Tremendous

An angel investor's take on life and business

  • Mass Protests in China as Bank Runs Continue

    Major news out of China as over 1,000 protestors in Zhengzhou demanded their savings back:

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    There are runs on several Chinese banks. The depositors, desperate not to lose their life’s savings, are taking great risk to speak out.

    From the Indian Express:

    In a rare large protest in China, over one thousand angry bank depositors, who have been protesting for access to their frozen funds, faced off with the police in Henan province leading to a violent clampdown Sunday.

    Depositors of four rural banks in this central province have not been able to withdraw their funds since April. Sporadic protests have been going on since May.

    Many smaller Chinese banks promised high interest rates to attract deposits. They advertised those rates on platforms run by Chinese tech giants like Baidu and JD.

    Now, these small banks are finding themselves unable to pay those high rates. Worse yet, some banks have been infiltrated by criminals who are siphoning money out:

    In the present case it is being alleged that these banks attracted deposits by offering attractive terms and high interest rates. A report in the South China Morning Post in May said that while Bank of China offers 2.75% a year interest on five-year deposits, the found banks in question were giving around 4.5% a year on their deposit products through third-party platforms.

    Also, a statement by the Henan police on July 10 said that a criminal group had gradually taken control of several rural banks and was moving out funds.

    Behind the peril facing Chinese banks is a weak economy. Intense COVID lockdowns this year have hammered economic activity.

    An overheated property market is also crumbling. This has triggered defaults at major property developers, including Evergrande.

    Something interesting happens when people see depositors struggling to get their money out. They start wondering about their own bank.

    This is how a contagion could spread through the Chinese banking system. Cue It’s a Wonderful Life, without the happy ending.

    The Chinese government’s violent repression of small savers in Zhengzhou may be just the beginning.

    China is in a sensitive period. The 20th Party Congress, enormously important to the Communist elite, happens in November.

    At that meeting, Xi hopes to secure a third term in office and effectively become leader for life. He and his underlings are likely to repress any “disturbance” during this time.

    Already, China’s massive surveillance apparatus is being turned on these small savers.

    Zhengzhou protesters have had their “health codes” turned off. Without the green QR code on their phones, they can go nowhere and do nothing.

    The health code system was created to stem COVID. Predictably, it’s now being turned against dissidents.

    I’m not a particularly religious man, but this Orwellian act reminded me of a passage from the Bible:

    It forced all the people, small and great, rich and poor, free and slave, to be given a stamped image on their right hands or their foreheads,

    so that no one could buy or sell except one who had the stamped image of the beast’s name or the number that stood for its name.

    Revelation 13:16-17

    I hope these decent, hardworking people will get their life’s savings back. I also hope we always resist this type of tyranny here at home.

    What do you think is next in China? Leave a comment at the bottom and let me know.

    More on China:

    China’s Real Goal in Tech Crackdown: A Regimented, Obedient Society

    How China’s Tech Industry Dies

    China’s Tech Crackdown Means Economic Decline

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  • How to Write Investor Updates

    You did it!

    You closed a big funding round! Time to pop the champagne!

    But you still have one little problem: what are these pesky investor updates?

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    If there’s one thing that really confuses founders I meet, it’s investor updates. Many big investors require regular updates as part of a funding round.

    Meanwhile, founder after founder has no idea what’s expected of them.

    Updates can and should be simple. This is what I want to see:

    1. Revenue
    2. Burn
    3. Cash in Bank
    4. Runway
    5. Highlights
    6. Lowlights
    7. Next month’s plan
    8. Asks for investors

    Here’s an example update I wrote. It’s for my favorite startup, Uber (yes, even now).

