Planet Yelnick

The Unicorn Bubble is Finally Getting its Due

Tech bubble: Different this time? 

By Elliott Wave International

Editor's note: This article is from Elliott Wave International's brand-new investment report, "U.S. Investors Face a Giant, Historic Bubble." It originally appeared in the April issue of The Elliott Wave Financial Forecast, published March 27, 2015. For a limited-time, EWI has agreed to give our readers exclusive free access to the full report. Please click here to read it now.

In March, we covered the return to a popular fascination with technology.

The striking resemblance to 2000's technology mania is not going unnoticed. How can it? With the NASDAQ's much heralded return to 5000 and magazine covers proclaiming "Google Wants You To Live Forever," concern about an "asset bubble" is being raised. But this is actually another throwback to early March 2000, when the NASDAQ reached its all-time high and the Financial Forecast remarked on a "public ambivalence toward warnings of any kind."

The March issue of The Elliott Wave Theorist explains that while people may remember some of the details, they "forget their prior mood and rationalize present extremes into normality."

This March 7 headline from a major financial paper offers a perfect example of how this "normalization" works: "Forget 2000. It's a Different Investing Ballgame." Really? Yeah, really. "It really is different this time," says another. "The crazy valuations seen at the turn of the millennium -- when silly concepts, such as collecting eyeballs, attracted billions of dollars from breathless speculators wanting to get in on the new, new thing -- are absent."

There's just one problem with this assessment, it's not accurate. Here's the reality, or should we say surreality, as depicted in Bloomberg on March 17:

The Fuzzy, Insane Math That's Creating
So Many Billion-Dollar Tech Companies

The article discloses how companies are shooting to "astronomical valuations," mostly with Internet ideas that capture people's bullish imaginations and, as in 2000, cause them to look beyond mundane things such as cash flow and profits. Once again, such stone-age metrics are less important than "the number of people using the product" and "whether they pay for it. Investors salivate over what's called 'hockey-stick' growth curves, indicating massive uptake. Costs, especially operations costs, are largely ignored."

As in 2000, the fever has been spreading fast. According to Bloomberg, start-ups with billion-dollar valuations were once dubbed "unicorns" because of their rarity. Now, Bloomberg counts more than 50 of them. Many have expanded ten-fold, so a new buzzword, "decacorn," now applies to those with capitalizations of more than "$10 billion, which includes Airbnb, Dropbox, Pinterest, Snapchat and Uber."

Of course, the driving force behind many of these investments is the same--a fear of missing out (FOMO).

"A severe case of FOMO can cause some to do crazy things to get into the hottest deals," says Bloomberg. This is exactly what the Financial Forecast said in March 2000, when we explained why people fail to heed ample warnings in the final throes of a mania: "Acting on such an opinion might mean missing something on the upside. 'The average person must ride it out,' says [a] Nobel Prize winner. Quotes such as these will deserve preservation in bronze when the bear market is mature." Clearly, that time still lies ahead.

For compelling Elliott wave evidence of a culmination of the Mania Era, see the five-wave advance in the share price of the current technology leader, Apple Inc., on page 3 of the March Elliott Wave Theorist. As the Theorist notes, after rising more than 14,500% over the past 12 years, S&P Dow Jones Indices added the stock to the Dow Jones Industrial Average on March 19.

This is one more remarkable parallel to the prior technology mania, as Microsoft was added to the Dow Industrials just prior to its January 2000 top. Here's how EWFF interpreted its addition in November 1999:

The ultimate concession to technology is due November 2, when Microsoft will be inducted into the Dow Jones Industrial Average. For most of the bull market, the world's most dominant stock was excluded from the world's premier blue-chip average. But just as RCA was added to the Dow in October 1928 (and removed in 1932), Microsoft has assumed its rightful place at the head of the pack, in time to lead the way down.

Apple has just been acknowledged in the same way and for the same reason. The pressure to pile onto the technology bandwagon has proved irresistible to the Dow's purveyors. This has generally happened when the most important stock market reversals were at hand.

Editor's note: This article is from Elliott Wave International's brand-new investment report, "U.S. Investors Face a Giant, Historic Bubble." It originally appeared in the April issue of The Elliott Wave Financial Forecast, published March 27, 2015. For a limited-time, EWI has agreed to give our readers exclusive free access to the full report. Please click here to read it now.

Buying AAPL: Catching a Falling Knife, or a Buying Opportunity?

By now it is clear Apple has fallen off a cliff after a parabolic rise.  History says the fall will at least retrace the parabolic rise. We saw this recently with Crude Oil rising over several years into a parabolical peak at $147 (cash price), then falling in six months to $31 before bottoming. We saw this in 2000 with a bunch of tech stocks, and in particular the leader at the time, Microsoft. Is AAPL, the leader in 2012, replicating MSFT, the leader in 2000?  The charts are eerily similar (courtesy Bespoke):

History also says a bull trap will emerge on the way down, a major bounce where many think they have caught the bottom, but when it reverses, they instead get sliced & diced as if grabbing a falling knife. Same bulltrap happened to crude on its rapid drop. The AAPL false bottom may have already occurred around $500 (see chart). After bouncing at that level, it has hit an airpocket and now seems on a bottomless journey down. A scan of the punditry finds some expectation for a bottom at $410, and I expect that level to catch some bids, but a look at the chart (red line) shows no support level until AAPL gets to the start of the parabolic spike up, at around $350.  

Apple is a quality company, and its recent miss seem to be more an anomaly of comparing a 14 week quarter a year ago with the 13 week quarter that recently ended than a sudden break in Apple's trajectory. Hence, at some point, a bottom will be found, and a buying opportunity discovered; the bigger question is whether, like Microsoft's lost decade, will Apple will grow quite strongly but never regain the recent stock highs? Maybe there is an app for that ... 

Green Energy Falls Off the CleanTech Cliff

This is really sad for those who believe in a future of green energy, but for investors has sent a clear message: the Green Bubble has burst. Solar City delayed their IPO, Solyndra and others are wrecks of a solar bubble, and Tesla may become the only electric car company standing as Fisker is now in deep financial trouble. The renewable energy stocks are down an astounding 98% from their peak, showing the signature of a parabolic rise into a bubble and a fast linear collapse:

AAPL Investors Face the Gravity of the Problem

Apple is falling to a key support level. It peaked around the levels I predicted, and has fallen fairly steadily since the iPhone 5 first weekend news of slow fulfillment.  Now we have unrest in their Foxconn factory. The stock today has dropped and plateaued for the moment right below the 640 support level. AllAboutTrends provides this chart in their newsletter today for guidance on where the stock may be going:

3DTV Without Glasses

In 2010, CES was all about 3DTV. I thought 3D would flop, or more prosaically, rapidly commoditize as just another feature in a flat screen TV. That certainly was what has happened.

The breakthrough would be to remove the 3D glasses, which is technically feasible as TV processing speeds up, but is just a lab project right now. On small screens I have seen a polarized approach to glasses-free 3D, especially to spice up videogames. Now the polarized approach is being tested on larger screens. A cheaper approach, but also years away, and in the demonstrations I have seen, an approach wtih a very narrow range of viewing (a small sweet spot for the 3D effect). The other method, using faster processing, would create multiple decent viewing angles.

In either case, not likely to hit CES until late this decade. Instead, the Next Big Thing is 4K TV - HDTV at much higher resolution. We should see multiple demo units at CES 2013. 

The Settop Box Is Beginning to Disappear

HBO just launched an OTT service to the Nordic countries - huge move, not tied to cable, presaging what is about to come. Something like 30% of viewing is now off TV, and tends to be excerpts not the whole title. The Smart TVs finally have a sufficient built-in capabiltyy to enable direct to TV over IP without STB. Something like 200M will ship in the next 18 months, growing to 50% of all flat TV shipments by 2016. Google plans to sell off the settop box business from Motorola, preferring more open platforms and knowing that the cable providers prefer to lock-in their customers. All of these means the disruption is about to become painful to the incumbents.    

Samsung's Ambitious Android Camera

Following Nikon's android camera, and not losing a beat after its big patent loss to Apple, Samsung launches a Galaxy camera. Lots of coverage, ranging from "yet another" android smartphamera (gets the award for awkward cleverness) to "crazy attempt" to fuse smartphone and point-and-shoot. 

Samsung has added some interesting twists on just having Instagram and other photo apps in your digicam. Like Nikon, they have easy sharing with Facebook et al. Beyond Nikon, and as a part of their fight with Apple, they offer their sCloud version of Apple's iCloud, which automatically uploads all your photos to Samsung's cloud. Other cloud services, like Dropbox and SugarSync also do this, and free you from the clutches of the phone vendor; still, this is a very good idea. 

As a camera, it has a huge 4.8" view screen, 16 megapixe sensor, and a 21x optiocal zoom. Pricing unkown.

Has AAPL Peaked, Part II

"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

When AAPL ran up into an interim peak in March, I asked whether AAPL has peaked? I used a chart which showed two potential pivots: at 593-601, which formed the interim top; and 668-677. We have now come to 675 and fallen off a bit. Apple's next big announcement is coming, and often stocks run up on rumor and fall on news. That may be all this is; or, is this the peak?

If you expand this thumbnail of AAPL's incredible run up, courtesy SlopeofHope, you will see a classic parabolic rise pattern. We saw it in 2008 with oil, which shot up to $147 a barrel then fell like a drill bit straight down over the next six months to $32. We saw it with the NASDAQ from late 1998 to early 2000, where it too fell like a dead cat from April to October of that year. And of course in stock after stock and commodity after commodity.

AAPL has now become the highest market cap in history, at least in nominal dollars. In inflation adjusted dollars, Microsoft was worth more in 1999, and IBM was much higher in 1967. Still, a seminal achievement for AAPL, and a warning flag for investors.

I ran a comparison of Google's thrust to its peak vs. Apple in my prior post, supporting the argument of a peak based on analogy. Here is the comparison to Microsoft's thrust up during the dot-com bubble, which shows Apple may have more room to run:

Word of caution: parabolic thrusts end badly, but by their very nature (underlying stampede of the herd) are unpredictable of how high they will run and when they will end. Arguing from a few analogies, like Google and Microsoft, is very thin to base a trade upon. The dynamic for Google several years ago or Microsoft in 1999 were very different than today. This is not an argument for "this time it is different," just a reflection of the über momentum behind parabolic rises, and how the emotion of greed (or for money managers, fear of falling behind) can run for a longer time than a short can stay solvent. Particularly so in this environment, of a Global Scramble for Yield; money managers have to have AAPL to keep up with their brethren, and boy do they enjoy the outsized yields so far. 

A little technical analysis may help. Here is the updated chart from the last report, with predicted levels of resistance, now shifted a bit to 671-688, a range we hit already:

 

Five Lessons From The Facebook IPO

Facebook: Fakebook, FailBook, FacePlant, pick your favorite euphemism for the epic fail tepid offering on Friday (it hasn't failed, yet, although perception here seems to have become reality - no pop, fail). The first half an hour of trading was a mess, and some retail trades ordered right away didn't get filled until after hours. Amazing.  

Whatever plagued FB also impacted a plethora of other tech stocks, including ZNGA, AAPL, NTFX, and INTU. Zynga in particular had a wild drop followed by a trading halt before recovering a bit. ZeroHedge's foresenic analysis concluded that software hammered the social software's IPO - software errors in the exchange routing systems.

The NASDAQ head defended his software this morning in the NYT, claiming his system didn't cause the stock to decline. He blamed order cancellations for the trading delays. I guess he doesn't realize that the glitch led to trading confusion, which caused the brokers to back off selling to their retail investors, who then stood aside. So, does he believe that a slackening of buy orders didn't contribute to the decline?

First lesson: FB would have been better off listing on the NYSE.

The expected first-day pop failed. Was this due to routing errors, gross over-pricing, or human mis-judgement?

A lot of the tech press blames the greed of insiders, who upped the amount of shares they could sell in this offering by a whopping 25% of the offering. Or the underwriters, who let it happen. Sy Harding has a more prosaic view, that Zuck's desire for advantaging the retail investor screwed up the normal process. There is also the Goldilock's view, that the offering ending flat means it was priced just right.

