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Remembering the Long, Strange Trip of Groupon’s Now-Fired Chief

Posted in Uncategorized, tagged , , , , , , , , , on March 1, 2013| Leave a Comment »

Article from NYTimes.

With Andrew Mason’s forced resignation from Groupon on Thursday, the career of one of the most unusual corporate chieftains has ended.

And what an eclectic journey it has been for the onetime darling of Silicon Valley, which ascended with blinding speed, then crashed just as quickly.

Though Mr. Mason’s departure from the four-year-old company he founded had been speculated about for some time — certainly in light of Groupon’s poor financial performance since its initial public offering — the exit was finalized only on Thursday morning, according to people briefed on the matter.

It was little surprise, coming after yet another disappointing quarter, in which the company missed analyst estimates and posted revenue guidance that also fell short of expectations. The company’s stock slid 24.3 percent on Thursday, to $4.53.

That valued Groupon at just $3 billion — after the company went public in late 2011 at a $12.7 billion valuation.

After meeting Thursday morning, Groupon’s board requested that Mr. Mason resign. He agreed.

Mr. Mason will be replaced on an interim basis by an “office of the chief executive” formed Thursday morning, made up of Eric Lefkofsky, Groupon’s chairman and co-founder, and Ted Leonsis, the board’s vice chairman.

Mr. Mason will still have some presence at the company: He currently owns about 7 percent of Groupon’s stock, and controls a much larger percentage of its voting power.

Mr. Lefkofsky bid Mr. Mason farewell in a fairly standard corporate statement: “On behalf of the entire Groupon board, I want to thank Andrew for his leadership, his creativity and his deep loyalty to Groupon. As a founder, Andrew helped invent the daily deals space, leading Groupon to become one of the fastest growing companies in history.”

In typical fashion, Mr. Mason described the circumstances a bit more trenchantly. Here’s an excerpt from a letter he sent to company employees on Thursday, which he posted online “since it will leak anyway”:

After four and a half intense and wonderful years as C.E.O. of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding – I was fired today.

He also references “Battletoads,” a cult video game for the Nintendo Entertainment System that a small minority of DealBook remembers as being sometimes absurdly difficult.

A Pittsburgh native who graduated from Northwestern University with a degree in music, Mr. Mason rarely ever seemed like the corporate type. He originally created Groupon as part of a bigger Web venture, focusing on daily deals as the most commercially viable part of that start-up.

Even then, he was known for his quirky humor. Three years ago, Mr. Mason made a video for a fictional “Monkey for a Week” lending service.

As Groupon grew, Mr. Mason’s peculiar demeanor sense of humor continued to garner attention. His grooming came up at least once, as Silicon Valley denizens pondered whether he’d hit a tanning salon before appearing at a TechCrunch conference in 2010 with a prominent bronze glow.

And in 2011, Mr. Mason had an unusual way of not responding to a question by All Things D’s Kara Swisher that he didn’t want to answer: with a “death stare.”

Groupon's I.P.O. roadshow video presentation.Groupon’s I.P.O. roadshow video presentation.

By that fall, as the daily deals giant was preparing to go public, Mr. Mason took on a more professional cast. In a video to prospective investors, the Groupon chief executive looked a bit more professional, complete with slicked-back hair and a dark suit and tie.

It was a persona he settled into post-I.P.O., usually delivering sober financial information in his public appearances.

But other parts of the run-up to Groupon’s I.P.O. in late 2011 were hardly laughing matters. The company took fire for introducing controversial accounting measures in its prospectus, which critics contended masked losses and unfairly diminished a need to spend heavily on marketing.

The Securities and Exchange Commission queried the company over its financial information in a series of letters that were eventually made public.

In August of 2011, Groupon announced that it was dropping the metric.

Two months later, the company revised its prospectus again to further clarify additional financial reporting measures, as well as to include an internal e-mail from Mr. Mason that was subsequently leaked to the press.

Even after going public, Groupon still ran into the occasional issue. It restated quarterly results last year after disclosing a “material weakness” in its internal accounting controls.

For all those troubles, Mr. Mason accepted responsibility.