    The information is completely fictional, but here’s how it should look:

    Uber – June 2022 Investor Update

    Hello,

    June was a great month for Uber! We saw significant growth across markets:

    Burn: $75,000/month
    Cash in Bank: $1,082,453
    Runway: 14 months

    Highlights:

    • Major growth in new New York City market brought us our highest monthly revenue ever
    • Hired 2 new engineers to build out user profile function
    • Reduced CAC from $45 to $35

    Lowlights:

    • Cease and desist order in Austin, Texas. We are appealing.
    • Departure of a strong front-end engineer

    Next month’s plan:

    • Expand to New Jersey
    • Hire 2 more front-end engineers

    Asks:

    • Intros to strong front-end engineers with experience in Python
    • Lobbyists with connections to taxi boards in major cities

    Thank you,

    Travis Kalanick

    Many founders update their investors only rarely, if at all. And when they do, there’s way too much information!

    This update gives investors all the key data points about your startup. But it doesn’t take tons of time to write or to read.

    So what can updates do for you, as a founder?

    Updates get your existing investors excited about your progress. This makes us eager to invest more even before you ask! 💰

    You also get to put those moneybags to work for you! Your investors have tons of connections and expertise just waiting to be harvested.

    Go with monthly updates, or at least quarterly. If we only hear from you quarterly or even less, that’s fewer opportunities for us to help in a timely fashion.

    Even if the terms of your financing don’t require any updates, send them anyway! You want your investors engaged, excited, and helping you.

    Finally, investor updates are a good idea even for companies with no investors! Call it a “Company Update” and make sure every potential investor you meet gets it in their inbox like clockwork.

    Once they see your diligence and your company’s progress, they’ll be breaking down your door to invest.

    What questions do you have about investor updates? Leave a comment at the bottom and let me know!

    More on tech:

    Talking Startups and Today’s Fundraising Pullback

    Are You a Venture Scale Business?

    Talking About Today’s Startup Market on The Accelerator Podcast

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

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

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    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

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    Photo: “Confused PC” by Luigi Rosa is licensed under CC BY-SA 2.0.

  • Are You a Venture Scale Business?

    A nice young man contacted me recently with an investment opportunity: a nude resort in Mexico.

    I declined. But not for the reason you might think.

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    Are You a Venture Scale Business?

    My decision wasn’t a moral one. I passed because this is not a venture scale business.

    Venture scale businesses are companies that can grow at massive rates. They also have very high profit margins.

    Why isn’t the nude resort a venture scale business?

    Because you would have to build hotels, pools, restaurants (ew) and whatever else a nude resort has. And you’d have to do it at impossible rates.

    Because it involves physical items, it cannot grow at the same rate as a software business.

    A Typical Venture Scale Business

    Venture scale businesses are almost always software companies.

    What’s our obsession with software? You can build a software product and then make it available to as many people as you want.

    Building the product costs a lot. But making it available to one more person costs very little.

    Of course, it usually takes some sales and marketing dollars to land a new customer. And customer support also costs money.

    But a good Software as a Service (SaaS) business generally has a gross margin of 80% or more. This means that for every new customer they get, 80% of what that customer pays them falls to the bottom line as profit.

    Yum yum! 😋

    But Not All Software Companies Qualify

    You can have a software startup with a killer product and great margins…and still not be a venture scale business.

    Why? Because in order to interest VC’s and angels, you have to do more than grow fast with high margins. You have to grow big.

    Really big.

    Venture investors are looking for billion dollar companies. To get there, you have to generate massive revenue.

    The current valuation multiple for high-growth SaaS businesses in the public markets is about 8. This means that for every dollar you make in revenue, the markets give you 8 dollars in valuation.

    So, to be a $1 billion business, you need to hit $125 million in revenue.

    Let’s say you’re making software for wedding planners. No matter how good your software is, it’s unlikely to ever be a venture scale business.

    Assume the most you can charge the wedding planners is $50/month. There are about 23,000 wedding planners in the US.

    So even if you got every wedding planner in the entire country as your customer (impossible), your revenue would be only $13.8 million. Your valuation would be about $110 million in the public market.

    Realistically, you’d probably top out around $40 million at best.

