Distilling Venture Capital

Introduction Welcome to Distilling Venture Capital.  I am your host, Bill Griesinger Distilling VC is a visionary podcast that provides an insightful and informed view of the key trends affecting the VC and tech startup world.  My mission is to cut through and go beyond the hype that tends to dominate the tech landscape.  And provide you with information you can use Opening Observations: In Today's Episode I return to what I have termed Unicorn-mania, building on the subject of my first episode in March.  So, it will be a Unicorn-mania Redux. I'm returning to this topic b/c, well, we need to revisit it primarily b/c things seem to be sliding further toward the insane, literally with each passing week. And, I will talk about the continuation of this insanity in the context of some real-life examples:  The true poster-kids for "Unicorns are not real"…  Specifically, I'll provide insights into WeWork and Uber, and the unmistakable role played by Softbank's Vision Fund in helping to fuel the craziness. And, let me say from the outset, how disappointing it is to see the technology press and the data analytics firms like CB Insights and Pitchbook (a Morningstar Co.), continue to engage in this ridiculous charade.  I am going to get into some examples of that in a moment.  Suffice it to say, that if you have a subscription to one of these firms, my analysis may leave you questioning what value are getting for the money… To begin, let's quickly review what I covered and highlight a few take-aways from Episode 1 of Unicorn-mania;   I outlined and highlighted the hype that characterizes VC and techland today with respect to overvalued, so-called Unicorns – companies alleged to be worth $1B+ I also highlighted the Stanford Univ. Study, Squaring Venture Capital Valuations with Reality, that reveals and proves that so-called Unicorn tech companies are substantially overvalued – and offers a valuation model that really works in valuing theses companies  The Study dissects and debunks the use of post-money valuation as nothing short of an illegitimate method for valuing any company, let alone VC-backed private tech companies. Before I go further into the topic, I am going to strongly encourage you to please refer to the Show Notes for this Episode to access links to the following: Link to Stanford University Study:   Squaring Venture Capital Valuations with Reality - Downloadable pdf found here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2955455 (Social Science Research Network – SSRN) Link to Video:   Presentation at SVOD (Sil. Valley Open Doors Conf.), June 2016 by Ilya Strebulav, author of the Study and Professor, Stanford Univ. Grad. School of Business:   https://youtu.be/k4OtGWZ3iYI Original Version of the Study was submitted and published April 19, 2017;  However, the findings were presented about a year earlier in June 2016 at SVOD Conf. (Silicon Valley Open Doors) Where Prof. Strebulav was the Keynote Speaker (I encourage you to got to the link and watch it.  It's < 20 minutes) Summary of the Findings – From the Study Abstract: We develop a valuation model for venture capital--backed companies and apply it to 135 US unicorns, that is, private tech companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post--money valuations average 48% above fair value, with 14 being more than 100% above.  Every Company reviewed and valued, (100% of the Sample) was overvalued to some degree – that means not one company came in at the post-money valuation utilized by the VC industry Values were calculated for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as initial public offering (IPO) return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%).  According to the authors, "Overvaluation arises b/c the reported valuations assume all of a company's shares have the same price as the most recently issued shares."  Even though each new round of funding effectively sucks the value out of prior rounds through seniority and superior rights, among other preferences.  Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms of the Preferred rounds, at the time of the Study, almost one-half (65 out of 135) of unicorns lose their unicorn status.   Stanford Study Pre-work:  In 2016, prior to publishing the Stanford Univ. Study, Strebulav and his team of researchers surveyed, as part of their work, more than 1,000 VCs regarding valuations.  It was the first survey of its kind:  Result; 92% of respondents of the VCs surveyed agreed unicorns are over-valued;  A whopping 75% believe unicorns are significantly over-valued AND, as I noted in Episode I, did you ever notice that the PE industry doesn't have an equivalent designation (Unicorns) for its $1B+ value companies, even those that are in the tech category? Why this study's findings are not a wake-up call to the industry is currently a mystery to me. Who Cares? To demonstrate that my concerns and the opinions I've expressed, that Unicorn-mania is a total distraction, a waste of time, as I stated in Episode I, are not just some overly-dramatic soap-box issue I am on… Turns out, I am in some pretty impressive company, actually – with respect to my criticisms of the mania.  