I think all these factors had an impact. Some whisper numbers suggested the institutions would have been happier at $36 not $38; and I suspect that when they got pushed aside for more retail investors, they had less incentive to play for the first-day pop (where they sell off some of their position for a quick skim). Worse, letting the enthusiastic retail investor in early removed the piling-on that drives a first-day pop. For the savvy retail investor, if you can get a piece of a hot offering, the offering ain’t so hot.

Second lesson: there is a reason IPOs are done a certain way, and it isn’t all greedy bankers. Google tried to change it, and got a tepid offering. Perhaps the same occurred here. Stocks are not like normal commodities, in that they increase in perceived value as they rise, whereas as normal stuff sells more when it goes on sale. BTFD.

Thanks to the greenshoe, the underwriters most likely have avoided taking a bath. They came in to support the stock at $38. A Reuters piece, widely linked, estimated the potential cost was $2B, well in excess of the potential profit on the offering  – indeed, in the JP Morgan derivatives “London Whale fail” level of a huge loss – but this reflects a common misunderstanding of the mechanics of an IPO. (Take a gander at this 'evil banker' sort of post on the economics of an IPO that exaggerate the upside and overlook the potential downside.) The greenshoe allows them to float an additional 15% in a hot offering - a potential profit enhancer - but also allows them to buy back shares in a cold offering as this one turned out to be. In effect, the 'shoe gives them a 15% short position which they can apply against buying back shares without cash. (And Reuters persisted with its misleading reporting even after the greenshoe was explained to them.)

Various investigations will sort out what went wrong. Fundamentally this is such a large float that the sort of first-day pop should not have been expected - even though the people-in-the-know almost universally expected a pop. I must confess, I too got caught up in the excitement; I thought it would open at $44, be driven down near $38 and then rise above $44 to end the day around $48. It did open around $44 – some services have it at $42.99 (WSJ), others at $45 – but of course it never climbed back above those levels. You can see the opening action in this chart:

Third lesson: Man is a herd animal.  That is why we get booms and busts, bubbles and depressions.

The biggest fallout of this IPO may be that it will not take the place of Apple in 1980 and Netscape in 1995 - the IPOs that rang the bell on the subsequent tech booms. Instead, it is more of another Google, a seminal offering that did not spark an early Web 2.0 boomlet. You can see a comparison to AAPL, MSFT, GOOG and AMZN in this cute infographic. 

My take: FB waited too long to go public.

Fourth lesson: It should have gone IPO in 2009, while it was still in the big growth stage.  THAT would have been one glorious pop! And a lot of the value would have flowed to the retail investor, not just the insiders and institutional investors, as they would have caught the great 10x rise from then to now.

I do not expect the FB IPO to put a damper on the upcoming onslaught of other social mobile web IPOs. There are about the same number of $1B+ valued private social companies as public ones, and most will attempt to get public over the next 18 months. 

Think of the pop that didn’t happen as the proverbial dog that didn’t bark. FB got out at a huge valuation! It now has a huge cash hoard to go roll-up the industry and solidify its tremendously advantaged position. It will spawn thousands of local millionaires, and they will become a new hoard of angel investors to increase the entrepreneurial fervor that has gripped SF and NY.

Final lesson: Don’t confuse buying a stock with buying a company. Facebook is stronger after their IPO, much stronger, even if the stock weakens.

Has AAPL peaked?

I was day-trading GOOG around 2007 when it went parabolic and then fell like a rock. A warning shot for what happened to the market in 2008. Been playing with AAPL in a  similar way, and just saw it go parabolic. Is history repeating? First the collapse of AAPL and then the whole market? Check this chart out from Doug Kass:

I have seen a lot of commentary on this chart. "This time it is different!"  GOOG was at a 50 PE while AAPL has drifted to a PE that is the same as the whole S&P (which makes sense given its market cap size - "regression to the mean" - It IS the mean now!). AAPL is still growing fast and has continued dominance of its sectors. Etc.

Stock predictions range from a low of $450 to a high of $750, with whisper at $1000, which would value AAPL at close to $1T. 

Now, I am an Apple fanboy, and use my iPad and iPhone 4S constantly, eshewing my Android phone (Google Nexus - you get it, prior Google fanboy untll the stock popped), hardily touching my Windows netbook, and sitting in front of an iMac dreaming of a Macbook Air with a touch screen. But I am buying a stock, not a company.

That stock has produced. Looking back, it got to as low as $3.18 in 1997-8, whle generally hovering below $5. Bill Gates bailed out Apple for $150M back then. if Microsoft had held that stake, it would be worth over 100x - over $15B. Microsoft also bought into Facebook in 2008, and that stake will be worth a lot too, but the AAPL return is truly outstanding.

Parabolc runs always end badly, typically with a fall off a cliff shape. When GOOG fell, it had the expected bounce (wave 2) and then fell hard - look at the chart. But parabolic runs have no clear rules. AAPL may keep running. There are a bunch of stock market aphorisms around this, including don't get in front of a moving freight train.  

One way to figure this out is to use techncial analysis. Here is a wave chart on AAPL, which says the recent tick at $600 could very well be the end:

This Time the Tech Boom is Driven By Reality

Last time, the dot-com boom was driven by a frenzy over gaining eyeballs. Valuations went through the roof well before revenues.

This time the hot companies are growing real revenues remarkably fast. The WSJ noted how much faster the leaders like Groupon and Zynga have raced towards $1B in revenues, much faster than in prior tech booms and perhaps the fastest in history:

Groupon’s revenue in 2010 rose more than 22 times to $760 million in its second full year since its daily deals site launched, up from $33 million in 2009. Zynga, the maker of online social games like FarmVille scored revenue of $850 million in its third full year in 2010, more than triple the year before, and Facebook’s revenue rocketed to as high as $2 billion in 2010, its sixth full year.

Their ridiculous revenue growth rates actually rival those of the four largest Internet companies–Google, eBay, Yahoo and Amazon.com ... 

Compare all of this with the software industry. [L]ess than one-third of the nation’s top software companies reached $50 million in annual sales in six years or less – and the fastest to $50 million, Novell, took three years. Microsoft crossed the $50 million barrier in eight years; Oracle, 10 years.

It should be no surprise, then, that Facebook has crept back to a $70B market cap in private trading, and JP Morgan just raised a $1B fund to buy into the private market of shares for high-fliers, beginning with Twitter.  Something big is brewing, and the smart money is leaping in.

The tech trade press is beginning to figure out that these valuations fit within normal metrics, assuming the incredible growth continues.

It is not 1999 all over again. Not yet. 

It is too facile to knee-jerk and call it a bubble when we have revenue growth of this magnitude by the leading social companies. 

Get Ready to Party Like it is 1995

1995 was one of my favorite years. Silicon Valley had been in a funk for over a decade, with a fading memory of the last tech bubble, the PC IPO craze that flamed out in 1983 but launched some really great companies. The peace dividend from the fall of the Berlin Wall had impacted engineers in local defense companies (remember the movie of a laid-off defense worker in LA going postal?), and an area-wide initiative called Joint Venture:Silicon Valley was formed to revitalize the place. Was Silicon Valley already over? 

Then along came the Netscape IPO and the dot-com boom was born. It ran for five more years. 

This time around our Netscape is Facebook, and it has its own social network of other high-profile IPOs. LinkedIn, Groupon, Twitter and Zynga are expected to go out before Facebook gets forced out by our SEC by April 2012.

The question du jour is will it spark the next great tech boom, and the most encouraging (nea joyous) answer is that people are still skeptical. They expect this bubblet to burn off fast and for Silicon Vallley to sink back into the abyss of the past decade. The herd was also full of skeptics in 1995, and in 1996, and 1997; it was only after the eBay IPO in 1998 that the stampede began and people opined that this time it was different. Of course it wasn't, but the Nasdaq doubled from late '98 to early '00. 

I led a local panel two weeks ago, with VCs squaring off against Angels and SuperAngels. When asked whether the slew of social IPOs would spark a new boom, they demurred and said these would be one-off events, like Google was - special companies that get out, not the start of another bubble. This attitude is good news; in 1999 the same sorts of opinion leaders would have said they know things are nuts but they have to keep investing to keep up. (You can look that up - a real quote from a well respected VC.) It is the attitude of greed, which is just fear - fear of falling behind. 

Point is, we are still in "1995", not "1999". 

Last week, however, the new tech boom began to be recognized. It started at GigaOm, where their European commentator asked whether we could avoid another bubble, and answered that we have already been in one for 20 months, it just hasn't been recognized. Then the inestimable Om Malek compared some of the bubbilicious valuations (Twitter at $10B!!) with the salaries paid to baseball stars by the Yankees. He made them make sense. (If you have been following this blog, you know that for the past year I have reported on ever-rising valuations of SuperAngel startups, the signature of a new tech boom.)

The recogniton began building across the week, with Dick Kramlich of NEA telling Bloomberg how the coming social IPOs would be the first blockbuster IPOs since the '90s! (NEA invested in Groupon when it was called ThePoint, at a normal venture valuation, before it ran to over a Billion Dollar value two years later.) It culminated with a report across the wire at MarketWatch about here comes dot-com 2.0!

The MarketWatch gushy wire got me worried, so I scanned more news items, and breathed a sigh of relief. The general thrust of the commentors is still coming in skeptical. The SF Chronicle ran a piece today about the incipient bubble, and concluded that the skepticism is curbing the hype. The head of the very successful incubator, Y Combinator, calmly explained that there is no tech bubble, since unlike the '90s, almost all of these companies have real business models (Twitter excepted). Mark Cuban, who became an overnight billionaire in the dot-com bubble by selling a Broadcast.com to Yahoo for $5.7B, a business which then promptly disappeared, expressed disdain, calling this not a bubble but a "pyramid scheme"; he would know! Paul Kedrowsky, an industry watcher, opined late in the week that Facebook is not a bubble value, and it could go higher in secondary-market trading before its IPO.

Ok, this 'we don't believe it yet" got me comfortable again, until I saw the advance cover for next week's Fast Company: Mark Pincus, CEO of Zynga, will grace it. CEOs are back, as celebrities - we haven't seen that since 1999! 

The problem: it is well known that when a magazine like Sports llustrated shows a star quarterback after a big game, he is likely to bomb the next week. Getting on the cover of Sports Illustrated was the kiss of death for a sports star. In the 1990s, getting on the cover of Inc had the same impact. Is Pincus peaking?

This weekend the WSJ laid the issue to rest. We are not like 1999 in one huge respect: money is leaving venture capital, not rushing in. This is not a general bubble but a narrow-based boom, with VC fundraising still very challenging, leading to haves and have-nots in the VC world. In the late 1990s, investors were piling money into VC firms. This time, especially because they use 10-year returns to allocate capital, capital is still leaving the venture world, not rushing into it. (VC ten year returns are really bad compared with other asset classes. The technical term is that VC ten-year returns have sucked, big time.) This actually bodes very well for future VC returns, as less money chasing these funds should make the brave & the few still moving into VC very successful. 

I discussed this with Rory O'Driscoll of Scale Ventures (formerly Bank of America Ventures). Rory is one of the great thinkers in this industry. He does his homework and respects numbers, as you can see from his blog VC Matters. He constructed the following chart, which shows how VC returns do best when VC finds are on a diet, and he expects future returns to rise:

Curiously, no one has yet named this era. I call it the Social/Mobile/Web, and while the social web has dominated to date, the mobile side is shaping up to be huge. Mary Meeker was one of the great analysts of the dot-com bubble, and now she is at Kleiner Perkins, dong what she does best. Her latest work shows how the next decade will be shaped by the new face of mobile. From her point of view, it is 1996 all over again. 

Demand Media Kicks Off Social IPO Season With a Bang

Amidst a nice little Obama SOTU Rally since late in yesterday's session, Demand Media (DMD) priced at $17, above the range, and is now trading around $23, a fine opening to Social OPO Season. DMD is now valued at $1.5B and is the largest Internet IPO since Google. The offering was also super-sized, from 7.5M shares to 8.9M. 

