Sacred Cow Dung: The Start of Internet Tsunami 2.0 Averted? eBay Shareholders Get the Final Word: "Skype Who?"

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September 29, 2005

The Start of Internet Tsunami 2.0 Averted? eBay Shareholders Get the Final Word: "Skype Who?"

[“Uncle! Uncle! I give Up” — I really thought I could make it as the last hold-out in the VC Blogosphere NOT to comment on the Skype-eBay (or is it eBay-Skype?) Deal — Wrong again — cgm]

What the Skype/eBay Deal Says To Me About the State of —

Venture Capital, VCs, eBay, PayPal, Google, Microsoft, Portals, Web 2.0, Bubble 2.0, VoIP, Global Venture Opportunities, Strategic Valuations, The Digerati Elite, Skype Shareholders, eBay Shareholders, and —

… the Ultimate Sanity of the Public Markets …

in the Face of the “Second Coming” of “The Perfect Storm”.

Venture Capitalists

Further proof that the only thing that excites VCs more than Bagging the Rare MOTU is feeding their privately-held MOTU to another much bigger (and publicly traded) MOTU.

Also, another great example of the inherent “two-faced-ness” of the art of venture capital. As any entrepreneur who has ever received venture financing will attest to, VCs are hard-nosed cynical assholes on the buy-side. But once we’ve closed the deal, we transform into psychotic optimists — “Kool-Aid Drinking” blithering idiots (at least publically).

And that makes sense — once we have a stake in the game, it’s in our own self-interest to promote the hell out of our portfolio companies.

On the public side, analysts are separated from the bankers because of obvious promotional synergies which ultimately result in unhappy customers who paid way too much for way too little and who eventually complain in large enough numbers to regulators that something is finally done about it (usually too little too late).

Not so on the private side. VCs are unfettered by any such rules and regulation. VCs are analyst-banker hybrids — true “pump and dump” operators — “beat them up on the buy-side” (and justifiably so) and then “promote the hell out of them on the sell-side” — the target goal being a very public stock-dump into either the public markets or the hands of a “paper wealthy” “sophisticated investor” management team (with little practical M&A experience) who should know better than to buy a load of bullshit that we VCs would NEVER accept on our own buy-side.

And remember, their “independent” M&A “advisors” get huge fees for a YES and zero for a NO — so how objective can they really be about what’s in the best interests of their client company? It’s awfully lonely for management to be the only killjoy to say NO to such a big bash — even though it is they who are left alone to clean up the post-party mess the next day.

If you don’t believe this is how we do it — Check out a pitch book (How often to you get to see a powerpoint presentation worth several billion dollars?) — the eBay PaPal Skype Pitch-book — a nice job doing the mental gymnastics required to rationalise away how this isn’t just another irrationally exuberant Web 1.0 deal — “This is Web 2.0 baby!” — Prepare for the coming Tsunami 2.0

Sure, this is the “fully-vetted” “public” version but, knowing how other deals get done, I can say with “ignorant confidence” that the bulk of the bullshit in that document came from the VC sell-side — not the eBay (errr … rather PayPal) buy-side. (And why not? It’s not everyday you can write a powerpoint presentation worth several billion dollars. Makes sense to go the extra yard to make to the buyer to “look smart” to their boss — Sales 101.)

So why do VCs manufacture such psychotically optimistic forecasts on the sell-side — which we ourselves would never ever buy into? Because, occasionally, you can get away with it. And as every psychologist will say about gamblers — it’s behaviours which are intermittently reinforced with jackpots, which are the hardest to extinguish. This is really the psychological underpinning of what drives a VC, like a gambler, to go for (consciously or unconsciously) the improbable, but still possible, jackpot — or to bag the rare MOTU.

eBay

Most of the blog posts I’ve read on this deal haven’t failed to note the obvious irony that the company that makes it’s business knowing the price of everything, seems to know the value of nothing.

