Tag Archives: Economy

Sequoia Dumps Citizen: Ruthless, or Reasonable?

February 27, 2023 tremendousblog 4 Comments

When a startup is struggling, what’s the duty of investors? This question is front and center as Sequoia has walked away from controversial startup Citizen, cutting it off from funding and resigning from the board.

From a report out this weekend in the Financial Times:

Sequoia Capital has resigned from the board of controversial crime-tracking app Citizen after it told the company it would not participate in its latest attempt to raise capital amid a funding crunch for tech start-ups.

[Sequoia partner Mike] Vernal resigned from the board earlier this month after Citizen’s management approached venture investors with a proposed deal to raise new funds and recapitalise the business by restructuring its debt and equity, said two people close to the deal.

The deal will virtually wipe out Sequoia’s investment. The firm’s decision to stop funding Citizen has some in Silicon Valley crying foul:

One of the people close to Citizen said Sequoia’s decision was “ruthless” and that, as its earliest backer, it had “abandoned” the company in its hour of need.

Across Silicon Valley, venture capitalists are carrying out an “internal triage” of the “companies that matter . . . and those where the [return on investment] makes continuing to invest irrational”, the person added.

There is no public information on Citizen’s performance. But clearly, it’s not doing well

Successful startups don’t see their equity wiped out.

So Sequoia is faced with a tough choice. Should it give more money to a struggling company, or cut its losses?

It chose the latter. And since Sequoia will no longer be a meaningful investor in Citizen, Vernal naturally stepped down from the board.

The “hour of need” hand-wringing misses the point. No one is entitled to venture capital.

If a company isn’t performing, how can Sequoia put more of its investors’ money where it’s likely to be lost? Sequoia has a responsibility to the universities, pensions, and charities it works for.

We also have no idea what internal dysfunction may exist at Citizen. Its founder has shown poor judgment in the past:

In 2021, its founder Andrew Frame faced scrutiny for offering a reward to find a man wrongly suspected of arson. Prior to Citizen, Frame created a similar app called Vigilante that was banned by Apple over content concerns.

Declining to re-invest doesn’t mean Sequoia won’t support Citizen in other ways. The firm can provide advice, introductions, and more.

But this is business, and capital goes to the people who can best use it.

Whenever you get a dollar from an investor, assume it’s the last. Find paying customers and get your company on firm footing.

Then, VC’s will be begging to invest. And you can be the one to choose.

What do you think of Sequoia’s decision?

Why Tech Stocks Are Oversold

June 1, 2022 tremendousblog 6 Comments

It’s no secret that tech stocks have gotten kicked in the face in the last 6 months. The NASDAQ index of tech stocks is down 26% since November:

I’m convinced that public tech stocks are oversold right now. That’s been my gut feeling for at least a month, but today I came across some fascinating statistics.

Sequoia Capital, the best venture capital firm in history, released some stunning figures in a recent presentation to its founders:

– “61% of all software, internet and fintech companies are trading below pre-pandemic 2020 prices”
– “That’s despite many of these companies more than doubling both revenue and profitability”
– “⅓ are trading below COVID lows, when uncertainty and fear was peaking”
“- Growth-adjusted multiples [valuation divided by revenue] have fallen even further and are well below the 10-year average and pushing the 10-year lows”

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If a company doubles its revenue and profits but actually trades for less money than before, that is a bargain! If you liked it at $100 a share and $10 a share in earnings, for example, you have to love it at $75 a share and $20 in earnings!

But what about interest rates?

The NASDAQ is actually cheaper now than it was when the federal funds rate hit its recent peak in July 2019. At that time, the NASDAQ had a PE ratio of around 30 with the federal funds rate at 2.4%.

The current federal funds rate is a paltry 0.33%. Even if you look at rate expectations, they’re only around 2.8%.

Meanwhile, today’s NASDAQ PE is just 22.

And don’t forget, the Fed may not raise rates as much as expected.

Companies are laying off workers, the economy is on the edge of recession, a war is raging in Europe and COVID may return in the fall. There are many potential reasons why the Fed could back off.

Could tech stocks fall further? Absolutely.

But with every company and household pulling back at once, I think inflation will begin to moderate soon. And if it does, the Fed has a lot less reason to raise rates further, putting more pressure on tech stocks.

Fundamentally, here’s the question you have to ask yourself:

“Do I think the value of technology companies will be greater in 20 years or less in 20 years? Will they have more innovative products and paying customers, or fewer?”

The answer is obvious. Technology has transformed every industry and will continue to do so, resulting in massive profits.

And I want to be there when it happens.

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

Why High Oil Prices May Not Matter for Stocks

March 10, 2022 tremendousblog Leave a comment

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You don’t need me to tell you that oil and gas prices are through the roof these days.

