LinkedIn IPO - 'Votes' the matter?

Finally got down to reading the LinkedIn Prospectus and stumbled upon an interesting 'Risk Factor'

The dual class structure of our common stock as contained in our charter documents has the effect of concentrating voting control with those stockholders who held our stock prior to this offering, including our founders and our executive officers, employees and directors and their affiliates, and limiting your ability to influence corporate matters.

Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. Stockholders who hold shares of Class B common stock, including our founders, and our executive officers, employees and directors and their affiliates, will together hold approximately 99.1% of the voting power of our outstanding capital stock following this offering, and our co-founder and Chair, Reid Hoffman, will control approximately 20.1% of our outstanding shares of Class A and Class B common stock, representing approximately 21.7% of the voting power of our outstanding capital stock, following this offering, and therefore will have significant influence over the management and affairs of the company and over all matters requiring stockholder approval, including election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future.

...

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example,Mr. Hoffman retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future, control a majority of the combined voting power of our Class A and Class B common stock. As a board member, Mr. Hoffman owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Hoffman is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.

Why this makes sense is that an investor coming in an IPO, (generally) would care much lesser about the voting rights than the Pre IPO shareholders (the founding team and the VCs). And the best part is, all shareholders are rewarded with more voting rights if a Pre IPO shareholder goes for an exit (since her Class B shares get auto-converted to Class A, thus the percentage voting rights for the existing investors increase). In fact, a typical retail investor would probably not mind more 'control' in the hands of a proven management (the Class B shareholders). But would getting less voting rights be actually a 'good' thing for the small investor category? Not really, as technically the 'risk' of the 'control' being in the hands of a certain few also is not necessarily a good thing.

Come to think of it, the differential voting rights could be very useful for startups going for crowdfunding - since the 'crowd' would probably be okay with getting shares of much less voting rights and thus the founders can have more 'control' over the venture they have started. [Of course, this doesn't hold for angel and VC investors - who would want a say per share equal to that of the founders.] This seems even more appropriate for startups as against mature publicly traded firms, in the latter case the 'crowd' being okay with inferior voting rights could probably also imply that the individual investor is more concerned with making a quick buck rather than staying invested for the long term. In case of startups, since immediate exit opportunities may not be available in any case, there are more chances that the 'crowd' has come in with a long term view.

One of the major criticisms for dual class structures has been about the possibility of the superior voting right holders misusing their powers for corporate matters like executive compensation, mergers and executions, etc. However, in case of early stage startups [Pre Revenue, Pre Profits, or at best marginal profits], such issues would possibly be relatively less relevant as against mature publicly traded (and possibly billion dollar market cap) entities (where chances of greed taking over are higher).

Wonder how much is this tool being already used, but surely looks like tweaking the voting rights structure can give some flexibility that can benefit all parties.

Paying users Vs Paying users

One of those ‘paying users’ is the ‘conventional’ user who pays for your service. The other, though is just the opposite - you pay the user as a part of your business model! And by ‘user’ I mean the ‘C’ in the typical B2C business (rather in this case –a C2B business).

One such interesting concept that I came across recently and one that falls in the second category is Carpaisa. Their tag line says it all – “Brand your car and get paid”. The user (a car owner) registers with Carpaisa, after which one of the many registered advertisers would put up a vinyl sticker ad on the car, the car owner would keep the ad on his car for a certain period of time, and the advertiser would pay the car owner depending on certain predecided parameters (Carpaisa, ofcourse would get a cut out of the deal)

This somehow reminded me of mGinger – a service where users can register to get paid for receiving promotional SMSes. I had registered with mGinger a long time back (have not exactly got rich yet though!)

The commonality between the two is that the user registers with the service purely with the intention of making money (without much of an effort). In case of mGinger, the effort is actually zilch, all you need to do is be ready to receive a few SMSes everyday. And the best part is, no one really knows that you are – well - earning a few bucks this way (if at all you do)!

However, in case of Carpaisa, there is a big difference. It is not an online/mobile promotion any more, but a promotion in the physical world. The user’s car will actually be doubling up as a brand ambassador for the advertiser company. And well, everyone on the road will (obviously!) know about it (that precisely was the advertiser’s intention in the first place). However, my sense is that it might be a bit awkward for many to put up an ad on their cars.

The basic theme in both the services is to lure users into registering by showing them an easy way of making money (not that anything is wrong with it). But the users have nothing else on their mind really! (Oh that also reminds me of SpeakAsia – the online survey site where they claim to pay users for filling surveys– they are even showing TV Commercials these days!).

