Tag: venture capital

• Revolutionizing the online buying and selling of consumer real estate

  This week it was announced that Social Capital Hedosophia II — a special purpose acquisition company associated with Chamath Palihapitiya — will merge with the real estate startup Opendoor, effectively taking the company public. Without going into all of the details, SPACs are kind of popular right now. They’re a way to take companies public without going through the traditional IPO process. And Chamath is clearly a believer in the approach, as he has gone ahead and reserved all of the symbols from “IPOA” to “IPOZ” on the New York Stock Exchange. $IPOB is what will be merging with Opendoor.

  But SPACs are not the point of this post. The point is that I have written a lot about Opendoor over the years on this blog. (Here are those post.) And I’m pretty sure that, on a number of occasions, I have referred to it as one of if not the most promising consumer-facing real estate startup. So in my view this announcement is a pretty big deal for both the company and for the industry. As Chamath puts it in the below investment thesis, “real estate is the largest, undisrupted form of buying/selling in the US worth more than $1.6 trillion annually.” And it’s only a matter of time before that process moves online.

  Big News: $IPOB is merging with @Opendoor and will take them public. More than $1B is being invested to help Opendoor build a legacy company.
  
  This is my next big 10x idea (memo attached).
  
  Tune into @SquawkCNBC today at 8am ET to hear more.
  
  💪🏽💪🏽 pic.twitter.com/6u4ki1PhDj

  — Chamath Palihapitiya (@chamath) September 15, 2020

  2020.09.16

• Non-consensus thinking

  The venture capital industry likes to talk about the importance of investing in ideas that are and turn out to be both non-consensus and successful. The idea here is that if an idea or opportunity is already consensus, then there’s too much money flooding into that space and it becomes too difficult to make money. This is particularly true in venture capital where a select few companies usually end up generating most of the returns. This is a high risk business. Supposedly, even the best VCs end up having to write off a big portion of their deals.

  But I don’t think that this logic need only apply to venture capital. In real estate development, you are often faced with similar situations. For example, if an area is already consensus — that is, it is already considered to be highly desirable — then capital is going to naturally flow into it and land prices will be relatively high. These high land prices might be justified by the revenue side of your pro forma, or they might not be. I know many developers who avoid “core” locations simply because the land is too much and the margins are too little.

  On the other hand, if an area is non-consensus — that is, you’re not sure people will want to rent or buy new space in the area — then the land prices should reflect this. But here’s the thing. What you’re doing is trading, among other things, a lower land price for greater market risk. Because the non-consensus bet could turn out to be either successful or unsuccessful. People will either want to occupy space here or they won’t. And remember, by definition, it being non-consensus means that most people believe they won’t — or at least not at the prices you might need in order to make the math work.

  What all of this means is that if you’re right about something that most people think is wrong, then you have the opportunity to do quite well. (Though I am not suggesting that you need to follow this framework in all situations.) This is on my mind right now because it feels to me that there are certain consensus opinions emerging as a result of this pandemic. For example, opinions around the demise of office space and the demise of downtown living. If you’re a regular reader of this blog, you’ll know that I think these death-of-the-city predictions are largely bullshit.

  I could be wrong. Or I could be right.

  2020.08.14

• Twelve climate technologies

  This is an excellent blog post by entrepreneur and venture capitalist Vinod Khosla about some of the “instigators” that are working to help solve our climate crisis and some of the areas in which we probably should be focusing on next. One of the things that’s noteworthy about the post is that he distills it all down into 12 areas of focus that — if solved and if scaled — could have a material impact on carbon emissions. They are (verbatim):

  1. Electric vehicles & automotive batteries
  2. Food & agriculture, especially meat
  3. Low carbon transportation: Air transportation (jet fuel), shipping (electrofuels, biofuels?)
  4. Cement or substitute construction material
  5. Low carbon dispatchable electricity generation (fusion, geothermal, nuclear)
  6. Public transit
  7. Grid storage (long duration battery storage)
  8. HVAC
  9. Industrial processes (hydrogen?)
  10. Fertilizer (hydrogen)
  11. Water
  12. Steel

  Looking at this list, it is clear that some of these things are already happening (and some aren’t). I currently own an ICE vehicle, but I’m fairly certain it will be the last non-electric vehicle I ever own. It’s also not clear whether I will want to continue owning a car. Dynamic mass transit and overall autonomy are things that we’ve talked a lot about on this blog.

