In Tech, Nike Scores Again?

Nike tries again at venture capital and scores a touchdown? That’s the news apparently left out of a report by CB Insights. Published on March 22, 2016, the report told of big “bets” by fitness brands in tech and other areas. CB Insights’ findings were culled something called the Business Social Graph. To tell this story, you really numbers not pictures, so continue reading.

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Nike started its corporate venture capital unit in late 2011. In the beginning, Nike’s team was Avi Sahi and John Hull. According to Linkedin, Avi Sahi was involved in two transactions involving a minority investment in DyeCoo Textile and another in Llamasoft. Both investments fit the venture capital unit’s mission of sustainability and innovation.

It appear Nike appears invested $2 million in DyeCoo and $3 million in Llamasoft. The amounts come from quarterly filing reports summarized in the chart at the bottom. While the amounts may be small for Nike, the amount are larger for founders of these companies.

Nike invested, along with Intel Capital, in Reflektion in March 2014. Reflektion brings machine learning to e-commerce. Nike investment appears to be $1 million and was part of the $8 million Series A round. Nike also invested $1 million in the Series A round of Grabit. Grabit makes adhesion technology for material handling and industrial automation.

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Now Hannah Jones appears to head Nike’s corporate venture capital ambitions after the departure Avi Sahi left in November 2014. John Hull left earlier in 2012. She now leads the sustainable business and innovation team at Nike. And Ms. Jones has the title to match: Chief Sustainability Officer & VP of the Innovation Accelerator.

Ms. Jones has picked up the pace of Nike’s investments. Under Avi Sahi, Nike made about one investment each year of approximately $1 million to $3 million (see chart below). Since 2014, Nike has not announced any new minority investments. But according to SEC filings, Nike has more than double its corporate investments. 

By then of 2015, Nike corporate investments increased from $6 million to $17 million. In the three months ended May 31, 2015, the increase was $2 million. For next quarter ended August 31, 2015, the amount increase was $1 million. The last quarter filed by Nike, the amount of increased to $8 million.

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Where do the numbers come from? Answer: Not from a Business Social Graph, but from Nike.  In the filings, Nike has made investments of non-marketable preferred stock, the kind of security associated with private companies. Nike reports the value of these investment using internal models and assumptions, since there are no public market prices.

Since 2011, these investment have increased from zero to $17 million. The increase may have come from increases in the amount and the value of the investments. The assumption made here is the increases are due additional investments. Why? The increases correspond to publicly announced minority investments by Nike. In addition, the investments have been steady and modest.

If Nike has indeed increased its venture investments, this is good news for founders and startups of Silicon Valley.


Nike’s Quarterly 10-K: 2011 to 2015.

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Jack Dorsey’s Other, Other Company

Jack Dorsey has founded another company, which is not Twitter, nor Square Inc., but West Studios.  We know West Studios made $1.2 million from Square Inc. in 2012 for consulting services (Page 172).  And per LinkedIn, West Studios does marketing and advertising for “the world’s most inventive young companies” (does that include Square?).

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Another fact, West Studios also received a stock option for Square Inc. The option was exercised in 2014. So Jack owns stock in Square directly and indirectly (assuming West did not sell its stock). All these gems of information can be found in Squares S-1 filing from last year’s IPO.

And now you ask: Why should I care? A: S-1 filings provide all sorts of helpful information for the founders, investors, and advisers of startups, especially for preparing financial models and cash flow analysis.

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Salesforce Tower and End Times

Besides building up its tower, Salesforce has increased investments in startups. You can read about it in their recently released annual report; it came out on March 7th. Just keep reading, if want to save time and you want to know the really important stuff.

With the rumor of Intel Capital selling part of its portfolio, corporate venture capital is the hot topic this week. Q: Why is Intel Capital selling? A: Strategic or Financial reasons. While the old media reports Intel press releases, you can decide for yourself. So keep reading or look up if you want to know if the end is near.

 

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Just some background before proceeding.  First, the amount reported by Salesforce are investments where the company owns less than 20% and does not exert control; for accounting purposes this called the cost method. Secondly, the investments included non-marketable securities and debt. The debt is probably convertible debt.

Salesforces’s total investment for the year ended January 31, 2016, was $505 million. The fair market value of the investment was $715 million; so if all the portfolio companies were sold, the gain would be $210 million. Salesforces’ rate of return here is 44%. You can play the same gain for 2015 (see below). In 2015, the rate of return of 72%.