Money being the only driver for the userbase is somehow not a very comfortable feeling for me. What’s your take?

Incubator or B-School?

Came across this piece of news recently about JGI Ventures floating a Rs 500 Cr startup fund. JGI Ventures is a part of the Bangalore based education group Jain Group of Institutions. The 'eye catching' part of the news - however - is not that. It is what appears in the second paragraph -

Budding entrepreneurs would be able to undertake a 30-month postgraduate course for a fee of Rs.30 lakh under JGI iDEA, or Incubating and Developing Entrepreneurial Ability.

This made me curious and I went through the programme brochure. They have chalked out a comprehensive 30 month course which covers subjects across domains (Finance, Marketing, IT etc) - and also includes some 'International Exposure' to make your business plan 'global'.

Now, at first sight, it sounds more like a B School programme (and a damn expensive B School programme at that!). Only difference is that a B-School programme typically ends with Campus Placements. This won't.

And if it sounds like a typical incubator, then the fact that there is a fees of Rs. 30 lakhs makes it 'different'. Moreover, one need not even have a business idea in the head to be a part of the programme. As the brochure reads -

Having a pre-conceived business idea will be a part of this process but will not be a mandatory criteria for selection. While aptitude is important, the primary focus of the selection process is to assess your attitude and passion to become an entrepreneur

In fact, this is in stark contrast to PayPal Co-Founder and Facebook early investor Peter Thiel's 20 Under 20 programme where he wants to "invest upto $100,000" in 20 Under 20 kids and "teach them about entrepreneurship".

Is this just an attempt at a new B-School trying to position itself differently (with a sweetener of a Rs 500 Cr startup fund at the end of the course replacing the traditional campus placements). And if one thinks of it as an incubator, then doesn't the huge fees upfront remove the incentives for the 'mentor' to really mentor like an investor?

Moreover, the well chalked out structure of the program - while it looks impressive on a brochure - might not be what is required. For example, not everyone would really require a visit to seven different countries to crystallize a business plan. So at least there could have been an option to pick and chose parts of the course (and thus also cut down on the course expenses).

Certainly there are lots of aspects that pique curiosity. But still, 30 lakhs?

Marketing in Product UI

Just got myself a Tata Photon+. Was rather surprised when I saw the Interface for the first time. Here's a screenie of how it looks.



The two images on the left and right turn out to be hyperlinks to this page - which keeps giving me a 'Connection Timed Out'!

Now then, the fact that I am seeing the UI of your product/service means that I have already bought your product/service (if not all, then at least in most cases). Even if I have not, at least I am in a position to click on 'Connect' - and check out the product myself. Basically, I (as a user) am in a stage where my (repeat) purchase would depend more on your product/service performance - and the claims on the left and right ends of the interface - if anything, are only going to annoy me whenever the service fails to live upto my expectations.

And if you still insist on inserting your ad images in your own product UI, then please put high resolution images so that at least the text is legible :P

Angels in the Crowd

Of late there has been a growing buzz in the early stage investments space – lots of seed stage funds, incubators and entrepreneur mentoring platforms have come up – which is definitely a very encouraging sign. An interesting innovation in this area is the advent of crowd funding platforms for startups, which – simply put – allow the crowd (people like you and me) to participate in the early stage funding process. [You can give GrowVC a whirl in case you haven’t already – a global platform that connects entrepreneurs with funders and mentors. Another similar example is AngelList. In a way, SecondMarket also allows one to get a piece of the pie of private unlisted firms, although it is more of secondary sale]

Crowd funding for startups is undoubtedly an exciting phenomenon – as it turns the traditional investing model on its head – wherein typically the ‘smaller’ investor comes in only when the company becomes ‘larger’ – large enough to have got listed on a stock exchange with all the regulatory hurdles cleared – thus making sure that the ‘small’ investor’s interest is safeguarded (as it is not efficient for people like you and me to perform a thorough due diligence of a company to invest an amount as small as say Rs. 10,000.).

The big plus of such a concept is for the startups themselves – they get a platform to showcase their product/service, and also a forum where they can get a general perception of how good their business model is according to the ‘crowd’ (Although the ‘crowd’ – who are mostly investors – may not really be the ‘end customers’ for the startups – so it is possible that even the ‘crowd’ may not be able to appreciate the solution that the startup is intending to provide). Not to forget, of course, the main objective – which is to get themselves some funding!

From the funders’ point of view, apart from being an opportunity for ‘small’ investor to be part of the early stage investment space, it also creates a pool for early stage funds to build a pipeline of deal flow.