DMD has about the same market cap as the venerable New York Times. 

DMD has a different model than the NYT: it creates on-demand websites based on expected hot search keywords rather than create news stories based on, well, news. It covers topics that are of current interest, and should be compared to Time-Life or McGraw-Hill rather than a newspaper. This sites are a new form of the sort of special-interest magazines that McGraw-Hill used to cherish. Some of the most popular are ehow.com, livestrong.com, trails.com and the guy site cracked.com. 

A popular term in the websphere these days is "curation", the use of a human editor to organize and select content. DMD is a hybrid of machine-generated and curated, where the keywords help guide DMD to construct a site that matches how prospective readers are trying to find information on the web, and the human curators construct and update the site. In effect, they are using keywords to drive editorial content, and humans to make the site interesting. Although DMD is the subject of derision from old-fashioned editorial sites, it is better thought of as using modern, social techniques to determine suitable groupings of editorial content.

Its bet is the crowdsourced keyword editorial context drives better editorial content. So far its sites collectively are the 17th most watched sites on the Internet, an incredible achievement. The most read is ehow.com. 

If you wish to play this new category, a good read is this TradingIPOs analysis by Bill Simpson. He says to watch the operating expense ratio, essentially the spread between paying contributors and monetizing the sites. DMD uses freelancers for the most part. In an accounting decision which is controversial, DMD amortizes the cost of content over five years, rather than expensing; this turns a loss into a profit. He thinks fair value is $14-16, below the current trading range. 

The other issue to watch is Google's steps to rank search results differently, which could lower DMD sites in the search stack. Right now 41% of DMD readers come in from search results. The initial move of Google is to encourage searchers to report poor results, which I do not expect to lead to much of a response and therefore to have little impact on DMD. The war between quality results and synthetic sites from DMD will continue. 

The Social IPO Onslaught is About to Commence

The new wave of tech is the Social Mobile Web, and its leading companies are lining up to go public. We haven't seen such a lineup since 1995, when Netscape went out and rang the bell on the dot-com mania. Further back, this happened in 1980 when Apple went out (in an overall poor market climate) and set off the PC bubble. Will lightening strike a third time?

The first out is Demand Media (to be Nasdaq: DMD), run by Richard Rosenblatt, who had been CEO of the parent company to MySpace. DMD is a next generation style content site, which mass-produces sites based on hot keywords. Google search begats synthetic content, designed to rise to the top of search results and skim clicks.  Blogger Paul Kedrosky describes DMD's business as: “find some popular keywords that lead to traffic and transactions, wrap some anodyne and regularly-changing content around the keywords so Google doesn’t kick you out of search results, and watch the dollars roll in.” This modern way to produce content has produced hockey-stick growth, but Google just announced modifications to search results to undermine these synthetic web sites. DMD is highly dependent on search optimization and will quickly modify what it needs to to stay ahead of Google.

How this business dynamic plays out is anyone's guess.

How this IPO dynamic plays out will set a tone for the coming IPO Season. DMD should go out at over a $1B valuation, and be the largest Internet IPO since Google itself. It is supposed to price at the close on Tuesday (tonight) and begin trading Wed. 

On its heel are LinkedIn, Zynga, Groupon and eventually Facebook. LinkedIn is now trading at a $3B valuation. Yes, trading, even though it is not yet public. Markets fill gaps, and a secondary trading market for private shares has evolved for these social IPO candidates. Demand for these shares is hot hot hot, and Facebook ticked to a $70B valuation even as Goldman Sachs did an organized sale of $1.5B at a $50B value. 

You might wonder why they have to subject themselves to Sarbanes-Oxley and other nefarious regulatory schemes when they can raise and trade effortlessly in private markets. Well, the Empire eventually strikes back, and the SEC has put pressure on Facebook to go out as its tradeable shares close in on the 1934 Act limit of 500 shareholders.  

Until the Empire shuts it down, SecondMarket is a great resource. Here is its current hot list, showing which social IPOs should be hot:

Tech Stock Smackdown

Uncertainty creeps into the tech world on soft cat's paws. Last week was full of surprises: Eric, Steve, some guy at AMD, half the HP board, gone. Apple has tremendous momentum and had blow-out earnings, but maybe it is all priced in? Google still beat, but a close look suggests it barely made it, and largely on currency hedging, not core business. AMD beat and the stock gets hammered the next day on chip pricing weakness. And maybe it is over for the PC-centic Intel Architecture? The sharp reaction suggests the stock was priced to perfection.

Perhaps next week will be a general tech stock smackdown, as the whole market is priced to perfection. 

Small caps have taken a dive (see chart). 

The major indicies didn't fare much better, other than the Dow, driven up by GE and strong earnings, plus a hint of crony capitalism. We have a clear divergence which will resolve one or the other:

Tech is where the action is. First AAPL. Casey Research had done a bearish number on them last June, but reconsidered this weekend as the iPad has blown past all expectations. AAPL is poised to be the WinTel of the tablet era; it might garner the combo value of Intel+Microsoft as of the 2000 peak. They find the current stock price in line with expected earnings. And add this:

Now that Jobs might be gone for good, would we recommend shorting the company?

Apple had its Q1 2011 earnings call yesterday, and results were again better than anybody could have expected. Revenue for the quarter of $26.7 billion reflected an increase of 31% from the previous quarter and 70% from the same quarter a year ago. Earnings per share came in at $6.43, a full $1.79, or 38%, increase from last quarter. What’s more, iPad unit sales came in at 7.3 million, indicating an average of 2.43 million per month – more than 20% higher than the 2 million units we assumed for the conservative earnings forecast above.

So, for now, Apple is running like a well-oiled growth machine. An amazing feat given its size (with a market cap over $320 billion). And we expect this to continue for at least the next several quarters whether Jobs is at the helm or not.

The test for AAPL will come when it hits the 50 DMA, which has provided support during prior Whither-Steve-Jobs episodes:

Over to GOOG. Larry Page was the initial Google CEO, and he stepped aside for Eric Schmidt for a decade. Now he has gone back into the drivers seat.

Is the second coming of Larry Page the return of a Steve Jobs, or of a Jerry Yang (YHOO)?

Other founders have returned to run their company and done middling, such as Michael Dell right now. At moments of market transition a successful tech CEO needs to bet the company on a new vision. Google is at such a moment, losing momentum to Facebook and the whole social mobile web phenom.

Most tech companies fail to come up with a second act: IBM, DEC, Lotus, Yahoo, to name a few. Consider the fate of Microsoft since the departure of Bill Gates:

Ballmer completely fumbled the transition for PC to mobile. Compare MSFT to AAPL during the Ballmer era:

Will there be a general tech selloff next week, bring the broader market down? It seems much more likely afer this past week. Uncertainty begats profit taking. 

Will Steve Jobs Bring Down the Market?

It is difficult to imagine a world without Steve - he has been the prime driver for three generations of computing: Apple // begat PC and MSDOS; Mac begat Windows; and iPod begat a whole new mobile experience, with iPhones and iPads. This is an unparalleled achievement. Whither technology if Steve really retires, or his illness worsens?

His leave was announced a day before earnings, which suggests Steve's situation is too serious to wait even a day. 

Apple is expected to announce blow-out earnings tomorrow, but AAPL is down 7% in German markets, and the Nasdaq 100 futures are down hard (see next chart from SlopeofHope). Apple has had such a run that stories are beginning to emerge that the stock has no place more to go. The next frontier would be to conquer TV, but Steve has insisted the Apple TV offering is but a hobby - which means his vaunted Steveness has not yet figured out how to conquer the world of Mad Men. Most likely it is his failure to negotiate deals that would enable Apple to offer a $30 cable TV bundle over the Internet within iTunes. It could be this is the time to sell AAPL, not buy the coming dip.

Of course, last time this happened, the stock dipped 10% and then tripled. This time Steve's condition may be worse. 

This drop started before the Steve announcement, which suggests the expected January correction has begun. This event could trigger a series of falls. Investors are best described as jittery. 

One Interesting Insight From CES

The public side of CES was very incremental. Nosing around the floor can sometimes unveil that which is hidden. I spent some time with a very well-connected character in mobile and he laid out the case that Oracle will have to enter the smartphone race, and may be in the best position to challenge Apple and Android. 

When HP bought Palm I commented on their logic: rather than be a box supplier for Windows or Android, they believe they need to have architectural control. Palm's new WebOS is the most developed alternative to Apple and Android, and gave HP the best starting point. They intend to eschew the mobile handset space (at first) and race ahead in tablets. WebOS is easy to program in for web designers, giving HP a possible developer community to leverage. (Apple's iPhone leveraged the Mac base, and now has a whole new base; and Android leveraged Java). How well they do will now depend on execution and great apps.

HP seems a bit slow to get out of the starting gates, however, which opens up room for another challenger. Nokia's Symbian seems out of it. RIM's Blackberry is making their play right now with their new touch line, and it still has a strong following, as you can see from this recent Nielsen market survey:

What remains is a huge Java phone installed base, estimated at 3B feature phones, all of which rely on Java. That base dwarfs the smartphone market. Sun (now Oracle) is the prime licensor of Java, and Java gets into handsets via 'stack' suppliers like Aplix and Esmertec (now Myriad). The world remains firmly Java even as the high-end is going Apple or Android. 

Oracle bought Sun and now is in a series of battles to maintain royalties for Java. Esmertic (Myriad) has defected and sued Oracle, claiming excessive royalties; Android modified its Java engine and claims not to owe to Sun. Oracle has sued Google and counterclaimed against Myriad. 

Rather than play defense, their next move is to go on offense and launch a Java-based smartphone OS (or embedded java stack that the handset makers can add on top of their proprietary OSes). They have a 3B user market to convert, scads of handset makers to sign up (all left a little high-and-dry by the onslaught of Apple), and a huge Java developer base to keep in the fold and out of the clutches of Android. My source says they are already making moves:

From the directions that Oracle is taking (and deeply investing in) it is clear that they are making a large client move with embedded Java. They have made it clear to the JCP executive committee that JSE 7 will be their technical competition for Android. They are setting up to support the eco-system and willing to make the moves needed to recapture and grow the Java market share. They will be pushing JSE 7 changes into OpenJDK that they have partnered with IBM on. ... This will exceed the openness of Android, but they will still need to meet the service value of Android.

Watch and see whether Oracle goes a step further into a branded Java smartphone community with an apps store, mimicking Android. Investors take note that an apps store for Java already exists in a company called GetJar, which might be snarfed up by Oracle as their strategy gains substance. Game on!

KIndle Safe From CES Tablet Mania

iPad Not a Kindle Killer, TechCrunch survey says. Good thing too. CES is full of tablets but my family is full of Kindle lovers.

With 3D a Bust, TV Gets Smart

CES approacheth, and so do video dreams. Last year the industry bet on 3D, with Sony going all in. As I reported after the 2010 show, it was not ready for prime time. It flopped.

This year hope changes to "smart TV" - the boob tube turned into a smartphone, with apps galore. Clever, certainly, but smart? Wait 'til you see the remote! Will immediately fail the Wife Acceptance Factor (WAF). 

Smart is not well-thought-through yet, but starts with an Internet-connected TV that accesses television online. The onslaught of Netflix continues unabated. Stories fly through the blogosphere about cord-cutting away from cable and into online TV. Cable is indeed losing customers, and about at the pace we saw a decade ago from landline to mobile telephony. 

I bought two networked blu-ray players that were simple enough to pass the WAF and yet provide Netflix, Vudu and YouTUbe on the telly. Both came from LG and were powered by Widevine, one of my investments that recently got bought by Google. I believe in online TV and have placed bets. 

Stepping beyond "online TV" to "Smart TV" and into the land of apps, and the future gets murky. TV remains a lean-back experience. For TV makers, the cost and complexity to enable an apps layer (typically powered by Google's Android) may be quickly wrung out of the profits in the hyper-competitive TV market. The advantage will inure to Google, Netflix and the new intermediaries who provide the content & apps services. 

Let's see what they cook up at CES. More when I return. 