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Salesforce corporate venture has increased greatly over the past five years, like the tower. From 2012-2016, the amount invested was: $21 million, $48 million, $47 million, $158 million, and now for 2016, the amount invested is $505 million. Apparently, the investments are for early stage company focused on enterprise computing.

Now back to the building. There is rule of thumb which says the end of bubbles is marked with the completion of high building. Examples: the Asian Crisis had the Petronas Tower and the Lehman Shock had the Burj Khalifa. Will the Salesforce Tower mark the end of (this) time?

No one will tell you when the end is near, but the savvy move ahead of the market. Oh, the completion date of Salesforce Tower is 2018.

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No More Intel (Capital) Inside

Today “Intel Inside” does not apply to it’s venture capital unit. Bloomberg reported that Intel is considering selling part of Intel Capital. A source said the assets sold could be worth more than $1 billion. Here is some context; the stuff not reported.

Intel reported the fair market value of Intel Capital’s portfolio as $2.6 billion (as of September 26, 2015). Bloomberg reported that the sale of the assets could be worth $1 billion, so it appears Intel Capital is considering selling less than one half of its portfolio companies.

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No reason was given by Intel for the sale. Wall Street Journal said “sale would allow (the) company to focus on startups in key technology, geographic areas” and Bloomberg implied the sale was due to Arvind Sodhani retirement from Intel Capital back in 2015. 

The reason is really simple once you just look “inside” Intel.

It appears Intel Capital has invested approximately $1.6 billion in its portfolio companies. And now that the total portfolio is worth 2 times or $2.6 billion, Intel is selling high. Intel may just be selling at the top of a market which has had an incredible bull run.

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Here are the assumptions and data:

The information was reported by Intel in its September 26, 2015 10-Q. Intel total investment in private companies is $3 billion. The $3 billion amount includes Intel investment’s in Cloudera ($250 million) and UniSpreadtrum ($966 million).  

These two companies are not Intel Capital portfolio companies and were excluded. So the total invested by Intel Capital as of September 26, 2014 is assumed to be approximately $1.6 billion.

The fair market value of the private company investments was $4 billion as of September 26, 2015. Excluded from the $4 billion were Intel’s investments in Cloudera and UniSpreadtrum.

These purchase were so recent, it is assumed that the costs represent the fair market values of both companies. Intel invested in Cloudera during the 1Q14 and UniSpreadtrum during the 3Q15. So the $450 million (Cloudera) and $966 (UniSpreadtrum) were excluded from the $4 billion, fair market amount.

Intel Capital makes invested in portfolio companies for less than 20% and can not control management, so Intel records the investments using the cost method of accounting.

Here is the data:

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References:

Intel Considers Sale of Some Venture Capital Assets to Refocus

Intel said to mull sale of $1 billion venture capital portfolio

LinkedIn is Now Waterproof

LinkedIn is now waterproof or at least trying to get here. It’s stock was destroyed by the tsunami which swept through the markets in January 2016. As a good gesture, LinkedIn Chief Jeff Wiener contributed his equity award to an employee pool. But this is bigger than just improving moral and underwater stock options. 

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Twitter also wants to retain employees so it is offering employees cash and/or stock to stay a little longer. And Jack Dorsey also contributed his stock to Twitter employees back in October 2015. Compensating employees for underwater options or worth-less stock also occurs in private markets, especially with the Unicorns.

Again in January 2016, Foursquare had it’s value lowered from a down round. Foursquare chose to swap it’s employees underwater options for restricted stock units, rather than give cash, repricing the option, or just giving more options. Again it was to make the employees more happier.

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But all of this is not about keeping employees; it’s really about falling stock prices. Sentiment appears to be changing. Investors in the public markets are moving money elsewhere. And the hot money that once flowed from mutual funds, hedge funds, and others is leaving or starting to leave as reported last week by Wall Street Journal.

Company valuation can rise from real growth or speculation. When there is real value, then the employees, who contribute to the success of the company, win. In the past five years, valuations appear to have risen due to the hot money flow into Silicon Valley. And now that the money is flowing out, it’s the employees who lose.

 

 

 

 

Visa gets Square Inc.

Visa gets Square, but not most. Visa made an investment in Square in 2011. But when the amount of the investment was announced in February 2016, it caused confusion in the markets (stock price shot up 4%) and in the press (it’s a vote of confidence). It appears most assumed the investment was made for financial reasons. It appears no one knew why Visa owned Square in the first place. No one asked why?

Actually it wasn’t Visa, but Visa Ventures which make the investment. Establish in 2011, Visa Ventures makes investment in startups for reasons other financial gain, but to gain knowledge of changes in the marketplace, an access to new markets, or an option on future acquisitions. Visa Venture has made other similar investments such as Securekey. So the investments are more strategic and less financial. 

