures, later wrote a blog post about excessive “burn rates.”

But Mr. Andreessen’s Twitter lecture was notable because he has been one of the most vocal opponents of the idea that Silicon Valley is currently in a bubblelike environment.

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Ericsson buys majority stake in cloud startup Apcera

Ericsson has taken a majority stake in San Francisco-based Apcera, which s led by CEO Derek Collison

Ericsson said it is buying a majority stake in Apcera, a software startup whose cloud-based software helps customers control their computing resources.

The San Francisco company led by CEO Derek Collison had raised about $7 million since it was founded in 2012. Collison is a former Google Inc. executive who also designed cloud software while at VMware Inc.

The amount of money invested in the deal by Swedish networking giant Ericsson was not disclosed.

Ericsson is one of the legacy networking equipment providers who are trying to find ways to get in on the move to accessing programs and data in the cloud instead of on site. Its sales have stalled for the past two years.

Apcera has more than 20 employees and said it will continue to operate under its current name as a standalone company. The all-cash deal is expected to close in the last quarter of this year.

The company’s investors include True Ventures, Kleiner Perkins Caufield & Byers, Rakuten Inc., Andreessen Horowitz and Data Collective.

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Cromwell Schubarth is the Senior Technology Reporter at the Silicon Valley Business Journal.

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Happy Thursday!
At Cupcake Digital we love Thursdays because this is the day we find out what’s new for the week in the App Store. From week-to-week, we do our best to give Apple the latest and greatest we’ve been working on to maximize our potential for promotions and strong curation within their store.


A Beauty-ful Strawberry Shortcake Launch
We recently launched a new Strawberry Shortcake Beauty Salon app exclusively on the Apple App Store, and we are very pleased with the premium placement we received, which resulted in top ranking for the first weeks the app was available, and the app continues to hover in the top ten. The results for this latest addition to our Strawberry Shortcake collection are very positive and we look forward to seeing how these apps generate incremental volume of downloads and revenue as Apple launches their bundling capabilities this week. One of our first bundles to go live features our terrific Strawberry Shortcake apps.


Sparky the Fire Dog is Back!
For the second consecutive year, we were tapped by the National Fire Protection Association to create an app featuring Sparky the Fire Dog. The purpose of his free app is to educate school-aged children about the importance of smoke alarms and having an escape plan in the event of a fire. This year’s app, Sparky & The Case of the Missing Smoke Alarms, launched with strong placement among free apps for kids on the App Store as well as the Amazon Appstore for Android and the NOOK App Store. Fire Prevention Week is celebrated in schools October 5-11, 2014, and this app will be a big part of the campaign, giving Cupcake Digital some great exposure by association.


New Licensing Agreement for Max and Ruby
Cupcake Digital will be collaborating with Nelvana Enterprises to create apps based on the long-running Nick Jr. series “Max & Ruby,” inspired by Rosemary Wells’ award-winning books. The agreement covers a range imaginative play and educational apps that will bring to life the comical situations and memorable antics of Max and Ruby beloved by young children and parents around the world. Apps will begin to roll out as soon as December of 2014.


Cupcake Digital’s iStoryTime Library app (lower right corner) comes preloaded on Acer tablet devices.
Cupcake Digital’s iStoryTime Acer Iconia Preload
Finally, we’re pleased to report that the preload of Cupcake Digital’s iStoryTime Library app on Acer tablet devices is resulting in a nice jump in Android users for the app. In a few short months, we’ve already added 40k new users on this device and now will be able to engage them with messages about new books in the library and additional standalone products from Cupcake Digital.
Please don’t hesitate to reach out to me directly if you would like us to give you access to some of our apps. I really enjoy sharing these with you and hearing your thoughts and ideas.

Brad Powers

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Venture Capitalist Sounds Alarm on Startup Investing
Silicon Valley Has Taken on Too Much Risk, Gurley Says


Updated Sept. 15, 2014 3:17 a.m. ET

Venture capitalist Bill Gurley, shown in 2010, says cash-burn rates at tech startups are alarmingly high. Bloomberg News
Silicon Valley is a risk-driven place. But over the past year, it may have taken on more than it can handle, according to one prominent venture capitalist.

“I think that Silicon Valley as a whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now—unprecedented since ’99,” said Bill Gurley, a partner at Benchmark, referring to the last tech bubble.

