Alibaba.com IPO is good for Yahoo

Alibaba.com is set to raise $1.5B in its IPO by selling 17% of the company - that's an $8.8B market cap. Not quite as good as Facebook's $15B, but still pretty good. Yahoo (YHOO) owns 39% of Alibaba Group, the parent of Alibaba.com. So Yahoo's sake in Alibaba is worth at least $8.8B * 83% (Alibaba Group's ownership of Alibaba.com) * 39% (Yahoo's ownership of Alibaba Group)= $2.8B. The IPO is WAY oversubscribed, so the stock is likely to go up initially. Let's call Yahoo's stake at least $4B 2 weeks after the IPO.

Yahoo is carrying this on their books at $1.4B. (A piece of their 10Q is copied below). So they have a net gain in their assets of $2.6B - which is $2 for each of their 1.3B shares outstanding. Of course, unless they sell their stake there's no telling what the final value is - Alibaba Group could waste all the money and Yahoo could end up with nothing, or, by anoter account, they could end up with $13-$15 / share.

At any rate, my investment strategy won't let me buy Yahoo anyway, but if it did, I'd do some serious analysis based on this IPO. It might already be priced in or maybe Yahoo is overvalued, but if not, it's worth checking out.

The 10Q says:

Note 4

INVESTMENTS IN EQUITY INTERESTS

Equity Investment in Alibaba. On October 23, 2005, the Company acquired approximately 46 percent of the outstanding common stock of Alibaba, which represented approximately 40 percent on a fully diluted basis, in exchange for $1.0 billion in cash, the contribution of the Company’s China based businesses, including 3721 Network Software Company Limited (“Yahoo! China”) and direct transaction costs of $8 million. Pursuant to the terms of a shareholder agreement, the Company has an approximate 35 percent voting interest in Alibaba, with the remainder of its voting rights subject to a voting agreement with Alibaba management. Other investors in Alibaba include SOFTBANK Corp. (“SOFTBANK”). The investment in Alibaba is being accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of Investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Alibaba and any related amortization expense, one quarter in arrears, within earnings in equity interests on the condensed consolidated statements of income.

Through this transaction, the Company has combined its leading search capabilities with Alibaba’s leading online marketplace and online payment system and Alibaba’s strong local presence, expertise and vision in the China market. These factors contributed to a purchase price in excess of the Company’s share of the fair value of Alibaba’s net tangible and intangible assets acquired resulting in goodwill.

The purchase price was based on acquiring a 40 percent equity interest in Alibaba on a fully diluted basis. As of June 30, 2007, the Company’s ownership interest in Alibaba was 44 percent, an approximate 2 percent decrease from the initial investment, primarily as a result of the conversion of Alibaba’s outstanding convertible debt in April 2006. The Company’s ownership interest in Alibaba may now be further diluted to 39 percent upon exercise of Alibaba’s employee stock options. The Company will recognize non-cash gains if and when such further dilution to its ownership interest in Alibaba occurs, as such reduction in interest results in an incremental sale of Yahoo! China. In allocating the excess of the carrying value of its investment in Alibaba over its proportionate share of the net assets of Alibaba, the Company allocated a portion of the excess to goodwill to account for the estimated reductions in the carrying value of the investment in Alibaba that may occur as the Company’s equity interest is diluted to 40 percent.

As of June 30, 2007, the difference between the Company’s carrying value of its investment in Alibaba and its proportionate share of the net assets of Alibaba is summarized as follows (in thousands):

Carrying value of investment in Alibaba $ 1,414,801

[...]

I need to learn how to put tables in Blogger.

Technorati: Yahoo, investing, YHOO, Alibaba

OMTR buys VSCN - a great deal!

Omniture (OMTR), the gorilla in online enterprise analytics and the related products and services, just bought Visual Sciences (VSCN, formerly Websidestory) - depending on who you ask, they're either #2 or #3 in the space (with WebTrends being the other player in the top 3). Visual Scences has a current reputation for wandering a bit - having done a bunch of acquisitions of its own and then failing to integrate them very well.