Let's take a look: All of the examples are from the 4th Quarter of 2015, when some rather prominent and accomplished investors and tech company leaders had begun calling BS on Unicorn valuations, even before the real Mania commenced in earnest over the last several years: Marc Benioff, Chmn and CEO of Salesforce, Dec. 2015 on Bloomberg TV stated,  "The unicorn mania that's going on, that's dangerous for our Silicon Valley economy,"   "this is just, you know, unheard of... It's become a self-esteem issue for these entrepreneurs."  Benioff states to the SF Bus. Times, also Dec. 2015:  "I'm not buying the unicorn theory…"  There's no reason [for] these companies who claim to be worth billions of dollars and making billions of dollars to stay in the private markets." Benioff asserted that some billion-dollar valuations are the result of "manipulation" of private tech markets and again called on founders to go public to "rationalize" their worth.   Suggesting, by implication, that these values are not rational! Legendary VC John Doerr, who joined Kleiner, Perkins, Caufield in 1980 – [did they even call it venture capital back then?]  – In the same 12/7/2015 SF Bus. Times article Doerr pointed out, "Google has acquired one company per week since 2010 but has only five times paid more than a billion dollars for a company," Doerr said. "There are 150 companies considered unicorns, 93 are in the United States. How does that math work?"  Great Q indeed!  I suggest it doesn't, b/c it's not about the math but rather about the hype. Bill Gurley, another highly respected and accomplished VC veteran from the Valley and Founding partner of Benchmark Capital.  In Oct. 2015 at the WSJ Laguna Beach Tech Conf. stated,  "All these private valuations are fake. ... It's all on paper, it's all a myth,"    "Anyone that's raised $400 million is probably spending $100 million a year," he said. "Until you get liquid, you haven't really accomplished anything." And finally, Mark Suster, a voice I respect a lot in the industry.  He has been a Managing Partner at Upfront Ventures since 2007.  Suster puts out one of the better blogs in venture called "Both Sides of The Table" in which he dispenses and provides excellent, valuable, how-to and other advice for start-up entrepreneurs on a whole range of topics – you should check it out.    Well, back in a Sept. 2015 piece that he published on his blog, Mark does not hold back with his sentiments regarding Unicorns stating, "There's no one sane I know any more who doesn't privately say that things have gotten out of hand. Few like to say so publicly.    And I blame unicorns. Mark is very clear that he's not referring to what he identifies as "successful" companies themselves but "the entire bullshit culture of swashbuckling startups who define themselves by hitting some magical $1 billion valuation number and the financiers who back them irrespective of metrics that justify it.  Unicorn has become part of our lexicon in a sickening way and will no doubt become part of the history we tell about how things got so out of control again. 10 years from now people will be embarrassed to say unicorn." Well, we are about 5 years out from those highly critical assessments from some really smart people in the industry.  Unfortunately, the sane voices of these reputable tech titans from late 2015 have gone under-reported or unreported in recent years.  Which, I guess, is a primary symptom or characteristic of a "Mania" itself – delusional thinking…prone to exaggeration, denial and so on, but I'm no doctor…so I'll leave that diagnosis for others to ascertain. I stated in Episode I in March, It Is a big distraction from what's really important in evaluating and valuing venture-backed tech companies.  We've been completely DISTRACTED for nearly 5 consecutive years since the warnings and criticisms of this mania in 2015 by key, reputable industry players in VC and tech. And, that's despite the publication and dissemination of the most conclusive, comprehensive accurate study ever regarding what the valuations of these companies really are. Here's the central problem – The $1B+ valuations ascribed to so-called unicorn companies are not true market valuations at all.  They all utilize a metric called "post-money valuation" that inflates their value.  As stated, the Stanford Univ. Study found 100% of all unicorns are actually over-valued to some degree when applying proper market valuation metrics based upon the terms and conditions found in the Pref

Introduction Welcome to Distilling Venture Capital.  I am your host, Bill Griesinger Distilling VC is a visionary podcast that provides an insightful and informed view of the key trends affecting the VC and tech startup world, including Fintech.  My mission is to cut through and go beyond the hype that tends to dominate the tech and VC landscape.  And provide you with information you can use. Episode Introduction: Today's Episode is another in my Focus-on-Fintech Series where I bring you a close-up look into companies in the sector and the innovations they are bringing to the market Given that Fintech is global movement and phenomenon that is changing, for the better, the way we participate in and get finance done around the world, one of the hottest places on the globe for Fintech investment today is Brazil.   In today's Episode, I delve into and distill down why Fintech is attracting such interest and investment in Brasil Fintech in Brasil: The Basement.io Story To help me do that, I am pleased to be joined today by Frederico Rizzo, Founder and CEO of Brazilian Fintech company, Basement, based in São Paulo, Brasil.  