- Facebook trounces Wall Street estimates with sharp ad sales growth: Facebook Inc provided more evidence on Wednesday that it can turn eyeballs into profit as the maker of the world's most popular app and social website trounced Wall Street's estimates, sending its shares to an all-time high. The leading social media company's mobile app and push into video attracted new advertisers and encouraged existing ones to spend more. It now has more than 1.7 billion monthly users, well ahead of any rivals. Its shares were up 5.4 percent in after-hours trading at $130.01, after hitting their highest since the company went public in 2012. Mobile advertising revenue accounted for 84 percent of the company's total advertising revenue, compared with 76 percent a year earlier. Total advertising revenue surged 63 percent to $6.24 billion, beating the average analyst estimate of $5.80 billion.Meanwhile, Facebook still has several untapped areas for revenue opportunities, including its WhatsApp and Messenger apps, both of which have more than 1 billion users. But Wehner said the company does not plan to monetize them any time soon, and that it is instead focused on building interactions between businesses and users on the apps. Facebook also owns picture-sharing app Instagram, which recently announced it has more than 500 million users. Facebook has yet to say how much money Instagram makes, but research firm eMarketer predicts it will make $1.5 billion in revenue this year.Total revenue rose 59.2 percent to $6.44 billion, ahead of analysts' average estimate of $6.02 billion.
- GoPro revenue plunges 47 percent, but beats estimates: GoPro's quarterly revenue plunged 47.4 percent, but beat analysts' estimates, which have been sharply lowered on shrinking demand for the company's body-mounted point-of-view cameras. The company's shares were up 2.4 percent in volatile trading after the bell on Wednesday. GoPro's revenue fell to $220.8 million in the second quarter ended June 30 from $419.9 million a year earlier.The company, whose cameras are worn by surfers, skydivers and other action junkies, said second-quarter units shipments rose 8 percent to 759,000 compared with the first quarter. Its average selling price increased 11 percent sequentially and 14 percent on a year-over-year basis. GoPro, however, maintained its full-year revenue guidance of $1.35 billion to $1.5 billion. Analysts on average were expecting revenue of $1.34 billion. GoPro posted a loss of $91.77 million, or 66 cents per share, for the second quarter.
- Groupon reports better-than-expected revenue, still not profitable: Deal site Groupon saw its shares rising today in after-hours trading, following a better-than-expected second quarter earnings report.Groupon revenue in the first half of 2016 reached $1.49 billion.Groupon beat Wall Street revenue expectations with second quarter revenue of $756 million. And it posted a better-than-expected net loss of $6.8 million on a non-GAAP basis, or $0.01 loss per share. In a phone interview, Groupon CEO Rich Williams said that the reasons the company did not make profits in the last quarter are essentially two: Groupon is still investing in marketing and other efforts to attract new customers, and they face other costs associated with company restructuring.In the first half of 2016, Groupon revenue looked better than it did over the same period last year. But the company is not looking quite as strong as it did in the first half of 2015 in terms of profitability.
- Pandora Is Said to Have Held Talks About Selling Itself: Pandora Media, the largest Internet radio service, has held discussions about selling the company, according to people briefed on the talks. Pandora is working with Morgan Stanley to meet with potential buyers, said the people, who spoke on condition of anonymity. The talks are preliminary and may not lead to a deal, the people said. For Pandora, it would be a curious time to sell. Its shares are yielding a market value of $1.8 billion, down from more than $7 billion two years ago. The stock has fallen more than 60 percent since October. Pandora has the largest number of users for music streaming, but the competition is encroaching. Spotify is said to be arming itself with another $500 million in capital, and Apple Music recently surpassed 10 million paying users. Pandora’s users peaked at 81.5 million at the end of 2014, and, after falling to about 78 million in the third quarter of 2015, ended the year with 81.1 million. The company is spending heavily to attract users, and its ability to make money from those users may be waning. In the third quarter, Pandora lowered its full-year financial guidance, expecting its adjusted earnings to be $51 million to $56 million, down from the $75 million to $85 million it projected in the quarter before. “It has lots of users but can’t grow revenue quickly enough,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “It is another stumbling pioneer.”
- For Analysts, Loving LinkedIn Was Wrong: It’s not often Wall Street says “I’m sorry.” But after LinkedIn reported its earnings on Feb. 4, about a dozen financial analysts with varying strategies and sensibilities issued mea culpas. Some had rated LinkedIn a buy a few hours before its downgraded forecast. They watched in horror as its stock fell more than 40 percent, bottoming out below $104 on Feb. 5. Some put it more simply than others. “We were wrong,” SunTrust Robinson Humphrey analyst Bob Peck wrote in a Feb. 5 note downgrading the stock to “neutral.” (He’d praised LinkedIn’s odds of continued progress two weeks earlier.) Mizuho Securities lamented the company’s “significantly slower” growth prospects, while James Cakmak at Monness Crespi Hardt said he was no longer sure even LinkedIn’s slower growth would be sustainable. LinkedIn took a beating even though its earnings report was consistent with recent performance. As usual, it beat earnings expectations, then issued a lower-than-expected sales forecast for the year. It delivered a similarly disappointing projection in last year’s second quarter, at which point its stock dipped 19 percent. But now Wall Street is more skeptical of the tech stocks it once assumed would grow forever. Until Feb. 5, LinkedIn looked like an ideal tech stock to own, almost like a combination of Facebook and Salesforce.com. A free network for professionals, it has the ingredients to grow virally, like a social media company. It sells services to recruiters, salespeople, and marketers, giving it several ways to snag recurring revenue. “This was considered one of the preeminent names, like Facebook and Google,” says Peck. Now reality is setting in, and to expand, LinkedIn has to do more difficult and expensive things, like developing and selling more product lines. “When companies hit these growth walls, people just react really strongly,” says Lemkin. Walls are springing up all over. On its earnings call, LinkedIn announced it had shut down Sales Accelerator, a software tool designed to connect businesses with potential customers, because of a lack of interest. Analysts had said the feature would be worth millions. LinkedIn’s overall user growth slowed, it got tougher to hold on to paid users, and the company had to lean harder on its sales staff. Small factors added up, and analysts were “blindsided,” says Monness Crespi’s Cakmak.