Omniture has been on a buying binge (Instadia, Offermatica, Touch Clarity, and now Visual Sciences). A lot of those paths end badly, but their stock has been going straight up the whole time. They also just hired a new HR executive specifically to help integrate acquisitions. They've realized they have a valuable currency, and they seem to be systematically using it to extend their reach into their customers and now, defend their flanks against encroachment from other companies. Visual Sciences wasn't executing great (they had a revenue multiple of 4.77 while Omnitures was 17.30 before the deal), but who cares? At these multiples, Omniture's market cap increases by $1.2B for paying $394M for Visual Sciences (the multiple will compress some, but still a several hundred million dollar market cap net gain for this deal), the deal is immediately accretive to their profits, and they've eliminated a competitor who puts price pressure on their individual deals. Omniture can keep some small pieces of the Visual Sciences platform that are interesting, cut a bunch of people, and migrate all of the customers to the combined entity over time. The migration will be painful for customers, and some will flee to WebTrends and Coremetrics, but their options for enerprise-class analytics are pretty limited.

If not for my investing rules, I'd look into buying OMTR now. A great deal that helps them lock up the space, is immediately accretive, reduces price pressure in their sales process, and has a huge net impact on their market cap given their multiple. They don't even have to integrate Visual Sciences at all if they don't want to - they could just sunset it entirely, and it would still be a good deal. Their major risk now is if someone bigger picks up WebTrends and/or Coremetrics and launches a price war in enterprise analytics. Maybe OMTR should buy both of those also - the multiple math might still work, although neither of those companies is public, so it's hard to say. If they keep rolling up the space, they'll also add a bunch of zeroes to the rumors of their own acquisition by Microsoft (MSFT) or Google (GOOG).

Technorati: Visual Sciences, Omniture, Webtrends, Coremetrics, investing, web analytics

Proposed syllabus

I used to think I wanted to be a professor, but then I learned that meant writing a lot of papers and thinking about esoteric academic things - neither of those activities would work for me. I am excited, though, that I might get to teach a class at University of Chicago Law School this spring. It will be a "quasi-law" class that focuses on the business side of entrepreneurship, aimed at law students who are interested in starting companies or just in understanding the process better. The proposed syllabus is below. If the class works out, I'll post all the materials online and it should lead to some good discussion.

The course will focus on the non-legal tactical details of entrepreneurial endeavors. The legal specifics of corporate formation, tax, contracts, etc, are well covered by a variety of other courses at the Law School. Students who are interested in either starting companies or working with startup founders as their legal counsel will solidify their foundations in this course. There will be no textbook – course materials will include Powerpoint slides, readings from various entrepreneur and venture capital blogs, sample business plans, and other sources. Grades will be based on a 30-60 minute oral business plan presentation with Q&A or on a 3-hour in class written exam at the student’s option.

Section I – Forming a business

1. The business plan
a. Executive summary
b. Team
c. Marketing
d. Sales
e. Technology (if relevant)
f. Competitors
g. Financials
2. The founding team
3. The financing strategy
4. Should you or shouldn’t you?

Section II – Running a business

1. Hiring
2. Firing
3. Compensation
4. Sales
5. Strategy
6. Board meetings
7. Various documentation
a. NDAs
b. PII agreements
c. Stock agreements
8. Working as the legal counsel for a startup (GUEST LECTURER)

Section III – Exiting a business (if there’s time)

1. Acquisition process
2. IPO (GUEST LECTURER)
3. Should you or shouldn’t you?
4. Various documentation

Technorati: University of Chicago, law school

Ten financings later...

Leo Chang and I had a big weekend - we closed our 10th financing together (plus two acquisitions). (Flyswat had several seed financings, some subordinated debt financings, and a Series A round, and Clickshift had two Series A closings.) Colin McKee, another MIT buddy, is a cofounder of this one as well.

MIT definitely undersold the peer network when I was deciding to go there. Business schools focus almost exclusively on how great your network will be after attending. MIT didn't sell it at all, but that network has been incredibly rewarding.

Slides from the El Dorado Ventures Search Marketing Panel

I've posted most of the slides from the El Dorado Ventures search marketing panel at the links below, with a few highlights inline.

The complete presentations:
My intro.
Chad Baldwin's from Coremetrics.
Ellen Siminoff's from Efficient Frontier.

Technorati: search marketing, El Dorado Ventures

Technical analysis doesnt work

Doug Reed, the CTO and Founder of Cake Financial, recently posted the question in his network: Does technical analysis really work? It doesn't, at least as applied by home traders because:

1. Technical analysis assumes that past prices can sometimes predict future prices. But the prediction is made by LOOKING AT A CHART. The market certainly has a few irrational people that lead to some small, temporary inefficiencies in price. But there are also gigantic funds using automated trading to trade out exactly these inefficiencies. There's no way that looking at a chart can find inefficiencies as effectively as a bunch of statisticians with a Cray.

