Melvin Capital Under Federal Investigation

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Melvin Capital Management LP is under investigation by the federal Department of Justice for possible abuses related to short selling. From Bloomberg:

The Justice Department is collecting a trove of information on dozens of investment firms and researchers engaged in short selling as part of a sweeping U.S. hunt for potential trading abuses, according to people with knowledge of the matter.

Prominent firms and their leaders mentioned in the Justice Department’s requests to some market participants include Melvin Capital Management and founder Gabe Plotkin; Orso Partners and Nate Koppikar; Sophos Capital Management and Jim Carruthers; as well as Kerrisdale Capital Management. 

In all, the DOJ is investigating nearly 30 different firms. They’re looking for illegal moves by short sellers to damage stock prices.

Those could include insider trading or colluding with research firms, as was alleged by Institutional Investor:

Institutional Investor published a piece last year detailing the “balance sheet” relationship between hedge funds and short-selling firms that publish research reports. As part of this relationship, the former pays the latter to publish a report (authored by the fund itself) that is critical of the company’s business. The report’s publication is timed to coincide with a significant company-related market event, such as an options expiry or earnings report, to induce further volatility and maximize profits. Many short sellers act in concert and pile onto the short trade, magnifying its effect and crashing the company’s stock price. The research firm that published the original report gets a cut of the overall profits or a fee.

Where does this leave Melvin Capital?

The hedge fund lost 39% last year on disastrous bets in shares of GameStop Corp. and AMC Entertainment Holdings Inc. And they’ve racked up another 17% loss to start 2022, taking their fund down by about half in total.

When investors see you drop by half, they figure you can go down all the way. Add a DOJ probe, and Melvin looks like the most toxic hedge fund on the planet.

I would expect to see investors pull out. When that happens, Melvin will sell whatever it can in order to meet those calls for redemptions.

In today’s volatile market, it may be selling at fire sale prices. This could put the fund into a death spiral.

As an investor, this information also makes me highly skeptical of research reports. You never know what agenda is behind them.

I’m fascinated to see where this probe goes!

What do you think of this investigation and Melvin’s future? Leave a comment at the bottom of the page and let me know!

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More on markets:

Melvin Capital Loses $1 Billion in 3 Weeks to Start 2022

Hedge Funds Pull Back from Tech Amid Big Losses

AMC Fails to Deliver Skyrocket 1940% to Start Year

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Tech Plunge Hits Early Stage Startups

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Well, it’s happening.

Ever since shares of major tech companies like Block Inc., Peloton Interactive Inc., and Robinhood Markets Inc. began to fall off a cliff last fall, investors have wondered when the pain would trickle down to early stage companies. I saw something last week that made it clear to me the market has turned.

A seed round in a strong company repriced at 15% below the prior valuation…while the deal was still in progress! This despite no new information from the company.

A year ago, this would never have happened.

But that’s what it took to bring in the money the company needed. That valuation drop came with another $1 million in capital from a new investor.

In this more difficult fundraising environment, the companies I see as most at risk aren’t those who accept slightly lower valuations. It’s companies that didn’t take advantage of the hot market to build a war chest.

Late last year and even into 2022, I’ve seen some startups raise just 8-9 months of runway. The standard is 12-18 months.

In a hot fundraising environment, I think companies should’ve raised 24 months worth of cash or more. But some startups only wanted to sell a smart part of the business now, confident they could get a higher price in the near future.

Those rosy predictions are looking less and less likely.

So where does that leave a company that didn’t raise while the raising was good? Undercapitalized and heading into a harsher fundraising environment where they may not be able to raise at all.

Throughout the boom, I passed on companies that didn’t raise at least 18 months of runway. And now I’m glad I maintained that discipline.

Long term, I see a solid outlook for early stage startups with ample warchests. Many companies in my portfolio are growing revenue over 20% a month, regardless of turmoil in public markets.