Gas stations are changing numbers faster than slot machines. And the explosion in prices is sowing fear in the stock market.

But I think this huge spike in oil prices won’t matter much for stocks in the long term.

Looking at some historical data today, I noticed that big advances in oil prices are actually associated with above average returns for stocks.

Let’s look back at some major oil price spikes and see what happened to stocks.

A Trip Down Memory Lane

Our first stop takes us back to the late nineties. That was the last time I saw gas under a dollar!

Indeed, oil was a mere $12.36 a barrel in February of 1999. Just one year later, it had shot up to $28.28, a 128% increase.

Surely a stock market crash was next, right?

Wrong. Stocks increased 11% that year, an above average return.

Our next stop takes us to the depths of the financial crisis. At the beginning of 2009, oil traded for $46.17.

By April of 2011, the price had jumped to $107.55, an advance of 133%.

Market meltdown? Hardly.

Stocks surged 48% as the economy rose again from the ashes.

Why would stocks go up even as oil, a major cost center, rises?

Both are responding to an improving economy. Stronger economic growth means better prospects for companies, raising stock prices.

A stronger economy also means more demand for oil as families go on vacations again and buy bigger and shinier SUV’s. That increases oil prices.

Indeed, you’ll notice that during periods of increasing oil prices, economic growth also increased rapidly:

What About Today?

In April 2020, oil prices stood at just $20.28 a barrel, the lowest in over 20 years. Today, West Texas Intermediate oil has increased to $119.26 a barrel, a staggering 488%.

Sure enough, a similarly massive upshift in economic growth happened during that time. US GDP went from falling 31% year over year to growing 34% year over year, as lockdowns were implemented and then lifted.

Since lockdowns began to ease in later 2020, economic growth has remained strong, routinely clocking around 7%.

That roller coaster for growth resulted in a roller coaster for oil prices as well. We shouldn’t be unduly alarmed that oil is recovering along with the economy as a whole.

While geopolitical events have contributed to higher prices this year, you’ll note that most of the increase in oil prices happened well before Russia’s invasion of Ukraine.

High prices or no, I’ll be holding my stocks.

This Week in the Venture Bubble

January 6, 2022 tremendousblog Leave a comment

Venture capital funding is growing at an incredible rate. The money pouring into early stage startups, my playground, has increased by billions of dollars per quarter just since 2020.

I see the perverse results of this cash flood every day. Here are a few, from just this week alone:

1) A company raising a seed round at a $125 million cap with no product in market.

2) An uncapped note. The ultimate schmuck investment vehicle…you don’t even know what you paid for your shares!

3) A restaurant raising venture capital.

Restaurants can’t scale like software businesses and are far less profitable. And food is not a winner take all market like many software products.

The standard VC playbook is losing money at first to dominate a market. Then, you make big profits later with your favorable unit economics.

That model doesn’t apply here.

3) A company raising a seed round at a $150 million valuation.

Some investors are now willing to invest in any business at any price. This may lead to more of the fourth thing I saw this week:

4) A company that had raised over $10 million in funding from blue chip VC’s recapitalized, completely wiping out prior investors.

Despite raising a boatload of funding, the company had never found product market fit and had very poor gross margins of about 25%. (A solid gross margin for a software business is more like 80%).

If we don’t want to lose our money like those unfortunate investors, we need some discipline. Here are my standards:

A) No $100 million seed rounds. Fred Wilson of Union Square Ventures proved this model cannot work.

B) No startups without a product in market unless it’s a very high profile founder. We’re taking sold her last company for $1 billion high profile.

C) No uncapped notes.

D) No low margin, old economy businesses masquerading as tech startups.

Who’s with me?

What are you seeing in the startup world? Let me know in the comments below.

China’s Tech Crackdown Means Economic Decline

August 17, 2021 tremendousblog 1 Comment

Imagine you’re running a marathon. You’ve led the whole race. But a strong runner is coming up on your right. The finish line approaches.

Suddenly, there is a loud “crack.” The other runner has been shot in the head. You win.

This is essentially what has happened to the Chinese tech sector in recent months. The Chinese government has cracked down on major companies like Alibaba, Didi Chuxing, and Meituan. It has also regulated its substantial ed tech sector out of existence.

China used to be the US’s leading competition in technology. Now it looks like an also-ran.

Leaders of Alibaba and Didi angering Xi Jinping is one reason for the crackdown. Another appears to be China’s desire to refocus from software to hardware. The Party seems to think microchips, batteries and advanced materials are critical to economic leadership, while consumer software is a distraction.

One problem: semiconductors and most other manufacturing industries are a lot less profitable than software companies like Alibaba or Didi. And all of China’s net job growth since 2012 has been in services, not manufacturing.

Even with that growth, well educated Chinese youth often struggle to find decent jobs. Severely curtailing one of the most vibrant sectors of the economy will only make it worse.