  But here’s the other idea put forward in Khosla’s post. If these are in fact the 12 most impactful and important categories, then we may only be 12 or so companies away from real solutions. We only be 12 or so entrepreneurs away from meaningful societal change. When you look at it this way, the climate crisis should hopefully feel a lot less daunting.

  2020.07.28

• A transactional real estate marketplace

  I would like to revisit the post that I wrote last week about the Brazil-based real estate startup, Loft. In it, I said that they are doing in Brazil what Opendoor, and others, are doing in the US. They are buying and flipping homes using algorithms. This has become known as “iBuying” and we’ve talked about it a lot here on the blog.

  But we have also talked about how this is probably not the end game. These companies are seeding a marketplace, because in every new two-sided marketplace you are always faced with a chicken-and-egg problem. You can’t attract supply if you don’t have demand. And you can’t attract demand if you don’t have supply.

  In reading the investment announcement by a16z, this larger vision is pretty clear:

  They [Loft] are building a transactional marketplace for the biggest asset class in the world, starting in the biggest market in Latin America, on a time horizon that makes it hard to believe it’s been less than a year since the PowerPoint. They buy homes, fix them (often according to formulaic specifications provided by active buyers), and sell them — what is now known as “i-buying,” with the vision of turning this into a transactional marketplace.

  If successful, these companies will transform from just “iBuyers” to fully fledged marketplaces for the buying and selling of homes. And when that happens (I believe it’s a when), it is likely to mean dramatic changes to the commissions landscape. Today, over $100 billion in residential real estate commissions are paid out across the United States each year.

  2020.01.08

• Software eats real estate

  At the beginning of this year, a16z announced that they co-led a $175 million investment in the real estate company Loft. Based in São Paulo, Loft is doing in Brazil what Opendoor is doing in the US. They are bringing more liquidity to the residential real estate marketplace, and it turns out that the need for this is even greater in Brazil. That has apparently made Loft one of the fastest growing real estate companies in the world today. Here are some interesting facts about residential real estate in São Paulo. And here is a talk by Alex Rampell (general partner at a16z) on how software is going to eat the real estate world.

  2020.01.04

• The re-allocation of capital (and predictions for this decade)

  I have stayed at two hotels over the last month where I did not need to interact with a human as part of the check in process. And in one of those two instances I didn’t even need to interact with a computer at the hotel.

  My room key was issued to me through an app and I used that (and Bluetooth) to open my hotel room door (after the app, of course, notified me that my room was ready).

  This is prediction #2 in Fred Wilson’s annual roundup of what is going to happen next in the world. Automation is reducing the costs associated with operating many businesses. Who is going to be the beneficiary of this consumer surplus?

  The other prediction that should interest most of you — because the impacts would be widespread — is this one here regarding climate change:

  The looming climate crisis will be to this century what the two world wars were to the previous one. It will require countries and institutions to re-allocate capital from other endeavors to fight against a warming planet. This is the decade we will begin to see this re-allocation of capital. We will see carbon taxed like the vice that it is in most countries around the world this decade, including in the US. We will see real estate values collapse in some of the most affected regions and we will see real estate values increase in regions that benefit from the warming climate. We will see massive capital investments made in protecting critical regions and infrastructure. We will see nuclear power make a resurgence around the world, particularly smaller reactors that are easier to build and safer to operate. We will see installed solar power worldwide go from ~650GW currently to over 20,000GW by the end of this decade. All of these things and many more will cause the capital markets to focus on and fund the climate issue to the detriment of many other sectors.

  For the rest of Fred’s predictions, click here. These are always great reads.

  2020.01.01

• The new decentralized workforce

  

  A few weeks ago the WSJ published an article about Toronto’s growing tech talent pool, arguing that its base now rivals the top US cities, but that it may not be an entirely good thing for the city’s ecosystem. I wrote about it here.

  This morning venture capitalist Fred Wilson published a post on his blog talking about the necessity of scaling tech companies in lower cost locations. It’s a good follow-up to the above article/post.

  Here’s an excerpt from Fred:

  Last week I heard some shocking numbers about salary levels for certain kinds of engineers in the bay area. I checked them out with a few of our bay area portfolio companies and they were more or less corroborated.

  The tight technical labor markets in the bay area, NYC, and a number of other regions in the US are making it hard to scale software businesses without burning massive amounts of cash.

  He goes on to argue that (startup) companies now need to think about scaling in other/remote locations sooner than they ever have before — basically as soon as the company hits about 50 engineers (or 100-200 employees).