“From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable,” he wrote in his letter…

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Venture capital for startups hard to get

Posted in Board Of Intellectual Capital, Business models, Economy, Entrepreneurship, Gerbsman Partners, International Finance, internet, Investments, IPO news, Market research, Social Networks, Startups, Strategy, Venture Capital, Venturebeat, tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , on December 12, 2012| Leave a Comment »

Article from SFGate.

It’s suddenly a lot harder for venture capitalists and startups to raise funds, as investors fed up with low returns turn their backs on the sector.

Most industry observers agree that lots of young firms will simply not be able to raise their next round of funding, commencing a period of belt tightening, consolidation and closures. At a minimum, it seems to mark the beginning of a more level-headed investment climate in Silicon Valley, after years of insatiable lust for all things mobile and social.

But if the drop-off is too sudden and steep, this new austerity could spill over into an economy highly dependent on the tech sector. Indeed, as The Chronicle reported last week, the industry has an enormous impact, with each tech job creating 4.3 indirect jobs in the community, according to a Bay Area Council Economic Institute report.

The investors and venture capitalists I spoke to insisted that we’re not on the verge of anything like the dot-com meltdown, characterizing the shift as a minor and healthy correction, or a “rationalization.” One suggested it was little more than the usual process of separating good and bad ideas in the marketplace.

But the numbers suggest something new is afoot. In the third quarter, the amount that U.S. companies raised in venture capital dropped 32 percent from the prior year, according to Dow Jones VentureSource. Venture capital funds themselves raised 17 percent fewer dollars from the second to third quarter, even as the number of funds grew, according to a joint report from Thomson Reuters and the National Venture Capital Association.

Economic uncertainty

Some partially blame the economic uncertainty surrounding the outcome of the election and the “fiscal cliff.” But the main problem seems to be that many of the “limited partners” that fund venture capital are pulling back after years of frustration.

Ever since a brief period in the late 1990s when venture capital burned bright, the industry has been delivering consistently weak returns on the whole.

In fact, despite requiring greater risks and larger capital outlays, venture capital has been underperforming the stock market over the past decade, according to a report this year by the Ewing Marion Kauffman Foundation.

Joe Dear, chief investment officer for CalPERS, told Reuters this summer that venture capital “has been the most disappointing asset class over the past 10 years as far as returns.” The huge pension fund for California’s public employees didn’t return repeated calls from The Chronicle.

Investment horizons have steadily spread out, from five to 10 to sometimes 15 years, as exit opportunities like acquisitions and initial public offerings fail to materialize. This has sometimes forced investors to put in more money to protect their initial funds.

‘Pretty grumpy’

“The industry definitely, for the last decade, has been a tough place to be,” said Ray Rothrock of Palo Alto venture capital firm Venrock. “We’re all pretty grumpy right now.”

Some of this is due to macroeconomic conditions outside the control of venture capitalists, notably the housing and banking crises. But at least some of it has to do with poor picks and herd mentality, funding companies with few real prospects and driving up the entry price for legitimately promising companies beyond what they could pay off.

“The market overfunded the number of companies in the system,” said Hans Swildens, founder of Industry Ventures in San Francisco. “There’s a glut.”

Even the grand promise of Web 2.0 companies that lured so much recent money hasn’t generated the hoped-for returns. The ones that managed to go public were often disappointments, including Facebook, Zynga and Groupon, in some cases leaving late-stage investors underwater on their holdings.

That was a final straw for some.

Last week, Forbes dug up figures from CB Insights that highlighted a wide and growing gap between the number of companies that raised initial funding and companies securing the follow-on investments, known as a Series A, generally necessary to keep going. This year, there have been 1,747 seed or angel rounds but only 688 Series A deals, underscoring the coming crunch.

Bad businesses

Based on as scientific a survey as the PR pitches in my inbox, there’s a tremendous number of silly, redundant and poorly executed companies out there that don’t warrant additional funding. The real problem isn’t that many of these companies won’t raise more money; it’s that they raised money in the first place.

For the venture capital industry to get back on track, it needs to embrace a renewed sense of discipline – on company picks, deal terms and total spending.

But hope springs eternal in Silicon Valley.