    Why Do Venture Investors Need $1 Billion Companies?

    I can imagine what you might be thinking.

    “Why are venture capitalists so greedy? What’s wrong with a $40 million business? That’s a lot of money!”

    It is! To understand why VC’s are so insistent on getting big, you have to understand how they make returns.

    Most of the investments they make will go to 0. Meanwhile, the few survivors have to become Godzillas in order to make up for all the losers.

    This is the only way they could avoid losing all their money. And if they lose everything, there will be no venture capital for anybody.

    Becoming Godzilla

    Since I usually invest at seed stage, let’s take that as an example. At seed stage, you’re usually 7-10 years from an exit by acquisition or IPO.

    Let’s say the seed stage company has $250,000 of revenue a year. To reach that $125 million of revenue in 10 years, the startup has to grow at about 5.3% monthly.

    That means you nearly double every single year for a decade, on average. In reality, you probably grow even faster than that early on, then taper off.

    Can you imagine the nude resort doubling its business every year? First year 1 resort, next year 2, and 1,024 resorts by 2032?

    Not really.

    Wrap-Up

    I hope this helps explain some of the reasons you get a no from investors.

    It may be frustrating. But they have their own people to answer to: their investors!

    Venture capitalists won’t be able to keep raising funds if their returns are bad. So they have to make sure they pick only the best bets.

    For more on this subject, check out this excellent segment of the This Week in Startups podcast with Jason Calacanis and Molly Wood:

    What questions do you have about venture scale businesses and what venture investors look for? Leave a comment at the bottom and I’ll try to answer!

    Have a wonderful weekend everyone! 👋

    More on tech:

    Talking About Today’s Startup Market on The Accelerator Podcast

    The Power Law (Part One)

    Managing a Crisis the Sequoia Way

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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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: “Godzilla ゴジラ” by kirainet is licensed under CC BY-NC-SA 2.0.

  • Apple Tackles the Most Aggressive Spyware with New Lockdown Mode

    Apple Inc. landed a major blow for privacy yesterday. It announced a new Lockdown Mode, designed to stop even the most sophisticated spyware attacks:

    Apple today detailed two initiatives to help protect users who may be personally targeted by some of the most sophisticated digital threats, such as those from private companies developing state-sponsored mercenary spyware. Lockdown Mode — the first major capability of its kind, coming this fall with iOS 16, iPadOS 16, and macOS Ventura — is an extreme, optional protection for the very small number of users who face grave, targeted threats to their digital security.

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    The new feature will be released this summer to developers and fully available this fall. It blocks numerous exploits that spyware uses:

    At launch, Lockdown Mode includes the following protections: 

    • Messages: Most message attachment types other than images are blocked. Some features, like link previews, are disabled.

    • Web browsing: Certain complex web technologies, like just-in-time (JIT) JavaScript compilation, are disabled unless the user excludes a trusted site from Lockdown Mode.

    • Apple services: Incoming invitations and service requests, including FaceTime calls, are blocked if the user has not previously sent the initiator a call or request.

    • Wired connections with a computer or accessory are blocked when iPhone is locked.

    • Configuration profiles cannot be installed, and the device cannot enroll into mobile device management (MDM), while Lockdown Mode is turned on.

    In all, this still sounds like a pretty usable phone to me.

    Most websites should work and phone calls are unaffected. You can even send pictures to your friends!

    Apple appears to have done a great job in balancing usability and security. After all, if Lockdown Mode bricks your phone, no one will use it.

    Apple is even offering up to $2 million to anyone who can break Lockdown Mode. So start coding, folks!

    Most of us probably don’t need this type of protection. But for dissidents or persecuted minorities, it could be critical:

    “The global spyware trade targets human rights defenders, journalists, and dissidents; it facilitates violence, reinforces authoritarianism, and supports political repression,” said Lori McGlinchey, the Ford Foundation’s director of its Technology and Society program.

    Lockdown Mode could also protect heads of state. Angela Merkel had her phone hacked while serving as Chancellor of Germany.