  Many companies are now working with a distributed workforce. Supposedly 2/3 of the global workforce now spends at least one day of the week working remotely. I almost never work from home, but I do get how this is possible.

  So what is happening is that engineering talent is spilling over into secondary markets out of necessity. There’s an economic imperative to colonize. But I would imagine that, at least initially, most of the economic benefits accrue to the colonizer.

  Photo by NASA on Unsplash

  2019.09.01

• Risk, uncertainty, and opportunity

  

  For two reasons, I really like Fred Wilson’s recent blog post on hypothetical value to real value. Firstly, it is structured in the way that I think good blog posts are structured. He starts with a personal story (about this son) and then uses that to take a position and impart some knowledge about the venture capital industry. It makes for a more engaging read. Secondly, I like how he describes the journey and spread between hypothetical value and real value:

  Venture capitalists and seed funds and angel investors make or lose money on the journey from hypothetical value to real value. And when the spread between the two narrows, the money we make is less. When the spread increases, the money we make is more. It is easier to drink your own Kool Aid in the world of hypothetical values. You handicap the odds of winning more aggressively. You trade ownership for capital at work. You accept the new normal. Real value doesn’t move so fast. Because it is right in front of you. You can see it. So it is not prone to flights of fancy. I try to keep this framework front and center in my brain as we meet with founders and work to find transactions that work for everyone. I find it to be a stabilizing force in an unstable market.

  All of this is related to the notion that you make real money when you’re right about something that most people think is wrong. Because that would be hypothetical value. If it were real value, then everyone would simply believe it. It would be “right in front of you.” And this is pretty much true of all competitive marketplaces, including the real estate industry. Risk and uncertainty create opportunity.

  Photo by James Sullivan on Unsplash

  2019.08.25

• Uber’s seed investors made this much money

  $UBER went public on Friday. Notwithstanding the initial stumble, Uber will go down in history as one of the most lucrative venture capital investments of all time.

  The stock is down from its IPO price of $45 per share, but at that price, the initial seed investment of $510,000 that First Round Capital made back in 2010 was worth about $2.5 billion on Friday.

  Here is a list of some of the other notable investors from Uber’s seed round and what their initial investments grew to over the course of 9 years (chart from the WSJ):

  

  Of course, for every Uber, there are many more failed companies. And for every investor who turns $5,000 into nearly $25 million, there are many more who decided to pass on the opportunity.

  In the case of Uber, many early investors couldn’t see how the product could go mainstream. It initially started upmarket with limousines, which was actually a clever way to hack the chicken-and-egg problem that plagues marketplaces.

  Many also wondered how many metro areas outside of San Francisco had the kind of urban density and supply and demand drivers to support this kind of a service.

  Today, some nine years later and many billionaires later, lots of people — including myself — are still wondering: Will Uber turn out to be a great (i.e. profitable) business? Hindsight is always 20/20.

  2019.05.10

• One great big exit (not the Brexit kind)

  

  Wired’s oral history of how the London startup scene came to be is a good reminder that, typically, a city needs some great big exits (acquisition or IPO) to really kickstart an ecosystem. In the case of Silicon Valley, you could perhaps trace things back to Fairchild Semiconductor (1950s). But a more recent example of this phenomenon would be the PayPal Mafia, whose members have gone on to found Tesla, LinkedIn, YouTube, and other companies that you may have heard of.

  Put simply: success begets success. When a startup does really well and the founders and employees of that company get rich, it is likely that many will go on to found/fund other successful companies in that same city. In the case of London, that catalytic startup was arguably Skype (at least according to Wired). Microsoft acquired the company in 2011 for $8.5 billion, giving birth to the Skype Mafia. Of course, that wasn’t the only ingredient, but it sure helped (excerpt from Wired):

  Since 2008, according to data compiled by Dealroom.co, the UK has created 60 unicorns (tech companies valued at $1bn or more) – 35 per cent of the 169 created across Europe and Israel. In the past three years, the UK has created more unicorns (25) than France, Germany, the Netherlands and Sweden combined (19). And London has produced 23 unicorns with a combined value of $132bn, compared with Berlin’s eight, worth $32bn.

  The world has changed since Skype was founded. It’s now cool to be doing a startup. But given that every city seems to be trying to establish a thriving startup scene, I think it’s valuable to point out just how important a single big exit can be, not just for the people within the company, but for the broader city. Easier said than done, right?

  Photo by Benjamin Davies on Unsplash

  2019.04.30