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Archive for January, 2016

Startup funding slowdown hits harder in Silicon Valley than S.F

The chill that descended on fourth quarter startup funding affected Silicon Valley more than San Francisco, according to research done for TechFlash Silicon Valley by PitchBook Data.

The overall number of deals and total of dollars that poured into Bay Area venture-backed businesses reflected the dropoff from the feverish activity of recent years that PitchBook and others reported earlier this month.

But it played out unevenly in the region.

There were 176 funding deals done in Silicon Valley in the last three months of 2015, down 35 percent compared to last year’s fourth quarter.


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San Francisco had 185 deals in the fourth quarter, down by about 30 percent from last year.

Helped by a huge Q4 $1.6 billion in funding raised by Airbnb, the amount raised by San Francisco-based VC-backed companies jumped by about 29 percent year-to-year to $5.2 billion.

The dollars raised in Silicon Valley in the period dropped by about 13 percent to around $3 billion.

 

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Investors around the world are ditching the markets

Not to alarm you — and please don’t call your wealth manager immediately after reading this — but the entire world is going to cash.

Bank of America Merrill Lynch (BAML) sent around a report tracking global fund flows, and since the second half of last year, cash has been the most popular asset in the world.

Over that period, about $7 billion went into the stock market. Fixed-income funds saw $46 billion in outflows, which BAML thinks is mostly due to redemptions from the credit markets, as opposed to, say, the government bond market.

Over the same period, $208 billion went into cash. When we say “cash” we mean the cold, hard stuff, and anything that can easily be converted into it. That includes money-market mutual funds and bank deposits that carry interest. It basically means investors are taking their money out of the markets and sitting it out.

BAML said investors are effectively selling inflation and buying deflation, or the continued decline in the value of asset prices.

The week ending January 27 saw the largest outflows from Treasury Inflation-Protected Securities — which are supposed to provide protection from inflation — in 33 weeks. It also marked the 13th straight week of outflows from bank loan funds and the seventh straight week of outflows from financials.

“All votes of no-confidence in the economy,” BAML said in the note.

In contrast, there have been four straight weeks of “robust inflows” into super safe government and Treasury bonds, and 19 weeks of inflows into muni bonds.

Here are the charts:

There have been huge inflows into money-market funds, while bond funds have seen outflows.

There have been huge inflows into money-market funds, while bond funds have seen outflows.

BAML

Super-secure government and Treasury funds have seen four straight weeks of inflows, according to BAML.

Super-secure government and Treasury funds have seen four straight weeks of inflows, according to BAML.

BAML

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The Fed just put global financial markets on notice

Federal Reserve Chair Janet YellenREUTERS/Joshua RobertsFederal Reserve Chair Janet Yellen.

The Fed didn’t budge.

On Wednesday, the Federal Reserve kept its benchmark interest rates pegged at 0.25% to 0.50% — as was expected.

So, effectively, not much has changed.

But the Fed made a key change to make clear that it would be “closely monitoring” developments in global financial markets.

Here’s the key sentence (emphasis added):

The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

The Fed also said that it would keep an eye on international developments as it examines the possibility for raising rates in the future (emphasis added):

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

When it comes to the Fed’s decisions, generally, its main concern is the US economy. So, often we don’t hear much about its thoughts on what’s going on overseas except for a few mentions in the minutes from each meeting, released three weeks after the initial statement.

But it looks like the Fed is once again eyeing what’s happening abroad as it is materially affecting businesses that make up the US economy.

“Although one could argue they are always monitoring global economic and financial conditions, the phrase ‘closely monitoring’ has traditionally been associated with a Fed that is quite concerned about current events. Combining this phrase with the removal of the phrase which noted that risks are ‘balanced’ highlights the uncertainty within the Committee,” according to UBS economist Drew T. Matus.

“These add up to a FOMC that, while still not willing to remove the option of going in March, is acknowledging conditions that may prevent them from doing so. Indeed, this statement could be read as making the FOMC that much more data dependent heading into the March meeting,” he continued.

Notably, the Fed previously included language about “monitoring developments abroad” in September after a rocky summer — although they subsequently took it out in December.

So now, given that the markets were quite volatile in January and various big US businesses such as Apple pointed in “softness” abroad, it’s not entirely surprising that the Fed again included such a reference.

Still, it’s worth acknowledging that this time around, the Fed’s tone was less intense.

“Note how much more benign the statement [this time] sounds than the warning that was included in the September 17, 2015 policy statement,” observed Credit Suisse’s Dana Saporta.

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Apple’s new 4-inch iPhone will be named ‘5se’ and pack updated hardware and Live Photos

Tim CookREUTERS/Stephen LamApple CEO Tim Cook.

Apple is coming out with a new iPhone called the “5se” that has a 4-inch screen and a number of new features, like curved edges and the Live Photos feature, 9to5Mac’s Mark Gurman reported on Friday.

The new phone, scheduled for release in April, is basically the same size as the old 5S, but comes with updated internal components and features that were previously only available on the newer 6-series iPhones.

Gurman reported that the “se” is supposed to mean the “special” and “enhanced” edition of the old 5S phone.