Rothrock stresses that the industry’s trend-line averages mask very strong results and ongoing investment at top firms, as well as growing venture capital activity among corporations like Google. Companies are just being more selective and looking beyond consumer Internet opportunities.

“We’re steady as she goes in terms of funding enterprise,” he said.

Secondary opportunity

Swildens oversees a secondary fund that buys shares from limited partners and venture firms looking to liquidate part of their holdings. He sees this period as a ripe opportunity for bold investors to get into promising companies at suddenly reasonable rates.

“Ours is one of the few firms aggressively putting money into these funds,” he said.

Mark Heesen, president of National Venture Capital Association, is similarly optimistic. He says the industry could be primed for a strong comeback in 2013, as long as the broader economy strengthens.

Above all, what the industry needs are some wins – acquisitions or initial public offerings that put investors clearly in the black and start to restore some lost confidence.

“If we see these exit markets start to generate good returns, I think you’ll see limited partners look at this asset class again,” he said.

James Temple is a San Francisco Chronicle columnist. E-mail: jtemple@sfchronicle.com Twitter: @jtemple

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Multinationals Stake a Claim in Venture Capital

Posted in Board Of Intellectual Capital, Business models, Economy, Entrepreneurship, Investments, tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , on September 4, 2012| Leave a Comment »

Article from NYTimes.

MENLO PARK, Calif. — New York, London and Hong Kong are common addresses for blue-chip multinationals. Now Silicon Valley is, too.

From downtown San Francisco to Palo Alto, companies like American Express and Ford are opening offices and investing millions of dollars in local start-ups. This year, American Express opened a venture capital office in Facebook’s old headquarters in downtown Palo Alto. Less than three miles away, General Motors’ research lab houses full-time investment professionals, recent transplants from Detroit.

“American Express is a 162-year-old company, and this is a moment of transformation,” said Harshul Sanghi, a managing partner at American Express Ventures, the venture capital arm of the financial company. “We’re here to be a part of the fabric of innovation.”

The companies are raising their profiles in Silicon Valley at a shaky time for the broader venture capital industry. While top players like Andreessen Horowitz and Accel Partners have grown bigger, most venture capital firms are struggling with anemic returns.

The market for start-ups has also dimmed, in the wake of the sharp stock declines of Facebook, Zynga and Groupon, the once high-flying threesome that was supposed to lead the next Internet boom.

But unlike traditional venture capitalists, multinationals are less interested in profits. They are here to buy innovation — or at least get a peek at the next wave of emerging technologies.

In August, Starbucks invested $25 million in Square, the mobile payments company based in San Francisco, which will be used in the coffee chain’s stores. This year, Citi Ventures, a unit of Citigroup, invested in Plastic Jungle, an online exchange for gift cards, and Jumio, an online credit card scanner.

Banco Bilbao Vizcaya Argentaria, the large Spanish banking group, opened an office in San Francisco last year. The team, which has about $100 million to fund local start-ups, is looking for consumer applications that will help the bank create new businesses and better understand its customers.

“We are in one of the most regulated and risk-averse industries in the world, so innovation doesn’t come naturally to us,” said Jay Reinemann, the head of the BBVA office. “We want to avoid the video-rental model. We want to evolve alongside our consumers.”

The companies are hoping to tap into the entrepreneurial mind-set. Multinationals, with their huge payrolls and sprawling operations, are not as nimble as the younger upstarts. While they are rich in resources, big companies tend to be more gun-shy and usually require more time to bring a product to market.

“Companies cannot innovate as fast as start-ups; increasingly they realize they have to look outside,” said Gerald Brady, a managing director at Silicon Valley Bank, who previously led the early-stage venture arm of Siemens. “We think it’s happening a lot more than people recognize or acknowledge.”

Of the 750 corporate venture units, roughly 200 were established in the last two years, according to Global Corporate Venturing, a publication that tracks the market. In the last year, corporations participated in more than $20 billion of start-up investments.

Big business has played the role of venture capitalist before, with limited success. During the waning days of the dot-com boom, financial, media and telecommunications companies sank billions of dollars into start-ups.

