Facebook establishing a venture arm to invest in startups
axios.com
axios.com
They clearly have data on web traffic, consumer usage, advertising spend, etc. that other VC firms and investors generally don't have access to.
They can use this to understand entire markets, see who the incumbents are, estimate revenue/users, see who's up-and-coming, etc. Obviously within some margin of error.
I wonder if this is how Facebook identified that Instagram was on the path to success, and knew $1B was a great deal. Meanwhile everyone at the time thought they were crazy for spending that much.
Since startups aren't publicly traded, I don't think insider trading laws apply to trading their securities. FAANG is legally allowed to use their access to information to make better investing decisions than other companies are able to. (IANAL)
It seems like they have a high chance of getting a great ROI. Once you're a big tech company, this is just another way of monetizing the vast troves of data you have.
Is Google Analytics free out of the kindness of their heart? NO. It's free because you can spot up and coming winners.
The same logic applies to why Amazon develops open-source software that makes developing cloud applications easier.
I mean, this wouldn't be insider trading since anyone can do their own legwork to get this information. Insider information would be things that aren't (yet) disclosed to the public, not things that can be ascertained through thorough research.
> Since startups aren't publicly traded, I don't think insider trading laws apply to trading their securities.
Yup. Insider trading laws are designed to prevent the public from being at a disadvantage. Private firms don't need to disclose anything publicly, they can choose their investors, etc...
Can they though? My point is that FAANG companies are uniquely positioned by having access to this data that the public couldn't possibly have access to.
The point is it's not considered insider information.
Having unique data and insights you develop is not a crime - indeed it's what you specifically want. Sourcing and acting on information from inside the company you're not authorized to have is.
People working to build unique skills and data is normal competition and building up a competitive advantage, not 'insider trading'.
Insider trading laws apply to all companies, be them public or private. It is illegal to trade based on undisclosed material information the other party doesn't have - the law doesn't care whether the stock you're buying is private or on an exchange.
Here's an example: suppose you have a startup that's been going a long time, and some employees want to sell their stock on a secondary market. To avoid this, the startup offers to buy back employee stock, using the most recent valuation of the company to price it. However, the CEO knows that since that valuation was carried out the company is doing much better than expected - and the real value of the stock is much higher. This isn't disclosed to their employees.
This is classic insider trading, and the SEC has taken enforcement action against private companies for doing this sort of thing.
FWIW, I don't think Facebook actually has a large amount of material data in this case - a lot of what they possess (number of active users, platform engagement, etc) is already going to be known by the other party.
Insider trading laws are designed to criminalize misuse of confidential information, they're not designed to create a fair playing field.
> FWIW, I don't think Facebook actually has a large amount of material data in this scenario - a lot of what they possess (number of active users, platform engagement, etc) is already going to be known by the other party.
Facebook knows how much money widget-makers are spending to promote widget product pages on Amazon.
Insider trading is an individual crime.
https://www.investor.gov/introduction-investing/investing-ba...
Like the people who track flights to speculate on M&A, or use satellite and aerial imagery to look at parking lots. Gathering information isn't a crime, in fact gathering and acting on that information is explicitly what you want at an aggregate level. What you don't want is entities stealing or misappropriating information that doesn't belong to them. I think all the mentioned data categories are basically Fb's line of business, so if it's usable it seems like its pretty fair game.
This is very interesting, got any source or article? Thanks
edit: found this https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics.
Many cargo-culting orgs can use this as an example to learn "corelation != causation".
1. Buy shares of X; or bet a high-stake deal with X's board to up the stock price by N percent within a period T. 2. Run some offers/programs - which are intended at the theater - not real revenue. Instead of usual 200 cars a day, store might see 400 a day, sales numbers and volume remaining unchanged 3. Objective achieved; use propaganda marketing to sell the idea to others 4. This ups the stock price anyway - cuz data! 5. Collect bounty from X's board for making good on promise 6. Profit!
The theater might not be as simple as what's seen in this example, but this is exactly what startups in one way or other call "hustle" - and possibly the art of faking it till you make it.
Is that different from what Facebook can do for their funded startups?
This is unrelated to insider trading.
