The Startup Bubble Deflation: A Story of Disproportionate Valuations

By Grace Tepley, J.D. Candidate 2022 | Posted on

The recent deflation of the startup bubble may be explained by Wall Street investors’ growing reluctance to buy into huge startup valuations. Recent IPO debut flops of hot companies with high valuations (Uber, Lyft and Peloton) have other companies like WeWork rethinking going public anytime soon. Peloton alone managed to lose $900 million of private investor wealth after their recent IPO. Similarly, with a price of $45 per share, Uber reached a valuation of $82.4 billion in their IPO, substantially less than its most recent $120 billion private valuation.

The reason these highly valued companies are struggling on the public market has to do with a new trend in venture capital (VC) investment. VC firms are increasingly flooding young startups with seemingly endless capital. Speculations as to which companies have the highest growth potential has resulted in VC firms dolling out enough money to keep young startups afloat. This holds true for startups lacking fundamentals such as the ability to turn a profit, maintain experienced leadership, and establish well-developed business plans.

Young companies that receive billion dollar valuations – once deemed “unicorns” for their rarity –  are the new norm in the startup community. VCs betting on future growth and market dominance rather than current and sustainable profitability has resulted in the overvalued bubble seen today. In fact, these practices have resulted in 49% of VC-backed unicorns boasting valuations far above their market value.

Public investors are increasingly becoming skeptical of these huge valuations because, despite creating massive revenue, some companies, like Uber, fail to make a profit. Overall, less than one fourth of all recent IPOs are from profitable companies. The IPO flops of Uber, Lyft and Peloton suggest that public investors may be shifting back to preferring tangible profitability as opposed to the path to profitability narrative that is being sold today.

However, there are notable exceptions to this flop phenomena that indicate public investors are still interested in interacting with unicorn-status companies that have their fundamentals in place. For example, Pinterest and Chewy sufficiently impressed public investors to survive their IPOs without losses. Likewise, Airbnb’s recent acquisition of talented leaders marks a clear investment in its business model that may welcome public investors.

It is likely that the recent deflation in the startup bubble is the market’s way of correcting itself from disproportionate valuations. Whether or not highly valued companies will continue to seek public investments may now depend on the reliability of their future profits. What is clear is that the discussion of overvaluation is increasingly important to both public and private investors, as well as the startups intending to raise capital from these sources.

The Startup Bubble Deflation- A Story of Disproportionate Valuations

Vox Media Acquires New York Magazine

By Gayatri Raghunandan | Posted on

Vox Media announced its acquisition of New York magazine along with its digital assets in an all-stock transaction in September 2019. A press release by New York Magazine revealed that Jim Bankoff, Vox Media CEO and chairman, will continue to lead all aspects of Vox Media. Pamela Wasserstein, chief executive of New York Media, will serve as president and have a seat on the company’s board of directors. According to Bankoff and Wasserstein, the deal is a logical step, which will not diminish the brands of either company.

New York Magazine, which was first published nearly fifty-one years ago, laid off at least five percent of its staff this year and has recorded a $10 million loss each year. Earlier in the year, the magazine also witnessed its editor-in-chief, Adam Moss, stepping down after fifteen years in the position. However, amidst such changes, Jim Bankoff has recorded that there would be no personnel changes within any of the magazine’s related publications or even within any of the Vox media brands, which include The Verge, Eater, Curbed, Vox and SB Nation. This statement has been surprisingly reassuring following the large-scale restructuring of New York Magazine, which laid off sixteen full-time staffers and sixteen freelancers or part-time employees.

Many experts say that this is a merger driven by shared ambition and that Vox’s growth trajectory and success in developing premium editorial brands is a driving force of this acquisition. The combination looks to diversify various forms of media and is supported by the nature of Vox Media, which was reshaped by Jim Bankoff. At present, Vox’s model relies less on digital advertising, yet boasts of a sizable profit on a revenue of $185 million, as reported last year. The company also recently negotiated a production deal with streaming service Hulu to create a series of TV shows. The deal was followed by another production agreement with Netflix. Vox’s revenue has been further enhanced by licensing its content management system, Chorus. Keeping in mind Vox’s recent successes, the rationale behind this merger has been firmly stated by Bankoff, who calls this combination in the digital media industry, most unique and different from all those mergers in the industry which have emerged out of desperation or for pure financial engineering.

Following the consummation of this transaction, Vox Media is expected to remain profitable and perhaps even increase its revenue by $300 million by the end of 2020. Vox Media has already raised more than $300 million, which includes $200 million from NBCUniversal. Further, according to the estimations of both Bankoff and Wasserstein, the combined sites would have at least 125 million unique monthly visitors. While the value of this transaction remains undisclosed, it is expected to close later this year.