Tesla Does Cars the Silicon Valley Way

Tesla has bounced back after Monday's lockup drop. Nonetheless, many comments I received on my Tesla posts show skepticism, and ask what is so special about Tesla. This week's Economist tackles that question. Simply put, Tesla went about designing its battery packs the Silicon Valley way, while Chevy with its Volt and Nissan with its Leaf went about it the car company way. 

Tesla assembles its packs from thousands of battery cores of the sort found in laptop batteries, leveraging a scale manufacturing ecosystem. The car-makers redesign the batteries into large-format cells, laminated together in tiles, creating a custom-maunfacturing requirement for each car-maker. Which approach do you expect is more scalable and cost-effective?

Tesla puts 6,831 battery cores into blocks, and assembles blocks into its battery pack, which is liquid-cooled. The Leaf uses 192 tiles, each the size of a magazine, and ties four tiles to make a module. The Leaf's battery pack is made from 48 modules and is air-cooled. Which approach to cooling do you think better extends battery life and manages environmental changes?

Tesla may see more competition from battery-pack makers like A123. They also design a custom battery, rather than using laptop cells, and modify the chemistry to make them less prone to over-heating and easier to cool. It also makes them less energy intensive, requiring more batteries for the same drive time, although perhaps they can be managed differently to last longer (ie. allow a lower level of discharge before recharging). Another new entrant is Coda, which initially planned to use A123 batteries but switched to designing a custom battery with a Chinese company that is one of the largest makers of laptop cores. 

Game on! Tesla's stock is holding up while A123 is still well below both its IPO price and its first-day pop. My bet is on the Silicon Valley way. 

Tesla Down Not So Big In a Flat Market

Tesla is a bellweather of the cleantech IPO market. Last night I asked how Tesla would fare after the 180 day lockup ends and venture investors start selling. VentureBeat reports that Tesla is down 16% at the moment after an 8% drop last Thursday, the prior trading day. 

So far about 6m shares have traded. The lock up added 75m new shares to the market on top of a prior float of 93m shares. Short interest on Thursday was 6:1. All in all, the Tesla drop is not as bad as one might have expected. The stock got close to $25 and is now up a bit at $26, still well above its IPO price. We shall have to see how much more it drifts down all week as the selling continues.

WIll Tesla's Stock Hold Up Past Lockup?

Tesla comes off lockup Monday. Shares available for trading will triple Monday. Typically a potent IPO will fall, as venture investors take profits.

In this case, the funds hold such a large position, they may make a year-end distribution of Tesla stock rather than rushing to sell, leaving it up to the limited partners' to decide to hold or sell, which might smooth out and delay profit-taking. 

VentureBeat, which supplied this IPO photo, does a nice assessment of the lockup risk to the stock. Most telling Tesla has attracted a large short interest. The GM IPO drove up short interest, and it hit 22:1 at the end of October right before an earnings report. Right now the short interest expects a drop, and an informal poll of venture capitalists found the highest they expected Tesla to settle was at $18, a huge drop from its current price above $30. Grinches all!

Tesla has defied the skeptics. The stock popped after the IPO then fell below the offering price, but unlike another high-profile cleantech IPO, A123, Tesla then climbed back up and recently got to new highs. Tesla has scored great deals with Mercedes, Toyota and Panasonic (for batteries), buoying its prospects both as a business and a potential acquisition. It expects to unveil its next car in the January Detroit Auto Show.

In the slow Santa trading period, Tesla is the stock to watch. 

Disclosure: I have a small indirect interest in Tesla. 

How's That Net Neutrality Thing Working Out?

The free-wheelin' days of the Internet are numbered. The Internet now becomes subject to Federal encroachment with the new net neutrality regs. It is not clear if the FCC has the authority to regulate the Internet, and that proposition might be tested in court, but they went ahead and grabbed the power anyway. 

The most immediate impact is on Internet stocks: cable is up, phone companies are down, and content companies have gone up a bit then plateaued. Google and Apple went down when the news broke.

It is perhaps no coincidence that this is breaking when WIkiLeaks is under assault. Julian Assange is in jail under a somewhat odd (if not trumped up) sex charge from Sweden, and he may fall into the clutches of the US government. 

Where are the civil liberty folks when we need them? Is it that hard to compare WikiLeaks to The New York Times, and the private who illegally leaked to Daniel Ellsberg of the Pentagon Papers? Or are web sites about to lose the protections of the First Amendment, including Freedom of the Press?  

Instead, it is left to the WSJ of all places to expose the forces behind net neutrality, which are probably not what you think they are. John Fund unveiled what led to this decision and the motivations behind it - which are to control content, not simply price the fast lanes of the info highway:

The net neutrality vision for government regulation of the Internet began with the work of Robert McChesney, a University of Illinois communications professor who founded the liberal lobby Free Press in 2002. Mr. McChesney's agenda? "At the moment, the battle over network neutrality is not to completely eliminate the telephone and cable companies," he told the website SocialistProject in 2009. "But the ultimate goal is to get rid of the media capitalists in the phone and cable companies and to divest them from control."

There is a lot of blather flying around the blogosphere over this, and over McChesney's background, and the story could easily blow this out of all proportion. The current administration did, however, try to shut Fox News out of the flow of press briefings by the While House, and have floated the idea of reinstating the Fairness Doctrine in order to shut down talk radio in general and critics like Rush Limbaugh and Glenn Beck in particular. Their record on a free press is already suspect.

The FCC decision today is much more limited, but might be the proverbial camel's nose under the tent. This is the angle taken by TechCrunch, which views the fight as just beginning. GigaOm focused on the disparate treatment of wireline and wireless networks, expecting wireless broadband prices to rise. VentureBeat found the exemption of wireless networks "a bit of a head scratcher." 

The capstone to this story might be the old adage to be careful what you wish for. Big Internet content companies like Google have been lobbying for some sort of net neutrality rules, and may someday wish they had left things alone. 

The Tech Boom is Showing Up in the Nasdaq

I have been writing about the tech boom that is emerging in Silicon Valley. Beyond the anecdotes, the boom is showing up in indexes of private company valuations and growth. Despite the dearth of IPOs, the broader forces that are driving this boom are showing up in the Nasdaq100. The explosion in social mobile web apps & devices is energizing stocks like Apple and Amazon. The Naz has shown relative strength since the September-to-Remember rally:

SlopeofHope crowed on Friday about how the Naz100 is about to break to new post-bubble highs (referring to the 2000 dot-com bubble), being the first major index to crest the 2007 highs. The Naz100 is the subset in the Nasdaq of the top 100 non-financial Naz companies based on market cap, and reflects better than the whole index the breakout of this social mobile web boom. Many Naz companies are small-caps not related to this trend. 

Slope added a word of caution, that this peak may be a top, consistent with other signs of an impending top in stocks (see my recent post). This seems pro forma. More likely it marks a potential divergence, where the tech boom drives the Naz100 despite a more lackluster or down broader market. This happened in the early 1980s and reflects a boom based on economic fundamentals in a sector rather than a general market bubble. Imagine what comes of the Naz100 if Facebook, Twitter, Groupon, Zynga and Twitter go public in the next two years. 

Silicon Roundabout: London Joins the Social Mobile Web Party

The social mobile web phenomenon with all those colluding superangels and bubbilicious valuations has been so far centered in two places: Silicon Valley (SF) and Silicon Alley (NYC). The Economist now reports that a third center has emerged: Silicon Roundabout in the east end of London:

In 2008 followers of the technology industry began to talk excitedly about a cluster of internet start-ups in the Shoreditch area, near the ugly Old Street junction, to the north-east of the financial district. There are now around a hundred high-tech businesses in what has inevitably been dubbed Silicon Roundabout.

Measured by the concentration of technology firms and the availability of generous and informed investors, California’s Silicon Valley is still in a league of its own. But in the second division of hubs, this chunk of east London is near the top, along with the likes of Boston and Tel Aviv. That its growth took place so quickly, and during a recession, is remarkable enough: the high-tech zone in Cambridge has taken decades to evolve. But the fact that Silicon Roundabout also emerged without government support, or even direct links with universities, should pique the interest of countries that have tried to cultivate technology hubs without the same success.

Observers of Silicon Valley have reported a cluster of forces led to its emergence: universities, venture capital, favorable employment laws, and a density of engineering talent. The Silicon Roundabout story has none of those attributes. How did it emerge so fast?

The Silicon Valley story fit an era of investing in core technology, which spun out of universities, and required heavy venture capital to get launched. The founders of social mobile web companies are working at the top of the technical stack, in the apps layer, where the tools allow rapid product development. They can be funded by angels and super-angels, and get far enough along in market traction to attract funding from VCs that need not be close by. 

Simply put, this is no longer about technology, but about imagination. 

What is driving Silicon Roundabout is the same phenom that started first South of Market Street in SF and second north of the Village in NYC: birds of a feather flocking together. The 20something Millennials who are driving the social mobile web like to live in cities, and their energy and co-opetition is feeding on itself to lead to long hours and cool products.

So where next? My bet is Silicon Outback: Sydney. It has the same attributes of a place attractive to Millennials, and shares a cultural affinity to social mobile web products. Get on it, down under, will ya?

The Baton is Passed from CleanTech to the Social Mobile Web

Interesting meme racing around the tech blogosphere on this cybermonday: that one of the most respected venture firms, Kleiner Perkins, is switching gears from cleantech to the new social mobile web or whatever it should be called. John still expects some billion-dollar cleantech IPOs next year, but he has been talking up the new sFund and it has sparked speculation about where he sees the next big thing. 

CleanTech had a bit of a bubble, and is off the peak, both in values of many deals and in pace of investing. Certainly some deals have done well, in particular Tesla, which in recent days has traded up above the levels of the initial pop after IPO. (Note: I have a small indirect interest in Tesla.) Yet there has not been a green IPO that spawned a rush to the category. It has not had its Netscape Moment. As GreenBeat summarizes:

Basically, cleantech needs a facebook

The social mobile web has its Facebook, and its Twitter, Zynga, LinkedIn, Groupon, etc. While many are awaiting for a series of social mobile web IPOs in the next two years, the market has already treated Facebook private shares like IPO candy. SecondMarket reports that Facebook shares are now trading at $50B market value. This makes it worth more than Yahoo or eBay, closing in on Amazon ($80B), and within 1/4th of Microsoft and Google. 

John may be a bit wistful, having so strongly promoted the sFund he has cast a shadow on his cleantech investing. We can see where this is going with a recent funding round of his firm and Accel partners (who just made a killing selling Facebook shares) into an energy efficiency deal, OPower, a deal that crosses over between the Internet and cleantech. 

Where John leads, we should not be afraid to follow. The SuperAngel phenom has now crossed over itself into mainstream venture capital. The game is on! The next tech boom is emerging, 

Bubble Trouble

Funny juxtaposition. The media cannot get the story straight. First the WSJ publishes a Serious Editorial that Few Businesses Sprout, With Even Fewer Jobs, especially from a dearth of venture-capital startups. They added a nice chart (below), and made this assertion:

Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Then the NYT opines As Technology Deals Boom, the Talk Turns to Bubbles, which makes this assertion:

Is the world ready for another Internet bubble?  Ready or not, it appears to be coming. In fact, it may already be here. And it seems to look, not surprisingly, like the last Internet bubble.

The NYT is tracking a storyline emerging from Silicon Valley, of the SuperAngel bubble that I have been reporting on. Last week at the Web 2.0 conference in SF two leading venture capitalists faced off for a discussion of whether this was a bubble or not. The facilitator hoped for a SuperAngel smackdown, and instead got a fairly good discussion of what is bubbling in Silicon Valley (and Silicon Alley in NYC). 

On the SuperAngel side, Fred Wilson of Union Square Ventures said he had seen irrational bidding up of deals, and was worried. He had blogged that he was seeing Storm Warnings of too much capital pouring into deals:

I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

On the traditional VC side, John Doerr of Kleiner Perkins, the very model of a modern venture capitalist, sees this as the beginnings of a new tech boom, not the blowoff top of irrational exuberance as in 2000. He concludes with:

Booms are good!