China has lost sight of what those microchips and batteries are supposed to do: run software! They are not ends in themselves.

What’s more, the threat of sudden crackdowns will make it harder for all Chinese companies to raise money and grow. Maybe the hammer is landing on tech now, but investors will wonder, “Who’s next?”

China Is Killing its Tech Industry

July 5, 2021 tremendousblog 1 Comment

Major news over the holiday weekend as the Chinese government required all app stores in China to remove the Didi Chuxing app. Didi is the Chinese equivalent to Uber, and dominates shared rides in the country, along with a major presence abroad:

China has ordered app-store operators to remove the app of Didi from their stores, the latest as tension escalates between the nation’s largest ride-hailing giant and local regulators. The app has disappeared from several stores including Apple’s App Store in China, TechCrunch can confirm.
The nation’s cyberspace administration, which unveiled the order on Sunday, said Didi was illegally collecting users’ personal data.

Existing users can continue the use the app for now, but new signups are blocked. This comes just days after Didi raised billions in an IPO in New York, perhaps angering the Chinese government.

The claim of data violations seems specious. Didi’s CEO, Li Min, denies that any data is handled improperly or passed to the US.

This is part of a broader crackdown on China’s technology industry:

Alibaba Group fined $2.8 billion shortly after CEO Jack Ma criticizes the Communist Party
Fintech giant Ant Group, also founded by Jack Ma, has IPO cancelled
Bitcoin miners forced to shut down and are racing to move their servers elsewhere, including the US, as the Chinese government prepares to launch its own competing digital currency
A Chinese billionaire, many of whom are in the technology industry, dies every 40 days on average, often in suspicious “accidents” and “suicides.” Some are simply executed.

What is this doing to China’s technology industry? The damage is reflected in a massive decline in the number of “unicorns,” or startups reaching $1 billion valuation, in China. Meanwhile, the number of unicorns in the US is skyrocketing and the tech industry as a whole is hotter than ever.

China’s overall economy has also trended sharply downwards in recent years:

The Communist Party doesn’t want any competing power centers, and the Chinese tech industry, with its wealth and control of information, is perhaps the biggest alternative power center left.

But the industry needs freedom to experiment and exchange ideas, and a stable climate without the constant threat of fines, shutdowns and imprisonment. Entrepreneurs can find that here in the US, along with abundant funding. And I think you’ll see more and more of them making that jump.

Can Bitcoin Protect You From Inflation?

May 14, 2021 tremendousblog Leave a comment

Bitcoin is often referred to as digital gold. Unlike fiat money such as the US dollar, its supply expands at a slow, steady rate.

The Federal Reserve has printed so much money during the COVID crisis that money supply is up over 25%. This has led to fears of inflation. The consumer price index (CPI) jumped by 4.2% in the first quarter of this year, the highest since 2008.

So can bitcoin, with its steady supply, provide protection from inflation? Bitcoin hasn’t existed long enough to provide a good test, but the evidence we have indicates that it doesn’t really correlate with the price index and thus is unlikely to provide a good inflation hedge.

Take a look at the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index excluding volatile food and energy prices. It’s been pretty consistent in the last decade, bouncing around the 2% level:

At the end of 2020, prices plummeted, pushing the US economy into deflation for the first time since this data series began in the 1950’s. If bitcoin is to provide an inflation hedge, it would need to drop when prices do and increase when prices rise. But we saw the opposite behavior, with bitcoin going vertical:

If you look at CPI as an inflation measure, you see the same pattern, with a noticeable decline in 2020 that wasn’t reflected in bitcoin:

Bitcoin doesn’t seem to perform well as an inflation hedge, although it could be useful for other purposes. If you’re worried about inflation, I’d suggest Treasury Inflation Protected Securities, which pay you a fixed rate plus the rate of inflation, protecting your interest payments from erosion by rising prices.

Dig into these posts for more on Bitcoin:

Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

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The Tiny Village That Beat the Great Depression

April 8, 2021 tremendousblog Leave a comment

Nestled in the Austrian Alps is the tiny village of Worgl. In 1932, as the world economy was in the depths of the Great Depression, Worgl too had fallen on hard times:

The Great Depression was in full swing and of its population of nearly 5000, a third were jobless, and about 200 families were bankrupt. The situation was desperate. The town would try anything.
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What followed was one of the most radical economic experiments in history. The town created a new form of money. It was a lot like the standard Austrian schilling it replaced, except its value dropped by 1% every month. In a year, you’d have just 88.64 left of every 100 schillings.

This gave residents a strong incentive to stop hoarding currency, a natural reaction to a scary economic climate:

The speed that money changed hands (14 times higher than the national schilling) helped keep local businesses afloat and, in time, brought back the town’s lost jobs.