I think people misunderstand how great and powerful index funds are for retail investors. Moreover, I people massively overhype this alternative data thing. Using alternative data to generate alpha is mindbogglingly difficult. If you just buy from a 3rd party firm, most likely all the alpha has been sucked up. So you need to source it yourself, clean it, analyze it, etc etc. It's really fucking difficult, and very expensive.
Trust me, you're not missing out. Your index fund is probably beating the returns of many firms with billions of dollars in capital and dozens of research analysts.
Peter Lynch famously researched companies by watching to see where his family spent pocket money. I recall reading analyses of trading performance by members of Congress -- they generally did about the same as everyone else except in companies associated with their districts.
Anecdotally, it is easier to double small dollars than large dollars. Berkshire Hathaway's growth has eased for ~2 major reasons: 1) Prices have been high for the last decade+, frustrating the core algorithm of value-investing. 2) It is very difficult to put huge amounts of money to work.
The alternative to a world with asymmetric information (and probably impossible to implement at that) is one with zero privacy, where all information is open to everyone always. I don't think we want to live in that world.
Well, the people working for Billionaires should be able to figure that out right?
A hedge fund, investing team, whatever you want to call it, has a limited capacity. They need to beat market returns on pool of money so large that spending 2 months to find a 300% return on something with a max investment of $75k is absolutely an incorrect use of time.
Read about opportunity cost to understand why there are many things “worth it” to people without access to something better.
Just by investing in an index fund, retail investors are getting a pretty great investment, essentially freeloading off of all the hard work the active funds are doing.
The problem with the idea, and the eventual reason it didn't work, was that though it was largest VC fund ever, 100bn isn't actually that much in the scheme of things. There's so much money sloshing around the system looking for the place where it will be treated best. So, in essence, what Softbank ended up doing was bidding up the price of the entire industry, creating massive inflation. If Softbank gives a shi-tton of money , and another VC gives a shit-ton to a competitor, they've both just wasted a shit-ton of money.
I actually don't think Masa is the compete idiotic everyone makes him out to be. He has a very high tolerance for risk, but that doesn't make him irrational. The Vision Fund might not be doing that well, but Softbank's stock is looking pretty good at the moment.
Simply outlawing extreme ownership of capital, via high taxes is a way to avoid privacy issues.
Unfortunately, we don’t seem keen to enable people to live their lives. We seem keen on making people ogle these giant initiatives and enterprises.
I don’t believe that’s natural. Growing up “off the grid” until the 90s, I’m still aghast at how sycophantic people act towards Amazon or a Gates like rich person.
Then I started seeing how forced social interaction is for upper middle class especially.
I should point out my family wasn’t poor. On the contrary, my parents just wanted to raise us outside the mainstream.
Don’t get me wrong I, love the gaudy culture. What I’m talking out against is demands to organize it just so. To normalize to the point of absurdity human agency to propping up of finance markets and banal old men’s gambling fetish, lavishing praise and riches on men as “owners” of the things we build collectively at scale is absurd to me.
There’s too much evidence out there suggesting success like that is luck not skill, and continued success like that is due to corruption of human social goals, not a lifetime of extremely good luck.
Continuing to play that social ladder game is hilariously morbid motivation to me.
Why not just have these men take their genitals out and prove who can take more whacks to the sack. That’s really what all this stuff feels like to me.
Lookit Bezos dashing back in to save Amazon. The idea is the place is winning!! Oops reality gets in the way and they stumbled with logistics hard.
Thanks to lavishing Amazon with praise in the form of billions, they’ll power on through it no problem. Tens of thousands of employees spared!
Meanwhile, thanks to the tax system literally millions of people are fucked.
Also, it's generally the case that there are more opportunities to turn $1 into $2 than to turn $1B into $2B.
I believe this is not true for multiple reasons.
First - regulatory capture. Once a sector of economy generates a handful of billionaires, legal / regulatory barriers go up which make it much harder for startups to compete.
Second - competitive barriers. Google can acquire all the search channels (eg. paying Apple and Mozilla billions of $$$ to be the default search engine on iOS / Firefox).
Third - price undercutting by subsidizing a subset of the incumbent's product portfolio by profits from other parts of the business. See: Amazon vs diapers.com.
So yes, the game is definitely rigged in favor of billionaires.
This entire thread is getting so tangled up in what's presently legal and supportable under our exact, current implementation of capitalism that all of our brains have fallen out.