Basement is a fintech company leading the way in Brasil related to innovation in the investment sector, providing a platform for individuals to invest in SME private companies and other services.   Frederico, thank you very much for joining me today. Please tell us a bit about what Basement does, when and how you got started, and the reasons that motivated you to create the company.  What was the impetus, motivation for the formation of Basement? What is the story around the company name Basement? What is the opportunity or need for Basement to collaborate or partner with other major financial or investment institutions?  Is it necessary for success in your business model? Can you Provide a short history of the role of credit and equity in Brasil…Brasil has not historically had "deep" credit markets.  This access to financing is simply not available to well-managed SMEs.  You must be a big corporation and listed publicly to get access to credit at reasonable interest rates… Meaning, if you weren't a large corporation with access to the public stock market, you really couldn't raise capital – you had to grow your business with cash – which means limiting and constraining your growth. Fintech in Brasil, é Muito Quente (is super-hot) What is driving this?   One reason is a result of concerted effort by the key financial governmental regulatory bodies in Brasil over the last 1-2 years to move toward open, digital banking through open data sharing mandates… What does this mean? CVM – Comissão de Valores Mobiliários; Brazilian equivalent of the SEC The Brazilian Central Bank and the National Monetary Council set out open banking regulations earlier (May 2020).  The data-sharing framework aims to foster financial inclusion, drive competition in financial services and increase security. "The premise is that the personal data held by banks and other financial institutions do not belong to them, but to the respective holders, customers," according to Marcelo Chiavassa, professor of digital law at Universidade Presbiteriana Mackenzie Campinas Financial institutions must begin adhering to new rules stipulating that data belongs to individuals, says Maristela Martins, country manager for Brazil at Backbase. That means that clients' journeys will need to include explicit, simple, quick and secure consent agreements. Other Comments on Brasil Credit Markets: In recent posts you written, you have noted some delays in certain key regulatory initiatives on the private investment front.  Can you describe what those are and what, in your view, needs to be done to move forward? How important are these regulations for Brasil, in your view?  The Basement Business Model & Business Model Characteristics You offer several services, please elaborate on the services offerings of Basement Cap table management and valuation services Ultimately an alternative exchange, but it's the early days and that will take time Growth Prospects for the Basement Business? Huge addressable market; Two main things: 1st, Regulation changes that are already in motion have to move forward.  We work closely with the regulators in this regard. 2nd big challenge is the go-to-market.  Learning a lot along with the market.  Education, product-market fit, channels.  We are testing all of this After 6 years in the market we know a lot of intermediaries – funds, angel groups, accelerators, lawyers – so we are trying to build the channels and go-to-market. We knew early we couldn't have the type of venture model where we scale fast so we've spent 6 years developing.  That's been the best approach – almost boot-strapping model We've raised about 4 rounds; have over 300 investors, the huge majority with no control.  A very healthy cap table in our perspective.  It's all about execution now. Now for us, the next 12-18 months, we have what we need to execute and develop a great go-to-market strategy. Competitive Advantages Describe the competitive landscape, relative cost/pricing structure and how you leverage your expertise to bring a compelling value proposition to clients Other competitive advantages, differentiation… Closing Remarks: Frederico, thank you very much for joining me today.  I would love to do a follow up sometime as you progress and things are going. We will ultimately become a Delaware co. eventually to get closer to a bigger market – in terms of capital structure. Contact Information, Basement Frederico, How can those seeking additional information and wishing to learn more about Basement contact the firm?  Website:   www. basement.io Frederico Twitter:  @Frederico.rizzo Linkend also as Frederico Rizzo Thank you for joining me for this edition of DVC.  I hope you found the topic interesting and it gave you some things to think about regarding how to implement successful Fintech services.  I am currently working on the DVC website.  In the meantime, Please send questions and your comments regarding today's Episode to:    [email protected] Stay tuned for my upcoming Episodes in which I am going to provide a follow-up to Episode 001, Unicorn-Mania.  We'll do a Unicorn-mania-II Redux where I will dig into and discuss the sagas of WeWork and Uber in the context of Unicorn-mania.  And, I'll be bringing more episodes highlighting the Fintech sector in Brasil with other innovative companies that are changing the financial services landscape in Brasil.  Thank you again and I look forward to joining you for my next Episode of Distilling VC.