Despite the popularity of the iPhone 6 series, there has been some demand for a smaller version of the iPhone, like the 5S. Gurman says that Apple is hoping the new 5se will cause those 5S users to upgrade their old phones.

According to Gurman, the 5se also comes with similar curved edges like the 6S or 6S Plus, and features that include Live Photos and Apple Pay. It also comes with an 8-megapixel camera and the same color options as the 6S.

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Biotech investor: ‘None of us were as smart as we thought we were’

Screen Shot 2016 01 15 at 4.50.33 PMInvesting.com

It wasn’t that long ago that investors couldn’t get enough of biotechnology stocks. Now it seems as if they can’t get out of the sector fast enough.

The Nasdaq biotech index has dropped by about 17% in the first two weeks of 2016. This comes after it more than doubled in the previous three years during an investment boom that saw record IPO and venture-capital investment volume and a surge in takeovers.

A key part of this is the decline in the broader market. When investors are selling everything, relatively risky investments will drop further and faster, explained Bryan Roberts, a biotech investor who is a partner at the venture-capital firm Venrock.

“Investors get skittish when they see risk assets showing signs of deterioration,” he told Business Insider. “And biotech is absolutely a risk asset.”

In other words, this doesn’t speak to some kind of breakdown in the prospects for biotech companies or drug development, which can take as long as a decade and cost upward of $1 billion.

But it is a reminder that investors who made a bundle betting on the sector in recent years were also riding a wave of risk-taking across the board.

“None of us were as smart as we thought we were for the last three years,” Roberts, who has invested in the sector for 18 years, said.

There are some factors specific to the biotech sector that may be weighing as well. It was a letdown, for example, that there wasn’t much in the way of big news at the JPMorgan Healthcare Conference. The annual event is typically a great time for the industry, and in past years it has been loaded with news that spurred stock gains.

Bryan RobertsCourtesy VenrockVenrock’s Bryan Roberts.

(A massive takeover was struck at the start of the event — Shire’s $32 billion takeover of Baxalta — but it had publicly been in the works for nearly six months by the time it was announced.)

The timing of the market sell-off is particularly bad news for one group of companies. As in 2015, the JPMorgan conference was preceded by a wave of filings for initial public offerings and follow-on share sales.

The companies begin the IPO process right before the conference so they are set up to put a price on their shares by the end of January, Roberts said.

“But what nobody could predict was the downdraft in the market,” he said. “They all flipped confidential before you knew what the market was doing that Monday. And as you will note, no one has flipped to a public filing since.”

Investors already had reason to be wary of biotech IPOs. Half of last year’s IPOs — in which companies raised more than $5 billion — were flops as far as share performance is concerned, according to Bloomberg’s Zachary Tracer.

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San Francisco, January, 2016
The Advantages of a “Date-Certain M&A Process”
Apart from a formal bankruptcy (Chapter 7 or Chapter 11) there are two basic approaches to maximizing enterprise value for under-performing and/or under-capitalized technology, life science, medical device, fuel cell, cyber security, digital marketing, solar companies, etc. and their Intellectual Property: a “Date-Certain M&A Process” and an assignment for the benefit of creditors (ABC).

Both of these processes have significant advantages over a formal bankruptcy in terms of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “Date Certain M&A Process” has resulted in numerous transactions that have maximized value anywhere from 2-4 times what a normal M&A process would have generated for distressed asset(s). With a “Date-Certain M&A Process”, the company’s Board of Directors or senior lender hires a crisis management/ private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets.

The advisor works with the board, senior lender and corporate management to:

  1.  Focus on the control, preservation and forecasting of CASH.
  2. Develop a strategy/action plan and presentation to maximize value of the assets. Including drafting sales materials, preparing information due diligence war-room, assembling a list of all possible interested buyers for the IP and assets of the company and identifying and retaining key employees on a go-forward basis.
  3. Stabilize and provide leadership, motivation and morale to all employees.
  4. Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest.
  5. The company’s or senior lenders attorney prepares very simple “as is, where is” asset-sale documents. (“as is, where is- no reps or warranties” agreements is very important as the Board of Directors, Officers and Investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (to include customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors) and coordinates their interactions with company personnel, including arranging on-site visits.

Typical terms for a “Date Certain M&A” asset sale include no representations and warranties, a sales date typically four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $250,000 range to bid and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date Certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the Board of Directors or the senior lender may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.

The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is four to six weeks, although such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to a “waterfall” to include the senior secured lender, unsecured creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a “Date Certain M&A Process” can be concluded in 5 to 6 weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the Date Certain M&A Process compressed turnaround time, there is a significantly reduced requirement for investors or the senior lender to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the tire-kickers. In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the Board of Directors and/or the senior lender retains complete control over the process. For example, the board of directors and/or senior lender can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations/Clean Exit – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business. To this end the insolvency counsel then takes the lead on all orderly shutdown items.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 91 technology, medical device, life science, cyber security, fuel cell, digital marketing and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Virginia/Washington DC, Boston, Orange County, Europe and Israel.

GERBSMAN PARTNERS
Phone: +1.415.456.0628, Cell: +1 415 505 4991
Email: steve@gerbsmanpartners.com
Web: www.gerbsmanpartners.com
BLOG of Intellectual Capital: blog.gerbsmanpartners.com

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