We don't need Facebook to have this much power! Why should they be allowed to keep this much capital untaxed? Why should they be allowed to own and operate Whatsapp, Instagram, Spotify, and Oculus, all as one huge entity?
Now, compare that to a retail store working with the store across the street to fix prices - very illegal, unless the same company owns both stores, in which case it's just called "price discrimination" or "good business". That type of instance - where the behavior would be illegal if it were coordinated between competing firms - is where antitrust concerns really come into play.
Of course, it gets murkier (and becomes a very obvious anti-trust issue) when it comes to acquisitions of competing firms like Instagram. I wouldn't be surprised at all if Facebook's goal here is to acquire stakes in potential competitors while they're still small enough to fly under antitrust authorities' radar.
It isn't insider trading for Facebook to use all the information it has about web trends to buy companies. However, if a Facebook employee used the non-public information Facebook has to go and buy stock in those same companies, that would be insider trading and be illegal.
Most employees don't own a significant enough stake in their company to benefit from trades made by the company acting on company data. But executives do, and they personally gain from trading on behalf of the company. Trades that would be illegal for any other employee to make.
I think what people mean is this isn't covered under the legal definitino of insider trading, but should be.
Expect Google Ventures instead. If you're a Facebook / Google / Microsoft exec it is extremely lucrative to get shares in a company (sometimes as an advisor, sometimes as an investor) then acquire it through the giant company you work for. A lot of Microsoft execs were newly minted millionaires with the LinkedIn acquisition; a lot of Google execs had the same with Nest. Dell, HP, Oracle, VMWare... execs do this all the time.
Lemme give you a broader perspective on, "Company does thing with its money with complex economics and risks outside of its primary source of revenue." These giant companies all have charitable foundations. If you're a main line employee, you want to donate something, your company will match it, it uses an outside contractor to vet the charity, it doesn't do any of that stuff for YOUR main line employee charitable contribution.
You're an exec, you get 10-100x the donation matching benefit as the main line employee, and for some reason it's done through the foundation. Which goes to your family's charity. Run by your wife and kids.
A lot of this stuff boils down to, "executive compensation plans." It's everywhere! The Overstock CEO's ICO scheme was insane. Normal people just buy back stock you know? But it's gotta be creative, take people by surprise.
Some exec had to be motivated to do this and they're going to be motivated by their own personal money. No different than a VC. It doesn't mean that just because it's Facebook and not some VC firm they'll do any better. My expectation is they'll do a lot worse in both economic and accounting terms. The scheme will depend too much on Facebook being the acquirer in the long term so prices will be way inflated and insiders will be too incentivized to buy trash.
Facebook doesn't need the money. It's looking for you to do the R&D.
/s
Most of the times, acquirehire by these top companies is probably better than being a regular senior FAANG engineers.
Not sure why that is bad. It's probably not the top of the world (e.g. billionaires). But it's definitely a great situation to be in.
But let's not exaggerate. It's not bad for whatsapp founders. Better than 99.9999999999% of the population (maybe add a couple 9s at the end).
For me, I don't even wanna make a single donation because I need to save every dollar. I can't join any protest or get involved in any politics because I'm already busy enough with my own life.
Whatsapp founders now have 6,000,000,000 USD to power the change they want to see happen. Ok, maybe 5B, as they might want to keep 1B for living cost.
But the "incredible journey" startups, the ones built primarily to exit, are just bait&switch scams for their users. The users are enticed to enter a relationship with the startup, to build a part of their lives or their work around that startup, only for said startup to suddenly get bought out and the product/service cancelled, destroyed, or altered into a much worse and exploitative form.
I've personally seen this dance enough times, and I now refuse to consider depending on a service if I even suspect the founders are in for an exit, and not long-term business growth. I'll chose F(L)OSS alternative first, a stable company second, and a startup only if I can't afford to make the solution I need myself.
Public companies have a fiduciary duty to maximize profits and investor returns.
They're simply using the data that's available to them to make great investment decisions to make more money.
It seems like a conflict of interest to invest in a company and then turn around and compete with them. If the end plan is to take their ideas once they start becoming successful, you don't need to give them money in the first place. (Case study: Snapchat)
No, they don't. There are many articles on the subject, here is one:
https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
Facebook is a Delaware company.