And because you are an auction company you should know better than to fall prey to the “got to win” buy-side momentum psychology of the “top dollar” auction model which often leads to the all-to-common “Morning-After Effect”— “What was I thinking last night when I paid $10k for that stupid (but cool-looking) 18th century bird-feeder?” Truth? You weren’t thinking at all. You were just caught up in winning. You need to rationally pre-set you upper-limit “walk away” price — and then stick to it — which sometimes means ACTUALLY WALKING AWAY.

On another note, it’s much easier to turn PayPal to a high-growth revenue engine than it is to try to squeeze any more revenue growth out of the aging (or “maturing”) online auction money-machine.

Expect more PayPal-centric announcements as eBay’s original business remains a slower-growth, but still huge, cash-cow business unit fueling new acquisitions — The PayPal business unit is clearly in charge of the executive suite at the new eBay.

Google

I suspect the timing of the eBay/Skype deal was set in motion by the introduction of GoogleTalk which somehow “validated” both VoIP and Skype simultaneously (at least in the minds of those who’ve been living under rocks).

Google has, once again, demonstrated to the world their foolish commitment to their unique “Not Invented by Google” complex with their rejection of a Skype acquisition and their introduction instead of their “home-brewed” Google Talk.

Instead Google management continues to defy rational business judgement by continuing to under-leverage the buying power of their inflated stock. I don’t believe I am in the minority when I suggest that any rational executive armed with inflated stock recognises the risk:benefit shifts towards “it’s cheaper to buy than to build.” (For example, this is the financial logic without which the entire medical device industry would collapse.)

Other MOTU Portals

Of course, while it may appear to suck for VCs that their most logical exit isn’t even in the market to buy their wares, that hasn’t stopped the masterful spin-meisters from convincing the “other Portals” that Google will eventually wake up and start buying everything in sight.

So VCs merely change the elevator pitch to one of “Strategically Containing the Imminent Google Threat” —

“Hey Guys, there’s a limited time for you to buy up entrenched incumbents in markets Google still believes it can build instead of buy.”

— e.g., VoIP — hence the Yahoo/eBay/Microsoft … “bidding war” (with Google noticeably absent) which drove up Skype’s valuation stratispherically.

BTW, It’s a beautiful thing being an Arms Dealer — someone is always ready to buy if you paint the “immanent threat” in a compelling way to each side of an imaginary (and self-serving) conflict. (just ask the Bush White House).

The “Other” Bidders

And you know who you are. Don’t let anyone make you second guess your decision TO PASS —

Yes, it IS possible to overpay for a MOTU — even using the Byzantine “non-Euclidean” calculus of Web 2.0 Valuation —

so just be patient and let eBay prove you were right to pass at that price.

US vs Global Opportunities

The fact that the founding entrepreneur of Skype is not only foreign, but is also on the run from US authorities seeking to enforce our archaic protectionist copyright laws, does not portend well for the future US opportunities. Oh, and don’t cry for Niklas Zennstrom’s semi-permanent exile from the US — There are lots of other nice places to live on our planet where a billionaire can invest (or even spend) his money in peace.

The distributed nature of the Skype organisation across multiple non-US countries also doesn’t portend well for the US. Skype merely highlights this already well-established and growing global trend in other nations who are much more effectively exploiting the global markets while the US remains arrogantly xenophobic.

Skype is just the first of many much bigger MOTUs which are directly addressing and taking advantage of favourable structural changes in the global economy. The US may still be the biggest economy but the global economy is always going to be bigger.

N.B., Global markets are no longer just an after-thought — to be executed after a successful US market entry. It is now the US economy that is becoming the after-thought — to be executed after a successful global market entry.

“Strategic” Valuations

For all the sobering talk by VCs about heavily-discounted cash-flow-based valuations (on the buy side, at least), the preferred exit has always been, and always will be, “strategic valuations” (on the sell side) — even if the “strategic” part is a bit flimsily fabricated from pure buzzword-compliant rationales and “squint and imagine” due diligence. [subject for another post]

With this deal, the fantasy juices of both entrepreneurs and venture investors flowing again at full-throttle — feel “the power of the dark-side”. The sucking sound of Web 2.0 grows louder. The forces are aligning. The Gulf waters are warm so there is a high probability of an inexorable build from tropical storm to hurricane status. Memories of recent past are all too short.