While it comes across as a Gordon Gecko sort of comment, I think John has the better of this argument. The reason the SuperAngel bubble is not showing up in the WSJ stats is that it is a very small phenom right now, nothing like the dot-com bubble.  A bubblet, not a bubble. This is how new tech booms start, and it adds more support for a coming tech boom that will rival the PC craze from 1978-83 and the dot-com mania from 1995-00. 

The Chevy Volt is an Interesting Car

Who woulda thunk that the most interesting car in the world would come from GM, and a Chevy to boot. Motor Trend test drove the Volt, and liked it more than the flashy Tesla. The Volt is in fact the first practical electric vehicle, one that fits more than a niche market.

Unlike the Tesla, or the Nissan Leaf, the Volt can be driven as far as a regular car without running out of juice. It is the first true electric (vs a hybrid like the Prius that relies heavily on the gas engine) with a range extender that kicks in to recharge the battery when the all-electric driving has drained it.

The Volt is the first electric to fulfill the American dream of driving with no limits.

The trade press is wrestling with this. Is it really an electric? Or a disguised hybrid? Silly question. The allure of electrics is in normal commuting (say, 40 miles), the car can run all electric, be plugged into the grid at night, and be good to go in the morning. The Prius cannot do this; if it is lightly feathered in the morning commute, it gets perhaps 13 miles on battery and then the engine kicks in. But who does that? In everyday driving, the engine kicks in all the time. It gets over 40 mpg, but so does the new Jetta diesel with "Prius-humbling thrust". 

The Volt is designed to run 25-40 miles on batteries without needing the range extender. Motor Trend trucked around LA and got 36 miles before the range extender kicked in. The car kept going, and drove the same way, since the small engine was charging the battery, not clutched into the drive train like a hybrid. They drove 120 miles with the AC on, and even pushed the Volt to 100 miles an hour and up steep inclines. Driving hard, they got 75 mpg. Driving to and fro their office, they got 127 mpg.

They also pushed it up the mountains outside LA. Above 70 mph, the engine clutches to the drivetrtain, giving extra power.

The Volt also has a "mountain mode" to stay at a steady 70 mph on electric power and pass those annoying 18-wheelers heading up steep grades. This is especially useful when on a ski trip. 

It may not win the Indy 500, but it won't slow you down. Again, no limits.

The Volt is the best advertisement for the potential of all-electrics. The American driver has nothing to fear of an electric future. 

And none too soon, either: on the very day the Volt launched, JD Powers issued a report throwing cold water on the hot electric vehicle category, expecting them to sell poorly, especially when the subsidies run out. The Washington Post picked up the story, with an op-ed that concluded:

[T]he Obama administration's commitment of $5 billion in loans and grants for electric cars is the biggest taxpayer rip-off since corn-based ethanol. It benefits no one but a few well-to-do car buyers and politically connected companies. Any "green" jobs these rent-seeking firms create will vanish when consumers reject their products and/or the subsidies cease.

The Volt may prove JD Powers wrong, if it sells well; and even if it doesn't, this op-ed is a bit over the top. Cars are never just about the money. When I was working in LA, even the assistants and secretaries had BMWs. A car is much more than mere transport. The Volt may never have the sex appeal of a Tesla, but it says something about the driver that the comparable Chevy Cruze never could. 

Even if Volt doesn't sell well, it provides a lesson about innovation that is far more important than the car itself: 

Amidst bankruptcy, bailout, dealer triage and brand reduction, how could a ragtag team at GM pulled off the best-engineered electric to date?

The lesson is this: it was not in spite of all the turmoil, but because of it, that GM finally got freed from the hangover of Ralph Nader's Unsafe At Any Speed, a book which stifled innovation at GM for over 40 years. The real story here is a how a team unleashed from regulations, lawsuits, intimidation and public excoriation could put the US car industry back in the forefront of innovation.

In Silicon Valley, we celebrate the success of Tesla to show the world how the Silicon Valley approach can revitalize a mature industry. We know small furry mammals can run ring arounds the big dinosaurs. With the Volt, a fossilized elephant has learned how to dance. 

Motor Trend thinks it would make a great movie.

Strike 3 For 3DTV

I have been beating up on 3DTV, and now surveys strongly support my position. NewTeeVee reports that surveys of consumer interest show only 15% interest in 3D at home, with 63% not seeing the need. In contrast, the interest in online (Internet) TV is 51% higher.

The third strike against 3DTV (after lack of content and those darned glasses) is the GoogleTV announcement, with Android-powered online TVs and blu-ray players been launched by Sony.

This launch is huge since the TV now joins tablets and smartphones as the next connected device, which I see as the foundation for the next tech boom. The price increment for an online TV is fairly small, and I expect it to largely disappear as Internet becomes a requirement in future TVs and blu-ray players. 

While online is gaining strong interest, estimates for 3DTV shipments are decreasing from earlier optimism in spite of chirpy optimism normally seen in market research firms trying to sell reports to manufacturers. (A key to understanding these reports is that the "higher numbers win", meaning the ones trying to promote the market will buy reports with higher numbers, so when the chirpy researchers drop forecasts the market is really weak and they are scrambling to regain credibility rather than sell reports.)  

The biggest differentiator of online TV vs 3DTV is: it's the content, stupid. For many viewers, it is a simple as getting Netflix online, which looks like an online subscription movie service with much broader selection than HBO or Showtime. There is also keen interest to add new channels (especially special interest and international) as well as to watch social videos from YouTube and other sources. Sports viewing gets enhanced as well with additional viewing angles and commentary, and it is possible to watch NFL games online despite the blackout on local TV.

There is still much to be worked out. Sony bet their strategy on 3G back at CES, and now seems poised to make a new bet on online TV. They need to fix a few things, like this overly complicated remote. TV is a leanback experience ...

IPO Pipeline Building But Quality is Falling

As we go into the final stretch this year, the IPO pipeline is building, but their valuations are sinking. TechCrunch reports 67 deals entered the pipeline since July, and so far this year the first nine months were up over the same period in 2009. IPOs were up to 32 in Q3 from 20 in Q3 a year earlier, but the size was down, with one over $500M. The WSJ gives more data on the pipeline, looking at 49 venture-backed IPO candidates:

• 9 of them are retreads, taking their second shot at going out, which the Journal notes is but "a small fraction of the group that previously cancelled their IPOs." 
• Only 11 of them are above $100M revenue
• Only 16 were profitable in 2009
• Only 1 well-known social media winner is going out - Demand Media

This is not a very compelling distribution, and it is also a bit skewed by two outliers (see charts). It appears we will have to wait for the balance of social media winners (Facebook, Twitter, Zynga, LikedIn) to spark a revival of IPOs. 

Tech Startup Valuations Continue to Rise

More indications of a coming tech boom are showing up. Not so long ago, the angel or seed round would value a company at around $1-2M. With the rise of the SuperAngels and the Cambrian Explosion of interest in consumer Internet deals, seed round values have crept up to $3-4M, levels normally seen with traditional Series A rounds.

Now observers are noticing that they are jumping over the $4M line as well. Two recent deals received around $1M each at values above that $4M line. I know of a number of other financings above that line, but what is striking about these two deals is that they are getting done by newer entrants to this game:

• Hipmunk raised in a "hyper-competitive" round where a cluster of angels drove the values up; previously we had seen this sort of auction coming from traditional VCs after the seed round
• The Pulse iPad app (shown above) raised an angel round from four traditional VCs (Redpoint, Mayfield, Greycroft and Lightspeed), who followed the SuperAngel convention of an uncapped convertible note

Both may be one-off situations, particularly the gang of four VC stepping down to the angel level. Sometimes these types of investments make sense due to relationships and are not the start of a new trend. Nonetheless, it is clear the rapid rise of SuperAngels is disrupting the traditional VC business. 

3DTV Without Glasses Adds a New Dimension to Future TV (But Don't Hold Your Breath)

I reposted yesterday I post I had done after CES because of the announcements this week of 3D TVs without the need for glasses. Those units are not ready for prime time, and I think the announcements run the risk of the classic Osborne Computer mistake of the 1980s: Osborne was the leader in portable PCs (before laptops), but they were not compatible with the IBM PC during the period when the PC began to gain an architectural lock software. Osborne rushed to announce their next model would be PC compatible, and customers held off purchasing the current model. The company went bankrupt.

The Osborne mistake is now enshrined in business schools as what not to do. So why did some of the big Japanese TV makers jump the shark on 3DTV?

Start with the dreadfully poor outlook for 3DTVs. In my CES post last January, I found the push for 3DTV premature for three reasons:

• too little content - HDTV could leverage movies while broadcast caught up
• too sketchy an experience - the look was not that compelling
• too burdensome to use glasses

Shortly after CES, the early results suggested that 3DTV would be a bust. It was thought to be a gimmick, an expensive feature seeking a market, not a need driven by consumers. Samsung had to add warning labels to their 3DTV sets, that drinking and 3D don't mix. I am not sure this is a real problem or over-anxious lawyering, but some people do report headaches or dizziness while wearing those 3D glasses.

About the same time, the big push by movie studios into 3D seemed to be missing expectations. After Avatar and Alice in Wonderland, the new releases were disappointments. Hollywood is in the doldrums and the studios have been pushing 3D as a way to increase ticket prices and hold theatrical revenues up even as ticket sales droop. Nonetheless, Hollywood is persisting, and recently it was announced that the highly-anticipated Hobbit movies will be in 3D. 

As with color and HD, it is believed that sports will drive 3D demand on TV. Some leagues like baseball and hockey are already streaming 3D broadcasts. (This may cause some bandwidth challenges, as 3D will have to coexist with normal HD.) ESPN launched a 3D channel just in time for the World Cup.

All well and good, and yet there has been no rush to 3DTV. It is coming too quickly after major upgrades to HDTVs, and is way behind in compelling content. And of course has those darned glasses. 

Big news then that this week several makers including Toshiba announced a 3DTV without glasses. When I was at CES I asked when this would be out commercially, and heard promises of "five to seven years." Naked-eye approaches have been known for a while, and are being developed across the TV makers. Here is a video by Toshiba showcasing their new naked 3DTVs:

The Toshiba models have modest sized screens, and need to handle nine viewing angles, which today requires lower resolution images - they are less than HD sets in 3D mode. They have very narrow viewing angles, and you have to get really close to see the effect. The Toshiba models are designed for niche markets, and may not even sell there.

In a nutshell, we are still a years away from commercial HD-quality naked-eye 3DTV sets.

My take: the Japanese often do this, to one-up each other, with less of an eye to the impact on consumers than they should. They launch inside their own echo chamber. The visibility to the consumer of a better 3DTV in the future may suppress 3DTV sales in the present, but the Japanese are probably betting these announcements will be little noticed. Instead, inside their echo chamber, they can use the promise of naked eye 3D to overcome the real problem: the dearth of 3D content for TV. The promise of these sets "soon" should sustain the development of more 3D content for TV.

3 Things to Know About 3DTV

Everywhere you looked at CES this year was filled with the promise of 3D. Sony made a huge commitment to 3D, betting the company it seems. Nine months later, it appears they will lose the bet. 3DTV is not ready for primetime. 

The experience is sketchy

The glasses are a big obstacle. What if you have only two or three at home, and you want a gang to see a football game? Much of the content at CES was repurposed 2D. It looked simply awful. I saw a demo by JVC touted as the first 4K HD experience. It was terrible, with blurs and artifacts. I saw Avatar at IMAX 3D before the show, and even there it took 30 mins into the movie for the mind to calm down and engage with the 3D experience. People with minor eye problems will probably get headaches. The TV experience required real 3D content and new polarized glasses with internal fast switching, and even that was not enough. I agree with this review of Samsung's demo:

Samsung’s glasses-ridden, 50-inch 3D LED LCD HDTV display did not impress us to the least bit. If you can imagine wavy and blurry vertical 3D lines popping at you and inflicting instant nausea and headaches, then you will understand the effect of the display. It was simply too harsh on the eyes and the image changed 3D perspective as the viewer walked left and right. Overall, the image was not natural but was rather cartoonish and definitely not ready for commercial use. 