Introduction Welcome to Distilling Venture Capital.  I am your host, Bill Griesinger Distilling VC is a visionary podcast that provides an insightful and informed view of the key trends affecting the VC and tech startup world, including Fintech.  My mission is to cut through and go beyond the hype that tends to dominate the tech and VC landscape.  And provide you with information you can use. Episode Introduction: Today's Episode is part of my Focus-on-Fintech Series As background, When we talk about Fintech, Financial Technology, many in the sector think of technologies being deployed by startups in the areas of payment solutions (Transferwise, Square, many international players), peer-to-peer lenders (Lending Club, FundingCircle, Prosper, SoFi), digital banking – neobanks (many by non-banks), wealth management – robo advisors (Robinhood), AND also insurance-tech and real estate-tech, where the processes in those industries are being automated with technology, blockchain, smart contracts, AI, etc.  There are many examples… I have the pleasure today to be joined by Federico Baradello, the Founder and CEO of Finalis.  Finalis is a visionary company that is revolutionizing the way private deal making and M&A gets done.  Thank you Federico for joining me today…   One of the things that intrigued me about your business model was when I read a post you published near the end of March I happened to see on Linkedin.  You brought into focus and pointed out statistics regarding the private M&A industry that I had not really paid attention to before as a huge Fintech opportunity… You drew the comparison and contrast of how there has been very little VC investment to bring technology and innovation to the enormous broker-dealer/M&A deal process, unlike what has occurred in Real Estate Tech and Insurance Tech, which are similar in size to private M&A from a commission/fee revenue perspective US Totals Invested in Fintech: 2019 US Fintech investment - $59.8B;  2018 was $58B 2019 Real Estate Tech ~ $15B 2019 InsureTech ~ $12.1B Federico explains and discusses the reasons why the Investment Banking-private M&A business has attracted so little investment dollars (< $50 million) compared to the large sums raised by InsureTech and Real Estate Tech. You've pointed out that private deal-making is broken, noting that $4T+ of M&A and private placements are transacted operating on 1990s technology I thought it would be useful for listeners, [in the context of this dearth of tech/innovation spending in priv. deal M&A,] to take a few minutes to talk about the idea for and creation of Finalis. The Finalis Business Model & Business Model Characteristics You've described the Finalis model as a "broker-in-a-box" solution… and, the first scalable BD that automates and brings together streamlined, efficient processes for Compliance (FINRA, SEC) as well as deal-flow technology solutions… Solution – "Lease a broker-dealer-instead" model Create technology to automate the process rails for priv. M&A transaction from beginning to end – Federico Explains… How did your prior experience as a Deal Attorney and your understanding of the existing incentives native to I-banking business provide you with the vision for creating Finalis? It's an execution-driven business Paper the process – law firms get paid by the process I-Banks are in it for the commission %, so incentivized to reduce costs and get to the close Thus, not inclined, incentivized to leverage technology; there is a resistance to change that gets in way of the closing processes… In a prior conversation, you described Finalis' Mission as, to "Empower Deal Makers" and your Vision as, to be the "world's largest distributed I-bank."   Also, to become the "first scalable broker-dealer" in the private M&A industry.  Can you elaborate on what this vision/mission means and how you arrived at it based on your direct experience doing and documenting deals? Growth Prospects for the Finalis Business? Huge addressable market;  How do you define the addressable portion you go after initially and strategies for executing? Private market deal-making was booming pre-pandemic and you've described the enormous size of the private deal M&A industry ($4T+).  Do you have a view or prediction regarding what is in store for this industry post-COVID19? Competitive Advantages Describe the competitive landscape, relative cost/pricing structure and how you leverage your expertise to bring a compelling value proposition to client firms Other competitive advantages, differentiation… Closing Remarks: Company Name, Finalis; Federico provides an interesting account and story around where the name Finalis originated. Contact Information, Finalis Those seeking additional information and wishing to learn more about Finalis can visit the firm's website at, finalis.com Other ways to reach out and engage… Thank you for joining me for this edition of DVC.  I hope you found the topic interesting and it gave you things to think about.  I am currently working on the DVC website.  In the meantime, Please send questions and your comments regarding today's Episode to:    [email protected] Stay tuned for my next Episode in the Focus-on-Fintech Series where I am going to provide insights and real examples of the extremely hot Fintech market in Brazil;  I'll explore why it has been attracting record venture investment at a rapid pace.  I'll be interviewing a São Paulo, Brasil-based Fintech company that is at the forefront of this rapid growth – that also happens to be focused on the private investment market.  Stay tuned.  Thank you again and I look forward to joining you for my next Episode of Distilling VC.