- Delivery Start-Ups Face Road Bumps in Quest to Capture Untapped Market: DoorDash, one of a multitude of start-ups with a mobile app that lets people order and get food sent to their doorsteps, relies on contract drivers like Brian Navarro to make the deliveries. The problem is that workers like Mr. Navarro don’t always stick around. Mr. Navarro began driving for DoorDash and another delivery start-up, Postmates, in Los Angeles about four months ago. Mr. Navarro, 40, who previously drove for the ride-hailing companies Uber and Lyft, said he had seen plenty of contractors quit DoorDash and other delivery companies during the time he has worked with them. The issue is just one headache now troubling delivery start-ups, which have been among the hottest sectors of start-up activity in recent years. Based on a belief that the companies would succeed once they grew to enormous scale, investors poured more than $730 million into delivery firms like DoorDash, Instacart and Postmates from early 2014 through the first half of 2015, up more than 1,100 percent from the same period a year and a half ago, according to data from CB Insights, a venture capital analytics firm. But entrepreneurs and investors are beginning to find that the economics of making a delivery service work are far from easy. Good Eggs, an organic grocery delivery service, laid off more than 100 employees and shuttered its offices outside its San Francisco headquarters in August. Instacart, the grocery delivery service, recently laid off 12 recruiters, which the company said was “part of an overall plan to slow down hiring” after a growth spree last year. And DoorDash has been turned down by some venture capitalists as it has tried to raise new financing, according to three people familiar with the company’s plans. The problems are rooted in the high operating costs of the start-ups, which typically act as middlemen between consumers and restaurants or grocery stores. The companies not only have to pay for large fleets of drivers, they also have big groups of employees who receive customer orders from the apps and who then manually make calls to the restaurants to order food. At the same time, to attract customers, many of the start-ups offer introductory prices and discounts, often making delivery free for first-time users. As DoorDash’s experience with drivers shows, the start-ups’ costs don’t necessarily decline over time. For some drivers, who are paid a fee per delivery, it can be difficult to make enough deliveries in an hour to make it financially worthwhile for them. And when drivers move on, the companies must spend again to recruit replacements.
- Groupon Soars 23% On Favorable Earnings: Not dead yet, deal site Groupon soared 23% in initial after-hours trading, following a better-than-expected fourth quarter earnings release. The company beat revenue forecasts, bringing in $917 million, instead of the anticipated $846 million, and a 9% year-over-year increase. Adjusted earnings per share was a four cents, whereas Wall Street was expecting zero. This is quite the bright spot for the company — until today, the stock had been down 71% in the past year. Shares closed Thursday at $2.24, a far cry from the $20 per share the company saw when it went public in November 2011. Groupon has expanded beyond its core local deal business, acquiring services like Ideel, for fashion discounts and OrderUp, for food delivery. But perhaps until now, nothing has been able to change investor perception that the Groupon brand is tarnished. At one point, the company held acquisition conversations with Google, around a $6 billion price tag. Today, Groupon closed the day with a market cap of $1.4 billion.
- The Difference Between Facebook and Twitter: Twitter Is Lonely for New Users: The simplest reason Facebook has built a massive gap between the two companies over the past three years is that you don’t feel alone on Facebook. It’s easy to find connections because everyone you’ve ever met and their mother is already on the social network. (Seriously, all my friend’s moms have Facebook accounts.) Posting isn’t intimidating because you know who’s going to see it (your approved friends), and you’re almost always guaranteed some kind of feedback on what you share. It may be a “pity Like” from your cousin or your college roommate, but I can’t recall ever seeing a Facebook post that didn’t have at least one like or comment. I don’t care who you are, social validation feels good. Twitter, on the other hand, is lonely, especially for new users. Unless you’re a politician or a celebrity, signing up for Twitter probably means spending your first few days on the service (if not weeks or months) with close to zero followers. Tweeting into a black hole is not fun. Finding relevant conversations is not easy, and venturing into strangers’ conversations takes courage. It’s still too hard to find people to follow when you first sign up on Twitter. The company has made it easier to follow celebrities and media organizations you might want to hear from, but finding people you might actually interact with is a massive challenge the company still hasn’t figured out. I see engagement-less tweets all the time. These things hurt Twitter’s growth because they push people away before they ever see benefit from the platform. That’s why, as of two years ago, nearly a billion people had signed up for Twitter, most of whom never stuck around. (The numbers of deserters is probably much higher today.) The easiest way to fix this problem is to fix Twitter’s feed, which does a great job funneling in a constant stream of live updates and a horrible job helping your tweets get seen. I have 11,000 followers, people I assume follow me because they want to see what I’m tweeting. I tweeted 22 times last week, and my tweets were seen, on average, 3,500 times apiece. (This includes one super-popular tweet that got lots of views thanks to a retweet from an NFL player with a big following.)
- The Risk of a Billion-Dollar Valuation in Silicon Valley: Deep inside a Silicon Valley unicorn lurks a time bomb. It is a peculiarity of venture capital financing that the engine that pumps money into a promising start-up can later cause the same start-up to self-destruct. With all the hoopla and debate over sky-high valuations of technology start-ups, it is worth keeping in mind that the switch that helps to drive those surging valuations can also be turned off. The “bomb,” so to speak, is known as a liquidation preference. In every financing round, the money that a venture capital firm invests is not given freely. The firm and the start-up will negotiate terms of protection. Negotiable terms include voting rights, seats on the start-up’s board and assurances that a future fund-raising won’t unduly dilute the venture capital firms’ stake. The liquidation preference is among the most important of these protections. This feature provides that the venture capital firm’s investment will be repaid before the founders and employees are rewarded. If the firm has particular leverage, it can negotiate an even more protective form, known as the senior liquidation preference, which provides that the firm will be paid not only before the common stockholders but also before anyone else who bought preferred stock in earlier rounds. These provisions apply in a sale but not in an initial public offering of stock. The idea is to ensure that even if the investment does not perform well, the venture investor will still get back its initial money. According to a recent survey by the law firm Fenwick & West of 37 unicorns — private companies with valuations of $1 billion or more — every investment had a liquidation preference. Higher valuations create higher expectations, and failure to meet them can set off a downward spiral and a forced sale. In that event, the venture capitalists are paid first, leaving “unicorpses” in their wake and the founders with nothing. And don’t expect I.P.O.s to save these companies. Some unicorns, like Honest Company, have terms that require minimum I.P.O. prices for the V.C. investors that they just won’t be able to meet anytime soon. As these valuations go up and down, remember that reaching a $1 billion valuation is not all good news for a start-up. Instead, it can simply mean that the newly foaled unicorn has made a Faustian bargain.