    Other world leaders probably have spyware on their phones right now, even if they don’t know it.

    Apple is not alone in addressing aggressive spyware. Google has a feature called Advanced Account Protection that adds security to logins and downloads.

    It’s unclear which company offers the better package for high risk users. But I’m glad both are taking the issue seriously.

    The main enemy for Apple and Google in the security fight is an obscure Israeli company.

    NSO Group produces spyware called Pegasus. It can infiltrate phones without any user action.

    From Scientific American:


    Since 2019, Pegasus users have been able to install the software on smartphones with a missed call on WhatsApp, and can even delete the record of the missed call, making it impossible for the phone’s owner to know anything is amiss. Another way is by simply sending a message to a user’s phone that produces no notification.

    Once installed, Pegasus can theoretically harvest any data from the device and transmit it back to the attacker. It can steal photos and videos, recordings, location records, communications, web searches, passwords, call logs and social media posts. It also has the capability to activate cameras and microphones for real-time surveillance without the permission or knowledge of the user.

    It’s striking that no matter how careful you are about passwords or clicking links, you’re not safe from Pegasus.

    The software has been used by authoritarian regimes for surveillance. Some evidence suggests it was used by the Saudis to locate and kill journalist Jamal Khashoggi.

    Even as it threatens others, NSO Group itself is threatened with extinction.

    US sanctions has wreaked havoc on its business. An acquisition by a US defense contractor could save it, but it faces government opposition.

    Without a white knight coming to the rescue, NSO may not survive.

    And I say good riddance. An unscrupulous company that sells tools to dictators to track and kill dissidents needs to die.

    What do you think of Apple’s Lockdown Mode and digital surveillance? Leave a comment at the bottom and let me know!

    More on tech:

    The Autonomous Weapons of the Future…and Present

    Talking Startups and Today’s Fundraising Pullback

    Managing a Crisis the Sequoia Way

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    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: Apple CEO Tim Cook

  • Bill Ackman Loses $4.8 Billion

    Hedge fund manager Bill Ackman has taken major losses this year. From a new report by Institutional Investor:

    Bill Ackman’s Pershing Square Holdings fell 9.5 percent in June and is now down 26 percent for the year, as investors’ fears of recession outweighed concerns about the inflation Ackman has been inveighing against since last fall. 

    Pershing Square’s three biggest stock holdings are down more than the market. Through June, Universal Music Group is down almost 23 percent, Lowe’s Companies fell more than 32 percent, and Chipotle Mexican Grill is down 25 percent.

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    He is now significantly underperforming both the S&P 500 and the HFRX Global Hedge Fund Index.

    Ackman’s fund had $18.48 billion under management at the beginning of the year. This 26% drop means a loss of approximately $4.8 billion.

    In addition to his stocks falling, Ackman also made a large bet that short term interest rates would increase. When they fell on recession fears, he took substantial losses.

    Ackman is still betting on higher short term rates. This could expose him to further huge losses.

    Ackman is predicting 4-5% interest rates, but markets disagree.

    Markets expect short term interest to go no higher than 2.5% next year. Ackman is forecasting 4-5%.

    Longer-term inflation expectations are also modest. This could mean less need for rate increases.

    The 5 Year Breakeven Inflation rate measures inflation expectations over the next five years. Today, it sits at just 2.51%.

    Perhaps Ackman will be proven right in time. But as he nurses this big loss, he’d do well to remember these (perhaps apocryphal) words:

    “The market can remain irrational longer than you can remain solvent.”

    John Maynard Keynes

    What do you think of Ackman’s big stumble? Leave a comment at the bottom and let me know.

    More on markets:

    New Law Could Put Big Short Sellers on the Endangered Species List

    AMC Fails to Deliver Pass 2.6 Million in New Report

    Why the Stock Market’s Inflation Worries Don’t Make Sense

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    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: Bill Ackman

  • New Law Could Put Big Short Sellers on the Endangered Species List

    A new law introduced in Congress could mean the end of some major short sellers. According to a report that broke this morning on TheStreet, the law would require disclosure of short positions by large investors.