There are big challenges to be overcome though. For one, the platforms have to strike the right balance between the following two extremes
- Potential investors ending up NOT investing in startups – because it may not make sense to invest a lot of time to study the startup/entrepreneur/ business model – given the amount they want to invest is so small [As against, angels/seed stage funds – who spend a lot of time to understand the startup and the entrepreneur, but also invest a substantial amount]
- Potential investors following a herd mentality – and ending up (frivolously?) investing small amounts, but in large numbers [GroupOn/Facebook Valuations on SecondMarket?]

Moreover, the Capital Market regulators would also come into picture – making the regulatory environment more stringent (which is of course, good in a way!) [The SEC has already shown its inquisitiveness towards the SecondMarket transactions!]

We have already seen the rise and (relative) fall of the Microfinance industry. We probably need to keep a check to make sure the ‘Microequity’ concept sees a comparatively smooth sailing.

The 'Stop Loss' Trigger

Comparing starting your own venture with an investment in the stock market is not fair at all. But, there is one concept in the stock market jargon that I feel has some significance for an entrepreneur. A ‘stop loss’ – in simple terms – is a valuable tool (trader’s can’t do without it – but novice investors unfortunately do not use it that often) which helps you keep a cap on the losses. So in case you buy a stock for Rs 100 with the (obvious) expectation that the stock price will rise after you buy it, and unfortunately some event occurs which your diligent analysis could obviously not predict (disturbance in Libya / 2G scam / your investee company’s CEO quits), a stop loss at say Rs 90 would have helped you to keep the possible losses in check.

Coming back to our analogy, a stop loss is essentially an acceptance that as an investor, I could be wrong – and in case I am wrong, rather than throwing good money after bad (‘averaging down’ as is the tendency with many investors) – I might be better off cutting my losses. Thus, for an entrepreneur, a stop loss (and here the loss is not just a ‘capital loss’, but also a lot of ‘time’ and ‘emotional’ loss – which is far more heartbreaking) would be deciding at what time to stop pursuing the idea in case things are not shaping up as expected. In the startup where I worked before, we kept hopping from developing one product to another as we realized why our products may not work. I wonder if it was insufficient analysis of the market or a ‘conformation bias’ that stopped us from quitting early (or not getting into it at all). Similar is the case with one of my close friends who started with something which did not work out and then did something totally different and now he is into something entirely different as compared to the earlier two ventures.

A sense (and the guts) to accept you are wrong is important. Though it might sound like ‘quitting’ (which is generally not taken in a positive sense), you at least live to fight another day!

Cross posted on IdeaBing

Value of an Idea

This post featured on Ideabing

Many successful internet ventures are based on the simple concept of connecting buyers and sellers - eBay allows people to buy and sell stuff over the internet , JustDial makes it easy for local service providers to reach out to customers, Job Portals (Naukri, Monster, Timesjobs) connect job seekers with employers, Property Sites (99acres, Indiaproperty) connect property buyers with property sellers, Platforms like SecondMarket connect buyers and sellers of private company stocks, and so on. The idea is to find a niche (except eBay which is the most generic) and then build a forum that connects people around that niche – taking care of all the requirements specific to that niche . The value addition for users is tremendous - it creates a platform where information is exchanged about the supply and demand of the object in question - eventually resulting in a price that tends to be fair for both parties.

The context of this post is the recently launched OpenInvo - a platform for buying and selling ideas. The proposition here is that people like you and me can post their business ideas on a forum - and parties interested in executing the same can 'buy' the ideas. The prospect is superexciting – now you have a market for something as intangible as a thought in your head! Of course, as OpenInvo explains, the ideas on ‘Sale’ could be in various stages – from a mere three lines of concept to a fully thought out plan to partial execution – and the value of the idea would vary accordingly. The buyers, OpenInvo expects, would mostly be companies looking out for new ideas in their domains of interest and having the financial muscle to execute.

That apart, what makes me curious is as a seller of an idea – how will you decide for how much will you sell an idea for! The very fact that you are putting your idea for sale shifts the power to the buyer (if you believe it in so much, why don’t you execute it yourself?). This is what makes this concept different from Angel Investments where the ‘Idea Owner’ is only seeking funding and mentoring and not an outright sale. Also it is really difficult to claim ‘owning’ an idea – that is where execution wins. Execution is tangible – something for which you can demand value. Ideas, if not backed by execution, are (mostly) worth next to nothing.

Nevertheless, it will be interesting to see if OpenInvo makes it to the list of ‘successful online market places’ I listed earlier.