Vox Media Acquires New York Magazine

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

By Jimena Rubio, LL.M. Candidate 2018 | Posted on

In the wake of further developments by the SEC, many key players in the industry are currently combining efforts to petition federal authorities to see certain virtual currencies in a “different light.” The Venture Capital Working Group is led by Andreessen Horowitz, which includes another significant VC firm, Union Square Ventures, and lawyers from Cooley LLP, McDermott Will & Emery LLP, and Perkins Coie LLP.

The primary purpose of the Group is to deter regulators from categorizing cryptocurrencies, such as Bitcoin and Ether, as securities. On March 28th, the Group met with the U.S. Securities Exchange and proposed a “safe harbor” for some cryptocurrencies.

The proposal suggests that digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.” It adds that full decentralization could occur under several conditions, including when the token creator no longer has control of the network based on its ability to make unilateral changes to the functionality of the tokens. It can also be used, not just as a speculative investment, but for its intended purpose on a computer network.

The group notes that these definitions are only suggestions, but the “proposed safe harbor has been vetted by, and has the support of, many of the key players in the industry.” People briefed on the meeting said that regulators did not immediately embrace the safe harbor proposal.

Many entrepreneurs and law firms have been creating new ways for virtual currency projects to issue their tokens as securities and some exchanges have talked about getting registered as official securities exchanges. It is still unclear what will happen to tokens that did not register as securities but are later categorized as securities.

Furthermore, on April 26, a congressional hearing with testimony from the SECs Division of Corporation Finance took place to develop more reasonable approaches toward token sales and their classifications. The discussion marked a new attitude amongst SEC members and addressed how certain utility tokens could not be securities if purchased with no investment intention.

In the hearing, the SEC division head, William Hinman, stated:

“They can certainly imagine a token where the holder is buying a token for its utility, not as an investment; especially if it’s a decentralized network where it’s used, and not central actors where there would be information asymmetries where they would know more than token investors.”

Hinman — likely referring to the Venture Capital Working Group — replied that one of the steps that the SEC was taking was “meeting with participants that have these ideas of a token that shouldn’t be regulated as a security” and working with them on how they should be structured. Hinman pointed out that the SEC is heavily engaged with academics and other departments to better explore how everything might work, and that in the long run, the U.S. is “pragmatic” in its support of new technology.

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

By Shaika Ahmed, J.D. Candidate 2019 | Posted on

Microsoft Corp. v. United States is a recent data privacy case concerning the extraterritorial reach of the Electronic Communications Privacy Act’s (of 1986) Stored Communications Act (the “SCA”).

In 2013, the US federal government issued Microsoft a warrant, asking it to turn over the email of a target who was being investigated in a drug-trafficking case. The warrant, issued by a US magistrate judge in the US District Court for the Southern District of New York, was issued under SCA. Pursuant to this warrant, Microsoft was to produce all emails and information associated with the target’s account. Microsoft denied the government’s request, arguing that the SCA precluded an extraterritorial application of a warrant for information stored on servers in Ireland.

After multiple failed attempts to block the government’s order, Microsoft appealed to the Second Circuit. A three-judge panel of the Second Circuit overturned the lower court’s ruling in July 2016, invalidating the government’s warrant. Relying on the US Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, which held that the “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” the Second Circuit found no mention of extraterritorial application in the SCA.

In June 2017, the US Department of Justice appealed to the Supreme Court, arguing that the Second Circuit’s decision allows large, data-laden companies to deny law enforcement officials with requested information stored on servers outside the US and warned that such prohibitions could hamper criminal investigations. The Supreme Court granted certiorari in October 2017 and the case, United States v. Microsoft Corp., was heard on Feb. 27, 2018.

The Supreme Court’s ruling was to be expected by June 2018, but in the time between the oral arguments in February and the expected decision in June, Congress passed the Clarifying Lawful Overseas Use of Data Act (the “Cloud Act”) on March 22, 2018. The Cloud Act allows US judges to issue warrants with an extraterritorial reach to obtain data such as the one at issue here; if the warrant’s scope conflicts with foreign law, then companies have means to object under the Cloud Act.

In response to the Cloud Act, the DOJ requested that the Court vacate the case and remand it to the Second Circuit. On April 17, 2018, the Court issued a per curium that per the passage of the Cloud Act, the case was rendered moot, vacating the case and remanding it.

While it may seem strange, Microsoft actually backed the Cloud Act. In its support for the Cloud Act, Microsoft stated that legislators, rather than the courts, are best situated to resolve such extraterritorial disputes, in that comprehensive legislation as opposed to “repeated court visits and legal battles” is proper. Microsoft’s hope is that legislation such as the Cloud Act will motivate “governments to move forward quickly to put new international agreements in place…a set of agreements that create an accepted model and establish clear international legal rules that satisfy law enforcement and privacy advocates alike.”