    Today, big investors like hedge funds have to disclose the stocks they own quarterly. But they can keep secret any short position they have, no matter how large.

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    If the bill passes, those days are over. From TheStreet:

    The Short Sale Transparency and Market Fairness Act will modify the reporting requirements applicable to certain institutional investment managers who have more than $100 million in assets under custody and who are required to file ownership reports with the SEC. Key modifications include:

    1 Reducing the reporting window from 45 days to 10 days after the end of each month for such asset managers.
    2 Expanding such reports to require reporting of direct or indirect derivative positions or interests (including short positions).

    This could make it dangerous for hedge funds to heavily short a stock. Soon, everyone would know about their position.

    That means other hedge funds could buy the same stock to engineer a short squeeze. They may be joined by retail investors, as was the case in shares of GameStop Corp. and AMC Entertainment Holdings Inc. last year.

    A short squeeze can cause catastrophic losses for a hedge fund, as in the case of Melvin Capital.

    The new law could also make naked short selling more difficult. This generally illegal practice involves selling short shares without borrowing them first.

    I’ve long suspected naked shorting in shares of meme stocks like AMC and GameStop, along with many other investors.

    But what if regulators or the public could count up the amount of short positions out there? If big investors have far more shares short than exist, it would be strong evidence of naked short selling.

    In all, I think this bill would be a very positive change for markets. If investors have a right to know about long positions held by big institutions, why not short positions?

    What’s more, in a future financial crisis, knowing who shorted what could be critical. A huge short position that blows up could push an institution to insolvency, perhaps dragging others with it.

    We don’t know yet whether the bill will pass or what final form it might take. But here’s hoping Congress acts to make markets safer, fairer, and more transparent.

    What do you think about the new bill? Leave a comment at the bottom and let me know!

    More on markets:

    AMC Fails to Deliver Pass 2.6 Million in New Report

    Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

    $6B Hedge Fund Cut Off from Trading As Investigation Looms

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    If you found this post interesting, please share it on Reddit/Twitter/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: “U.S. Capitol building” by Gage Skidmore is licensed under CC BY-SA 2.0.

  • Why the Stock Market’s Inflation Worries Don’t Make Sense

    We’ve been seeing some scary inflation numbers recently.

    The consumer price index rose 8.6% from last year in the latest report. These eyewatering levels have gone on for months, spooking consumers and markets.

    The S&P 500 is down 20% for the year, largely due to worries about inflation.

    But strangely, bond markets are actually predicting lower levels of inflation now then when the S&P 500 was at its peak!

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    The key number to look at is the 5 year breakeven inflation rate. This figure measures the difference between yields on inflation-protected Treasuries and yields of Treasuries without that protection.

    The difference between those bond yields shows how much inflation investors expect.

    Markets peaked at the end of 2021. At that time, investors expected inflation of about 2.9% a year over the next five years.

    Now, investors expect inflation of just 2.6% through 2027.

    The stock market is freaking out about inflation. But the much larger bond market actually predicts falling levels of inflation.

    Perhaps what’s really causing the turmoil in stocks today is psychology. People are terrified of losing their money.

    That’s a legitimate fear, but it doesn’t have anything to do with the realities of the inflation rate.

    I suspect inflation will moderate in the coming few quarters, in line with the bond market’s expectations. And as that happens, I expect stock markets to rise.

    Until then, I’m holding my stocks.

    What do you think is next for stocks and inflation? Leave a comment at the bottom and let me know!

    There will be no blog on Monday for the holiday. I’ll see you on Tuesday.

    Have a great holiday weekend everyone! 👋

    More on markets:

    Hedge Fund Giant D1 Loses $7 Billion in 2022

    The End of Celsius — the Beginning of Crypto Regulation

    Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

    Get the blog before anyone else…subscribe!