Introduction Welcome to Distilling Venture Capital.  I am your host, Bill Griesinger Distilling VC is a visionary podcast that provides an insightful and informed view of the key trends affecting the VC and tech startup world.  My mission is to cut through and go beyond the hype that tends to dominate the tech landscape.  And provide you with information you can use. Episode Introduction: I would like to introduce Today's Episode topic as follows;   We hear a great deal about cryptocurrencies, mostly Bitcoin, and the impact they are having on the financial services and investing landscape, with respect to how we define money, e-commerce, make investments, and even what Central Banks are doing to authorize/issue their own digital currency or stable currency, etc. On the other hand, we don't hear much or may understand very little about the derivation and creation of cryptocurrencies themselves.  Where do they come from?  What is their intrinsic value and utility?  How is all of this accomplished? So, today We're going to get into what I consider a very interesting segment of the crypto-currency world – Crypto-Mining - that we don't often hear that much about but yet is vitally important to our ability to be able to utilize these digital currencies, digital assets to conduct financial transactions:  Crypto-currency Mining To answer these questions and distill down our understanding of the crypto-mining industry, I am joined by JP Baric who is the Founder and CEO of an technology/energy company directly involved in multiple aspects of the crypto-mining industry, operating as Aurum Capital Ventures   Aurum Capital Ventures is leading the way not only in the development and deployment of turnkey crypto-mining technology in the field…but also efforts to bring much needed liquidity and financing to the mining and cryptocurrency markets themselves… So, we'll dig into those topics…   Welcome JP and thanks for joining me today.  To kick off today's conversation, JP, perhaps you can provide a little background about the origins around the formation of your Company and identify its core goals and objectives.    What you Will Learn in Today's Episode: Define Cryptocurrency-Mining & How it Works   The Future of Crypto-Mining Crypto-Currency and Crypto-Mining are Fully Transparent Markets, by Design The Search for the Best Equipment and Cheapest Source of Energy  How Aurum Capital Ventures is Changing the Game and Mindset Regarding Crypto-Mining and the Production of Energy Aurum is Both a Buyer and Seller of Energy Aurum is Redefining How Energy is Consumed and Transmitted Aurum is Creating Unique Investment Vehicles to bring needed liquidity – both debt and equity capital – to the Crypto-Mining and Crypto-Currency  How Crypto-Miners are Rewarded What is a Halving Event and What does it Mean for Cryptocurrency Mining? And Much More…   Cryptocurrency Mining Explained Miners are, in effect, getting paid for their work as auditors.  They are doing the work of verifying previous bitcoin transactions.  It is said that, miners are, in effect, "minting" digital currency… By verifying transactions, miners are helping to prevent the "double-spending problem," a scenario in which a bitcoin owner illicitly spends the same bitcoin twice  In addition to rewarding miners and supporting the bitcoin ecosystem, mining serves another vital purpose:  It is the only way to release new cryptocurrency into circulation.  In other words, miners are basically "minting" digital currency The primary draw for most Bitcoin miners is the prospect of being rewarded with valuable bitcoin tokens To earn bitcoins through mining, you need to meet two conditions.  One is a matter of effort; one is a matter of luck: 1) You have to verify ~1MB worth of transactions. This is the easy part. 2) You have to be the first miner to arrive at the right answer to a numeric problem. This process is also known as, proof of work The integrity and value of crypto is predicated upon the ability of miners to confirm, validate a 1MB block   We just had a pre-designed reduction in the reward that miners can earn when mining, referred to as a Halving Event:  On May 12, 2020, Yesterday, the reward for mining Bitcoin just dropped from 12.5 BTC to 6.25 BTC, for validating a 1MB Block -   This is what crypto- miners face all over the world.  Block-halving is hardcoded into how Bitcoin operates.  