On October 3, the Berkeley Center for Law, Business and the Economy (BCLBE) held a speaker series entitled “Innovating for Social Impact.” The center welcomed three leading attorneys in social entrepreneurship and nonprofit legal strategy: Joel Beck-Coon, Nancy McGlamery and Will Fitzpatrick.
Recap: “Innovating for Social Impact”
The Risks of Insolvency in Venture Capital
The venture capital industry has one goal: making startups incredibly lucrative and, thus, maximizing returns to venture capital investors. For the venture capital investor these outstanding returns are generally materialized 5 or 6 years after the Series A investment round, when the investor makes an exit and the startup either performs an initial public offering of its shares (IPO) or is sold to a strategic acquirer or a private equity fund.
However, in a business inherently risky as venture capital, there are also many examples of failures, where venture capital backed startups go insolvent or bankrupt. This happened recently with online retailor and Montreal-based Beyond the Rack, which had previously raised over U$90 million in venture capital investments and other financings. When the company was entering into insolvency, it pursued a sale with a potential buyer, but negotiations fell through, forcing it to file for creditor protection on March 23.
A New Era of Shareholder Activism in Silicon Valley
We are all familiar with legendary hedge fund investors like Bill Ackman and many others making history with shareholder activism in Wall Street, but this trend is also starting to appear on a smaller scale in other places…notably venture capital in Silicon Valley.
Picture the following scenario: A venture-backed startup valued at $4.5 Billion in its latest investment round, a hotshot CEO, and venture capital investors with a history of acquiescence with its portfolio companies—contributing to growth without major interferences in management. It seems like the perfect Silicon Valley tale, until the California Department of Insurance starts to investigate the company and its CEO for allegedly circumventing California State regulations in connection with employee’s insurance training. Zenefits exemplifies this scenario as it was subject to an investigation of such practices.
Recap: “Venture Capital Speaker Series—Paul Vronsky, Kleiner Perkins Caufield & Byers”
On February 10, 2016, the Berkeley Center for Law, Business and the Economy (BCLBE) welcomed Paul Vronsky, general counsel of Kleiner Perkins Caufield & Byers, for a discussion of his role at Kleiner Perkins and the future of venture capital.
A graduate of Stanford Law, Vronsky made his start at Gunderson Dettmer Stough Villeneuve Franklin & Hacigian, LLP, where he first encountered venture fund formation and management. Venture funds are unique among corporate work in that they require long-term legal strategies to anticipate the unpredictable life cycles of companies. The exceptionally high tax rate on capital gains also necessitates skills in tax law in order to truly master venture fund work, which Vronsky honed in a post-graduation class at his alma mater. Subsequently, by the end of Vronsky’s four years at Gunderson, 70 to 80 percent of his time was being dedicated to Kleiner Perkins alone.
Tech Valuation Utopia Projected to Take a Hit in 2016
In recent years, Venture Capital firms around the country have enjoyed the surplus of “unicorn” companies, companies that have not gone public but are privately funded and valued over one billion dollars. However, despite attempts to accelerate valuation growth in tech companies, the stock market seems to indicate that exorbitantly high valuations may take a hit in 2016.
A valuation, determined by different sets of criteria, is the estimated figure of what a company is potentially worth and how much the shareholder’s interest in a company is worth at any given time. It has become standard practice in the tech world for a company to have a valuation in order to attract more venture capital and private equity funding, which creates momentum for high stock prices when and if the company goes public. After a company goes public, a company’s valuation relies heavily on how well its stocks are doing in the market and on its current tangible assets.
Square’s IPO and the Tech Industry
Much speculation surrounded Square’s IPO. Facing a struggling IPO market and steep competition from companies such as Apple and PayPal, many wondered if Square could reach its fundraising goals. These fears were confirmed when Square set its IPO price at $9 per share, well below the expected range of $11-$13. However, after its public debut on November 18th, shares opened at $11.20, and at one point, increased more than 64 percent. Square closed its first day of trading at $13 per share, still 45 percent above its initial public offering price.
Mutual Fund’s Devaluation of Snapchat Raises Concerns for Tech Startups
The number of unicorns, companies valued at over $1 billion, has greatly increased, growing from 43 companies at the beginning of 2014 to around 128 companies in November. However, these companies are often difficult to value because the shares are privately held and there is no readily available market price. This is a serious problem for mutual funds since they are legally obligated to value each of their portfolio holdings everyday. The values can fluctuate between mutual funds as firms use different methods to value startup companies.
On November 10, 2015, Fidelity devalued its stake in Snapchat by 25%. Fidelity also devalued several more startup companies: Blue Bottle Coffee, Dataminr, Zenefits, and others. These markdowns may suggest that the market is slowing down or that these companies’ values were inflated. The high valuations might have also been a result of competition between investors to acquire the next big startup, driving up valuations. Fidelity is not the only fund devaluing its stake in startups, as the asset manager Blackrock devalued Dropbox.
Recap: “Venture Capital Speaker Series: Stephanie Brecher, General Counsel of New Enterprise Associates”
How does a Berkeley Law graduate end up as the General Counsel of one of Silicon Valley’s top venture capital firms? What does a day in the life of a General Counsel look like and what are the best steps to take to reach a similar prestigious career?
On September 29, Stephanie Brecher, a 1993 U.C. Berkeley Law graduate and General Counsel of New Enterprise Associates (“NEA”), addressed these questions and others to a group of law students in Boalt Hall on the U.C. Berkeley campus.
Ms. Brecher discussed her path from Berkeley Law to NEA. In the start of her career, she described herself as an “accidental tourist” in corporate law. After graduation, Ms. Brecher held a clerkship in the Central District of California. Upon completion of her clerkship, she decided not to take the position she had initially planned on, and instead she accepted a position as an associate at Steptoe & Johnson in Washington, D.C., where she hoped to work in international law, but was placed on the corporate team. After this position she worked as in-house counsel in Silicon Valley and spent nearly a decade at Nortel. Following her time at Nortel, Ms. Brecher returned to work at a law firm and became a partner at Sheppard Mullin Richter & Hampton before she acquired her position at NEA.
Unicorn Valuations and the Silicon Valley
Unicorn valuations and the problems related thereto are in the spotlight in Silicon Valley. Basically, this term is used when referring to invested start-up companies with a pre-money valuation (i.e., before a venture capital investment) equal to or greater than one billion dollars. This is in a context where, by nature, it is extremely hard to accurately determine the value of a start-up, as most of them do not have any operational background.
When a venture capital investor agrees to invest and acquire shares in a start-up with such a hefty valuation, it will most likely ask for several contractual guarantees aiming to ensure a minimum return on its investment, and that’s when problems may arise between investors and the founding shareholders.
A Potentially Hostile Tax Environment for Private Equity Firms
On February 26, 2013, the House Ways & Means Committee Chair Dave Camp released a comprehensive tax reform proposal that would categorize private equity funds’ carried interest as ordinary income instead of capital gains. It contends that carried interest, the profit interest in the fund, is a partnership interest held in connection with the performance of a service and should be taxed as ordinary income, since private equity funds are in the active trade or business of developing and selling businesses.