    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: Federal Reserve Chair Jerome Powell

  • AMC Fails to Deliver Pass 2.6 Million in New Report

    I did a double-take when I saw the number.

    Fails to deliver in shares of AMC Entertainment Holdings Inc. passed 2.6 million in June. The report, released today by the Securities and Exchange Commission, covers the first half of the month.

    Fails to deliver hit 2,653,787 on June 3 before settling at 1,231,742 at the end of the reporting period. Fails to deliver topped 1 million numerous times.

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    I’ve been writing about this topic for about a year, and I can’t recall ever seeing a figure so massive. This despite a long history of large fails to deliver in this stock.

    AMC’s fails to deliver are way out of line with other stocks. Here are the numbers on the same day for several companies dramatically larger than AMC:

    Amazon: 0
    Microsoft: 0
    Tesla: 24,983

    But let’s back up a second: what is a fail to deliver? A fail to deliver occurs when a trade is made but is never finalized.

    Now why might a stock like AMC have a pattern of large and persistent fails to deliver? A common reason is naked short selling.

    To sell a stock short, you must borrow shares and sell them. Naked shorting is the generally illegal practice of selling short shares you never borrowed.

    This is a powerful way to push down a stock’s price.

    If you naked short, there’s no limit to the number of shares you can short. After all, you never had to find any to borrow!

    Huge numbers of trades have failed in this stock for at least a year. Despite this, the SEC has not investigated these irregularities.

    I keep coming back to this topic because I’m amazed at the inaction. Why not find out why the market in this stock is functioning so poorly?

    I hope exchanges and regulators dive into this topic right away. We need orderly and fair capital markets for our country to thrive.

    What do you think is causing these failed trades? Leave a comment at the bottom and let me know.

    More on markets:

    Hedge Fund Giant Tiger Global Losing $28 Million an Hour

    $6B Hedge Fund Cut Off from Trading As Investigation Looms

    Hedge Funds Could Lose Nearly Half of Assets Under Proposed SEC Rule

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    If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

    Save Money on Stuff I Use:

    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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

  • The Power Law (Part Four): The First Venture Deal

    They were the best and brightest young engineers American could produce. But they had one problem: their boss was a tyrant.

    Shockley Semiconductor Laboratory founder William Shockley shouted at his talented engineers, recorded all phone calls, and even demanded they take lie detector tests. All refused.

    Instead, they did something few engineers in the 1950’s had ever done: struck out on their own. But how could these men of modest means start a semiconductor company?

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    Enter Arthur Rock, perhaps the first venture capitalist. Rock invested and also brought in entrepreneur Sherman Fairchild, who put in a cool $1.5 million.

    The “traitorous eight” engineers were off to the races. The company called itself Fairchild Semiconductor.

    This was the first modern-style venture capital deal. This fascinating history is recounted in Sebastian Mallaby’s new book, The Power Law: Venture Capital and the Making of the New Future.

    Like today, the Fairchild deal involved equity investment. What’s more, the founders and employees continued to own much of the company.

    That employee ownership was a critical advantage.

    Its engineers interviewed customers about what they needed before building anything. This made sure the new company’s products were useful.

    The engineers had a strong incentive to make sure they built products that sold well. Big sales meant their stock went up!

    Fairchild prospered, making huge advances in semiconductors and racking up millions in sales. Rock’s investment proved to be a home run.

    His first fund went from $3.4 million to $77 million in just 7 years. This 23-fold return would be absolutely off the charts, even today.

    What’s striking about the story of Fairchild is how unlikely it was.

    The culture of the 1950’s was all about big institutions, from major corporations to the army. Finance was highly conservative, more concerned with avoiding loss than reaching for enormous gains.

    Without this new form of investing, the Fairchild engineers would’ve kept laboring miserably for Shockley. Or perhaps they’d have moved to some lumbering bureaucracy with little interest in their ideas.