Its business as usual and it means that Bitcoin is doing exactly what it is supposed to do according to the original design of Satoshi Nakamoto. Halving Event - So, when we talk about miners being motivated and incentivized by being rewarded with Bitcoin for successfully delivering a proof of work,  Describe what a "halving" event is and what it means – how it affects crypto-mining activity Why is There a Halving Event? There can only ever exist a maximum of 21 million bitcoins.  Therefore, the reward for making new ones needs to be reduced periodically in order to bring sustainability to its value.  That's exactly what blockhalving accomplishes once every 210,000 blocks (roughly every four years). The creation of "mining pools" Business Problem that Aurum Capital Ventures is Solving Mining is a very capital and energy intensive business and is presently "oversupplied" globally Description of the main Business Problem Aurum solves – Its value proposition Where geographically are your major deployments? Discussion of Iowa, NY and other major installations Unique concept and approach to the energy component of operations Business Model Characteristics Your Bus. Model has Multiple Revenue Sources: Turnkey Mining Equip Deployments & hosting services;  Speed & Efficiency through repeatable process of Power procurement, infrastructure deployment, and remote management Running your own Mining servers Managed Services Selling used equipment to established network Defining and Solving the Capital Procurement Obstacles of the Crypto-Mining Industry: One of your firm's stated GOALS: There exists a lack of liquidity in the space.  JP explains how Aurum is creating unique investment vehicles to enable institutional capital to enter the space to provide liquidity Launch Global Bitcoin Mining Fund to allow for better market liquidity and transparency in the sector;  JP Baric Explains Securitization of mining hash rate (hash rate tokens);  JP Baric Explains Launching vehicles like investment trusts and funds that offer investors exposure  Goal: Enables Liquidity Unique Financing Approach: Issuance of secured, insured bond to finance equipment and projects Attractive risk-adjusted return characteristics for investors Opportunities for arbitrage in power contracts Providing increase in credit and capital to Aurum and the entire market Providing investment banks Mining, b/c it's an infrastructure investment is easier for institutions to get into to than Bitcoin purchasing Not currently in the prospectus of the major Energy Funds to invest in energy consumption products – they are only focused on energy generation - Bitcoin is not part of their investment thesis. Allows exposure to underlying Bitcoin asset and mine Bitcoins at a discount relative to the volatile Bitcoin market price itself.  JP Explains Competitive Advantages Modular, mobile equipment deployment – more efficient Rapid Payback/Utilization of "Stranded Energy" - Aurum's mobile mining deployments profitably monetize any type of stranded energy anywhere in the world Situation where the value of the underlying collateral (mining equipment) can increase in value during life of the equip. and related financing, due to a halving event of Bitcoin Allows you to build inventory of equipment for deployment now, in advance of halving event that you know occurs approx. every four years JP Baric explains Aurum's business model advantages relative to competitors such as Genesis Mining Closing Remarks JP provides an overview of where he sees things headed for crypto-mining industry in general… We've just had this Halving Event – what are some key things that happen next as it relates to Crypto-Mining? JP explains Aurum's leverage, differentiation and its expertise to bring to market top equipment and energy sources required by Miners and the financial liquidity mechanism to make it happen – keeping with Aurum's core mission Contact Information for Aurum Capital Ventures Those seeking additional information and wishing to learn more about Aurum Capital Ventures: JP's Twitter Account – @JPBaric Sign up for Investor Newsletter at: Aurumcapitalventures.com Thank you for joining me for this edition of DVC.  I hope you found the topic interesting and useful.  I am currently working on the DVC website.  In the meantime, Please send questions and your comments regarding today's episode to: [email protected] Stay tuned for my next Episode, coming very soon, where I will I am going to provide a follow-up to Episode 001, Unicorn-Mania, where I will dig into and discuss the sagas of WeWork and Uber in the context of Unicorn-mania.  Thank you again and I look forward to joining you for my next Episode of Distilling VC.