But for companies that thought the good times would last forever, the future is hardly as bright.

More on tech:

How Giant Hedge Fund Tiger Global Blows Up

Inside Mark Cuban’s Plan to “F— Up the Drug Industry”

Why I Just Invested in Deft, the Best Way to Shop Online

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How Giant Hedge Fund Tiger Global Blows Up

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Tiger Global Management LLC is one of the most dominant hedge funds in the world. Its footprint in the venture capital industry is staggering.

Last year, Tiger did 335 venture deals…almost one every single day. Its check size is colossal, often in the nine figures.

Those checks come within days with little if any due diligence. This steamroller approach has worked beautifully during the tech bull market of the last few years.

But now many major tech companies like Block Inc., Peloton Interactive Inc. and Robinhood Markets Inc. are down 50-80%. The broader Nasdaq is down 13% from its highs.

Here’s how Tiger could blow up:

1) Valuation multiples in tech compress. This is already happening, big time.

2) Startups Tiger invested in can’t grow into their valuations.

Maybe you’re still growing revenue like crazy. But if the valuation multiple is dropping, you may be unable to exceed the valuation of the prior round before that money runs out.

Tiger overpays more than anyone, so they’re at particular risk here.

3) Startup has to raise a down round. This is a round at a lower valuation than before.

4) Tiger may not want to invest since they already lost money on their first investment. Plus, if their whole portfolio is red, they have less cash available.

5) Huge negative signal from Tiger not re-investing, so the startup struggles to raise money.

6) There’s no one with a bigger bankroll or more willingness to overpay than Tiger, so the startup has few other places to go for funding.

7) Even as the company twists in the wind, Tiger’s involvement is minimal. They don’t join boards or advise founders.

In your toughest moment, your biggest investor is MIA.

8) Tiger suffers even more because its lack of diligence starts to bite. A hot market is the worst time to do minimal diligence, because frauds proliferate in frothy markets.

So Tiger loses in the honest companies and loses even more in the dishonest ones. Leading to…

9) A spiral of big, collapsing startups resulting in catastrophic losses for Tiger.

Tiger’s playbook seemed innovative in a hot market. But it could quickly turn disastrous.

Who survives this? Later stage firms that didn’t overpay along with most early stage investors.

Those of us who come in early are paying very low prices compared to a fund like Tiger. Even if valuations fall, we have a lot more wiggle room than they do.

Whatever happens, I intend to keep investing early in great companies. Let the chips fall where they may.

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More on tech:

Hedge Funds Pull Back from Tech Amid Big Losses

Inside Mark Cuban’s Plan to “F— Up the Drug Industry”

Why I Just Invested in Deft, the Best Way to Shop Online

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Hedge Funds Pull Back from Tech Amid Big Losses

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If you invest in startups, you hear two names all the time: Tiger and Coatue.

Both are giant hedge funds that have poured money into venture capital in recent years. Oddly enough, they’re based in the same building in midtown Manhattan, a few miles from where I sit.

Tiger Global Management LLC and Coatue Management LLC collectively run almost $150 billion, dwarfing even the largest venture funds. Through the last few years of the bull market in tech, they’ve pointed a firehose of cash at startups.

Tiger, Coatue and other hedge funds put eight and nine figure checks into late stage companies at an incredible pace. They generally do little diligence and can close deals in a matter of days.

When all tech stocks did was climb, this playbook worked great. But now that tech shares are retreating, Tiger, Coatue, and other hedge funds with similar strategies are taking a hit.

Tiger was down 15% in January alone, a major drop for a single month. It was also down for the full year in 2021. Coatue lost 4% in January.

Keep in mind that investments in startups are mostly illiquid and usually get repriced only when the company raises more funds. This happens every 12-18 months on average.

So Tiger and others could be looking at big writedowns in the future on their private portfolios, in addition to the losses they’ve already taken in publicly traded tech stocks.