The collapse was devastating. Although some managed to make money, far more burned through their cash. In 2002, Accenture, the consulting firm, scrapped its venture capital unit after taking more than $200 million in write-downs. The previous year, Wells Fargo reported $1.6 billion in losses on its venture capital investments. Dell, the computer maker, closed its venture arm in 2004 and sold its portfolio to an investment firm. (It resurrected the unit last year).

Companies say they are taking a different approach this time. Rather than making big bets across the Internet sector, investments are smaller and more selective.

“We invest with the idea that we’re a potential customer for a company,” Jon Lauckner, G.M.’s chief technology officer said. “We’re not looking to make several $5 million investments and make $10 million on each. That would be nice, but it’s not important.”

As they try to find the right start-ups, some are forging tight bonds with local firms. BBVA, for example, is an investor in 500 Startups, a venture firm that specializes in early-stage start-ups and is run by Dave McClure, a former PayPal executive.

Unilever and PepsiCo are limited partners in Physic Ventures, a venture capital firm designed to help corporate investors build commercial partnerships with portfolio companies. Both Unilever and PepsiCo have installed full-time employees in Physic’s downtown San Francisco offices.

American Express has stacked its investment team with technology veterans. Mr. Sanghi, the head of the office, has spent roughly three decades in Silicon Valley and formerly led Motorola Mobility’s venture arm. Through its network of relationships, the office has met with roughly 300 start-ups in the last six months.

The connections have started to pay off. Vinod Khosla, the head of Khosla Ventures and a co-founder of Sun Microsystems, introduced the American Express team to the executives at Ness Computing, a mobile start-up. In August, American Express partnered with Singtel, the Singapore wireless company, to invest $15 million in Ness.

Mr. Sanghi says Ness is a logical investment and a potential partner. The start-up’s application connects users to local businesses through customized search results.

“It’s trying to bring consumers and merchants together in meaningful ways,” he said. “And we’re always trying to find new ways to build value for our merchant and consumer network.”

For start-ups, a big corporate benefactor can bring resources and an established platform to promote and distribute products. Envia Systems, an electric car battery maker, picked General Motors to lead its last financing round because it wanted to have a close relationship with a major automaker, its “absolute end customer,” said Atul Kapadia, Envia’s chief executive.

Although the company received higher offers from other potential corporate investors, Envia wanted G.M.’s advice on how to build the battery so that one day it could be a standard in the company’s electric cars. After the investment, G.M. offered the start-up access to its experts and facilities in Detroit, which Envia is using.

“You want to listen to your end customer because they will help you figure out what specifications you need to get into the final product,” said Mr. Kapadia.

A marriage with corporate investors can be complicated. Besides G.M., Asahi Kasei and Asahi Glass, the Japanese auto-part makers, are also investors in Envia. They both build rival battery products for Japanese car companies.

Mr. Kapadia, who prizes their insights into Japan’s market, says his company is careful about what intellectual property information it shares with its investors. At board meetings, confidential data about Envia’s customers is discussed only at the end, so that conflicted corporate investors can easily excuse themselves.

“In our marriage, there has not been a single ethics concern, because all the expectations were hashed out in the beginning,” Mr. Kapadia said. “But I can see how this could be a land mine.”

For the big corporations, start-up investing is fraught with the same risk as traditional venture investing. Their bets might be modest, but blowups can be embarrassing and can rankle shareholders, who may see venture investing as a distraction from the core business.

OnLive, an online gaming service, offers a recent reminder.

The company was once a darling of corporate investors, with financing from the likes of Time Warner, AutoDesk, HTC and AT&T. At one point, it was valued north of $1 billion.

Despite its early promise, the start-up crashed in August, taking many in Silicon Valley by surprise. The company laid off its employees, announced a reorganization and in the process slashed the value of the shares to zero.

“It can be painful when a deal goes sour,” James Mawson, the founder of Global Corporate Venturing, said.

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GSV Capital, Placing Bets on Start-Ups, Falters

Posted in Board Of Intellectual Capital, boic, Business models, Distressed IP, Economy, FaceBook, Gerbsman Partners, Intellectual capital, International Finance, internet, Investments, IPO news, Market research, Social Networks, Startups, Strategy, tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , on September 2, 2012| Leave a Comment »

Article from NYTimes.

Few investors have ridden the recent Internet boomlet like the GSV Capital Corporation.

