Rami Rahal: and Information Runs Low
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Dec. 2014 EVALUATION Issue 4Page 1 May 2015 EVALUATION: Investing Insights brought to you by the students of NYU Stern LETTER FROM THE EDITORS INSIDE THE ISSUE In business school we tend to focus on companies in the public Brad Burnham: markets, reviewing case studies supported by endless amounts of Managing Partner, Union publicly available information. However, as of late, it’s impossible to ignore the plethora of activity in the private markets. Uber is Square Ventures…Pg. 2 purportedly raising money at a $50 billion valuation, greater than the market cap of 80% of S&P 500 companies. Investors poured Matt Krna: $59 billion into U.S. startups in 2014, the most since the dot-com Partner, SoftBank Capital era1. Previously common buzz words such as “M&A” and “synergy” …Pg. 7 have been displaced with newer, sexier buzzwords such as “disrupt” and “innovate.” Prof. Aswath Damodaran: We can’t help but consider the framework that Howard Marks Valuation Expert…Pg. 11 has laid out in his memos – investors are driven by two fears: the fear of losing money and the fear of missing out. We would put the Zeev Klein: venture capital market squarely in the second camp, with investors Co-Founder & Partner, clammoring to get a piece of the next big deal. While we are still Landmark Ventures…Pg. 13 trying to make sense of valuations in a market where “15 to 18 times” means 15 to 18 times sales, and not earnings, we are also intrigued by venture capital. Thus, for the fourth issue of SIMR Conference…Pg. 17 EVALUATION, we elected to focus on Venture Capital Investing. We hope to shed some light on an area where valuation runs high Rami Rahal: and information runs low. Co-Founder, Blue Cloud It is our pleasure to introduce the fourth issue of Stern’s Ventures…Pg. 19 student-run investment newsletter, covering a range of topics in the venture capital space, in addition to some student-submitted Mathew Farkash: investment write-ups. We hope that you enjoy and take away a few Co-Founder, Blueprint new ideas. Lastly, we would like to thank our interviewees for their Health…Pg. 24 time and contributions, as this would not be possible without their valuable insights. With that, happy reading! SIMR Events…Pg. 28 Bryce, Ethan, and Sid Stern Investment Idea EV Editors Contest: Long MAS, Short YOKU, Short HK: CAR …Pg. 29 1 Per Pitchbook Data Inc. (via Bloomberg research) Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/28/2021 May 2015 EVALUATION Page 2 Brad Burnham – Managing Partner, Union Square Ventures Brad Burnham is a managing partner at Union Square Ventures. Brad began his career in information technology with AT&T in 1979. He held a variety of sales, marketing and business development positions there until 1989 when he spun Echo Logic out of Bell Laboratories. As the first AT&T "venture”, Echo Logic was a catalyst for the creation of AT&T’s venture capital arm, AT&T Ventures. When Echo Logic was sold in 1993, Brad joined AT&T Ventures as an Executive in Residence. He became a Principal there in 1994 and a General Partner in 1996. At AT&T Ventures, Brad was responsible for 14 investments including Audible and Classic Sports Network. Brad co-founded TACODA in 2001 before joining Fred Wilson to create Union Square Ventures in 2003. Brad has a BA in Political Science from Wesleyan University. He is married with two kids and lives in New York City. Brad Burnham EVALUATION (EV): You started your career in more opportunistic, much more of a filter information technology with AT&T. How feeding process. You basically built a set of important was that early experience both on relationships, which yielded a certain amount of the technology and business development deal-flow, and then picked the best of those deals side? for your portfolio. When we formed this fund (Union Square Ventures) we took a very Brad Burnham (BB): It was formative but it different approach. We were very thesis driven wasn’t critical from the perspective of building and we knew what we were looking for. We went relationships back then that are important to me out looking for those particular deals, and began today. It certainly taught me a lot about how the talking about those deals on our blog, which was tech business works. Also, it taught me a bit a revolutionary idea in 2003-2004. Then, those about how large organizations work. This has specific deals started coming to us as a result of indirectly been helpful since I now work with the conversations we were having. We don’t young companies who compete with large have a typical process, and I think a lot of organizations. I understand what large venture firms have evolved towards something companies’ motives are and why it’s sometimes that is more thesis-driven and more focused than very difficult for the large firms to compete with historically so. start-ups. Even though large companies have all the assets in the world, including market EV: Venture capital is inherently a high risk, presence, capital and products, there are high return business. In a portfolio you have complex internal organizational dynamics in a number of singles, in addition to one or two large companies that make it difficult for them to home runs that more than pay for the strike- react to startups. outs. Could you walk us through one of your home runs? What about one of your strike- EV: How do you source new potential venture outs? investments? Could you briefly walk us through the investment process? BB: I’ll first talk about Indeed.com as a home run because it also allows me to talk about deal BB: I think the venture capital business has sourcing. It is important to understand the changed over the years. In the past, it was much difference between Web 1.0 and Web 2.0. From Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/28/2021 May 2015 EVALUATION Page 3 our perspective, Web 1.0 was a bunch of offline learnings from that deal were – one, that the businesses moving online. For example, founders were very mission driven, and Craigslist is really a 1.0 implementation of a therefore sub-optimized their own personal classified advertising business. If you look at economics. Second, in some ways the product Monster, Career Builder or Hotjobs in the was implemented in a way that was fully employment space, these are businesses that featured, but too complex in a number of We didn’t turn down Airbnb because it was too expensive or anything like that, we turned down Airbnb because we didn’t understand it, and because we made the classic venture capital mistake – we thought of ourselves as the customers. have long existed offline in the newspaper world. different dimensions. So, the lessons for me Moving them online cut costs, but did not were: you can have a very well intentioned team, fundamentally change the business. We started a very experienced and talented engineering to think, “Gosh, there isn’t really a 2.0 team, but if you try to build too much yourself implementation of employment advertising. and try to nudge your users too much, you’re not What would that look like?” We decided that it going to get the adoption. had to look like “Search” because in the 1.0 implementation you just put the ads online, pay EV: You have mentioned in one of your for the posting, and save the cost of printing, interviews about how you passed on an early trucks, and distribution. The 2.0 model should investing opportunity in Airbnb. Looking flip that around, and employers should put the back and given what we know now about ads online, and somebody should be searching Airbnb’s valuation, has that made you change across all those ads. So, we went looking for that your evaluation criteria when looking at business. After tapping our network to find our potential investments? guys (Indeed.com founders), we tracked them down and started what was a 6-month long BB: Yes, but probably not in the way the effort to invest in their company. After some question implies. We didn’t turn down Airbnb convincing, we led a $5 million investment in the because it was too expensive or anything like company, which turned out to be all of the that, we turned down Airbnb because we didn’t primary capital they ever took. They built a understand it, and because we made the classic business that they sold for reportedly over $1 venture capital mistake – we thought of billion to a Japanese company called the Recruit ourselves as the customers. When I saw the Corporation from our initial capital base – so original pitch, I couldn’t relate to the idea that that was a huge home-run in terms of the returns someone was going to go sleep on a couch on that initial investment. I think it worked really someplace. I’m 60-years-old, and I just do not see well because it was a 2.0 implementation myself wandering around the world sleeping on competing with a lot of 1.0 implementations, and couches. That was me assuming that I’m the also because the founders were very customer, which is a terrible idea for a venture complimentary. capitalist in almost any situation – because we’re not usually the customers.