- Instagram Hits 400 Million Monthly Users, Mostly Outside U.S. Instagram has passed 400 million monthly active users, mostly by adding people in countries outside the U.S. That compares with Twitter Inc.’s 316 million and Pinterest Inc.’s 100 million. Instagram’s number increased from the 300 million mark reached nine months ago, according to the company. Facebook has 1.49 billion monthly active users. More than 75 percent of Instagram’s users live outside the U.S., with most of the new participants coming from Brazil, Japan and Indonesia, the company said. As it expands, the photo-sharing application has started to ramp up its advertising business, taking advantage of Facebook’s network of tools and marketers to increase its offerings and global reach. At the beginning of this month, Instagram advertised in eight countries. By the end, they’ll be making money in more than 200, the company has said.
- The tech behind how Volkswagen tricked emissions tests: Volkswagen isn’t hiding from its emissions cheating scandal, which the company now says affects some 11 million diesel cars worldwide. “Let’s be clear about this: Our company was dishonest with the EPA and the California Air Resources Board and with all of you,” Volkswagen U.S. chief Michael Horn said Monday night. “In my German words, we have totally screwed up.” Thanks for finally coming clean, VW. But how exactly did the technology behind Volkswagen’s so-called defeat device actually work? Regulators allege that Volkswagen installed software into its cars that allowed the autos to circumvent EPA tests. But that still doesn’t explain how VW vehicles were able to determine when they were being subjected to an emissions test in the first place. To understand more about how Volkswagen cheated, we have to know a bit about the EPA’s testing process. When carmakers test their vehicles against EPA standards, they place a car on rollers and then perform a series of specific maneuvers prescribed by federal regulations. Among the most common tests for passenger cars is the Urban Dynamometer Driving Schedule (UDDS), which simulates 7.5 miles of urban driving. In the first 505 seconds of the test, the driver pushes the car to highway-level speeds. The second phase of the test looks more like what you’d see in stop-and-go city traffic. In all these tests, the driver has to stay within two miles per hour of the required speed at any given moment. Along the way, the testers collect emissions data. There's a dizzying array of other tests that cars sometimes face. There’s a test to simulate aggressive driving, which tops out at some 80 miles an hour, and a test that simulates urban driving on a hot summer day, with the air conditioning on full blast. There’s a cold-start test, where you begin the test with everything in the car turned off. There’s a hot-start test. There’s something called a New York City cycle, which simulates driving in a busy downtown area where you never get above 30 mph. And then there’s the Federal Test Procedure, a 30-minute test that mixes various elements of the other tests. In the end, the detailed requirements for each test gave Volkswagen the advance knowledge it needed to teach its cars when to behave more cleanly. By measuring how long the engine was running, the vehicle’s speeds, and even seemingly esoteric factors, such as the position of the steering wheel and barometric pressure, Volkswagen vehicles could understand they were being tested and so adjusted their engine performance to pass the tests, according to the EPA. Using a special engine setting for vehicle tests isn’t all that unusual, according to Consumer Reports. Most new vehicles do something similar because otherwise vehicles might interpret some of the testing procedures, like traction issues from being on rollers, as dangerous. But the problem here is that the EPA says the carmaker used its testing mode in an inappropriate attempt to beat the system.
- Quirky, an Invention Start-Up, Files for Bankruptcy: Quirky, an ambitious crowdsourced invention start-up, which raised $185 million from investors that included General Electric and leading venture capital firms, filed for bankruptcy on Tuesday. The failure of the company, based in New York, will surely raise questions about how far the crowd-based model of innovation and product development, made possible by the Internet, can go. Other companies are using crowdsourcing to make physical goods, from Threadless for T-shirt designs to Local Motors for automobiles. None, though, were doing it as broadly and across as wide a range of products as Quirky. The company said on Tuesday that it was seeking protection from its creditors while it arranged a sale of “substantially all its assets.” Quirky said that it already had an initial bid of $15 million for its Wink subsidiary, which was created last year. Wink makes software so that an array of Internet-connected home devices, as varied as thermostats and door locks, can be controlled from a smartphone app. Quirky had some success, with revenue rising sharply last year to about $100 million. But the scale of its ambitions — managing a sprawling community of inventors, transforming raw ideas into product designs, and orchestrating manufacturing and distribution — proved daunting and too costly.
- The Plot Twist: E-Book Sales Slip and Print Is Far From Dead: Five years ago, the book world was seized by collective panic over the uncertain future of print. As readers migrated to new digital devices, e-book sales soared, up 1,260 percent between 2008 and 2010, alarming booksellers that watched consumers use their stores to find titles they would later buy online. Print sales dwindled, bookstores struggled to stay open, and publishers and authors feared that cheaper e-books would cannibalize their business. Then in 2011, the industry’s fears were realized when Borders declared bankruptcy. Now, there are signs that some e-book adopters are returning to print, or becoming hybrid readers, who juggle devices and paper. E-book sales fell by 10 percent in the first five months of this year, according to the Association of American Publishers, which collects data from nearly 1,200 publishers. Digital books accounted last year for around 20 percent of the market, roughly the same as they did a few years ago. E-books’ declining popularity may signal that publishing, while not immune to technological upheaval, will weather the tidal wave of digital technology better than other forms of media, like music and television. E-book subscription services, modeled on companies like Netflix and Pandora, have struggled to convert book lovers into digital binge readers, and some have shut down. Sales of dedicated e-reading devices have plunged as consumers migrated to tablets and smartphones. And according to some surveys, young readers who are digital natives still prefer reading on paper. The surprising resilience of print has provided a lift to many booksellers. Independent bookstores, which were battered by the recession and competition from Amazon, are showing strong signs of resurgence. The American Booksellers Association counted 1,712 member stores in 2,227 locations in 2015, up from 1,410 in 1,660 locations five years ago.