After GSV announced in June 2011 that it was buying a stake in the privately held Facebook, the closed-end mutual fund surged 42 percent that day. Capitalizing on the euphoria, GSV sold another $247 million of its shares, using the money to expand its portfolio of hot start-ups like Groupon and Zynga.

Now, GSV is feeling the Facebook blues.

When the public offering of the social network flopped, GSV fell hard, and it still has not recovered. Shares of GSV, which were sold for an average of $15.35, are trading at $8.54.

“We probably benefited from our stake in Facebook more than we deserved on the way up,” said GSV’s chief executive, Michael T. Moe, “and were certainly punished more than we deserved on the way down.”

GSV, short for Global Silicon Valley, is the largest of several closed-end mutual funds that offer ordinary investors a chance to own stakes in privately held companies, at least indirectly. Closed-end funds like GSV typically sell a set number of shares, and their managers invest the proceeds. In essence, such portfolios operate like small venture capital funds, taking stakes in start-ups and betting they will turn a profit if the companies are sold or go public.

“I think GSV was really innovative in creating a kind of publicly traded venture capital fund,” said Jason Jones, founder of HighStep Capital, which also invests in private companies.

But the shares of closed-end funds trade on investor demand – and can go significantly higher or lower than the value of the underlying portfolios. The entire category has been hit by Facebook’s troubles, with GSV trading at a 38 percent discount to its so-called net asset value.

Mr. Moe, 49, has previously experienced the wild ups and downs of popular stocks.

A backup quarterback at the University of Minnesota, he started out as a stockbroker at the Minneapolis-based Dain Bosworth, where he wrote a stock-market newsletter called “Mike Moe’s Market Minutes.” He met the chief executive of Starbucks, Howard Schultz, on a visit to Seattle in 1992, and he began covering the coffee chain after its initial public offering.

“I left believing I had just met the next Ray Kroc,” Mr. Moe wrote in his 2006 book, “Finding the Next Starbucks,” referring to the executive who built the McDonald’s empire.

After stints at two other brokerage firms, Mr. Moe became the director of global growth research in San Francisco at Merrill Lynch in 1998. There he ran a group of a dozen analysts at a time when mere business models “were going public at billion-dollar valuations,” he said.

Shortly after the dot-com bubble burst, he founded a banking boutique now called ThinkEquity. At the time, he expected the I.P.O. market to shrug off the weakness and recover in a couple of years. Instead, it went into a decade-long slump.

“Market timing is not my best skill,” Mr. Moe said. In 2007, he sold ThinkEquity.

The next year, he started a new firm to provide research on private companies, NeXt Up Research. He later expanded into asset management, eventually changing the name to GSV. Within two months of starting his own fund, he bought the shares in Facebook through SecondMarket, a marketplace for private shares.

GSV soon raised additional funds from investors and put the money into start-ups in education, cloud computing, Internet commerce, social media and clean technology. Along with Groupon and Zynga, he bought Twitter, Gilt Groupe and Spotify Technology. The goal is finding “the fastest-growing companies in the world,” he said.

But Mr. Moe has paid a high price, picking up several start-ups at high valuations on the private market. He bought Facebook at $29.92 a share. That stock is now trading at $19.10. He purchased Groupon in August 2011 for $26.61 a share, well above its eventual public offering price of $20. It currently sells at $4.31.

Max Wolff, who tracks pre-I.P.O. stocks at GreenCrest Capital Management, said GSV sometimes bought “popular names to please investors.”

“This is such a sentiment-sensitive space, the stocks don’t trade on fundamentals,” Mr. Wolff said, adding, “If there’s a loss of faith, they fall without a net.”

GSV’s peers have also struggled. Firsthand Technology Value Fund, which owns stakes in Facebook and solar power businesses like SolarCity and Intevac, is off 65 percent from its peak in April. “We paid too much” for Facebook, said Firsthand’s chief executive, Kevin Landis.

Two other funds with similar strategies have sidestepped the bulk of the pain. Harris & Harris Group owns 32 companies in microscale technology. Keating Capital, with $75 million in assets, owns pieces of 20 venture-backed companies. But neither Harris nor Keating owns Facebook, Groupon or Zynga, so shares in those companies have not fallen as steeply.