Mr. Gurley, who often voices his opinions on his blog, Above the Crowd, sat down with The Wall Street Journal as part of a Journal event series called “Tech Under the Hood.” The investor in Uber, Zillow, OpenTable and other Web startups spoke on a wide range of topics. What follows is an edited excerpt of a conversation specifically about potential cracks in the tech-startup investing scene.

WSJ: I want to read you something from your blog. You quoted Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful.” And then you wrote: “Although we may have not reached the level of observing obvious greediness, there is most certainly an absence of fear. Those that managed companies in 2008, or 13 years ago in 2001, know exactly how fear feels. And this is not it.” What did you mean by that?

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Mr. Gurley: Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ‘’99. In some ways less silly than ’99 and in other ways more silly than in ’99. I love the Buffett quote because it lays it out. No one’s fearful, everyone’s greedy, and it will eventually end. And there are reasons, which might take all night to explain, why this business is cyclical over time, and the more chance you have to see different cycles and to see how it slips away, you can see it.

There’s a phrase that I love: “discounted risk.” Do people discount risk? Right now you’ve got private companies raising $200, $400, $500 million. If you’re in a competitive ecosystem and you raise that amount of money, the only way you use it—because these companies are all human-based, they’re not like building stores—is to take your burn up.

And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that’s a form of discounted risk.

In ’01 or ’09, you just wouldn’t go take a job at a company that’s burning $4 million a month. Today everyone does it without thinking.

WSJ: Because the equity looks so valuable?

Mr. Gurley: Yeah, it’s a whole bunch of things. But you just slowly forget, and half of the entrepreneurs today, or maybe more—60% or 70%—weren’t around in ’99, so they have no muscle memory whatsoever.

So risk just keeps going higher, higher and higher. The problem is that because you get there slowly the correcting is really hard and catastrophic. Right now, the cost of capital is super low here. If the environment were to change dramatically, the types of gymnastics that it would require companies to readjust their spend is massive. So I worry about it constantly.

WSJ: You used the word silly—a lot of silly stuff going on since ’99. Give us an example.

Mr. Gurley: I’ll give you something that’s tactical. Part of it is why it’s cyclical right. For the first time since ’99, in the past 12 months, I’ve been in board meetings where the company says, “Our only option is a 10-year lease,” at record pricing on a per square foot basis here in San Francisco, which is two or three times what the rent was three years ago. And so this is why it’s all cyclical—because the landlords get greedy. They wouldn’t do a 10-year lease if they thought that the rates were low. So they’re implicitly telling you they want to lock this in for 10 years, which is its own form of greed because what happened in ’99 is half the companies went bankrupt and they couldn’t pay the lease over the 10-year period.

Anyway, it’s those kinds of things that happen. The most obvious one is just the acceptable burn rate. And that can be seriously, negatively reinforced by the capital market. In the software-as-a-service world, where the risk is potentially among the highest, Wall Street has said it’s OK to lose tons of money as a public company. So what happens in the board rooms of all the private companies is they say, “Did you see that? Did you see they went out and they’re losing tons of money and they’re worth a billion. We should spend more money.” And there are people knocking on their door saying, “Do you want more money, do you want more money?”

So it takes the burn rate up.

WSJ: As a result, is Benchmark pulling back?

Mr. Gurley: There are two types of answers to that question. How do we go about investing on a day-to-day basis in terms of new things? And I happen to believe that innovation happens more continuously, even though there are financial cycles, so you can’t afford not to be out on the field. But I do think you want to look out for what is the long-term viability of something. I’d much prefer to do a Series A [funding deal] right now than I would later-stage because of this type of risk. So that’s one type of answer.

The other type of answer is what you advise your companies to do. That’s really difficult because if you have a competitor that’s going to double or triple down on sales and you just decide, “Oh, well I’m not going to execute bad business decisions, I’m just going to sit back,” you lose market share. So, choosing not to play the game on the field doesn’t work, so you’re left with trying to advise someone to be pragmatically aggressive with some type of conservative backdrop or alternative strategy in case the world shifts. But it’s hard.

WSJ: And you see people apps like Yo or Snapchat. These things get hefty valuations but in reality what we’re talking about right now is eyeballs. And once upon a time I remember people were really intrigued by eyeballs, and that didn’t work out.