- Payments Businesses Are Damn Hard: The Cover App Edition: Cover, a young payments app, is accepted in 350 restaurants in four cities. It has processed more than $10 million in transactions since the beginning of the year. But it will record, at most, just $150,000 in revenue in 2015 after passing on a big cut of its fees to other financial institutions, its founder says. So go the economics of a young payments business. And so ends Cover’s life as a stand-alone company. Founder Mark Egerman said today that his startup has sold to European competitor Velocity in a small deal, after passing on taking on more venture capital under less-than-great terms. “Payments is really a hard business,” Egerman said flatly. Cover allows diners to pay for a meal by pressing a few buttons in a smartphone app at partnering restaurants instead of handing over a credit card or cash. The company generates revenue by charging restaurants 3 percent of the price of each meal. But, like many payment processing businesses, Cover passes along about two-thirds of that fee to banks and other financial institutions behind the scenes. So on a $100 meal, Cover’s cut is $3, but it only keeps $1 for itself. Then it has to pay for all of its expenses. If that doesn’t sound sustainable for a small, venture-backed company, that’s because it’s not. (Cover has raised about $7 million.) Cover’s fate underscores how hard it is to build sustainable payment-processing businesses without enormous transaction volume, and why even much bigger payments startups such as Square and Stripe are diversifying their product offerings to beef up profit margins and create new e-commerce markets. Square processes more than $30 billion in brick-and-mortar transactions each year, charging merchants a 2.75 percent fee for each transaction. Like Cover, it passes on about two-thirds of that fee to other financial players in the payments ecosystem, including banks and credit card companies. To supplement this business as it readies for an IPO and to live up to its $6 billion valuation, the company has unveiled a host of products to create new revenue streams with better profit margins. Its cash-advance business, Square Capital, was doling out $1 million a day as of August. It is also selling software products to merchants through monthly subscriptions — another avenue to move past the minor margins of the payments business. Stripe, the online payments company, has said it processes billions of dollars in payments, but it already has a $5 billion valuation. Its one and only revenue source is still the 2.9 percent cut it takes of most transactions, plus a flat 30-cent fee. It, too, is looking for new areas of growth from new types of commerce.
- Groupon to Cut About 1,100 Jobs Worldwide: Groupon, operator of a daily deals website, said it would cut about 1,100 jobs globally as it restructures outside North America. Groupon is shutting operations in Morocco, Panama, the Philippines, Puerto Rico, Taiwan, Thailand and Uruguay after exiting Greece and Turkey, the company said in a separate blog post on Tuesday. Groupon, which had about 11,800 employees globally at the end of December, said that it expected to complete the job cuts, mainly in sales and customer service, by September 2016. A strong dollar has hurt companies with a large presence in markets outside the United States. Markets outside North America accounted for about 43 percent of Groupon’s revenue in 2014. The company said in April it would sell a 46 percent stake in its South Korean business as part of its turnaround efforts. “I think it’s actually a good thing for investors to hear that they’re taking some more cuts out of their international operations,” Topeka Capital Markets analyst Blake Harper said. Groupon, once the leader in the online coupons market, has also been struggling to boost sales as competitive deals on online marketplaces operated by Amazon and eBay make its coupons less attractive to shoppers. The company has started selling products on its website. Groupon said it expected to incur pretax charges of up to $35 million, including $22 million-$24 million in the third quarter, related to the job cuts.
- With click-to-shop ads, Instagram Takes Another Step Toward E-Commerce...: Instagram is running its first marketing campaigns that transform viewers into shoppers with a single click. Finally, retailers can link to product pages from their Instagram ads—a feature Banana Republic was among the first to employ—and still more sophisticated ads are in the works. The new ads are part of a carefully managed rollout of better marketing tools on the Facebook-owned photo-sharing app, which is starting to offer the sort of products brands have been demanding, especially in view of the $200,000 many of them are shelling out. And that's just the entry fee for buying ads on the platform, according to digital marketing executives familiar with Instagram's business. (Instagram declined to comment for this story.) "Instagram continues to tease big things coming," said one Hollywood marketing executive who buys ads on the platform. "And they're talking about more ways to integrate buying." Another ad executive revealed that, instead of a "Buy" button, Instagram would allow marketers to more easily link to checkout pages online. Yet even that step is a complicated undertaking, given that the app is largely a mobile experience. Sources reveal that more tools like this are on the horizon. Instagram is said to be considering a number of ad formats that could prove game changers for brands, similar to how Twitter built highly customizable ad cards that send users to products with ease. But because these changes would signal a fundamental change to how marketers use and customers experience the platform, Instagram is proceeding with caution, no doubt wary of displeasing its growing user base (now upwards of 300 million). Instagram introduced its first ads in late 2013 and since then has tried to maintain an image as a place for glossy campaigns as opposed to direct-response, click-driven efforts. The high price to advertise there is a reflection of the platform's self-fashioned air of exclusivity. "We're paying a premium on Instagram ads," the Hollywood executive said. Video ads are especially pricey, going for as much as $30 per 1,000 views, according to sources. Instagram is even attempting to get brands to rethink what success looks like by providing campaign data, aiming to prove that impressions boost sales more than garden-variety clicks.
- ..even as Instagram and Facebook are more entwined than ever, for advertisers, who now have a potentially powerful new marketing strategy—using video ads on one to drive sales on the other. Stuart Weitzman, the fashion brand, is one of the first marketers to buy video ads on Instagram, and then send product posts on Facebook to a custom audience of people who viewed the ad. It's an aggressive tactic that incorporates some of the most advanced new ad products from the two social media platforms. Stuart Weitzman also is using cinemagraphs—a mix of still imagery and video that Facebook is encouraging marketers to embrace—for the creative. "The campaign is about how to find that perfect mix of brand and direct response marketing," said Susan Duffy, CMO of Stuart Weitzman. "One of the exciting things we're doing is using the full marketing funnel." Stuart Weitzman is going after 22- to 40-year-old women, and it's using sequential messaging to influence their buying decisions. One week, the women see the cinemagraphs on Instagram, and the next, they get a product ad on Facebook, thanks to custom targeting tools integrating the two platforms. Facebook has no official stats on how many of its users also are on Instagram, but with more than 1.3 billion people on Facebook and more than 300 million Instagram users, there is plenty of room for overlap.