Introduction Welcome to Distilling Venture Capital.  I am your host, Bill Griesinger Distilling VC is a visionary podcast that provides an insightful and informed view of the key trends affecting the VC and tech startup world.  My mission is to cut through and go beyond the hype and Silicon Valley pop-jargon that tends to dominate the tech landscape.  I seek to provide transparency and    Opening Observations: Given that this is my inaugural episode under the Distilling VC label, I thought it would be appropriate and useful to provide you with some brief background regarding the podcast and the type of content you can expect in the future and a little about me… First, the podcast;   The vast majority of episodes I will bring will take you inside the insights, challenges, successes and the journeys revealed and shared directly through the words and experiences of tech company entrepreneurs, sometimes from the VCs who back them and others in the tech and VC community…So, I'll usually have very interesting guests.   Some brief background on me, your host:  I have spent a large part of my professional life (last 20 years) working in the Venture Finance business assisting VC-backed tech companies in procuring the capital they need to grow Over the years, I have had the opportunity and good fortune to meet and work with incredible, visionary management teams, many savvy investors and have had the privilege of underwriting and financing ground-breaking technology companies, many of which continue to have an impact on the technology landscape today (like Google; a $10M deal in 2001, for example).    With that as backdrop, today I want to focus on a topic that I believe signals something has gone awry in tech startup and VC land over the last 4-5 years.  And it concerns me greatly.   Have you noticed, Everyone seems to be fascinated with "unicorns?"  Venture capitalists, tech company founders and management teams, the tech press and the financial press and many others,   So, today's episode will delve into and distill down, "Unicorn-mania" so we can make sense of what's really going on. Let me state for the record, It Is a big distraction from what's really important in evaluating and valuing venture-backed tech companies.  Furthermore, it really touches upon the issues of transparency and accuracy, and ultimately the credibility of the industry itself, in my view  The longer this mania continues, I believe it presents dangerous consequences for multiple players inside and outside the VC industry.     So, what am I talking about?   Let's unpack this…  First, some definitional context:  What is a Unicorn company that we hear so much hype about today?  In tech and VC parlance, it is a private startup tech company that is valued at $1B or more, in theory, referred to as its "Post-money Valuation."   Great, what does that mean?  Not what you may think it does, as I will explain… And for historical context, The term unicorn, in VC, originated…in late 2013 when Cowboy Ventures Partner, Aileen Lee, coined the term for what she described as a tech company with a $1B valuation – and noted it was a pretty rare thing, as she pointed out then – which was correct.  There were 39 companies identified then in the 'Unicorn Club.'  27 of those were in the Bay Area!   So, it really was just a Silicon Valley phenomenon in the beginning…   Lee admitted the term probably wasn't the best or most well-thought-out description but went with it nonetheless.   "Yes we know the term "unicorn" is not perfect – unicorns apparently don't exist, and these companies do – but we like the term because to us, it means something extremely rare, and magical" Aileen Lee, Cowboy Ventures, Nov. 2013   The term was reinforced further in a 2015 interview with Crunchbase, and it has unfortunately, been with us ever since, to the detriment of the industry, in my view.   The Cowboy Ventures' website, even contains, to this day, a link to what it calls its "Unicorn Handling Guide" or protocol insisting that anyone using the term give proper attribution to the firm.  No one actually adheres to this "guideline" today, of course – but there it is.        This is not to malign or denigrate Cowboy Ventures as a reputable VC firm in any way.  It is, by most measures, a successful venture firm boasting a number of impressive investments and it has had a substantial number of notable exits, which you can find on their website.  So, I'm sure their LPs and their portfolio companies alike are pleased… The real issue is not about Cowboy Ventures at all…but rather a group-think mentality that has gripped and permeated venture capital…with no discernable benefit…   How Many Unicorns Are There?  