Even with the very active, frank, sobering, and healthily discussions of valuation rationales taking place in the VC blogosphere, I am skeptical that such discussion will have much effect on actual investor behaviour. The potential for Internet Tsunami 2.0 remains all too real.

It’s fine for Fred Wilson to caution us all to “drinking responsibly this time” — but drink we all will.

Skype Shareholders

It’s important to remember —

MOTUs don’t necessarily produce Grand-Slam Returns for their investors

Venture investing is not just driven by valuations.

The common metric to compare venture portfolio company performance is IRR (Internal Rate of Return) — not valuation.

What IRRs really measure is how quickly shareholder wealth was generated. This means that venture capitalists must focus on both numerator AND denominator issues. To get a high IRR you need to balance both the size of the valuation (numerator) with the speed you get there (the denominator). For example, funds which invest in medical devices perform well NOT because they generate such high valuations (which are “relatively” fixed by the market) but because they can predictably manage the fairly-linear time-to-market process to keep it relatively short.

IRR focus also explains to entrepreneurs why, no matter how great their company is performing, their venture investors start getting antsy to sell around year three. It’s nothing personal and is no reflection on your performance as a CEO. It just that once the numerator valuation has been established, the only way VCs can increase their IRR further is to make the denominator as small as possible. [a subject for another post]

Anyway, while the valuation established for Skype by eBay may not be the highest valuation ever, from an IRR point of view — for some of the Skype investors, this may be one of the highest performing deals EVER.

It does appear, from the outside, that Skype investors have hit the Trifecta —

1) They built THE MOTU in the VoIP Market

2) They did it quickly — less than 3 years, and

3) They bought low and sold high

I’ll leave it to Bill Burnham to do one of his masterful dissections of the public records (as he did with Google) to glean some insights as to who actually got what and when.

eBay Shareholders

The good news is that a wealth-destroying Bubble 2.0 Tsunami may not hit at all — because it ultimately requires a patsy to take the fall. In Bubble 1.0, the “greatest sucker” at the end of the Ponzi chain was the public. But if the incremental valuation eBay shareholders have given eBay for the Skype acquisition is any indication — it doesn’t look like public will be taking the bait any time soon.

This time, we may have found our designated driver!

Ebaypricechart3

BTW, Take-Home Lesson For The Digerati Elite:

“Never underestimate the public’s ability to resist the sinister machinations of the few.”

— It’s the “Wisdom of Crowds” in action.

Related Links

BTW — In Case You’ve Been Sleeping — The Sacred Cow Dung BUZZ SCORES for “eBay Skype” are pretty darn high for being only two week old —

as of September 28, 2005 —

Google: 7,440,000

Yahoo: 14,600,000

MSN: 103,268

Alta Vista: 14,500,000

Skype-eBay Deal [some of the better stuff “from the din”]

The “Must See It to Believe It” Pitch Book

Acquisition of Skype PowerPoint Presentation

The “Trial-Balloon” Lead up

[BTW, Juno Boyz seemed to be the blog most consistently on top of the situation — so,if you haven’t already, you might what to add them to your RSS reader if you want advanced warning on the next MOTU exit]

SiliconBeat: Tired of the Google Talk rumors? Read this:

Google Launches Personalized News :: AO

Google unveils instant-messaging entry | CNET News.com

Too early to sell Skype :: AO

Junto Boyz - GOOGLETALK... WATCH OUT SKYPE?

PBS | I, Cringely . July 28, 2005 - Skyped

Om Maliks Broadband Blog » Maybe Skype Is Shopping Itself

Junto Boyz - RUPERT MURDOCH BUYING SKYPE?... IF NOT, WHO?

The hype over Skype - Yahoo! News

EBay to Buy Skype?

A VC: eBay and Skype?