The content is not here

I saw at least four demos (I lost count). They repeated much of the same content - an Avatar trailer, a Monsters vs Aliens trailer, a Brazilian soccer game, some ancient Kyoto buildings, and some underseas stuff. I had seen Coraline at home in 3D (using the old fashioned red/green glasses) and it was fine. We have had a few other cartoons - Polar Express, Up, Monsters vs Aliens. Hardly enough to fill a Sunday evening, let alone a 24/7 channel. 

Discovery Network announced such a channel, and DirecTv announced they would showcase 3D content, but I see it as a land grab. Early on in HD the inimitable Mark Cuban launched HDNet and grabbed a very valauble cable slot. Discovery need not have that many viewers to create a lot of value, if the 3D content eventually comes. So their announcement does not mean scads of new content.  

When HD launched, there was a lot of content: movies. In contrast there is very little 3D content. It will take years to build. Repurposed 2D movies do not look great. There is a lot of interest in trying this, especially for blockbusters like Lord of the Rings and Star Wars, but it is questionable how good the experience will be. Hollywood is enamored with 3D since they can charge higher ticket prices, and undoubtedly (for a while) higher DVD prices, so we will see some more 3D movies, but it will take a while to fill the library enough for a decent set of 3D channels.

ESPN announced a 3D feed for sporting events. This is more interesting, as football drove color TV and HD. We shall have to see what it looks like, and how much they can afford to broadcast. 

The fix is not that far away

There is a way to get 3D on TV without the funky glasses: use a type of fast phase shift to create the illusion of 3D depth by changing viewing angles. It works with a narrow viewing field today. One way to accomplish this is to shift the angle of backlighting quickly. You can see an example of this effect in the flashing picture, courtesy Jim Gasperini. 

In my conversations I found that it needs 9 fast-shifted views to encompass the broad field of viewing of a typical family room or bar. I suppose this can be thought of as a center view and then four slightly distorted views on each side. The distorted views do the same sort of thing that 'panorama' mode does to stretch 4:3 content across a 16:9 screen. The 9 views allows the off-angle viewing to maintain proper proportions in the center. 

I was told this is 5-7 years away. Apparently the speed needs to increase from (today) 240 fps to over 1080 fps (9 x 120). Or something like that. 

The HDTV industry had been peddling LED as the next big thing. These LED backlit LCD sets are remarkably brighter and thinner, and allow LCD to rival Plasma in much the same way a more efficient speaker sounds better (louder just sounds better; brighter just looks better). Apparently the TV makers got impatient in a bad market; or maybe Sony's big move to bet on 3D pushed the rest of them to join the party. 

I think they will soon have a bad hangover. The rush to start a new buying cycle with 3D is premature. Too many issues come up with the glasses. What do you do when they break? Keep buying more? Are you going to casually sit there in the family room wearing goofy glasses and staring at the Toob rather than socializing? Nah. You will throw the glasses in the gadget bin and go back to normal viewing. 

IPOs in the Fourth Quarter

While the IPO market in 2010 has not turned out as hoped, there is some promise looking forward. A handful of IPOs have performed well. Jinko Solar (JKS) is particularly interesting, rising 3x in four months. JKS is a Chinese solar provider and is taking advantage of cheaper Chinese costs to sell vigorously into the US and Europe. It came out at a relatively modest value, and still seems relatively unknown.

You can fund some other promising IPOs from this year with a bit of research. The clunkers this year are getting more coverage than a suite of winners. You can get a flavor of expected Q4 IPOs here. 

Venture-backed IPOs have done better at 8% returns than IPOs overall (1%), but a big caution flag is over the lower quality of the 42 venture-backed IPO hopefuls in the pipeline: "71% generated less than $100 million in sales over the last 12 months and 57% have yet to turn a profit on a trailing 12-month basis." Some high profile IPOs like Tesla are still holding up. Coming up is Brightsource, a solar-thermal provider, which recently got approval for its facility in the Mojave Desert. 

Why VCs Are Bidding Up SuperAngel Deals

A question I have been asked in my series on the brewing bubble in SuperAngel deals (and funds!) is why the traditional VCs are getting into auctions for the hot deals. Jeff Bussgang guest blogging at VentureBeat has an interesting perspective about how in the New Normal for Venture Capital, with too much money chasing too few exits, the founders have all the leverage.

He uses colorful metaphors of sheep and wolves, which I think can overshadow the dynamic. The strategy for large VC funds in the New Normal is to put all their eggs in a few promising deals that could go IPO. They often express this as "we are in the business of funding great companies, not quick flips." There is nothing wrong with this, and indeed is the strategy of the top funds over the past 30 years - they would prefer to fund great entrepreneurs and build an Apple or Sun rather than sell out early. In order for this to work in an era of few IPOs, however, they need to be in the hot deals and get as much ownership as they can. When they collectively hop on this strategy, the deals get bid up. 

The VC auctions for hot deals is spreading to other categories of startups. And no surprise, the number of SuperAngel funds and the amounts they are raising is exploding. A bubble in funds! 

Here is a map of SuperAngels, in a 2x2 where the upper half are the bigger funds (over $75m). They are spread out by strategy, with the ones who have a much faster pace of investing more to the right. 

The market dynamic is running decidedly in favor of SuperAngel funds. Markets abhor a vacuum. A new phenomenon is filling in for the dearth of IPOs: secondary sales.

The eye-popping mark-ups are drawing new players into later rounds, providing new exit paths for these hot startups. Much of the money in Facebook and Zynga comes in the form of "secondary sales", buying out early investors and giving management liquidity. This trend is accelerating.

The inexorable math of the bet-big-on-hot-deals strategy is also leading traditional venture firms to do something they previously would have avoided: buying out the early investors. When a lean start-up doesn't need as much cash as being offered, the way to put more money in play and own a higher percent is to buy out the early SuperAngel investors. Consider this example:

• VC wants to put in $10m at $40m value to own 20% post money ($10m/$50m)
• Startup only needs $5m on top of SuperAngel earlier $1m invested
• VC puts $5m into the company and $5m buying out early investors
• VC now gets $10m in play with 22% ownership (by buying out early investors, the post-money value only goes up by $5m to $45m) 
• SuperAngels get 5x on their investment if they sell their whole position

The VC industry trades on IRR, the rate of return to investors in their funds. The VentureBeat article makes the math clear:

• a 5x return in 5 years is a 38% IRR
• to get 38% over 9 years, a 20x return is required

The SuperAngels can get out quickly and give high returns to their investors. The large VC funds are expecting to be in the deal a lot longer to mature it to IPO, and must shoot for 20x to provide the same sort of returns as nimble SuperAngels. Even if they do not achieve that across their whole fund, being in the few hot exits is gold for raising new funds. 

Expect this dynamic and the secondary-sale trend to continue. 

More Indications of a New Tech Bubble

I have been reporting how valuations for consumer Internet startups have been rising, with some deals auctioned up to pretty incredible levels, reminiscent of the dot-com bubble. This is an early indicator of a new tech bubble brewing, rivaling the 1978-83 PC Bubble and the 1995-00 dot-com bubble. So far only a handful of companies have benefited, such as Twitter, Groupon and FourSquare, but now the markups in value are spreading. GigaOm reports that cloud-service startups are also seeing the same pop. The consumer Internet companies rely on cloud computing, so it is no surprise that their success has dragged related companies in their wake. GigaOm gives these examples:

• StorSimple (hybrid storage systems) raised $13 million at a $50 million value, even though it has yet to bring in a dollar in sales
• RightScale recently raised $25 million at a reported valuation of $100-$125 million
• Eucalyptus is said to be valued in excess of $100 million
• Aster Data snagged $30 million with a rumored valuation between $85 and $120 million an even higher valuation than rumored; according to the company: "given the company's traction and category momentum, the C round is materially greater than the Series B"
• Cloudera, the Hadoop-based big data company and one of the all-stars of big data movement, is looking to raise a fresh round of funding and is being valued in excess of $100 million

The next shoe to drop is a signature IPO, like Apple in 1980 or Netscape in 1995. The most attractive candidate is Facebook. There is no question that it could go out whenever it wishes, given its scale (500M users) and revenues (ramping over $1B). Recent remarks by Peter Thiel, a board member, suggest that the earliest it goes out is 2012. Before that a number of other highly-visible companies may go out, including Skype (which has filed for IPO but might be bought by Cisco before it gets out), LinkedIn and Zynga. 

In the meantime, Facebook is already the subject of two movies, the most highly-awaited of which is The Social Network, coming to theaters this week. It is getting strong buzz, and has already attracted YouTube parodies. With that, who needs an IPO?

Why IPOs Are In the Dumpster

2010 started with high hopes for IPOs. The economy had been recovering since the summer of 2009, and investment bankers combed through the ranks of venture capitalists to drum up filings for tech IPOs. Early on over 9x more IPOs were filed than in recent years, but as it has turned out, US IPOs have raised the least amount relative to filings since 1999. More than half the filings have yet to complete, and over 60% have left IPO buyers with a loss, with 2/3 of them raising less than desired.

This isn't just a Silicon Valley story. Many of these IPOs are private-equity backed and come from across America. The WSJ ran an op-ed called The IPO and the American Dream, observing that "access to capital markets remains the most reliable job creator we know." Is it a surprise that more IPOs came out in Chinese than US capital markets? The op-ed urges policies changes in taxes, regulation (Sarbanes-Oxley of course) and immigration (more visas for the best & brightest), all good ideas. 

A very insightful study by the accounting firm Grant Thornton takes a deeper look at what troubles US IPOs. They first issued their findings in Why Are IPOs in the ICU? and followed up with a final report, embedded below. You can read summaries from CFO magazine and the WSJ. The disturbing conclusion:

The market for underwritten IPOs, given its current structure, is closed to 80% of the companies that need it ... We've killed the feeder system to the big leagues

They point to culprits beyond Sarbanes-Oxley, including the loss of analyst support (than you, Elliott Spitzer) and the rise of electronic exchanges, which reduces trading spreads and make it hard to make money on small cap issues. We used to have the 'Four Horsemen", investment banks which specialized in small cap IPOs, but they have been gone since 2001 due to unfavorable economics. Grant Thornton recommend a new "opt-in" market be created that fits the economics and needs of small cap IPOs. 

IPO Crisis June 2010 FINAL

In spite of all of this, chirpy optimism about what lies ahead is still prevalent. The pending list of VC-backed companies is over 4x higher than a year ago. 

It is clear, however, that markets do not stand still. With the absence of IPOs, besides increased m&a activity, venture-backed companies are seeing the rise of a new Secondary Market, so named as the investors do not buy the whole company but buy shares of early investors and management. Facebook and Zynga, two very successful start-ups, have delayed IPOs until at least 2012 and accepted secondary capital. This trend is poised to accelerate in the years ahead, creating new paths to liquidity for emerging growth companies that run around the blockages of excessive financial regulation and the huge policy failure of killing the small-cap IPO. 

Note: The Scream photo courtesy NYT The Haggler

Hitler Goes Ballistic Over SuperAngel Collusion

Hitler remixes are the gift that keeps on giving. Here he rants about the collusion story I reported on last week, which is sometimes beging tagged as AngelGate (riffing on the other gift that keeps giving, Watergate).

A Tale of Two VC Industries

A blog post by SuperAngel investor Fred Wilson of Union Square Ventures in NYC has struck a nerve. He argues that the venture industry is splitting in two: the traditional venture funds which focus on capital-intensive start-ups in info tech, biotech and cleantech, and the new emerging SuperAngel funds which focus on capital efficient software start-ups (many of which launch consumer Internet services). The capital efficient VCs focus on the "lean start-up" model, which I see coming from the Era of Cheap technologies that I discussed in the prior post on this topic. 

The traditional VCs have not changed their investment model; if anything, in the New Normal environment with few IPOs and low exits, they have doubled-down on putting even more money to work to build a few big winners. Looking at funding patterns within just one sector of venture, info tech, two different funding curves are evolving:

The whole SuperAngel phenomenon is getting more attention. A course will be offered at Harvard B-School next year to see how the lean model might apply to other sectors than software, including clentech, which is the most capital intensive sector. (Recent data says average first institutional money in is $30M with cleantech and under $5M with software.)  A tech reporter, the always-newsworthy Michael Arrington of TechCrunch, broke into a meeting of SuperAngels and came out claiming collusion! This is really funny since the SuperAngels represent a fraction of the capital in venture capital and blip of around 20 funds within a universe of almost 1000 venture funds - now the traditional VCs are worried about price-fixing from the challengers? 

