Opinion

The Great Debate

from Breakingviews:

Solving the second-class stock dilemma

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Over dinner in San Francisco recently, an activist investor and an internet entrepreneur got into a heated discussion. The two men, with a gap of about two decades between them, were debating the practice of many young, growth businesses in the technology world – though it happens elsewhere too – to issue multiple classes of stock, generally one for hoi polloi investors in public offerings and another for founders and other insiders with super-charged voting powers.

This, the investor felt, violates a tenet of democratic capitalism: “one share, one vote.” It treats public shareholders of Silicon Valley’s hottest properties as second-class citizens. Not so, argued the information industrialist, now working in his second mega-startup. Visionaries need to build their businesses without the distraction of having to please uppity investors every quarter. Giving them control of their boards of directors and key corporate decisions is vital.

The protagonists sort of agreed to disagree. Investors don’t have to buy shares if they don’t like the voting arrangements – though some might say that companies often don’t have to seek money from public investors, either.

But surely there is a way to square this circle. What if a mechanism could be created that would allow founders like Facebook’s Mark Zuckerberg or GoPro’s Nicholas Woodman to execute their plans for global domination, leavened with promises to make the world more awesome, without pesky shareholder interference – but also preserving in the long term the one share, one vote concept?

from Breakingviews:

Solving the second-class stock dilemma

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Over dinner in San Francisco recently, an activist investor and an internet entrepreneur got into a heated discussion. The two men, with a gap of about two decades between them, were debating the practice of many young, growth businesses in the technology world – though it happens elsewhere too – to issue multiple classes of stock, generally one for hoi polloi investors in public offerings and another for founders and other insiders with super-charged voting powers.

This, the investor felt, violates a tenet of democratic capitalism: “one share, one vote.” It treats public shareholders of Silicon Valley’s hottest properties as second-class citizens. Not so, argued the information industrialist, now working in his second mega-startup. Visionaries need to build their businesses without the distraction of having to please uppity investors every quarter. Giving them control of their boards of directors and key corporate decisions is vital.

To boost entrepreneurship, France tries to change its attitude toward failure

When entrepreneur-turned-venture capitalist Mark Bivens first moved to Paris in 2001, he regularly introduced himself as someone who had started three software companies in the U.S., two of which had flopped. That’s a badge of honor in Silicon Valley, where failure is viewed as a rite of passage. Not in France. One day, a French colleague took Bivens aside and gave him some friendly advice: if you want to reassure people, stop talking about the companies that didn’t work out. “I soon realized that failure carries a stigma,” Bivens says.

The French word “échec” is indeed loaded with negative connotations. It starts at school, where pupils who get bad marks can be quickly branded “in a situation of failure” early in their education, and often drop out before graduating. In the business world, failure has long been fatal: bankruptcy in France is a lengthy and complicated process, and can scar entrepreneurs for life. And in addition to the logistical hurdles of starting a new business after bankruptcy, second-chance entrepreneurs must contend with the social stigma associated with failure, which makes raising funds or even opening a new bank account difficult.

But at a time when France, and Europe more broadly, need a burst of entrepreneurial dynamism to jump-start their economies, an intriguing shift in mentality is starting to take place. It’s partly coming from the top. The French government is now wondering aloud whether this deeply ingrained aversion to failure is actually holding back the nation’s entrepreneurs, preventing them from attaining the sort of scale and greatness that startups in Silicon Valley have been able to achieve. The private sector, led by people with firsthand experience of failure, is also playing a role, by advocating changes that would lessen or remove the stigma and help entrepreneurs get back up on their feet.

Five steps the SEC can take to make crowdfunding work

A few weeks ago, President Obama signed the JOBS Act into law, making equity-based crowdfunding legal for businesses that want to raise capital in smaller amounts than traditional venture capitalists or accredited investors supply. Depending on who you ask, crowdfunding is either going to democratize access to capital and serve as a boon to small businesses across America, or it will be rife with con artists intent on bilking seniors out of their hard-earned savings.

Let’s hope the former is true. But concerns about fraud must be addressed so the emerging market can thrive without being spoiled by fraud and scams.

The Securities and Exchange Commission is currently writing rules that will govern crowdfunding and, it’s hoped, guarantee its success. (Disclosure: I worked as a securities lawyer at the SEC from 1986 to 1990.) To properly regulate crowdfunding without suffocating it at inception, the regulators at the SEC must strike the right balance between guarding against fraud and allowing the marketplace to work its will.

from MediaFile:

Instagram’s Facebook filter

The startup had millions of users, but, from the beginning, just one customer.

The predominant way of interpreting Facebook’s billion-dollar purchase of Instagram, in light of the social-networking giant's forthcoming IPO, is that Mark Zuckerberg had to pick up the photo-sharing app to boost his company’s mobile engagement. That would allow him to guard the mobile flank against incursions from Google, Twitter, and whatever other social-media tools might next arise.

That may be true – and it may even be the way Zuck thought about the deal when he swallowed hard and ponied up the purchase price. But that way of analyzing Facebook’s pickup, and the pickup of dozens of other startups, not just by Facebook but by Google, Twitter, LinkedIn and others, is probably not telling the whole story. Here’s a different theory, one that better describes the tech world that we, the users of the Internet, now inhabit: Instagram may have had millions of us as its users, but it was really built for just one customer: Facebook.

Silicon Valley, for too long, has confused the issue of what it means to be a user of a website, service or app, and what it means to be a customer of the app. Intuitively, you’d think they would be one and the same: The person using the app is the person consuming the app. But increasingly, apps are being made to grab the attention of the hegemonic companies in tech. Whatever it takes to get bought.

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