Tag: finance

Venture Capital is Dead, Long Live Venture Capital – Part III

The exit constipation in the VC world stems from market regulations, not bad actors. Founders often misjudge valuation premiums offered by mega-VCs, which favor the investors. Exploring IPOs in London and Toronto can restore liquidity and allow average investors access to growth equity, improving the global economy and potentially reforming US regulations.

For those of you who are skipping to the good part (and this is the good part), you really should take a moment to go back and see how we got here (Part I, Part II).

Because there are no bad actors driving the exit constipation in the VC world, just rational economic agents doing what market deforming regulations demand. But, now that we’re here, in an exitless void, here’s how we get out of it, and save VC as an asset class in the process. This is the new path to liquidity.

When taking money from mega-VCs, GPs seduce founders with what is typically a 10%-15% premium to the market from a valuation perspective. I know this from countless discussions with the partners, principals and associates that work at these funds over many, many years. That did change between 2020-2023 during the private bubble peak, but we’ve discussed how dangerous this was for different reasons in part I and part II.

When offered a premium to the market, it is deceptively easy to take the deal and feel like you’re getting a bargain as a founder. However, founders who lack formal financial training do not realize that they are comparing a premium on common shares to the preferred shares that VCs demand. These are not the same.

As pretty much every 409(a) document attests to, these preferred shares generally command a 30% premium to common shares. In short, the 10%-15% perception of overvaluation is, in fact, a 15%-20% discount in favor of the VC.

This is why I started recommending to all our portfolio companies to begin exploring exits beyond the reach of Sarbanes-Oxley, and explore IPOs in London and Toronto. This is the new way forward.

London and Toronto have deep markets (especially deep in London) where founders can IPO after a series A or series B and get to liquidity for themselves and investors in 5-7 years, thus escaping the madness of the great VC constipation crisis. By so doing, they also make employees liquid for option pools, access better governance and oversight, as well as access to capital that can further their growth without giving up preferred share premiums.

In return, average mom and pop investors will get access to growth company stock, just like they used to prior to the whole Enron/SoX fiasco.

This is actually an important structural fix for our global economy, restoring access to higher returns to average folks, where today only the wealthy get access to companies in the growth phase through private holdings.

Exiting via London, Singapore, Toronto, Riyadh, and other viable options is not just a better economic decision, it is the moral choice for the good of humanity any way you slice it.

If more companies went public when they first became a unicorn (or even before then), then VC would go back to funding seed and series A like they used to, with some series B for good measure. There would be no market for series C because public markets have way more liquidity than Sand Hill Road could ever dream of.

Another potential outcome to fix this would be if the US Congress amended Sarbanes-Oxley so that companies with valuations less than $1bn were only subject to audit requirements, like in the old days. With a modified but lighter version for companies with market caps between $2bn and $10bn, with full SOX after that. If the US adopted this model, we’d be competitive with other countries that realized their error and fixed this mess.

Until then, I think we’ll see US equity markets continue to yield market-share to foreign markets with less liquidity, and the great VC extension will continue.

For Crypto to Live, It First Must Die

Governments hate stuff they can’t control.

The beauty and promise of cryptocurrency is that Bitcoin and Etherium truly became the worlds first fiat monies divorced from any government backing. Yes, use of fiat is blasphemy to crypto die-hards, but for crypto currency to succeed as a global currency, we need to have an honest conversation about what fiat really means, and how crypto must kill off it’s government independence if it wants to truly reach its full potential.

Fiat currency is a medium of exchange that has no intrinsic value, unlike gold and other precious metals, that have industrial and artistic use with value apart from its circulation as money. Fiat currency has value because we believe it has value, and thus becomes a store of value and medium of exchange. Fiat currency to an economist is money that only has value because we have faith in it, and it has no use otherwise.

In this way, crypto currencies are true Fiat monetary systems in a pure way. Divorced from any government backing, and with an alternative use case of zippo, they truly are a medium of exchange that is divorced from everything. And therein lies the rub.

Governments hate stuff they can’t control. And Bitcoin/Etherium are far from their reach. The Satoshi’s and Buterin’s of crypto built their systems in such a way that governments can never, ever control them. And that is beautiful when it comes to creating the perfect fiat currency. No more printing money when you need it (looking at you Zimbabwe), and all the other money mischief devised by central banks that protect governments and hurt everyday people (for a good read on the various ways governments have done this, Milton Friedman has a great read by the same title if you click the link).

Governments have thus far reacted to crypto with what John Gottman recognized as one of the ultimate forms of rejection and contempt: stonewalling. This is when you just go quiet. Say nothing. Sit still. Ignore. The epic lack of regulatory interest in crypto is accomplishing its purpose: killing crypto silently.

Crypto currency’s promise, to have a stable system of exchanging stuff divorced from government mayhem, will never be realized until governments learn to accept that the future of currency is out of their control, but within their regulation. And this is where crypto lovers weep: regulation must happen for crypto to reach its full potential. In this way, crypto dies so that it can live.

In a world where we buy stuff and pay our taxes in Bitcoin and Ethereum, governments need to have rules around how money can be used. These rules include how to get paid back if you’re ripped off, how to track money to protect us from dark forces, and how to make sure people aren’t manipulating crypto markets and hurting consumers by restricting supply and demand. The public benefits of crypto currency are many, but only if the beast is trained to avoid destroying our freedom with its own.

And here lies the root cause of our current dilemma. A US Congress so old it might as well be a nursing home, led the way with the oldest White House leader ever, means that US leaders are too far removed in history to address modern problems they do not understand. Joe Biden remembers world war two as a kid. Ponder that and honestly ask yourself if he’s ready to suggest ways government can adopt the future of money. Yeah, I didn’t think he was doing anything either.

What the world needs right now is visionary leadership from a new generation of forward-thinking monetary leaders. Sadly, I’m not sure we have them right now, at least not outside of the developer community. Ouch.