2. The day to day fluctuations in prices are just noise. The only sustainable up or down trends are from fundamental economics - companies that make more money over time are worth more over time than companies that don't.

3. Technicians who have been successful using their method are no proof of the method's success. If you traded Google (GOOG) over the last few years and are holding it now, you made money regardless of why you traded it - whether because of fundamental analysis or technical analysis or astrology.

There are two flaws with looking at successful technicians as proof of the methods: (1) there's a major survivorship bias. People who have lost money for long periods using technical analysis no longer use it. So you don't see the losers of the technical analysis game because they've exited. You'd need to include them for the data to be worthwhile, and (2) correlation does not equal causality. The statement "technical analysis doesn't work" is not the same as "you will always lose money using technical analysis". If saying technical analysis didn't work were the same as saying it always lost money, the answer would be easy - just do the opporsite and always make money. You may make money using it and you may lose money, but the technical analysis won't be the cause of it. Lots of people have systems for roulette, even though there's no mathematical way to gain an advantage at a fair wheel. Some of them make money anyway. That doesn't mean their system works, just that they were in the right place at the right time.

4. Any strategy with frequent trading is going to lose so much to the friction of taxes and fees that it will be especially difficult for it to outperform substantially.

Thanks to Nassim Taleb in Fooled by Randomness for some of the examples.

(As an aside, I still really like Cake, even more after meeting the team right before my vacation. But please, PLEASE make it easier for the investing discussion to carry on in the existing online communities - blogs, Facebook, etc. There's no reason I'd want to post a long response to a question in the Cake walled garden and then repost elsewhere... A simple widget that lets me ping users in my network with financial content I find interesting combined with a mechanism to send my questions directly to the network (instead of posting them) would make the discussions much more vibrant.)

Technorati: technical analysis, investing, cake financial

El Dorado Ventures Search Marketing Recap

Yesterday, I hosted a panel for El Dorado Ventures on trends in search marketing. We had Ellen Siminoff (CEO of Efficient Frontier), Maura Lewis (Director, Measurement Planning & Analytics for Grey SF), and Chad Baldwin (Senior Product Manager for marketing optimization at Coremetrics - thanks to Chad for the pinch hit for John Squire, the SVP and GM of search at Coremetrics who had a last minute conflict). We should have recorded it and posted a podcast and some photos today, but I didn't think that far ahead. I'll be a better host next time.

A few themes came up repeatedly:

1. You must use data to buy search (or any marketing) effectively. Just having the data isn't enough, you must actually use it. There are no hard and fast rules about exactly what to buy to get the best return - if there were, everyone would buy that, and the ROI would get bid down quickly.

2. Walk before you run. Ad dollars are flowing online quickly and search is capturing almost half of the influx. So search budgets are still going way up. As you start out, though, or start to increase, do so slowly. Expect to make some upfront investment in learning before spending the big bucks.

3. Do not silo search. Search is one component of a healthy marketing mix. All of the components work together to achieve marketing effectiveness. When you buy and measure, make sure to do it across all channels.

4. Attribution is a big area of research for most of the companies that do search. Should you attribute "credit" for a transaction to the first click, the last click, all clicks? There are no good rules yet, but every panelist suggested you should at least know all of the clicks that precede an action - regardless of which one you currently credit. Some data presented showed that almost half of search budgets can get redirected to different words just by changing the attribution rule.

It was an interesting panel - thanks again to the panelists, and kudos to El Dorado for arranging these meetings to help add value to their portfolio. Many venture firms don't do stuff like that.

Technorati: El Dorado Ventures, search marketing, GreySF, Coremetrics, Efficient Frontier

Arrived in Sedona

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Should you be looking for a job? A reverse Turing test

The Turing test of artificial intelligence essentially says that a computer can be described as "intelligent" if it can fool a human into mistaking it for another human. Nassim Taleb, in Fooled by Randomness, has an interesting reverse test: "A human can be said to be unintelligent if we can replicate his speech by a computer, which we know is unintelligent, and fool a human into believing it was written by a human"

I randomly constructed the sentence below in JavaScript from about 100 business-sounding words. If it sounds like someone you report to, you might want to start looking for work...