- As PEs increase Tech Funding, Founders find that Big Valuations Come With Dangerous Small Print: About three years ago we started noticing a sliver of founders who were obsessively focused on valuations start to make short-term decisions in their fundraising that risked meaningful long-term consequences. With the popularity of the “unicorn” label, this trend has gotten worse. A few months ago a Midas List friend shared a story of dismay with an example in their portfolio that typifies the situation. Their founder had two term sheets to choose from. One was a “clean” term sheet with no preferences beyond the norm and a barely sub-billion-dollar valuation. The other granted the magical, in the founders’ but not investors’ minds, $1 billion valuation in exchange for a set of onerous preferences. The founder chose the latter. The investor’s fear, which we share, is that the excessive focus on valuation, regardless of terms, can be significantly damaging over time — not just to the founder, but to his team and all the prior shareholders, including seed and venture investors. Part of this is due to the changing nature of funders; many mega-valuation, pref-heavy term sheets come from private equity (PE) shops like hedge and mutual funds accustomed to standardizing on downside protection and guaranteed returns, a very different game than venture. PE shops are making even better returns than the already phenomenal ones we detailed through the issuance of additional shares, guaranteed return levels and other downside protections that protective prefs provide. And in the zero-sum game of return, additional return to one party comes out of the return, or through the dilution, of another; specifically founders, employees and prior investors alike. Let’s look at an example: Several years ago an entrepreneur raising money in a particularly heated round asked, “How do I get a billion?” He was entirely focused on hitting $1 billion in valuation above all else. He didn’t get to his billion target in that round, though he got close, but he did in a later round, at a significant cost. The cost was paid when the company went public. The cost of the valuation was a guaranteed return on the investment made: at least 2x on IPO. Beyond being onerous, as the IPO proved, it set a precedent and pattern. A later investor got a guarantee of 1.5x and the one thereafter a more traditional 1x; although a 1x guarantee on IPO is very different from a traditional 1x liquidation preference, which only kicks in on the sale of the company or a similar event. When the company IPOed it did so below the $1 billion valuation, and the preferences kicked in. In order to make good on the guarantees the company had to issue additional post- IPO stock, which diluted all the non-pref-enriched shareholders by almost 15 percent. The company’s shares also traded down significantly on opening day, chalking up an unwanted record; the biggest first day dip in IPO price of any U.S. company that year. More recently, when Box priced its IPO at $14 a share, below its last private round at $20, it triggered the preferences to their last private investors, Coatue and TPG, including “profit protection.” According to Box’s S-1, every share of Series F stock converted into shares of common stock equal to $20 divided by the lesser of 90 percent of the price per share of common stock, or $20, meaning Series F investors were guaranteed at least a 10 percent discount to the IPO price. If not the balance was made up in additional stock grants. So if Box priced at $22.22 or above, the Series F shareholders wouldn’t receive any additional shares from their preference for the shares they paid $20 thereby locking in a 10 percent profit plus all upside above $22.22. But Box priced at $14, triggering the preference and ever Series F share converted into 1.587 shares of public common, versus the one-to-one conversion they would have achieved at a $22.22 price, and further diluted the shareholder base. Box’s most recent 10K reports a share count of 119.8 million, but if the series F had not converted the number would have been 115.4 million, meaning the company issued an additional 4.4 million shares as a make good on top of the original 7.5 million shares originally converted. Without a conversion preference, the Series F holders would have converted to 6.5 percent of the shares, with the preference that increased, post IPO, to 10 percent (54 percent accretion for Series F PE shareholders) and lowered the remaining shareholders ownership from 93.5 percent to 90 percent. To make this that much more frustrating to the founders and investors before the final investor, Box’s shares actually traded as high as $24.73 on opening day, well above the $22.22 protection price, but since ratchets are triggered by IPO pricing the last private round investors received their additional shares regardless. Prior private preferred rounds (PPR) are not uncommon in IPOs, but they do appear to be more common in TMT (Technology Media & Telecommunications) IPOs, and are even more pronounced in TMT IPO down rounds.
- Written-off and forgotten, but still going: Groupon Market Value Seen as High as $6 Billion With Divestments: Groupon Inc. could divest four businesses in the next two years, netting as much as $730 million, to raise cash as it expands into an e-commerce marketplace, according to Gene Munster, an analyst at Piper Jaffray Cos. Groupon has a market value of about $5 billion, though it should be closer to $6 billion because those businesses are undervalued, Munster said. A majority stake in its Ticket Monster business, which offers daily deals and e-commerce services in South Korea, could fetch about $500 million, while smaller units might yield between $30 million and $100 million each, he said. With a stock that trades at little more than a third of its 2011 initial public offering price, Groupon has shifted its focus from e-mailed daily deals to competing with Amazon.com Inc. and EBay Inc. as a marketplace. To do so, it will need to sell some non-core properties to free up more cash to invest in the initiative, some analysts said. As of the end of December, the Chicago-based company had about $1 billion in cash and cash equivalents. “What is safe to say is that Groupon has several stealth assets that are generally underappreciated by investors as far as overall value,” said Munster, who is based in Minneapolis. Private equity firms are the most likely buyers, he said. Groupon shares have climbed 28 percent in the past six months to $7.39 in New York. Still they are 63 percent below the IPO price of $20 set in November 2011. Proceeds from the sales could help Groupon make acquisitions to expand its e-commerce operations, including online retailers or a payments business, Sweeney said. Another option -- buying a service that delivers food or goods to customers, Tom Taulli, the author of The Complete M&A Handbook, said in an interview. Or it could put the money into new fulfillment centers, Sweeney said. Groupon is testing Groupon Stores, where businesses can post their offerings. It’s also testing movie downloads from its site.
- Tencent market value breaks US$200 billion: China’s Tencent broke new ground on Monday when its stock (00700.HK) closed at HK$170.50, bringing the company’s total market value above US$200 billion for the first time ever. Tencent has been one of China’s biggest internet companies since the very beginning with its QQ messaging service. These days, the company has its hands in almost every corner of the internet industry. It remains the top player in China’s social media and messaging sector, and it also dominates a number of other sectors including online and mobile gaming.