Mr. Gurley: I don’t have that criticism as much simply because we’ve seen so many proven cases now of taking huge market share and then monetizing. That was said against Facebook, FB -3.74% and that was said against Twitter. TWTR -5.24% I think the jury is out on our sale of Instagram and whether we sold it too soon. And so I don’t necessarily buy into the well, you’re not monetizing so it’s not valuable.’ And I guess [WhatsApp’s sale to Facebook for $19 billion] is another data point.

But I think it’s different to employ a bunch of people when you don’t have the wherewithal to fund yourself through and what type of risk are you taking (in that situation). Anyway, it’s something I think about constantly. And, unfortunately, I’ve come to believe that bad business behavior is coincidental with the best of times in our field.

WSJ: What do you mean by that?

Mr. Gurley: So, the crazier things get, the worse people execute. I was thinking of writing this so I’ll test it out on this group.

So I took my family down to the Galapagos this summer and read this book on the way down there called “The Beak of the Finch” which is about this couple that has lived on Daphne Island for 40 years studying the finch. And, amazingly, when there are huge El Niño years and floods bring tons of food to this island, the finch population goes up like three or four times. Inevitably, when the rains are normal the next season there is massive death. Simply because once you get the food level back to a sustainable level. So, from a fitness perspective, excessive amounts of food lead to a lower average fitness and I think the same thing happens here.

Excessive amounts of capital lead to a lower average fitness because fitness, from a business standpoint, has to be cash-flow profitability or the ability to generate cash flow. That’s the essence of equity value. And so I think we get further and further away from that in the headiest of times.

WSJ: So who loses? Who is way ahead of themselves? Name some names.

Mr. Gurley: That’s obviously loaded. I do think there is a high likelihood that we’ll see some high-profile failures in the next year or two. I actually think that could be healthy for the ecosystem. You remember in March when the IPO window closed for like three weeks and everyone thought that the world was coming to an end? Like you really have to work hard to remember it because it reversed itself so quickly. I think having events like that can lead to sanity.

And another element is—that most people don’t think about—liquidation preference. This is pretty technical, but liq preference piles up on a startup. It’s not common stock, it’s preferred, and it has a debt-like element on the ability to get your money back. So if your liq-preference stack gets so big it makes it is really hard to raise the next incremental round of financing, unless you have some kind of financial behavior that says it definitely should be worth more. They calcify a bit. That’s probably the right metaphor.

WSJ: So what does that mean exactly? Last in, first out?

Mr. Gurley: Sometimes that happens when terms shift. But at the very least, your return horizon might be impacted by, you know, now we’ve got private companies raising between $200 million and $1 billion. If the company ends up being worth not that much, then you don’t even get your money back. And your return payout at different points on the horizon may be negatively impacted by the fact that so many people could take their money back instead.

So one of the first things that happens when that starts to become a problem is that you start to see derivative terms, which gets to what you were talking about—first money out. And those things are guaranteed returns against an IPO or some type of debt. You have creeping PIK dividends (dividends paid in preferred stock), that kind of thing. And that then starts to change your return profile for everyone underneath it.

Write to Yoree Koh at yoree.koh@wsj.com and Rolfe Winkler at rolfe.winkler@wsj.com


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For institutional investors, keeping secrets for long is an impossible task. The Securities and Exchange Commission requires these entities to file a 13F, a quarterly filing required of investment managers of assets of $100 million or more, which contains information regarding the asset manager’s investment style and potentially even a list of equities owned.

It’s a good gauge of what an investment company did in the last quarter. Taking a look back at prior quarters can paint a fairly accurate picture of what direction they’re assuming the market will take and how they’re positioning themselves to prepare – long, short, equities, derivatives, and so on.

When an investor like George Soros suddenly increases a bearish position by 605% in a quarter, it raises more than a few eyebrows.

For the quarter ending on June 30th, Soros Fund Management reported a large investment in puts, options that give an investor the right, but not the obligation, to sell a security at a given price, for an ETF that tracks the S&P 500.

Breaking Down Soros’ Position

Normally, a large investment firm will place hedges on positions, whether long or short, in order to mitigate risk. However, Soros increased his put position from 1.6 million to 11.29 million shares. That’s the equivalent of going from $299 million to $2.2 billion in notional value.

Skeptical investors dismiss any worries about an imminent market collapse due to the fact the Soros added to a few holdings like Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) as well as added 182 brand new stocks. They believe his short position is simply a hedge or part of a longer term trading strategy.

I’m not sure it’s that simple. Soros’ total short position leaped from 2.96% to 16.65% making it the largest part of his holdings for the second quarter. That doesn’t sound like a hedge, it sounds like bearish speculation.