Visa Ventures is in the business of corporate venture capital. Like regular venture capital, exits are important, such as an initial public offering, a mergers, or an acquisition. So Visa owns the shares in Square Inc. simply through its initial investment in 2011 and subsequent Square IPO in November 2015. What happens next really depends on why Visa invested in Square Inc. in the first place?

Visa made the Square investment to gain an insight into mobile payments. It said so (sort of) in it’s 2012 annual report;

“Technology is also opening up new opportunities for expanded merchant acceptance, as new mobile point-of-sale (mPOS) devices, such as Square..”

Rather than swipe your card in the traditional manner, Square allows small businesses to receive payments through the mobile phone. Of course this is now well known, but it was not so when Visa made it’s investment. 

Visa makes strategic acquisitions or investment when it complements their core business, as was done with the Cybersource. So it could be assumed, Visa could acquire all of Square if it was essential to Visa overall business. Otherwise, Visa may eventually just sell the stock and profit from any gains as done with any other corporate venture capital investments. 

It not only Visa which making investment in fintech, but others such as American Express, Mastercard, Citibank, and BBVA. Those financial companies need to understand and anticipate how technology is disrupting their business; venture capital investing is one way to do get those insights.

So why ask why? Asking why leads to more. Often markets are not rational and news reporters often just plumbing rather than fountains of knowledge. Asking why puts you ahead of the crowd, rather than part of the herd.

 

Max (Levchin) rolls into Texas

Max Levchin rolls into Texas this week like a tornado, from March 9th to 12th. Before speaking at SXSW, Max is also speaking at events sponsored by the engineering and computer science departments of UT Austin, Rice University, and Texas A&M. During the week, you can hear Max at fireside chats and make pitches to him, but there will be another important person there.

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Max means business, and so can you. If you know engineering or computer science, you can also know the business side of startups. Students in Texas can find more about entrepreneurship at their respective business schools:  Mays Business School, McCombs School of Business, and Entrepreneur@Rice. Those universities offer courses in new ventures such as finance and leadership.

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If you are not in Texas, then try the schools where you are; knowing a little about business can be helpful. The genesis of the biotech industry was the marriage of science and finance. After the meeting of Herbert Boyer and Robert Swanson, Genentech was born. While it took them time to commercialize recombinant DNA technology, Boyer, Swanson, and others gave life to a company which gave life to others.

For those in Texas, remember you have all you need. Once there was oil beneath your feet and a boom abound. And you still have acres of diamonds waiting to be developed. Because the other important person there will be…you!

 

Breaking News: Twitter Just Sold

Seventy to Fifteen and Twitter is gone, sold. At least, that’s the news reported this week as Twitter’s stock prices falls and stories circulated that Twitter will be purchased. Old media (Time) says it is “Twitter’s Final Days” and the newer ones say “Why Twitter is Hard to Buy” (The Information). Twitter is not an attractive target and not for the reasons reported. Twitter even said so.

Golden Egg. Twitter has lots of past losses, which is common, especially in the technology sector. In fact, Twitter has losses of $2.6 billion. The losses allow Twitter to offset future taxable income. The past losses are there to offset future income, until things are evened out, like children on a seesaw; so losses are really an asset.

Don’t Kill the Goose. Remember, Uncle Sam is another partner any business and he gets his share, before other shareholders, in the form of income taxes. As an owner, you would do anything to reduce your taxable income. Knowing this, Congress wanted to discourage anyone from acquiring a company just for its tax losses. Thus utilizing the tax losses is limited. Twitter even said so in its 2014 Annual Report (Page 34).

Twitter’s 2014 Annual Report 

Scrambled. Utilizing the tax losses is limited when there is change in ownership. Now if someone does not care about the tax losses then go ahead and buy Twitter. But some tax savvy private equity firm (Silver Lake Partners?) or a large company (Google?) with lots of taxable income may be concern with tax issues. And so acquiring Twitter becomes more difficult and more expensive.

Markets are made of people who are motivate by fear and greed, not necessarily the rational. Stock prices go up when there are more buyers than sellers and visa versa. Example: everyone get excited about Twitter, new book, etc, and at the IPO, the stock price goes to $26, eventually to a high of $70, and then poor user growth and the stock falls to $15.

It is up and down and boom and bust. During the recent boom, there has been more press about technology and more dealers in tech news. In the current period, there appears to be a lot of speculation in the financial markets and the financial press.