It's worth clarifying that only those to whom fiduciary duties are owed can ever sue for damages resulting from their breach. In other words, shareholders. That's how the threat gets operationalized—by a shareholder or class of shareholders suing the corporation for failing to maximize shareholder value through a fiduciary breach.
Anyways, the point I really wanted to make is that shareholder value maximization really is meaningfully encoded in American corporate law. If you meant to suggest that reality is less black-and-white than that, then I hope the foregoing ramble confirms that you are correct!
[1] https://www.businessroundtable.org/business-roundtable-redef...
[2] https://corpgov.law.harvard.edu/2020/05/16/purpose-with-mean...
[3] https://corpgov.law.harvard.edu/2020/05/27/on-the-purpose-of...
[4] https://www.youtube.com/watch?v=ET8v47XPcUY&feature=youtu.be
Did it end up just being lip service, or are there lasting changes in industry or individual companies that we can point to which show prioritization of stakeholder value over simple shareholder value?
I read the Harvard Law corporate governance blog pretty regularly, and a staggering percentage of recent scholarship on there has been about corporate purpose, stakeholder capitalism, and ESG. ESG and stakeholder theory aren't exactly the same thing, but here's a good overview of how ESG might impact M&A and governance moving forward [2].
[1] https://corpgov.law.harvard.edu/2020/06/19/making-corporate-... [2] https://corpgov.law.harvard.edu/2020/02/20/the-coming-impact...
The actual legal standard is much closer to “don’t rip off the company” than “you must grab onto every penny anywhere near your grasp.”
This thread has a bunch of references to court cases: https://news.ycombinator.com/item?id=23393674
The common theme is that the directors of a company have incredible latitude to run it as they please, and courts won’t second-guess business decisions as long as they are vaguely plausible.
Only way it could work is if they share their wealth in other areas / people which must be invested in and will not get enough capital if not for them. Ex: Google Venture - Solar City, Tesla.
But founders have to be fiercely independent and the companies must be independent. Like Elon Musk as founder and Larry / Sergey as investors.
Facebook DNA doesn’t allow that, they are predatory in nature. Trying to diversify by external forces since internal options simply failed. Founders of the companies they acquired, left with very unpleasant experience.
Take their money, if you are ready to be as independent as Elon Musk were and ready to say NO to Zuck when and if you have to.
Oculus Quest
You know that someone else is going to get that funding, but it's not going to be you. It's more likely to help your competitor than it is to help you (the reader of the article). This is bad news for the typical reader of this article.
You can send free money straight to my bank account at regular intervals and I could write all about my incredible journey; an inspiring story of struggle against all odds.
...The odds of not being able to afford a yacht within 5 years.
You wouldn’t be able to bootstrap Uber or AirBNB, because the markets they’re selling into are huge. However, there is an abundance of <10Bn-sized markets/industries out there that a VC wouldn’t think to invest in, where bootstrapped companies with a tech focus can grow and take over.
Because we're run super lean, we've been able to hire more and spend more on marketing during these tough times while businesses are downsizing or putting a halt on hiring/marketing dollars.
If the space you're getting into requires lots of capital, fundraising is unavoidable, but if you're thinking of even bootstrapping a company, it better be one that won't require a lot of capital (SaaS), and you need to run it lean.
This is an economy of scale. It's caused by your competitors' capitalization, and it may be unsustainable since it's with respect to customer-acquisition versus production.
If your competitors' unit economics work, they're strategically leveraging scale using capital. Not the other way. (If they don't, go into cockroach mode or sell to them.)
Just trying to understand the context here: your competitors apply/get-approved before you do, or is it that you don't want to take the funding? (or something else going on).
On the other hand, FB does have an incentive. Sure, they lose that investment, but they gain their own internal company that they own 100% of which has eaten your marketshare.
Has Facebook done anything with their patents? I know they had an early spat with Yahoo and got access to a bunch to help with that, and have since put more effort into building a portfolio, but I don't recall seeing anything in the way of litigation. I know there's been issues with clauses in licenses, though.
[1] I've read both patents, I'm the only inventor, and I can't tell the difference between the two.
"You have one patent family with three patents in it. The lowest number is the parent, it was first to grant. Before it was granted a continuation was filed - they wanted to claim some shit that you disclosed in the parent but didn't claim, and it got granted. Before that one got granted a second continuation was filed to claim some shit that was disclosed in the first continuation. Sometimes that comes from realizing something else in the patent specification was also really important and deserves protection, or something comes up in prosecution and the easiest way to get around a rejection is to file a continuation. All the claims in the patent family are unique."