If we closely examine the stocks he did add to, it’s clear he’s preparing for a worst-case scenario. Soros doubled down on gold mining ETF’s and added plenty of gold-based companies to his portfolio. He increased his position in Market Vectors Gold Miners ETF to 2.05 million shares worth around $54 million from 1.16 million shares in the first quarter. He also established a call option investment worth 1.33 million shares of the Gold Miners ETF.

The gold addition is telling. Gold is an asset class that’s typically bought as a hedge against inflation or economic uncertainty. Real interest rates are in danger of becoming negative with the inflation rate at 2% and the yield on the 10-year treasury at around 2.33%. That means the inflation-adjusted rate of return is a scant 0.33%. If that figure declines, gold could see a rally, but that doesn’t appear to be Soros’s line of thinking.

The general consensus is that gold prices will actually fall in the next twelve months. Goldman Sachs estimates that gold will fall to $1,050 an ounce, a drop of nearly 19%. Speculators have pared back stakes in gold futures by 15% for the week ending August 5th as well.

So if Soros isn’t adding gold to his portfolio as a bullish sentiment, then the only reason left is as a hedge against a bear market. But one firm, albeit a well-known one, establishing hedges and speculating on a market declines isn’t enough for us to question the strength of the 5-year bull market yet.

Following In Soros’ Footsteps

George Soros is perhaps most famous for his trade made back in 1992 when he shorted the British Pound for a net gain of $2 billion and forced the Bank of England to devalue the currency. When he takes steps to leverage himself to profit from a downfall, investors tend to take notice.

Other major players share Soros’ feelings on gold. Hedge fund Pauslon & Co. owns 10.2 million shares of the SPDR Gold Trust (NYSEARCA:GLD) worth $1.21 billion and held on to his position for the second quarter making no new changes. Other companies have a bullish opinion about the precious metal as well like BlackRock Global and U.S. Global Investors. It’s enough to wonder what they know that Wall Street doesn’t.

Two of the most popular stocks for institutional investors have been Facebook and Apple, both of which were bought in greater numbers by numerous companies in the last quarter. At first glance, such a move may seem to indicate a bullish sentiment by so-called “smart money,” but there’s more to these companies than meets the eye.

Both companies have their attention on the Chinese marketplace as the next great growth opportunity. China’s market though, appears to be bracing for a fall. As counter-intuitive as it may sound, that doesn’t necessarily bode ill for these companies. The Chinese market has rallied on both good and bad news which could mean the government will step in with stimulus to support prices.

The world’s second largest economy is preparing for slowing growth and government intervention while the U.S. markets continue to hit new highs every week. There seems to be a disconnect on Wall Street and investors should be cautious.

To Follow, Or Not To Follow?

Many investors follow 13F filings as if it were a Wall Street cheat sheet. Following the moves of “smart money” should be a beneficial strategy according to their thinking process, but they fail to take into account several downsides.

First of all, the 13F reports are always a look back at what institutional investors did in the prior quarter, not a play-by-play breakdown of current strategies. Attempts to mimic a 13F means always being behind the curve.

The other big drawback is that hedge funds and other money management firm are often quite large and invest in ways that the retail investor cannot and should not. Strategies can include equities, bonds, derivatives, currencies, swaps, and other exotic instruments that work in tandem for large sums of money. Just to initiate a position in the futures market usually costs at least $50,000 making the strategies of firms investing in these markets much different than the appropriate strategies for every-day investors.

Still, there are takeaways to investment changes like the one’s Soros Fund Management made.

Concern for a market pullback is not just idle speculation. Here’s a few things to consider:

    • Bull markets historically last about 5 years – 2014 marks year number 5 for the current bull run.
    • The average S&P 500 P/E ratio is 15 while the current P/E is nearly 20.
    • The strongest sector of the year has been Utilities, typically a defensive sector that performs well in recessionary stages, at 15% YTD.
    • The weakest sector of the year has been Consumer Cyclicals, typically strong in market expansions, at just 0.23% YTD.

Combine these facts with the strong short moves George Soros made and a picture of a bear may begin to form in your head. Investors should consider this a warning notice to begin protecting your portfolio with appropriate hedges like covered calls and puts. Caution is recommended in this environment and you can be sure that we’ll be keeping a close eye on what Mr. Soros does in the third quarter this year.


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