What is going on is that the traditional VC industry, which has funded disruptive startups to take on other industry sectors, is now getting disrupted itself! 

The venture capital model tends to fit the dominant technology trend. In the Era of Cheap, the traditional venture industry is caught in the wrong model. The New Normal has highlighted the problem of the old model: more money pouring into fewer exits means really bad returns. In contrast, the new capital efficient funds promise much higher returns on smaller and quicker exits - plus they are picking up some wascally-wabid high-fliers like Zynga, Twitter or Groupon. Imagine their returns if they catch the next tech bubble as well. 

Is a New Tech Bubble Brewing?

Last April I reported on venture valuations going into Wascally Wabid land: insanely great levels from very small beginnings. Today the WSJ headlined the phenomenon as Web Start-Up Values Soar, with some examples:

• Quora raised $14m at $88m post value before it even launched its service
• Blippy raised $11m at a $46m post value
• Foursquare raised $20m at $95m post value, up from a mere $1.35m at $6m value less than a year earlier

For those not familiar with venture funding, these are very big jumps, and very rapid. There have been more like this, although the whole group of wascally wabid companies is still relatively few (under 20).

What it has done is spawn a Cambrian Explosion of new ventures, increasingly funded by a new class of venture investors, the so-called SuperAngels. When this emergent phenomenon is combined with the global rush for smartphones and connected devices, it suggests that a new tech bubble is coming.

This is how it felt around 1978, when a plethora of new PC companies got started, some with wascally widiculous names like Kentucky Fried Computers, or the dot-com bubble, with all of those pets.com's. Reading economic history, this must but what it felt like in the early days of autos, with over 300 car companies started. There have been false starts before, such as pen-based computing in the late 1980s, but they never got this far. 

Tech bubbles follow a different timetable than credit bubbles, and are not driven by cheap money but by fundamental breakthroughs. The main driver of the other tech bubbles has been Moore's Law, the inexorable improvement in processing power at the chip level. The PC bubble came from the microprocessor. The dot-com bubble came from breakthroughs in modems. This proto-bubble is coming from the culmination of Moore's Law, where all the infrastructure to build a consumer web app is available for dirt cheap. Moore's Law has made computers, software, networks and data centers so cheap that value is being created at the top of the stack. The Era of Cheap is drving the explosion of new consumer Internet ventures.

It may seem challenging for a new tech boom to emerge inside of the New Normal economic environment. Yet the PC bubble grew large during the last double-dip, in 1980-82, and faded when the broader market took off. In the New Normal, there is a Global Scramble for Yield: with rates low everywhere, capital rushes into areas that can deliver. And when tech booms run, they deliver remarkable returns, at least to the winners. And they can run even when the other indexes stutter-step. 

The broader market technical are showing the possibility of such a breakout in the Nasdaq. The Naz has never recovered after the 2000 peak, unlike the Dow and the S&P, and has formed a large converging triangle pattern. It is very close to smashing above the upper trendline since 2000. Triangles are corrective formations, and this one connects the 20 year bull market (from the PC bubble to the dot-com mania) to a new bull run. If we break up, we should run pretty long and hard to new highs. 

The pattern may not break out now, but have one more drop to complete the triangle. Triangles are five-wave patterns, and this one has only had four so far. The final wave should be short in time and distance compared with the prior waves. The breakout should be fairly strong, a thrust out, and should take us at least as far as the largest width of the triangle, the initial drop, meaning we should go to new highs. 

SuperAngel VC Smackdown!

This morning I attended a fascinating session in Palo Alto that points to the future of venture capital in Silicon Valley. Provocatively framed as a "smackdown" between traditional VCs and a new class of Super Angels, it instead highlighted the future rebirth of innovation in Silicon Valley.

Venture Capital has been in its own Lost Decade with negative returns since 2000 after three glorious decades during the Era of Moore's Law. Moore's Law continues, but innovation has moved higher in the technical stack at the same time as the Politics of Envy have greatly plucked the Golden Goose of American innovation. This last decade brought us horrific laws like Sarbanes-Oxley, which raised the cost of IPOs, and tragic policies such as the demonization of stock options which have been pecking the growth engine to death.

Silicon Valley, however, finds ways around blockages. 

We have now entered the Era of Cheap, where great companies can be launched on the cheap. The first wave of Consumer Internet franchises are racing towards big IPOs: Facebook, Zynga, Twitter, Chegg, Groupon. These ventures were started with capital from a new breed of investor, the so-called SuperAngels - institutionalized seed funds that embrace the Era of Cheap. As this chart from CBInsights shows, in the past year the SuperAngel seed funds have grabbed over 25% share of new fundings from the traditional VCs.

What the smackdown series of debates (which you can find on VideoCrunch) show is how the Era of Cheap is disrupting the venture business itself. After funding disruption to traditional industries for thirty years, the big VC funds are finally getting a taste of their own medicine. How they will respond is unclear. There is a lot of chatter that the traditional VC model is broken. Certainly with the poor returns for the past decade, the pension funds which invest in the venture category are pulling out. 

But is the model itself at fault, or the exogenous factors that have plagued all financial sectors in the past decade? I argue that the New Normal of low returns for an extended period affects venture capital as well. I conclude that even granted the effect of exogenous factors, the VC industry should stop expecting it to go back to the old normal right away. Instead, venture capital needs to figure out how to deliver returns in its new nromal: an environment with few IPOs and smaller m&a exits. They need a new model. 

The SuperAngels have been the first to figure this out. The Era of Cheap lets them fund Internet deals which can be quickly tested on small capital. They may exit with a quick flip, or raise boatloads of VC capital and go for the big win; but the modest capital allows them the time to experiment and find a market before big money removes the quick exit. 

The final smackdown event went back and forth on this issue. The Big VC argument is that you need the big money to build a real company. The SuperAngel counter is that for both founders and buyers the small exit might be a better outcome, and they can preserve the big win if the company hits in the consumer Internet lottery of consumer appeal and fickleness. 

My take: in the old model, after the seed round, traditional VC was a necessity, In the new seed model, Big VC is but an option.

Electronics Going Gangbusters and Signaling a Coming New Tech Boom (But Not Now)

History does not repeat itself, but it does rhyme - Mark Twain

In spite of the increasing doom & gloom in economic indicators - the market clearly expects a big downward GDP revision tomorrow -  I am hearing of component shortages for consumer electronics being hastily manufactured in China. Apple is still supply constrained on iPads and iPhones, shipping every one they can assemble, and this may be impacting commodity components (like diodes and MOsSETs).  

Spot shortages may seem paradoxical when industry after industry has underutilized productive capacity, housing is in the dumpster and autos are down to under 12M a year in the US (imagine, they crested 8M in the early '50s when we had fewer than half the population). 

Yet this story of booming gadgets and busting everything else rhymes with one of the hit products during the Great Depression: radio!  People wanted to stay in touch, and radio (plus telephone service) boomed in very bad times. So too today in the demand for connected devices. Android tablets are the next big thing, with knock-off Chinese units selling as cheaply as $99 already. The demand for smartphones, iPads and Android tablets appears to be overwhelming the supply chain and causing spot shortages.

This gadget mania probably explains an interesting anomaly in economic indicators: imports are up more than exports (all those gadgets coming in from China for Christmas), and intermodal containers shipped by rail are still increasing - in fact set a record for the year - but truck traffic is flat. Speculation: imports are driving rail traffic, but exports & general economic recovery are not picking up the slack in trucking.

There is no fundamental reason this will end until market demand is saturated, which leads me to speculate that we will see the Nasdaq begin to diverge against the Dow to the upside as the fruits of the current beneficiaries of Moore's Law begin to explode into the new huge global markets for gadgets and the accompanying Cloud services. The question is when.

One spark could be a few high-profile IPOs. Apple went public in 1980 amidst the last double-dip, and Netscape sparked the dot-com boom in 1995 at a time when the market had been considered sluggish since 1987. Google failed to be that spark early in this decade, but then it came out amidst a boom in housing and private equity, right after a horrific tech bust. Poor timing for tech to rebound. 

This time around we have a new revolution brewing, and any one of the current tech darlings - Facebook, Zynga, Twitter - could be the spark to the new tech boom.  In the past, tech booms come on their own schedule, when the ongoing improvements in technology lead to sparkling new applications: PCs, Internet, now connected devices. Tech booms have tended to lead out of bad times. Case in point: the PC boom happened from 1978-83 before the Reagan Revolution and amidst terrible economic indicators.

Rumors circulate on when we will see those IPOs, with Facebook the biggee. Facebook was recently said to delay until 2012. Zynga is said to be at least 18 months from IPO, putting it also into 2012.

For other reasons that may be a good time to begin expecting the next tech boom. The timing between these booms appears to be about 12 years from end to start: 

• the transistor boomlet from 1962-66 was followed 12 years later in 1978 with the PC craze
• the PC craze ended in 1983 and the dot-com mania began 12 years later in 1995 
• the dot-com fever broke in 2000, and 12 years later is 2012 ...

It probably takes something around that timing for (a) Moore's Law to go far enough ahead to create new magical toys and (b) the fund managers who got hurt at the end of the prior bubble to retire and be replaced by green newbies. 

I do not expect it in the near term. The SOX index of semiconductor activity has been rolling over, indicating perhaps a seasonal lag or maybe a longer cyclical drop. When the next tech boom comes, it will show up first in chips, then devices, then software/services, then IPOs!

Green IPOs Have Been Mixed

Tesla at around $18.50 remains above its pricing ($17), although below its opening ($19), and so does JinkoSolar, which at around $23 has soared above its $11 pricing, but the rest of the green IPOs over the past year have been trading underwater. The rare earth company Molycorp came out in late July, priced below its expected range, dropped the first day, and has rebounded since, selling a bit over its offer price. 

SeekingAlpha runs a story by GreentechMedia that the riskier bets have come out first, and better ones are to follow. The next run of IPOs, however, look more like public venture finance that classic IPO liquidity events for investors - greentech as closer to pharma style IPOs, where the public provides long-term project finance. These too may stink up the room. 

After those comes some really interesting candidates, including the fuel cell company Bloom Energy and the solar-thermal firm BrightSource (in which I have a small indirect stake). Other interesting companies are Enphase, which makes a micro-inverter to turn solar cell output into usable electricity; Silver Springs Networks, which uses a mesh network to interconnect meters to the smart grid; and Solar City, which assists home and small business solarization. Rather than funding science projects, these IPOs will fund real businesses. 

More Bad News Blows in for Wind Power

 Visions of wind farms stretching across the prairie capture our imagination, and our tax subsidies. CEOs of great companies like GE shill for wind to sell turbines. Spain warned the US about the illusion of green jobs, which turned into a costly boondoggle that increased the cost of electricity and created few sustainable new jobs. 

The UK Mail reports that more than half the subsidized wind farms in England were built where there is not enough wind. Some deliver only around 5% of potential, while most others are under 25%. The report concludes that subsidies - and the allure of quick payback - are driving developers to build in the wrong places. Only eight of the 104 on-shore wind farms are above 30%, which is a reasonable threshold for proper siting. To add insult to injury, the Mail further reports that taxes to pay for these boondoggles are set to treble over the next decade. 

The Incredible Shrinking VC Industry?

The golden goose of US innovation continues to get plucked. The NVCA released data which shows the industry is shrinking at an accelerating rate. This reflects the New Normal for venture capital, where capital efficiency is gaining share against traditional VC. Many large funds have moved into CleanTech, where the investments required are huge and long-term. 

Curiously the WSJ looked at the similar data and had a rosy spin on it. Their estimate for 1H10 commitments to venture capital is $7.5B across 72 funds vs $6.6B across 68 funds a year earlier. Promising, but still half of 2008, when in the same period $14.2B was raised. 