- Urban Ladder aims for $100M in GMV, outlines tech-product plans: The firm has just raised $50 million in a fresh round of funding from both new and existing investors. The main focus is to expand our products and services to more cities, which we have been doing for the last six-seven months. The next focus is technology—we are focusing on innovations in customer experience, mobility, automation and analytics. We are trying to offer a new customer experience, helping customers get a sense of our products. We believe a lot of innovation needs to happen in this space. Mobility is getting a big push. Customers are doing a lot of discovery, exploration and transactions via mobile. Once we have the right products, services and technology in place, we would want to enable a marriage of these aspects to bring out greater results. Our aim is to invite the customer to give us the key to his/her house so that we can design and furnish an extremely beautiful house and give the key back to the customer in just three weeks through a tech-enabled process. A lot of innovation needs to happen on the customer experience and the web (store) part. We are investing a lot on mobile technologies to provide a great experience on the core catalogue as well as on areas like visualisation, personalisation and app development. A bunch of innovations will come out on how customers interact with products on mobile and how customers engage with the brand on mobile. We are building a strong technology, user experience and product management team to look into these aspects. We are also looking at technologies such as ERP, GPS and RFID to automate and ensure smooth flow of information throughout the process without any manual involvement. Analytics is another key area of focus in terms of real-time data and dashboards. We now have a scale of data with which we will be able to gain a lot of inputs on buying patterns and personalisation can be done much more effectively with real-time analytics.
- Marissa Mayer Shuffles Yahoo Leadership Team; Tumblr Struggles Lead to Founder's Demotion: Marissa Mayer, Yahoo’s chief executive, announced a major reorganization of the company’s product teams on Friday, promoting the head of one recently acquired company and effectively demoting the chief of another. Under the new structure, Simon Khalaf, the Internet company’s data-spouting prophet of mobile, will become a senior vice president and oversee many of the company’s consumer-facing products, including the Yahoo home page, its portals devoted to themes like sports and movies, and related Yahoo apps. Mr. Khalaf joined Yahoo in July when it bought his mobile analytics company, Flurry, for about $300 million. Flurry, which offers data and advertising services to mobile app developers, has since become the core of Yahoo’s efforts to compete with Google, Facebook and Twitter to persuade developers to use its tools. Mr. Khalaf, a rapid-fire speaker with a knack for presenting complex information simply and clearly, has become a crucial Yahoo ambassador to the outside world and played a starring role at Yahoo’s recent mobile developer conference. As part of the reorganization, the blogging platform Tumblr and its chief executive, David Karp, will report to Mr. Khalaf, according to an internal announcement made at Yahoo Friday morning. Although Mr. Karp will remain part of the executive team, he will no longer report directly to Ms. Mayer, which he has done since he sold Tumblr to Yahoo for $1.1 billion in 2013. The move reflects Tumblr’s struggles to broaden its appeal beyond its core audience of of artists, teenagers and 20somethings looking for a platform to express themselves. Tumblr has served as the technology behind Yahoo’s digital magazines, but it has faced challenges in luring advertising. Tumblr’s top ad executive, Lee Brown, recently left the company and joined BuzzFeed after Yahoo integrated Tumblr’s ad sales with Yahoo’s. Mike Kerns, the senior vice president who previously oversaw Yahoo’s home page and verticals, is leaving the company to pursue entrepreneurial opportunities
- Xiaomi takes baby steps in the US - where Apple rules, and carrier-sales + phone subsidies blunt cost advantages; also nears manufacturing deal in Brazil: Xiaomi will begin selling headphones, smart wristbands and other accessories online in the United States in coming months, taking its first tentative step onto Apple Inc's home turf without its signature Mi mobile devices. The company also said it is close to securing a manufacturing partner in Brazil, which will help it skirt punishing tariffs on imported electronics when it begins sales in Latin America's largest economy in the first half of this year. Xiaomi, a five-year-old upstart whose name means "Little Rice," came out of nowhere to become China's fastest-selling mobile brand. It has been rapidly expanding its global footprint through direct, online sales. The company was valued at $45 billion in a December funding round that drew investors ranging from Singapore's sovereign wealth fund to a private capital firm backed by Alibaba Group Holding Ltd co-founder Jack Ma. Its Mi devices, which scored with Chinese users because of their low cost and the company's heavy reliance on user interaction and feedback, are now sold online across Asia, including most recently India. Brazil marks the company's first foray with smartphones outside of its home continent. Global operations vice president Hugo Barra said Xiaomi intends to begin selling its phones there in the first half of this year. The company is in "extremely advanced discussions" with at least half a dozen manufacturing partners there, Barra, a former Google Inc executive, said without revealing names, which will help it side-step a roughly 60 percent tax on foreign electronics. The company is eschewing bigger-ticket items like phones and tablets for now partly because of the United States' carrier-sales and phone subsidy structure, which eliminates Xiaomi's cost advantage. More generally, Bin and Barra talked about the time and effort needed to tailor its MIUI Android-based operating systems for individual markets and obtain certification, among other things. Xiaomi's main intention for now is to engage American consumers and try and build a community there the same way it has in China and India - through fan events, interaction with users on social media such as a dedicated Facebook page, and gradually coming to know both local preferences and building its brand. For example, Barra told Reuters how Xiaomi might put its self-branded headphones in front of U.S. audiophiles and tweak the product depending on their detailed feedback.
- Pinterest launches App Pins, aimed at boosting app discovery on Apple's app store (1.4M apps and counting): There are more than 1.4 million mobile applications in Apple’s App Store, so unless you have a good idea of what you’re looking for, it can be tough to stumble upon novel, surprising items among Apple’s sprawling garden of apps. Pinterest, the popular social bookmarking start-up, thinks it has a fix for this. The company is unveiling a new product on Thursday that could make it easier for people to discover new smartphone apps without even having to go into Apple’s App Store. The product, called App Pins, aims to do the same thing for smartphone apps that Pinterest’s service has done for photos, recipes and many other types of websites. In short, the service is a type of digital corkboard that lets visitors save, or “pin,” items they like or places they want to go. Pinterest’s philosophy is that it can help nudge people into doing things — be it buying a coffee maker or trying a new recipe — by letting the site’s 70 million estimated regular visitors search for and save for later the things that interest them. Pinterest believes it is better positioned to help promote apps because of the nature of the service. People come to Pinterest, the company says, to find new things to do, see and buy. That is unlike Facebook, which has been used to connect with friends, or even Twitter, which is often about public discourse and news. In addition, more than 75 percent of Pinterest’s use comes from mobile users, a crowd more able and willing to download new apps. It is also a significant move for Apple, which has long surfaced popular smartphone apps via the “featured” section of its App Store. If an app is placed in Apple’s featured section, which is carefully curated by Apple employees, it is much more visible than the hundreds of thousands of other apps in the company’s gigantic repository. In the past, Apple has had some difficulty with providing adequate app search to its customers, and has made several moves to better surface apps. In 2012, Apple bought Chomp, an app search company, and it has also introduced a host of new features to the app store ace apps, including a menu that shows which apps are trending in popularity at the moment, and also gave users the ability to search by categories and sub-categories of apps. Along with Pinterest’s App Pins initiative, Apple will introduce its own curated App Store account on Pinterest, featuring multiple boards on the service on Thursday; it will use its in-house team to promote apps that will vary by season, theme and even the choices of so-called “guest pinners.” Pinterest said it did not yet have any plans to make money directly from App Pins. However, if Pinterest aims to follow in the footsteps of other social networks, App Pins could be significant for Pinterest’s business.