It depends on who you ask & upon whose data you rely: (Q2 2019), there were around 450 companies globally designated as 'Unicorns' Fast fwd to Feb. 2020 and it's alleged to be 580! Valued at ~ $2T (From Recent Crunchbase Unicorn Leaderboard) Q4 2019 CB Insights states there are about 390  (CB Insights) Roughly 48% to 50% are in the US About 24%-25% are in China UK and India come in 3rd and 4th with roughly 5% each   Here's the central problem – The $1B+ valuations ascribed to so-called unicorn companies are not true market valuations at all.  They all utilize a metric called "post-money valuation" that inflates their value.  In fact, based on a Stanford Univ. Study, which I will dig into in a moment, 100% of all unicorns are actually over-valued to some degree when applying proper market valuation metrics based upon the terms and conditions found in the Preferred Stock rounds.   There is both Good News and Bad News to report with respect to this phenomenon:   The Good News:  There is a solution, a remedy, if you will, for this self-inflicted malady of unicorn-mania.  It is The Stanford Graduate School of Business Study - And it has been readily available for several years.  Stanford GSB  (By Prof. Ilya Strebulaev and his colleague, Will Gornall) – which I'll dig into in a moment Now, The Bad News:  Few are paying attention, and some are deliberately ignoring the solution that's been made available.  Why?   The Study:  Squaring Venture Capital Valuations with Reality Downloadable pdf found here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2955455   So, let's dig into the study.  The results are astounding and vitally important to EVERYONE connected to Venture Capital, tech startups, capital markets and even consumers – I'll explain.    Released in April 2017 by the Stanford Univ. Graduate School of Business  The Authors:  Prof. Ilya Strebulaev, Prof. of Private Equity & Prof. of Finance, Graduate School of Bus., Stanford University Will Gornall, Sauder School of Bus., University of British Columbia, (Gornall earned his PhD from the Stanford Graduate School of Bus.)   Summary of Findings – From the Study Abstract: We develop a valuation model for venture capital--backed companies and apply it to 135 US unicorns, that is, private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find that reported unicorn post--money valuations average 48% above fair value, with 14 being more than 100% above.  Reported valuations assume that all shares are as valuable as the most recently issued preferred shares.  We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as initial public offering (IPO) return guarantees (15%), vetoes over down-IPOs (24%), or seniority to all other investors (30%).  Common shares lack all such protections and are 56% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.   Important takeaway regarding the findings of the Stanford Study:  The results and findings are not predicated upon some intricate mathematical or econometric model requiring reliance on multiple assumptions and conditions to arrive at its conclusions.  On the contrary, the Stanford Study valuations are derived directly from the legal, contractual terms and conditions negotiated between the venture investors and the companies.  Therefore, the study utilizes the actual economic terms of each Preferred round as it was negotiated – No assumptions or conjecture about the values in the Study are necessary.  This is a critical point.   It's a Consumer Protection Issue: A number of the largest US mutual fund companies (Fidelity, JH, T. Rowe Price and Vanguard) have invested directly in private co. unicorns In 2015, Fidelity > $1.3B into unicorns!  That's more than any US-based VC fund invested that year.  Including $235M in WeWork, $129M in Zenefits – A company that hired too many people, grew too fast, and the company culture spiraled out of control, and $118M in Blue Apron, the food delivery startup that IPOd in June 2017 and is now looking for a buyer… What is the common thread on all these investments by major mutual fund companies?  They all used the meaningless post-money valuation to value these private tech company assets in their portfolios.  Let that sink in for a moment.  It's Mind-boggling Incredibly, they have accepted and used these meaningless valuations to mark their holdings of these private tech companies w/o further analysis – a completely irresponsible methodology.  It surely doesn't inspire confidence in their ability to perform proper valuation analytics  Where's the adherence to the fiduciary responsibility of these investment firms to their clients?  There are real financial implications for any retail investor in a mutual fund (401k or directly) related to this high-risk category.  How about institutions?  Univ. endowments, public pension funds, etc.? Are mutual fund companies fully disclosing real risk of this asset class to their retail investors?  Accurately?  How so, if at all?  (e.g. – Fidelity had to recently write