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More on Alphabet’s Other Bets (Really)

GV and Google Capital had great year, last year. But don’t tell anyone; you are not supposed to know. To try to confuse you, Google became Alphabet and Ruth Porat became Alphabet’s new CFO. She dazzled most everyone about Alphabet’s so called other bets, but not you.

You saw the truth. It was right there in the Alphabet 10-K. While scribes, reporters, analysts, and bloggers, focused on the segmented information, you saw, for the first time, the grand performance of the “other” other bets: GV and Google Capital.

Corporate VCs. GV and Google Capital were Google’s search results for venture capital. Instead of institutional investors, Google and now Alphabet, are the sole limited partner. Alphabet began making early stage investments in 2009 with GV and later-stage ones in 2013 with Google Capital.

Fair Value. Alphabet disclosed its investments in private-companies under the non-marketable equity investments section of the 10-K, page 72. As of 2015, the total investments were $2.6 billion. The amount is assumed to represent both GV and Google Capital investments.

The fair value of the private-company investments for 2015 was $7.5 billion. Since there is no market value, Alphabet used private market transactions. Per a review of annual reports since 2009, this is appears the first time Google, now Alphabet, has disclosed fair value amount of the portfolio.

                                 Alphabet’s 4th Quarter ’15 Form 10-K

 

Impairment. Alphabet’s $7.5 billion fair value may indicate the skill of the GV and Google Capital teams. It could also represent the excess in the current valuations. Fair values can go the other way, then a corporation would show the decrease as an impairments in the portfolio. During the Internet Bust of 2000–2001, Intel wrote down the cost of its investment by approximately $500 million.

                                Intel 2001 Annual Report

 

Capital flows with the natural world; there are seasons, cycles, peaks and valleys, on and then….off. We may see some corporations leaving the venture capital space if losses are too great in the next down turn; but maybe not Alphabet.

The better bet is this: the GV and Google Capital teams have not only a lot cash, but also wisdom to continue investing for the long-term. But knowing Google, now Alphabet, you already knew that, too.

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Max Levchin Leaving Fintech Startup, Affirm

PayPal Mafia is no more! Max Levchin wants to be the only King! Max left the Boards of Yahoo and Yelp last year to focus 110% on his fintech startup, Affirm. He left Yahoo and Yelp during times of stress, but remains on the Board of Evernote. If he resigns Evernote, would that be a smoke signal for trouble too?

One should instead ask: Can this Max grow up to become an executive? He started the Levchin Prize. Max also expounds upon leadership on LinkedIn and looks earnestly into every camera to prove he’s really serious this time, but his youthful face tells another story than that of wise sage of Silicon Valley.

Money Changes Everything. Max really loves technology. And Paypal was seemly his first affair with business after finding his way onto the Stanford campus to meet Zero to One co-author, lawyer, hedge fund manager, and someday legend, Peter Thiel. PayPal provided lessons in bankruptcy, stock dilution, and negotiating with the savvy of Sand Hill Road.

Too much Time. After Yelp’s failed attempt to sell itself due to declining traffic and higher costs, Max left Yelp’s Board on July 24, 2015. Max “left for personal reasons” per the SEC filing. On December 4, 2015 — one week before Yahoo decided not to spin off its Alibaba holdings — Max resigned from the Yahoo Board. This time, it was “demands on his time” given as theofficial reason for departure. By finding time to fulfill the demands of both boards, Max could have learned more about business.

Leaving Home. In tweets, Max wanted to affirm that Affirm required his absolute concentration, his absolute time.

Max should leave Affirm, at least the day-to-day operations. By learning to delegate, Max would find the time to be Affirm’s chief executive officer rather than its product director, technologist, and jack of all trades. After starting Confinity, PayPal, Slide, and Glow, Max can easily graduate to the next level of entrepreneurship by going outside his comfort zone and into the wilderness as done by Steve Jobs.

Apple Computer’s steve p. jobs became Steve Jobs of Apple Inc. by business challenges posed by Next and Pixar. Many things can be said about Steve Jobs, but you can also know a person by their impact: a fingerprint in ink, a child’s footprint in the sand or hand prints in cement. Steve Jobs, along with his team, created Apple Inc., which will be Job’s legacy.

It seems Max does not want to be where the wild things are, but that is how young founders grow up to be a great entrepreneurs. Elon Musk turned on Tesla, Peter Thiel found Palantir, Reid Hoffman got Linkedin, and Max…, well we don’t know yet.

His legacy could be either really great, lasting companies or just a string of startups.

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