This all began in public markets. Big tech companies like Block, Coinbase, Robinhood and others lost half or more of their value.

The next tech companies to be hit were the late stage startups. Tiger has already begun renegotiating investments in startups to lower valuations.

This reduction in valuations for late stage companies is beginning to affect the early stage as well.

Just this morning, I saw a large seed round reprice at about 15% below the valuation just three days ago despite no change in fundamentals. Ouch.

So what should early stage investors like me do? Keep investing in great companies and smile when the valuation is less than it would’ve been 6 months ago. 🙂

Tech companies are still rapidly innovating and growing. Regardless of market turmoil, you want to be a part of that.

It’s still the hottest game in town.

Have a great weekend everybody! 🥳

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More on tech:

Inside Mark Cuban’s Plan to “F— Up the Drug Industry”

Why I Just Invested in Deft, the Best Way to Shop Online

Cana: The Star Trek Replicator for Beverages

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Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

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Can A Scientific Dream Team End Aging?

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No one wants to get old. But how can we stop and even reverse aging?

Perhaps a Dream Team of the world’s greatest scientists. And a whole lot of money.

Well, that just became a reality.

For those of us who follow venture capital, the news hit like a bomb. Previously unknown Altos Labs burst onto the scene with a $3 billion seed round, likely the largest early stage fundraise in history.

To put that in perspective, a typical seed round is more like $1-3 million.

Altos will be putting that money in the hands of some of the world’s top scientists.

Noted antiaging researchers like Izpisúa Belmonte and Alejandro Ocampo are on board. Nobel Laureates Shinya Yamanaka and Jennifer Doudna have also joined as advisers.

Altos has promised salaries over $1 million, generous research budgets, and autonomy. Plus, no more constant grant writing.

So can aging be reversed? New findings suggest it may be possible.

Just last September, researchers succeeded in reversing aging in mouse hearts using Shinya Yamanaka’s Yamanaka Factors:

…after two and a half decades of fitful starts and abandoned leads, Braun and a team of researchers at the Max Planck Institute showed that they could reprogram heart cells in mice and get the animals to regenerate cardiac tissue after a heart attack. The breakthrough, published in Science, adds new evidence that it will eventually be possible to help patients recover muscle lost in heart attacks and gives another boon to anti-aging researchers who want to one day apply these rejuvenation techniques across much of the body.

Heart cells are some of the hardest to reprogram. If scientists can do this, what else can they accomplish?

David Sinclair at Harvard reversed aging in mouse eyes the year before. The pace of these breakthroughs seems to be increasing.

Any investor in startups always asks the founder “why now?” Why is now the right time to raise this money and build this business?

Altos has a very compelling “why now.”

The foundation for reversing aging has been laid by Yamanaka and others. Scientists worldwide are building on it rapidly, coming up with cure after cure for previously untreatable diseases.

I’m itching to see what Altos can accomplish. Best of luck to their incredible team!

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More on tech:

Reversing the Aging Process in Mouse Eyes… and Maybe Someday, Us?

3D Printing a Human Ear

The Lost Planet of Vulcan

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My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me.

Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

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Inside Mark Cuban’s Plan to “F— Up the Drug Industry”

“I could make a fortune from this,” Cuban said. “But I won’t. I’ve got enough money. I’d rather f— up the drug industry in every way possible.”

Mark Cuban, Texas Monthly

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When you deliver something people need for less money than if they schlepped to the store, you win. See: Amazon.

That’s what Mark Cuban of Shark Tank fame is doing with his new startup. Cost Plus Drugs, which just launched two weeks ago, sells a wide variety of generic medications for less than anyone else.