- Contrasting routes to staying relevant: Texas Instruments ('small and spread out') and Cisco ('big and comprehensive'): Texas Instruments, a 63-year-old company that produced the first silicon transistor, ran into trouble several years ago selling digital chips for wireless products. The company refocused on cheaper and less sophisticated nondigital chips. Done well, these chips have exceptional profit margins, and Texas Instruments’ stock has gained 143 percent in the past five years. The Dow Jones industrial average is up 78 percent over the same period. The chips also turn out to be profitable at a time when seemingly everything is acquiring some kind of machine intelligence. Performance improvements that used to happen with better mechanical engineering now come from closer monitoring and computer analysis. Mr. Templeton foresaw Texas Instruments as targeting a lot of small manufacturers, the kinds of places with 50 employees turning out just a few products, that never came near his business before. The reason is that almost every part of the manufactured world, including things like outboard motors or novelty doorbells, is going to have to include machine intelligence to monitor its performance. He plans to sell it to small manufacturers through an online catalog of parts, with salespeople touching the larger accounts. “It’ll be difficult for you and your world to analyze,” he warned a room full of Wall Street bankers. “It’s literally hundreds of thousands of customers, very disaggregated.” On Wednesday, Cisco Systems reported second-quarter earnings well above what Wall Street expected. Revenue was $11.9 billion, versus a consensus estimate of $11.8 billion published in a survey by Thomson Reuters. Adjusted net income was $2.7 billion, or 53 cents a share, compared with an expected 51 cents a share. For John T. Chambers, Cisco’s chief, it seemed a vindication for several years of struggle. “I’m not sure people outside Cisco appreciate the magnitude of the changes we have made in the past years,” he said in an interview. Cisco, he said, had changed 30 percent of its leadership, moved 40 percent of its employees from traditional businesses like computer networking hardware, and into software, industry-specific applications, collaboration and cloud computing. Cisco laid off 6,000 people from its ranks of 74,000, but also hired 6,000 people for other jobs. All those changes were similar to what Texas Instruments had gone through: The old company was retooling for a world in which machine intelligence is everywhere. So far, however, Cisco’s “big and comprehensive” approach does not have the payoff of T.I.’s “small and spread out” style. These things have a way of swinging, of course, and the first rule for any incumbent facing change is the same: Find a way to survive that works for what you’ve got.
- Indian startup action: Housing.com in talks to acquire PropEquity, a real estate data analytics firm: Housing.com, is in talks to acquire Delhi-based P.E. Analytics Pvt Ltd, which owns a real estate data product PropEquity, sources close to the development told Techcircle.in. According to industry sources, Housing.com is believed to have offered around Rs 80 crore for the company. PropEquity recorded revenues of Rs 13.7 crore in 2014 and losses of Rs 70 lakh. The company has been in losses for the last three years as it had made investments in building a B2C product, according to sources. The deal will give Housing.com a ready revenue stream from B2B clients as the heavily funded company will come under increasing pressure to show revenues. PropEquity’s data and analytics enable clients – mainly real estate private equity investors, developers, and BFSI industry – to spot market trends, and generate macro/micro analytics. It claims of covering over 45,000 projects of 8,200 developers across over 40 cities in India and adding about 500 projects every month. Presently, the company has over 250 employees. On the other hand, Housing.com is a B2C product primarily with tools to sieve through mountains of data to develop indices and metrics that help consumer search for homes. PropEquity is majority owned by entities belonging to American hedge fund Och-Ziff Capital Management Group.
- Struggling to expand beyond Japan, Taiwan and Thailand, Line attempts to become a messaging platform for businesses (as WeChat has already done): Messaging app company Line has released a new service that will allow brands, SMEs and other business users to tap into its platform communicate with customers and consumers. The Line@ app – which is available for iOS and Android — is essentially an enterprise-focused version of Line’s chat app, which has 170 million active users worldwide. Line@ plugs into the existing chat service and lets us users exchange message with regular Line users and post content to the social network-like ‘Timeline’, but it is designed for communicating with people who are not friends, for example clients, customers or fans. “The Line@ service will greatly expand the potential of Line, for example allowing stores and facilities, as well as brand, media, and online business operators to promote new information, communicate with clients and other business contacts, create service usage reservations, and more. Designs, artists, magazine models, and other freelance talent can also utilize the service to communicate with fans,” Line explained. The new service is free to use, but Line is charging users for a vanity ID ($24 for the first year, $12 thereafter) while free accounts are limited to sending 1,000 messages per month. Those wishing to go for more can pay $50 per month for 50,000 messages, messages beyond that bundle cost $0.01 each. Line is already open to brands and business via its ‘official’ (branded) account option, but it costs tens of thousands of dollars to create and use a branded account leaving many business users priced out. In countries like Japan, Thailand and Taiwan — where Line is the dominant chat app — small merchants and SMEs have long adopted the consumer version of the app for their business, but in dong so they mix personal and work contacts in the same place. That’s exactly the issue that Line@ is designed to cater to, and it allows users to have a personal and business profile on the service. WeChat, the dominant chat app in China that counts nearly 500 million active users, has already made its app friendly to business users. Enterprise accounts were opened to all businesses last September, and earlier in 2014 the service added a mobile store platform and released its payment service to all businesses — combined together, those three elements allow companies to run their business and communications via the service. Line has introduced payment too, and though it is dabbling in its own version of shopping, it is pushing an online-to-offline strategy that allows companies to interact with fans via its mobile messaging platform — giving them a dedicated point of access, beyond the expensive official accounts, is an important step. However, Line has struggled to dominate markets beyond Japan, Taiwan and Thailand. A lack of users in a country makes it harder to sell the need for Line@ to businesses and brands, so it remains to be seen how this new app will be adopted.