Soon, the town went from 1/3 jobless to full employment. Tax revenues boomed as people paid their bills in the new currency before it lost its value.

Worgl’s success attracted attention from its neighbors:

Things looked up for Worgl and [Mayor] Unterguggenberger. The town did so well that six neighbouring villages successfully copied the system and over 200 grew an interest in following suit.

Ultimately, the central bank shut down this experiment in a local currency. Shortly thereafter, unemployment shot right back up to where it was before Worgl’s mayor made this bold move to save his town.

It makes sense that Worgl would’ve rocketed ahead of nearby villages. Worgl essentially had (very) negative interest rates and a far more accomodative monetary policy than its neighbors.

Today too, lowering interest rates, even below zero, is a commonly used tactic to stimulate economic activity. The US Federal Reserve lowered interest rates substantially at the beginning of the COVID crisis, and Japan and much of Europe has had negative rates for years.

But despite the success of Worgl, the results of negative rates today are mixed. Negative rates might encourage consumers to spend, but they could also discourage banks from lending. After all, who wants to lend when you might have to pay for the privilege!

Worgl remains an interesting footnote to monetary policy. Whatever the applications to today may be, I applaud the bravery of those villagers who took a radical step to try to save their home.

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Business, News

When the Suez Canal Was Blocked for Eight Years

March 29, 2021 tremendousblog Leave a comment

As the Suez Canal, chokepoint for 15% of world shipping, was cleared today, I thought of another time it was blocked. Not for a week, but for 8 years.

Following the Six Day War in 1967 between Egypt and Israel, Egypt blocked the canal to prevent Israel from using it. They placed old ships, debris, and even explosives in the canal. And it stayed that way, for eight years.

Thousands of workers rotated on and off the ships over the years to protect these valuable pieces of equipment. They organized joint social events and even created their own postage stamps, which have since become hot items for collectors.

The closure also had a serious effect on world trade, especially for countries that relied heavily on the canal. Seventy-nine country pairs saw the effective distance between them increase by 50% or more:

For these pairs, the closure caused an average fall in trade of over 20% with a three to four year adjustment period. Trade between these pairs recovered completely after the canal reopened eight years later with a similar adjustment period.

By the time the canal reopened, most of the ships in the Yellow Fleet could no longer make the trip:

The canal had remained closed so long that most of the Yellow Fleet ships had decayed and needed to be towed. But two of them—the German ships Münsterland and Nordwind—made it out on their own steam.

We had the benefit of peace this time, so the canal could be unblocked quickly. These episodes really emphasized to me the importance of peace and the free flow of goods to our prosperity.

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Photo: “File:Israeli Tanks Cross the Suez Canal – Flickr – Israel Defense Forces.jpg” by Israel Defense Forces is licensed under CC BY-SA 2.0

Business, COVID

Europe Is Falling Behind the US, and It’s Going to Get Worse

March 4, 2021 tremendousblog Leave a comment

A huge untold story of the world today is how far Europe has fallen behind the US economically in recent decades:

Here are the 2019 numbers (in 2019 dollars, again World Bank) US: $65,297. UK $42,330. That’s 35% less than the US. Or, the US is 54% better off than the UK.. France: $40,494. Italy: $33,228 That’s 50% less than US. Or the US is 96% better off than Italy. China: $20,261.
And it’s been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy… Once noticeably better off than the UK, and contending with France, Italy’s GDP per capita is now lower than it was in 2000.

More here.

So why is this happening? Regulation and lack of investment in IT in the services sector are chief suspects.

I definitely noticed this difference when I went to Paris for the first time in the fall of 2019. I was expecting a gleaming city, but I was surprised at the poverty I saw. There were panhandlers at the airport, which I’ve never seen in the US, and a lot of crumbling buildings and down-and-out people. It was rather sad. However, I enjoyed my time there a great deal, and would recommend their delicious food and superb art highly.

With the vaccine rollout in Europe going far more slowly than in the US, I think they will fall much further behind, and quickly. Other parts of the world will be wide open while they’re still locked down.

On the bright side, this could provide a great opportunity for the UK to catch up, since it has outpaced the US, China and almost every other country worldwide on vaccines. Their speed and innovative policies, like delaying second doses of vaccines, have impressed me a great deal.

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Tag Archives: Economy

Sequoia Dumps Citizen: Ruthless, or Reasonable?

Why Tech Stocks Are Oversold

Why High Oil Prices May Not Matter for Stocks

This Week in the Venture Bubble

China’s Tech Crackdown Means Economic Decline

China Is Killing its Tech Industry

Can Bitcoin Protect You From Inflation?

The Tiny Village That Beat the Great Depression

When the Suez Canal Was Blocked for Eight Years

Europe Is Falling Behind the US, and It’s Going to Get Worse

An angel investor's take on life and business