Hit F5 for a new sentence.

(Thanks to the BS generator for many of the words.)

Technorati: Fooled by Randomness, Nassim Taleb, Turing, Dilbert

Fooled by Randomness

I started reading "Fooled by Randomness" by Nassim Taleb yesterday. It is awesome so far. It should be required reading for anyone who ever reads any other business books. (It's also highly relevant to my new venture and very entertaining.)

Favorite quotes so far (my thoughts in parentheses):

- It is a mistake to use, as journalists and some economists (and many businesspeople) do, statistics without logic, but the reverse does not hold: It is not a mistake to use logic without statistics.

- The quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail. (the point being a result can be lucky or unlucky, and luck doesn't make a bad decision that leads to a good outcome any better)

- MBAs tend to blow up in financial markets, as they are trained to simplify matters to a couple of steps beyond their requirement. (Complexity and subtlety can be important in business - being able to handle them successfully, rather than managing by vapid sound bites, is equally important. Both Taleb and I have MBAs and feel the same way about them.)

Great book!

Cheap mobile office setup

I've just about finished the setup of the infrastructure for my new gig.
I'm super-cheap - when I raise money from investors, I like to spend it
on getting stuff done, not on gold-plating my IT. If the company gets
through the rough early days, there will be plenty of time and money to
build a more robust infrastructure layer.

My needs:
- mobile, push email that has good search functionality
- qwerty keyboard on my mobile device.
- easy collaboration on docs and calendar
- widespread wifi access
- laptop for quickbooks, powerpoint, etc.
- music to keep me from getting bored in the airport
- distributed, hassle free and continuous file backup

For less than $1000, here's how I met all the needs:

- laptop from Best Buy that was on clearance for newer models ($500)
- Tmobile Dash running Windows Mobile 6, with Tmobile Hotspot access and
a full data plan. The device is full qwerty, plays music, has good
battery life, and can open MS Office docs. ($200 for the device, $80 a
month for the voice, data, and Hotspot service)
- Wiki from Google, with judicious use of Google Docs and Calendar
- emoze for push email (free). The architecture is a bit less robust
than Blackberry since you need a desktop to pusher the email, but the
price is a heck of a lot better
- Twitter for group messaging. Blogger and del.iciou.us for sharing
thoughts online, Google Analytics to see traffic flow on the blog (all
free)
- all in one fax/copier/printer ($150)
- an old laptop running Fileshare from Microsoft (free - or maybe
another $500 if you need a second laptop). Fileshare is a continuous,
over the internet, backup/filesharing program. It's free and simple.
- gmail as my email aggregator, then pop access from Outlook.
- Napster to go subscription with music synced to the Dash

Now I'm all set - Hotspot access almost anywhere, can travel without my
PC easily, full email with good search capabilities, plenty of music for
my travels, collaboration and file access from any pc. Very simple and
very cheap.

Today, while on the Dumbarton bridge en route to the airport, I was able
to search through my email, find a backup number for a meeting I had,
and reschedule everything. Maybe not the safest way to drive, but
super-efficient.

Infrastructure is complete. And cheap.

(No hyperlinks because I'm blogging over email on the Dash from the
plane - not sure yet how to add links that way.)

Backlinks haven't been working. I've updated my setup here.

Is it in you?

I had an opportunity yesterday to end up in my "dream" job. Interesting
work, much higher pay than I'm used to, good lifestyle, surrounded by
smart, fun people, minimal politics. I turned it down.

I'm too excited about my new company. Huge risk of complete failure,
but huge upside if it works. I'll get paid less, work harder, travel
more, my business cards won't get as much attention - and I'll be
happier anyway. If it doesn't work out, there will be other great
opportunities.

I had a call last week with a Chicago law student contemplating leaving
school to do a startup. I did that and it worked out, so the dean sent
him to me. He was asking "how do I decide whether to go for it?"
There's no analytical way (as much as I hate to admit that) - it's a
deeply personal, emotional choice.

If my choice to take the harder road makes sense to you, you're an
entrepreneur. Otherwise, you're not. No shame in that, but if you do a
cost/benefit on startup life before launching your own company (as
opposed to on the company idea itself), you'll have a hard time being
successful as an entrepreneur.

Apologies to Gatorade.
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