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

Uber Suffers Another Legal Setback From Recent EU Ruling

By John Runkel, J.D. Candidate 2020, April 20, 2018 | Posted on

The ride sharing application Uber has faced another legal blow following a verdict from the European Union’s highest court Tuesday, April 10th. The Court of Justice of the European Union (ECJ) upheld a French Court’s verdict that Uber was indeed a transportation company, not a “information society service”, as Uber had previously claimed.

Moreover, the ECJ declared that France, as an EU member state, was well within its right to fine and file criminal charges against Uber for running an illegal transportation service. Uber’s appeal sought to strike the fine on the basis that EU countries must first notify the European Commission before passing laws that could potentially impact digital services. The ruling came down once again to Uber’s status as a transportation company as opposed to an information society service.

This is the most recent legal defeat in a series of devastating losses to European regulators for Uber. The Case arrived at the ECJ after Uber appealed a ruling from a French court fining it $907,000 for failing to use professionally licensed drivers for its UberPop application and violating a French law which sets down restrictions on the use of digital technology to find customers for taxying services. This 2014 law comes in the wake of continued conflicts between traditional taxi services and emerging ride sharing platforms leading many to believe that the legislation was developed to target companies like Uber in particular.

The UberPop application, which allowed peer-to-peer interactions for the arrangement of transportation, enabled individuals without the credentials demanded by French law for commercial drivers to ferry passengers.  While, Uber has since discontinued the service, the ruling threatens one of Uber’s greatest fiscal advantages over traditional taxi services, particularly in the European union where digital services receive protection from EU member state’s nation laws. Potentially even more damaging to Uber’s bottom line is the additional red-tape and financial burdens applied to typical transportation companies, which Uber has traditionally skirted.

These added costs further diminish the competitive advantages held by Uber due to its unique structure as European authorities have been increasingly aggressive in holding companies like Uber to more standardized regulations. Another such example was the November 17th ruling last year in the UK demanding that Uber treats its drivers as traditional employees entitled to minimum wages and vacation time.

Uber continues to operate a ride-hailing business in France with professionally licensed drivers, however, the ECJ’s ruling marks another major hit for Uber. This most recent judgment was passed down just months after the ECJ affirmed the holding from a Spanish court also finding Uber to be a transportation company.

The impact of the most recent rulings against Uber may also have significant effects on the EU’s attempts to maintain a single digital market and could potentially impact other companies utilizing digital means to provide services and goods. Regardless, with losses in the UK, Belgium and expulsions from Hungary and Denmark, one thing is certain Uber does and will likely continue to face a significant challenge while operating in European Markets.

Uber is private company originating from Silicon Valley that now operates globally as a ride hailing application.

Uber Suffers Another Legal Setback From Recent EU Ruling

Bayer Faces U.S. Hurdles for Monsanto Antitrust Nod

By Nalattaporn Pichaisawad, LL.M. Candidate 2018 | Posted on

The road to success is not a bed of roses. Although their deal was approved by more than thirty authorities around the globe, Bayer A.G. (“Bayer”), the German conglomerate chemical firm, still faces a legal challenge in the United States to win antitrust approval to buy American seeds supplier Monsanto Company (“Monsanto”). The U.S. government is worried that $62.5 billion deal could seriously hurt competition.

Looking back to August of last year, the decision on whether to approve the symbolic transaction has been postponed twice and suspended four other times. The deadline for the merger approval is currently scheduled to take place on April 5, 2018.

The significant proposed acquisition between Bayer and Monsanto would make the company the world’s largest integrated pesticide and seeds business. In fact, this would create a company with a market share of more than a quarter of the world’s seed and pesticides business. The transaction will constitute to the destruction of competition in at least three markets: pesticides, seeds, and traits.

In the United States, EU, and Brazil, the authorities are attempting to conduct further investigation of how combining Bayer and Monsanto will impact the price and supply of key products for farmers.

One of the effective solutions to solve potential antitrust issues is to sell a company’s assets when company seeking regulatory approval for a deal. After the CEO meetings, Bayer decided to resolve antitrust issue by selling assets to another company in order to carry out its project and achieve its $60 billion-plus takeover of St. Louis-based Monsanto. In particular, Bayer agreed to sell parts of its seed and herbicide assets to rival, BASF, for $7 billion to solve EU regulatory concerns. Moreover, Bayer agreed to divest its vegetable seeds business to BASF.

In the EU, the review of the Monsanto deal by the European Commission (“the Commission”) is set to greenlight after in-depth investigation by the Commission. The European Competition Commissioner, Margrethe Vestager, indicated that Bayer properly addressed its concern by selling its assets to competitor. She firmly stated that “Our decision ensures that there will be effective competition and innovation in seeds, pesticides and digital agriculture markets also after this merger.” The competitors can effectively compete with each other and the number of the competitors in these relevant markets will remain the same.