- Two gaming companies result: Zynga Q4 earnings miss: bookings $182M, stock down 10%; King Q4 earnings beat: bookings $586M, stock up 18%: The fickleness of the gaming industry was on full display in the earnings reports of "FarmVille" creator Zynga Inc and "Candy Crush" maker King Digital Entertainment Plc. Zynga's shares fell 10 percent while King Digital's soared 18 percent in extended trading on Thursday after the companies reported contrasting fortunes in a key industry metric. King's total gross bookings, an indicator of future revenue, increased 8 percent to $586 million in the fourth quarter, about $45 million more than the average analyst forecast. Zynga reported bookings of $182.4 million, about $19 million less than expected, according to research firm StreetAccount. The company, whose market value hit more than $14 billion in 2012, lost most of its shine after failing to come up with new games to match the popularity of "FarmVille". It was also caught off guard by mobile-focused rivals such as Dublin-based King Digital and Supercell, the maker of "Clash of Clans" and is now valued at about $2.4 billion. King, which went public last March, has a market value of about $4.6 billion. That helped it to avoid the fate of Zynga and "Angry Birds" developer Rovio Corp, which is also struggling to grow. King Digital's revenue and profit easily trumped market estimates as its newer games more than made up for the declining popularity of older titles. Zynga's main launch, the multi-player word game "Words with Friends", failed to excite gamers and launches aimed at the Chinese market failed to live up to expectations. The company said it would close its Beijing office and lay off all 71 employees. Zynga's forecast for bookings in the current quarter also fell far short of estimates, according to StreetAccount. Up to Thursday's close of $14.74, King Digital's shares had risen 10 percent in the past six months. Zynga's shares had fallen 7 percent to $2.66.
- Groupon Q4 revenue $926M, +20% Y/Y, stock flat: Groupon gave a forecast for first-quarter results that fell short of Wall Street's expectations on Thursday, as the online commerce company confirmed that several parties have expressed interest in acquiring its South Korean subsidiary Ticket Monster. Those parties had opened discussions with Groupon about possibly buying the loss-making Asian e-commerce firm, which sells tickets online and is valued at about $1 billion, The Wall Street Journal reported last month. Groupon said it was too early to comment on the likelihood of such a deal, though it continues to explore alternatives for its various Asian businesses. Groupon bought Ticket Monster from rival LivingSocial Inc about a year ago for $260 million. On Thursday, Groupon, which once dominated the fast-growing online coupons arena, forecast revenue of $790 million to $840 million in the March quarter, up 13 percent from a year earlier on a foreign exchange-neutral basis. That lagged Groupon's target for 15 percent growth on the same basis in 2015. It also fell short of an average analyst estimate of $856.14 million. Revenue was up 20 percent at $925.4 million during the three-month holiday period. Shares in the company slid 1 percent to $7.38 in after-hours trade.
Amazon launches global shipping into China (from Amazon global stores) starting Singles Day: Amazon is planning an interesting move in China that could shift the balance somewhat starting with its Singles Day sale this year: global shipping. To be clear, this doesn’t mean you can buy goods off of Amazon China from anywhere in the world. Rather, it means that Chinese consumers will be able to shop on Amazon’s US, German, Spanish, French, and Italian stores and have whatever they order shipped directly to China. Amazon China is also launching an “international shopping” feature that should make it more convenient for Chinese customers to shop for goods they want from foreign Amazon shops. Moreover, the shipping may not take as long as you’d expect; Amazon China has arranged partnerships with EMS, UPS, and other global shipping companies that should bring international orders to Chinese doorsteps faster than ever. The new partnerships promise to help customers get their orders through customs quickly, and some items may arrive within three days of being ordered. Sure, that’s nothing compared to the speed of shipping within China, but for an international order, three days is very fast.
LinkedIn positive earnings surprise (Q3 revenue $568M, 45% Y/Y, net loss $4.3M) on real momentum in China; no updated user stats: Interestingly, each of the company's three divisions grew at the same rate (~45%). Talent Solutions – otherwise known as the company’s recruitment products and services — continues to be the company’s biggest earner, now accounting for 61% of all revenues. Marketing Solutions – the company’s advertising products — is a steady 19% of revenues. Premium Subscriptions – the paid subscriptions to have access to more LinkedIn features — is 20% of total revenue, same as a year ago. The U.S. is 60 percent of all revenues, at $343 million, and while LinkedIn is pushing harder into markets like China, it’s pulling in $225 million at the moment.
Groupon also had a positive earnings report (Q3 revenue $757M, 27% Y/Y, net loss $21M); firm is hanging in there tenaciously with many new products: Groupon managed to best expectations, but not by a margin that investors found too compelling. The company is up 1% in after-hours trading. Groupon in the last quarter has been continuing its efforts to build out its product portfolio and continue developing its services in a bid to boost its traffic and offset any declines that it may see in daily deals. That has included the launch of individual business pages to rival those of Yelp, a shopping loyalty and couponing app called Snap, and a more flexible model for how it lets businesses list deals based on specific times of day to improve footfall. It’s slowly making some progress on these fronts. The company says that 100 million people have now downloaded its mobile apps globally.
Facebook Audience Targeting could be changing politics just like it is changing the news business: Modern political campaigns home in on their key voters with drone-like precision, down to the smallest niche — like Prius-driving single women in Northern Virginia who care about energy issues. They compile hundreds of pieces of data on individuals, from party registration to pet ownership to favorite TV shows. Some platforms are now tailoring their offerings to meet the campaigns wherever they are. Facebook, for instance, at its most basic level allows campaigns to focus their message on a particular ZIP code or gender, or even a group of voters that “likes” a certain set of Facebook pages — maybe MSNBC’s Rachel Maddow and The Nation, or Fox News’s Sean Hannity and Guns & Ammo magazine. At a more sophisticated level, a campaign can upload its entire voter file to Facebook, and work with one of the site’s data partners to reach only its targets with messages designed specifically for them.