Let’s see how much cheaper Cost Plus Drugs is for some common meds:

Albuterol (Proair) inhaler for asthma: $30 on Cost Plus vs. $86 on GoodRx (for pharmacies near me)

Prednisone (Deltasone) for asthma: about the same on Cost Plus vs. GoodRx

Norgestimate / Ethinyl Estradiol (Ortho Tri-Cyclen (28)) for birth control: $7 on Cost Plus vs. $13 on GoodRx

Atorvastatin (Lipitor) for high cholesterol: $4 on Cost Plus vs. $8 on GoodRx

Imatinib (Gleevec) for leukemia: $17 on Cost Plus vs $120 on GoodRx. Wow.

You don’t need me to tell you that medical care in the United States is ridiculous. Massive bills and no transparency make even me, an unusually fortunate person, hesitant to go to the doctor.

Cost Plus Drugs changes that. You know exactly what you’re paying, every time.

Even better, you know where that money is going. The website clearly breaks down the costs for manufacturing, shipping and labor.

Cost Plus also builds in a 15% profit margin. This may seem greedy, but it’s a lot less than competitors, and they have to make some margin to stay in business and expand.

You can’t disrupt the medical system if you go bankrupt!

Cost Plus has another big advantage: strong word of mouth. From Mark Cuban:

“When people save a lot of money on their medications, they often will tell others they know that have the same challenges. That word of mouth impacts our growth the most.”

This is critical for a consumer company. Consumer companies have to acquire tons of customers that may not spend very much each.

So, the cost of customer acquisition can make or break a company. Cost Plus has a great strategy here to grow organically at zero cost.

Cost Plus plans to begin manufacturing its own drugs and building distribution centers across the country. They’re going to control the whole stack, which is the best way to control prices.

As a startup investor, I’m itching to get in. A huge problem, a brilliant entrepeneur, an innovative solution….what’s not to like?

And as a consumer, you can bet I’ll be getting any meds I need from Cost Plus from now on!

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More on tech:

3D Printing a Human Ear

Why I Just Invested in Deft, the Best Way to Shop Online

Male Contraception With an Ultrasound Device?

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Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been great so far.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me.

Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

I wrote a detailed review of Misfits here.

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AMC Fails to Deliver Skyrocket 1940% to Start Year

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Well, I hate to say I told you so.

Fails to deliver in shares of AMC Entertainment Holdings, Inc. skyrocketed to begin 2022, after falling to low levels at the end of last year. 20,071 shares failed to clear by January 14th, the latest day in the data set just released from the SEC.

This is a 1,940% increase from December 31st, 2021. As I predicted then, the failed trades quickly popped back up to high levels in the new year.

This is a common pattern in AMC stock. Fails to deliver drop at the end of a month, only to jump right back up to absurd levels shortly thereafter.

Let’s compare AMC’s fails to deliver on January 14th to some of the biggest stocks in the market:

Microsoft Corp: 0

Apple Inc: 100

Amazon.com Inc: 1,430

Berkshire Hathaway Inc. Class B Shares: 164

AMC Entertainment Holdings Inc: 20,071

Why does little old AMC have fails to deliver orders of magnitude greater than these much larger companies?

When there is a consistent pattern of large numbers of failed trades in a stock, it can be indicative of naked short selling. This involves selling short shares you don’t own.

It’s a powerful tool to push down the price. Naked shorting tends to cause fails to deliver because, since the shares never existed, the trade cannot settle.

I’ve written about this issue for months. Still, the SEC has done nothing.

I think only a major public outcry for an investigation will change things.

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More on markets:

Melvin Capital Loses $1 Billion in 3 Weeks to Start 2022

Engineering an AMC Short Squeeze in Dark Pools

How Did High Dividend Stocks Perform In the Last Crash?

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Best of all: No fee!

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 and returns have been great so far.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get your management fees waived for 90 days

Misfits Market

My wife and I have gotten organic produce shipped to our house by Misfits for over a year. It’s never once disappointed me.

Every fruit and vegetable is super fresh and packed with flavor.

I thought radishes were cold, tasteless little lumps at salad bars until I tried theirs! They’re peppery, colorful and crunchy!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $10 on your first order.