However in the United States, the intense review procedure is being led by Assistant Attorney General for the Antitrust Division, Makan Delrahim, who also spearheaded the filing of the antitrust lawsuit to block AT&T Inc.’s takeover of Time Warner Inc.

From the Justice Department’s antitrust division’s view, although selling the assets to BASF, a good buyer who can compete effectively in the business, does help with some of the issues, the officials do not think it goes far enough.  The government would like Bayer to take a step further and divest more.

In its substantive standard of review of the proposed merger, the Justice Department is analyzing the economic relationship among entities on the same level of market (“horizontal restraint”) as well as the economic relationship along supply chains (“vertical restraint”)

No one knows what the future holds, but the companies still have hope after two previous deals – the combination of Dow Chemical Co. and DuPont Co. and China National Chemical Corp.’s takeover of Syngenta AG that won antitrust clearance.

 

Bayer Faces U.S. Hurdles for Monsanto Antitrust Nod (PDF)

Facebook Shares Tumble Amid Cambridge Analytica Scandal

By By Hilarie Bellis, J.D. Candidate 2019 | March 24, 2018 | Posted on

Facebook shares continued to tumble last week, falling more than 13% and closing just under $160 per share on Friday, March 23rd. Facebook is under fire after the revelation that Cambridge Analytica, a voter-profiling company, accessed the private information of more than fifty million Facebook users without their permission. The data was used by Cambridge Analytica to help profile millions of American voters for President Trump’s 2016 presidential campaign.

Facebook had originally downplayed the data leak, but founder and CEO Mark Zuckerberg finally issued a statement on Facebook last Wednesday. Zuckerberg later apologized during an interview on CNN, calling the incident a “major breach of trust.” The scandal has spurned the hashtag #deletefacebook, with Google searches as to how to delete Facebook tripling last week. Sentiment for the movement comes from a variety of places: some users say they did not realize their data was being sold and feel their privacy has been invaded, while others do not like the fact that their profile may have been used to help elect President Trump.

There are already four lawsuits filed against Facebook in Northern California federal courts, three of which are brought by shareholders of the tech giant. The fourth lawsuit is a class action suit alleging that Facebook had “absolute disregard” for the personal data of the fifty million users whose data was taken without permission by Cambridge Analytica.

Despite losing around $75 billion in market capitalization last week, COO Sheryl Sandberg said Facebook does not look at user privacy issues as long-term damage to the company’s stock price and business model. Yet the company’s business model is built on selling its users’ data. Should the company face tighter regulations, it may need to rethink its business model, which is likely why the company is taking small, slow steps to address the scandal.  

Zuckerberg has been called to testify before both the House and Senate. He has said he would be willing to testify, and that he was not sure whether or not Facebook should be better regulated. There is talk for more regulation of social media and technology companies. Apple CEO Tim Cook said he thinks tech companies should be regulated as to how they are allowed to use customer data.

Facebook Shares Tumble Amid Cambridge Analytica Scandal

ISS Faces Uncertain Future in the Commercial Space Age

By Joshua Trosch, J.D. Candidate 2020 | Posted on

The White House recently revealed in a NASA budget draft its plans to discontinue federal funding for the International Space Station (“ISS”) by 2025. This news comes on the tails of the administration’s plan to transition the ISS from NASA operation to one that accommodates competing commercial customers. While the White House has not yet released a concrete plan for what such an unprecedented transition would entail, the novelty of transforming an international, state-funded space research laboratory into a commercially available entity in low-orbit is sure to have a profound effect on international space law.

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Recap: “BCLB Law Firm Hot Topic Lunch Talk: Kirkland & Ellis LLP – The Hunstman Merger”

By Michael Homer, J.D. Candidate 2020 | Posted on

On February 12th, 2018, the Berkeley Center for Law and Business welcomed attorneys Bill Sorabella and Shawn O’Hargan from Kirkland & Ellis LLP. Kirkland & Ellis LLP advised American chemical manufacturer Huntsman Corporation on its $20 billion merger with Swiss chemical company Clariant. Then, in the final stages of negotiations, there was an unexpected twist, as activist investors abruptly blocked the merger. Sorabella and O’Hargan led the team that crafted the deal, before that deal suddenly fell through.

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Startup CEO Pleads Guilty to Defrauding Former Employees

By Camila Piedrahita Abello, J.D. Candidate 2019 | Posted on

Isaac Choi, the founder and CEO of WrkRiot, pleaded guilty to defrauding several former employees. He now faces up to 20 years in prison and a $250,000 fine.

When he pleaded guilty to one count of wire fraud, Choi admitted “he made false and misleading statements about various topics, including his educational and professional history, and the amount of his wealth” in an effort to recruit potential employees. He further admitted to emailing several employees forged documents reflecting salary payments that were never made.

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