    Either way, they probably wouldn’t have been able to make the huge technical advances they did at Fairchild.

    The impact of what some call “liberation capital” has only grown with time.

    Just a fraction of 1% of US firms raise venture capital. But that tiny group of companies accounts for 76% of the market value of IPO’s and 89% of R&D spending in America.

    The most valuable assets are increasingly intangible. They are not smoke belching factories but lines of code.

    This is why the venture industry will only become more important with time. It’s the only one that’s good at financing these intangible assets.

    Most other investors are conservative and want collateral young firms don’t have.

    When I meet with an ambitious founder today, I sometimes wonder where they’d be without venture capital. Perhaps they’d be toiling away miserably in some large bureaucracy indifferent to their talents.

    And I want to free them.

    More on tech:

    The Power Law (Part Three): Angels and VC’s

    The Power Law (Part Two)

    The Power Law (Part One)

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    Photo: The “traitorous eight” at the Fairchild Semiconductor offices

  • The Power Law (Part Three): Angels and VC’s

    In the world of venture capital, there are two species: great white shark VC’s and goldfish angel investors. They dwarf us in size and power as we wiggle about looking for an insect to eat.

    So I was surprised to learn that in some of the hottest deals, angel investors actually have the advantage.

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    In his superb new book The Power Law: Venture Capital and the Making of the New Future, Sebastian Mallaby recounts how the greatest tech companies found their first supporters. Time and again, the hottest companies rejected entreaties to meet from the top venture firms.

    Instead, they went to angel investors to raise money quickly and easily with a minimum of oversight.

    Mark Zuckerberg refused to meet with Accel early on. He even showed up at the offices of heavyweight Sequoia Capital in his pajamas!

    Sequoia founder Don Valentine recognized the stunt for what it was: a provocation. Zuckerberg wanted the princes of Sand Hill Road to know he didn’t need them.

    Instead, he turned to Peter Thiel and other angels for his first funding. Unlike the slow moving investment committees of venture firms, they could write a check on the spot.

    But Zuckerberg was not the first great entrepreneur to shun VC’s. Google founders Larry Page and Sergey Brin had every firm in the Valley breathing down their necks.

    Instead, they met angel Andy Bechtolsheim on their front porch.

    After a brief pitch, Betcholsheim raced back to his Porsche and returned with a checkbook. He invested $100,000 when the company wasn’t even incorporated.

    Along with angels, lesser known venture firms also back many of the greatest companies. As Mallaby notes:

    “…the idea that venture capitalists get into deals on the strength of their brands can be exaggerated. A deal seen by a partner at Sequoia will also be seen by rivals at other firms: in a fragmented cottage industry, there is no lack of competition. Often, winning the deal depends on skill as much as brand: it’s about understanding the business model well enough to impress entrepreneurs; it’s about judging what valuation might be reasonable. One careful tally concluded that new or emerging venture partnerships capture around half the gains in the top deals, and there are myriad examples of famous VC’s having a chance to invest and then flubbing it.”

    I was very surprised to learn that being at a top firm isn’t the advantage it may seem. No wonder Sequoia still cold messages founders!

    In this competitive environment, I look for ways for us to cooperate.

    VC’s can benefit if angels bring them great early stage deals. Angels benefit by being able to help their portfolio companies.

    In the end, if we can work together to build the greatest companies of the future, everybody wins!

    What are your experiences raising from angels and VC’s? Leave a comment at the bottom and let me know!

    More on tech:

    The Power Law (Part Two)

    The Power Law (Part One)

    Managing a Crisis the Sequoia Way

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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 with great returns.

    More on Fundrise in this post.

    If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

    Misfits Market

    I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

    I wrote a detailed review of Misfits here.

    Use this link to sign up and you’ll save $15 on your first order. 

    Photo: Google founders Larry Page and Sergey Brin. “File:Google page brin.jpg” by Ehud Kenan is licensed under CC BY 2.0.