The WSJ data shows money flowing to early stage and multi-stage but shrinking from later stage funds - sucking the middle dry. This is consistent with anecdotal experience in the heart of venture capital, Silicon Valley, where the mid-sized funds are the most challenged, and many larger funds are raising smaller this time. 

Possibly the way to square the two reports is to distinguish funds for US investment vs. funds for global investment. TechCrunch reports that the number of funds and overall capital are expected to continue to decline for traditional markets, but to expand for China, India and Brazil. Sequoia for example just closed a $1B early-stage China fund, which I believe would be excluded from the NVCA data (it counts based on location of fund, not of sponsoring firm) and yet skew the WSJ data upwards. 

Fallout From the Tesla IPO: Investing in Advanced Batteries

Tesla had a warm welcome at its IPO with a 40% first day jump and a 60% run to over $30 from opening at $19, but has since given back most of the after-market gain to close back at just above $19. This pattern is eerily like the IPO of A123 (AONE) a lithium-ion battery maker for electric vehicles: a first day pop then a drop. AONE continued to fall in a long slide to 35% below the offering price six months out. Tesla's trajectory created a "very ugly" inverted hammer candlestick at the top, which denotes a legion of quick flippers speculating rather than long-term holders. Tesla priced at $17 but opened at $19, where it garnered a lot of buying interest. It may find support there; if it breaks below, it could be dumped. 

Goldman Sachs helped underwrite the Tesla offering, and about the time of the IPO, launched a research report on lithium-ion battery companies which had a Neutral rating to reflect "a multi-year waiting period prior to clarity on plug-in hybrid and electric vehicle mainstream market adoption." Their main observation is that these advanced battery stocks are no longer trading on news but the market is awaiting proof points. Even this relatively cautious research report was found to be too optimistic due to expecting a too-steep drop in advanced battery costs due to economies of scale and a race by Asian makers to strive for share over margin. 

Let me be the optimistic here. We saw the sort of price drops Goldman expects (if not even steeper) in DRAMs and LCDs due to massive investment in Korea, Japan and China in scale manufacturing facilities. We also see rapid innovation emerging - for example, an apparent breakthrough in quick charging of these batteries: three minutes to 50% charge, about the time at the gas pump, or five minutes to 70%. Gas stations could add this as a new type of pump - and the price will be a lot lower per mile traveled. 

For Tesla investors, the Goldman report has a message: the premium in cleantech stocks seems to be gone, and now these companies will trade on results. Whether Tesla can remain above $19 is a good test of Goldman's thesis. Even so, if the stock decays as flippers abandon it, it should then find a strong bottom as A123 seems to have. At that point this becomes a bit of a long slog, but one with upside. Tesla as a business will grow in the near-term on technology deals with partners like Mercedes and Toyota, and in the longer term on getting its new S line out in 2012. 

Tesla IPO Building Momentum

Tesla is two weeks into its roadshow, and due to come out today. It is increasing the size of the float from 11m shares to 13m shares, a very positive sign. At this point in the process, the underwriters are getting feedback from institutions and building an opening day book of orders.  

Given the interest, the stock would be expected to sell at the high end or even above the range of $14-16/share. Indeed, it got priced Monday night at $17, valuing the company at $1.6B, a bit lower than a research estimate last week at $1.85B, or $20/share. The buzz last week was also generally positive. The last minute (unsigned) deal with Toyota also boosted interest.

There is a strategy to these sorts of IPOs to buy the dip six months after offering. Last Sept a much-hyped green IPO, A123, popped 50% on the first day ($29) but has since dropped below the offering ($13.50) to under $10. It has now come out of the 180 day lockup, where insiders begin selling and further depress the price. When that selling abates, the stock typically becomes a buy - especially in this case if Tesla does well, since A123 supplies batteries for electric cars.

A successful offering could strengthen the tech IPO market, which has gotten despairingly weak recently. Given the bellweather status of the first electric car startup going public, a successful offering could also bolster a whole slate of green offerings, such as Smith Electric, an electric truck startup that also wants to go out, and Fisker, the closest venture-back competitor to Tesla. It might also have a halo effect on solar IPOs, which were hot three years ago and have been downright chilly recently. eSolar may be the next solar IPO to test the window. 

Pushing the Wet Noodle on IPOs

As we await the seminal Tesla IPO (TSLA), the IPO market continues to disappoint. Last week's two tech IPOs, Motricity (MOTR) and Broadsoft (BSFT), both lowered their trading ranges then priced at the low end, and are currently 6-7% below even that. Solyndra, the solar startup that was visited by President Obama last month, canceled its IPO. Nat Goldhaber, a cleantech venture capitalist, remains bullish on cleantech IPOs but not on the solar sector, noting that Europe as been a center for solar and its austerity plans have dampened the solar industry. 

 

TechCrunch ran an assessment of IPOs and how the poor IPO market has impacted the leading companies. Their chart shows how meager the first day pop has been, and how the companies have tended to do poorly in the after-market. As a consequence, the leaders of this generation of new ventures - Facebook, Zynga, LinkedIn, Twitter, Skype - have so far eschewed the IPO and relied on generating cash flow and private investment to grow. Many of the later round investors are allowing the early founders and employees to partially cash out. 

It may be that we need a signature IPO - like Netscape in 1995 or Apple in 1980 - to spur the return of the IPO market. Many of the tech IPOs so far are not in that league, and instead fall into two categories: 

• late 1990s vintage startups whose investors are seeking liquidity after a long slog, and
• dashing cleantech ventures who need oil-tanker-loads of capital to build out at scale

Maybe Tesla can restart the IPO market, at least for cleantech deals. Even green-industry stock analysts are skeptical. It is a bit daunting to imagine a new company taking on the huge scale players in autos, many of which are already into electric vehicles, especially Honda and Toyota. Yet it is conceivable. Here is why:

• The last successful auto startup in the US was Chrysler in 1925. Chrysler got out when it was possible to launch against the scale of the leaders - it marked the transition away from innovation to scale economics
• There have been a number of other car startups between Chrysler and Tesla, but none with the game-changing potential of Tesla
• It seems inevitable that we transition the fleet to electrics. It will take several decades. Tesla marks the first startup of this transition
• Tesla may also mark the beginnings of a restructuring of the auto value chain, to become less vertically integrated and more like the consumer electronics industry, and to iterate models more quickly. If so, the scale advantage of the leaders will be turned into a cost disadvantage

Tesla is the bet on the future of cars, not the past. Electrics represent a generational disruption to the auto industry, and usually out of these periods new winners emerge. A discussion of their pitch is here, and you can see the roadshow presentation here. Key slide: building a platform, not just a car:

 

Disclosure: I have a small indirect interest in Tesla. 

Testing the IPO Window UPDATED

The IPO window will be tested this week with six offerings, two of which are venture-backed companies: Broadsoft (BFST), a 1998-era telecomm software company, and Motricity (MOTR), a 2001-era mobile software company.

UPDATE: Broadsoft priced at the bottom of its range, a poor sign. It fell 8% in its first day. Motricity dropped the size of its offering and lowered its range quite a bit from $14-16 to $10-$11. Watch Friday to see how it does.

The last tech IPO, ReachLocal (RLOC), priced below its range and fell below early last week, only to rise back slightly over the offering price. From the first day close, it has dropped quite a bit and is still down (see chart), but a few more days like today and it goes back to positive in the after-market. 

The keystone IPO is coming up: Tesla Motors (TSLA), the first serious auto startup since Chrysler in 1925 and the biggest auto IPO since Ford in 1956, should price the week of Jun28. The lead underwriters, Goldman Sachs and Morgan Stanley, announced a price range today of $14-16, valuing the company at $1.5B and seeking to raise $167M from the public and another $50M from Toyota. This is an increase from their expectations back in January when they first filed. Unlike Ford, which was profitable very quickly, Tesla has yet to make a profit; yet is highly awaited as an IPO. The increase is a good sign of confidence by the underwriters. 

While the tech press is generally positive, we do have the headline Blockbuster or Dud? based on recent green IPOs. A123 (AONE) jumped 50% on its first day but since has fallen to 33% below the IPO price with an aftermarket return of -56%. The Wall Street crowd may be even less kind, saying: "The car business is a fairly weak business, and there's lots of room for Tesla to run out of juice before getting plugged on." 

After Tesla, ZipCar intends to IPO, followed by GM re-IPOing after its LBO by the US Govt. The Tesla and Zip IPOs may be coming out a bit prematurely for the market to be ready for high-burn unprofitable ventures which lack the scale of competitors. Still, they both have enough sizzle to make up for the lack of beef. 

Tesla will test the IPO appetite and likely determine whether it remains open or shuts down for the rest of the year. 

The New Normal in Venture Capital

The "New Normal" is a characterization popularized by PIMCO, the big bond fund, to describe a low-rate, low-return environment that they expect to persist for a considerable period. This environment is affecting all aspects of financial investing, and it should be no surprise that it is transforming the venture capital industry. 

What has emerged is a new venture ecosystem, characterized by "capital efficient" funds which raise a modest amount of capital and can deliver good returns to their investors with $50M "quick flip" exits. When there are few IPOs and the number of Billion Dollar Babies can be counted on a couple of fingers, this is the only approach that makes sense for the limited partners (LPs) who invest in venture funds. The big funds are refocusing on long-term capital-intensive cleantech projects, which are more in character private equity deals. The statistics are vivid: as reported by Silicon Valley Bank and summarized in the attached chart, small funds have returned dramatically better than big funds. The funds below median are 24x more likely to return over 2x cash-on-cash to LPs than the funds above median (48% vs 2%): 

 

To make this work, the capital efficient funds are investing in lean startups: ventures that follow a set of principles to enable a small amount of capital to go a long way:

• Open source - which is low cost and has been stress-tested
• Cloud services - low capital to the startup and easy to scale
• Browser/App-phone clients - free to the startup and wide-spread 
• Rapid product iteration - letting the market give feedback quickly
• Socially-connected - very low cost customer acquisition
• Pervasive mobile - enabling a whole new set of applications

Venture capital produces great returns during waves of innovation. John Doerr, the inimitable leader of one of the premier funds, Kleiner Perkins, calls this the Third Wave after the PC revolution (1978-1983) and the Internet (1994-2000). This wave has not yet been succinctly characterized, but the leading candidate name is Cloud Computing. 

An immediate criticism of capital efficiency is who builds the big infrastructure, if not venture capital? The answer is already clear: the big Internet winners are scaling out cloud computing platforms (Google, Amazon, Microsoft), and the PC leaders are clearing the forest with new client devices, such as the iPhone and the iPad from Apple. 

The technology model of every era of innovation defined the predominate venture capital model - the funds designed themselves to leverage the trends. The last era drove megafunds to lay the railroad tracks of the Internet. This era in contrast is about working at higher levels of the technology stack than operating systems, computers, cellphones or networks. Now that the tracks have been laid, what are the new apps that people will love?

The always-connected Internet cloud provides the answer: the eternal beta application, launched quickly, changed constantly, always seeking to find the combination of fun and function that captures the hearts and minds of users. 

The disruption of the New Normal venture model is likely to affect a whole passel of current funds. It has been much noted how the amount of money going into to venture capital has decreased, and this is putting the squeeze on mid-sized funds. What has been less noted is that the New Normal model may cause LP capital to rapidly switch from traditional VC funds to the new breed of capital efficient funds. 

The New Normal model comes with Logan's Run: if you are over thirty, you won't be funded. The mantle of what is cool has been passed from the Boomers, who still rule the funds, to the Millennials, the new generation of 20-somethings who grew up tech-savvy. The Millennials first flocked to Facebook, Twitter and Zynga, the darlings of the new era, and are feverishly checking-in with Foursquare, Gowalla and other iPhone apps. 

The New Normal entrepreneurs care little of the old brand names of traditional VC. Indeed, the capital efficient funds believe the traditional VC model is broken. Maybe so - we shall see how the adapt. As this Third Wave crests, it is likely the capital required to make serious companies will increase, as it has in the past, bringing the traditional funds back into the game - or leading to a new breed of larger capital efficient funds. 

Right now it appears the venture capital jungle is soon to be ruled by little furry mammals running rings around big funds.