GSV is now dealing with the fallout.

In a conference call in August, Mr. Moe was confronted by one investor who said, “the recent public positions have been a disaster,” according to a transcript on Seeking Alpha, a stock market news Web site. While Mr. Moe expressed similar disappointment, he emphasized the companies’ fundamentals. Collectively, he said, their revenue was growing by more than 100 percent.

“We have been around this for quite some time, and we are going to be wrong from time to time,” Mr. Moe said in the call. “But we are focused on the batting average.”

In the same call, Mr. Moe remained enthusiastic – if not hyperbolic – about the group’s prospects. Many of GSV’s 40 holdings are in “game-changing companies” with the potential to drive outsize growth, he told the investors.

Twitter, the largest, “continues to just be a rocket ship in terms of growth, and we think value creation,” he said. The data analysis provider Palantir Technologies helps the Central Intelligence Agency “track terrorists and bad guys all over the world.” The flash memory maker Violin Memory “is experiencing hyper-growth,” he wrote in an e-mail.

But Mr. Moe was a bit more muted in recent interviews. While he says he still believes in giving public investors access to private company stocks, he recognizes the cloud over GSV. “We unfortunately have a social media segment that got tainted. I completely get why our stock is where it is. It’s going to be a show-me situation for a while.”

Acknowledging some regrets, Mr. Moe said he was angriest about overpaying for Groupon, saying, “Yeah, I blew Groupon.” He said that he also did not anticipate what he called a deceleration in Facebook’s growth rate, and that it was “kind of infuriating” that some of its early investors were allowed to exit before others. GSV often must hold its shares until six months after a public offering.

But the downturn in pre-I.P.O. shares has a silver lining, Mr. Moe said. Since the Facebook public offering, he has been able to put money to work “at better prices.” He recently bought shares of Spotify at a valuation of about $3 billion, roughly 25 percent below the target in its latest round of financing.

The I.P.O. market is also showing signs of life, he said, with the strong debuts of Palo Alto Networks and Kayak Software. And he still has faith in Facebook.

Whatever its current stock price, at least it is a “real company” with revenue and profit, Mr. Moe said, adding, “It’s not being valued off eyeballs and fairy dust.”

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Institutional Venture Partners Raises $1 Billion Fund

Posted in Board Of Intellectual Capital, Economy, Entrepreneurship, FaceBook, Gerbsman Partners, Investments, IPO news, Market research, Silicon Valley, Social Networks, Startups, Strategy, tagged , , , , , , , on June 29, 2012| Leave a Comment »

Article from NYTimes.

 

Institutional Venture Partners has another billion to play with.

The venture capital firm, an investor in Twitter, Zynga and LivingSocial, has raised $1 billion for I.V.P. XIV, its 14th and largest fund to date.

According to a partner, Sandy Miller, the firm initially set a $750 million target but increased it on robust demand. The fund, which was raised over four months, relied mainly on capital from previous investors.

Unlike some of its peers, Institutional Venture Partners does not write a lot of checks, usually not more than a dozen a year. As a later-stage investment firm, it invests $10 million to $100 million in seasoned start-ups in three main buckets: Internet, enterprise technology and mobile.

“I hate to sound dull but we’re doing the same strategy,” Mr. Miller said.

Mr. Miller, a longtime technology investor and co-founder of Thomas Weisel Partners, is optimistic despite recent setbacks in the technology sector.

Skepticism in the public markets, most recently highlighted by Facebook‘s underwhelming initial public offering, has damped enthusiasm for some late-stage start-ups. Zynga, for instance, an Institutional Venture Partners portfolio company, has tumbled more than 44 percent since its debut last year. And plenty of experts question whether another start-up it has backed, LivingSocial, is worth such a high valuation after Groupon, its far bigger rival, has fallen about 50 percent since its I.P.O.

Mr. Miller acknowledges that some valuations may pull back, but he says he invests for the long term.

“I’ve watched the technology market over a 30-year period,” he said. “There’s more interesting, high quality companies today than there has ever been and by a very wide margin.”

He added, “In every market, most deals don’t make sense, and that’s true now, but that’s always been true.”

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