> they wanted to claim some shit that you disclosed in the parent but didn't claim, and it got granted
Also, thanks to your friend!
This is the kind of money I wouldn't say no except for a very good reason.
You can mark assets on a spreadsheet, plot profits on a graph, and the result is simply a representation of the abstract concept: finances.
When you factor intent, then money becomes objective. When you factor the ethics of the entity using financial influence, then the result is objective because it affects the real world.
I don't know how else to explain this, and maybe I can't convince you, but real people are affected by these choices.
Profits are never a meaningful metric precisely because they can't be divorced from ethics.
Just think twice about turning down a deal from them, no matter how bad it seems, because they probably know a lot more about your market and their alternatives to your services than you do. And the strategy in monopolistic situations like this is join us or suffer.
Surely this how Alphabet has grown so big.
That’s what I thought they were doing with Oculus originally. Same with WhatsApp, then they started to commingle the branding.
One of William Bernstein's Efficient Frontier articles summarises some research on this:
> In the December issue [of Journal of Finance] Jarred Harford found that cash-rich firms destroyed 7 cents of corporate value for every dollar of cash reserves held. How does this happen? Let’s take two firms, both of which are considering a project or acquisition of marginal value. The first firm is cash-poor, and must obtain the capital from a bank, or a stock or bond issuance. This necessitates scrutiny of the project from the outside. The second firm is cash-rich, and thus requires no outside scrutiny—they can simply cut a check. Clearly, the cash-rich company is much more likely to make this potentially unprofitable investment.
> Rajan, Servaes, and Zingales look at the performance of large conglomerates, and find that investment capital tends to flow most readily to its least productive divisions. The more highly diversified the company (i.e., the less related its component businesses) the more dramatic the effect. What is most interesting is that Harford's research found that cash-rich companies are more likely to make diversifying acquisitions—in other words, to turn them into the same companies that this paper shows are the least efficient.
> [...] the February JoF contains an absolute gem from La Porta, Lopez-de-Silanes, Shleifer, and Vishny on dividend policy around the globe. Their primary finding is that in so-called "civil law" countries, such as most of Latin America, Scandinavia, and southern Europe, where investor protection is the weakest, dividend payouts are low. In so-called "common law" countries—basically the world’s English-speaking nations, where investor protection is excellent—payouts are high. Which gets back to Graham’s basic premise; investors prefer dividends and take them whenever the law and culture allow. The authors reinforce the points made by Graham and the other pieces; "failure to disgorge cash leads to its diversion or waste, which is detrimental to outside shareholders’ interest."
> But what is most remarkable about this piece is its tone, which is almost Menckenesque in its description of modern corporate ethics. They describe a Hobbesian world in the kind of plain English rarely seen in academic finance; "Firms appear to pay out cash to investors because the opportunity to steal or misinvest it are in part limited by law, and because minority shareholders have enough power to extract it."
Sadly, I doubt there is any company that can take them on.
Cartel doesn't apply. Facebook, Google, Apple coming up with an agreement to keep workers salaries lower is.
Gangster.. that term applies.
"... one billion dollars in cash and stock."
I don't mean this impolitely - the fact it wasn't clearly obvious as a joke means I should have tried harder.
Search: Onavo, Cambridge Analytica, Facebook EU fines, $5BN FTC fine.
And that's just the start.
Their job now is to keep Google from getting an antitrust lawsuit/similar sentiment etc.
Your accusation even conflicts with the basic definition of malware:
> Malware is any software intentionally designed to cause damage to a computer, server, client, or computer network.
I know what you're getting at, but why chose such a loaded term that doesn't fit?
> A wide variety of types of malware exist, including computer viruses, worms, Trojan horses, ransomware, spyware, adware, rogue software, and scareware.
It specifically mentions spyware, so let's take a look at that definition:
"Spyware is a type of malware that aims to gather information about a person or organization, without their knowledge, and send such information to hack another entity without the consumer's consent."
The very source you pasted this definition from (Wikipedia) goes on to list spyware as a type of malware, and the page for spyware lists Onavo as an example.