Are Tech Valuations `Bubbly’?

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March 25 (Bloomberg) -- Hortonworks Board Member and Benchmark General Partner Peter Fenton discusses tech valuations on Bloomberg Television's “Bloomberg West. (Source: Bloomberg)

? live from pier three in san francisco, welcome to "bloomberg west." where we cover the future of business and innovative technology.

I am emily chang.

President obama has a new plan to curb and hopes it is workable.

It would end the collection of american phone records.

Is it enough to ease concerns in the tech community?

We will have much more on that, later in the hour.

Today, a benchmark from one of the biggest names in tech capital.

He led early investments in twitter, google, and snap jet.

We are going to ask him if valuations are too high right now.

First, apple scores a victory over samsung in the global patent fight in japan.

A judge ruled that the -- apple iphone, 4s, did not infringe on the communication patent.

San francisco is out basing silicon valley when it comes to tech job growth.

They saw 57% growth in tech jobs from 20 10 to 2013. santa clara saw just a 14% increase.

Those numbers coming from state figures.

Companies like twitter, yelp, salesforce, and a wave of startups set up shop in san francisco.

King, maker candy crush, is expected to start trading tomorrow.

They previously set up at $21 per share to 24 dollars per share, valuing the company at $17 billion at the highest.

It would be significantly cheaper than others, like zynga and china interactive.

First, our lead story of the day.

Cory johnson is here with me in the studio.

Fox revealed its filing for its ipo.

It had filed secretly under the jobs act.

We have gotten a lot of numbers about sales, marketing revenue, $125 million over the last year.

Soaring to $171 million in the same time, also posting a big net loss of $168 million.

Both the loss and the marketing numbers are bigger than the actual sales numbers.

First of all, the way the company looks at things, the way that it values itself, reading the filings there is great detail on how they value the stock options they gave employees.

And they talk a lot about sales growth and sales growth numbers.

The growth numbers look pretty good.

Last quarter they had 39 million in the quarter.

Steadily growing.

That said, the rate of growth, the revenue growth rate, that is slowing down.

I do think that sequential is the right way to look at this.

Not year-over-year.

Principally it is a business where not every account days for two years worth of service.

Yes, that marketing cost was eye-popping.

Let's talk about that.

Here at true ventures, what do you think of that marketing number?

It is really high.

Does that show that customer churn is happening faster than we think?

I think it has less to do with boxes and it is wider in the market trend.

Most of these companies are trying to go from, you know, premium models to a pay model or a big enterprise model.

The cost is so much higher.

From that perspective it will take a little bit for them to catch up.

To that point we have a chart right now that demonstrates exactly what the marketing as percentage of revenue is.

It is a fairly amazing thing, to go 173% of revenues spent on marketing.

Last quarter, right before they got into the ipo, when they were preparing for the ipo, they dialed it back a little bit.

It raises this great x essential question.

Not about the existence of god, but close.

Does advertising work?

If it works, you should not have to spend that much money to grow revenue.

What would happen if they turned that on the market now?

If they stop spending money on marketing, you have an issue here.

Something else here, this is the sales growth as it compares to marketing.

Sales should be growing faster than marketing.

Generally speaking that has been happening, although not a lot until the recent quarter when they dialed it back.

Generally speaking, sales have been growing faster than marketing costs, but not a lot.

They have the pedal to the metal on spending without a real boost in sales growth.

Are these numbers good or not so good?

I wrote about this yesterday.

The house of horrors.

House of horrors?

That is right.

Venture capitalism, writer and -- i do have some once in a while.

You didn't notice?

Go on, house of horrors.

Looking back, you also have to look at how they have had many fortune 1000 companies.

Once you are into those accounts, you will not get designs out.

You will get market share and you will be buying more storage, more space, and more services from this country -- company.

The challenge is to kind of get past and look into the future.

Potentially the future is what you will be investing in.

Look at where they are going.

They have the ring on their back.

Cyclical trends are in their favor.

They have a lot of work to do, but that does not mean that you should throw out the baby with the bathwater.

Let's do a comparison between box and drop box.

Maybe a $2 million valuation.

Box has eight board members.

Dropbox only brought in one outside board member in addition to the founders.

Is dropbox that much of a better business?

Sorry to jump there, but i think that dropbox is more focused on individuals and smaller workgroups.

Where people do things on their own.

If you look at box, they are trying to go after big enterprise customers.

That is an expensive business.

At the same time, their approach is that this is the approach i have used, getting in through consumers and growing the business from that standpoint.

I think that both of those companies are on a slightly different timescale.

Mostly because they are focused exclusively on the consumer.

What about the difference between arron leavy andrew house and?

At the end of this, they only own four percent of his company.

B f j owns 25%. we do know that he has managed to maintain a significant amount of control if you take a look at the board.

The key there is that he owns 4.1% of the company and he is still at it, which kind of tells you that that is the ceo who is a missionary ceo.

The guy that you want to back.

Clearly he is not in it for the short term game.

I have gotten to know him for nearly a decade.

Two decades?

The company was founded in 2005. almost a decade.

He is on a mission, right?

This is a missionary approach to business.

Like those before him, he is laying down a new kind of path for these dumb bunnies to succeed and develop businesses.

A lot of what they have done was not known.

Either by consumer companies or enterprise companies.

They made a lot of mistakes.

They talk about that in the filing, how their pricing structure has changed.

Also, for four percent, he is going to control the company.

He is going to have 10 votes over every regular person.

He is not giving up the reins, even though his percentage of ownership is not as big as some ceos.

One of the most interesting things about fox, -- box, and we don't talk about this much, all for founders are still there.

You have got blood on the floor at other companies, but somehow they have all stuck together.

I think they are also outsiders.

They have a chip on their shoulders, as i was pointing out yesterday.

Adam is the kind of guy you want on your team.

[laughter] we will see.

Right now it is a money loser.

You are the one who said house of cards.

But there is always a happy ending to every house of cards move as well.

Well, we will be watching.

Thank you, as always, for stopping by today.

Still ahead, he is known for backing twitter when the company had just 25 employees.

Peter fenton joins us next.

You can watch us streaming on your phone and tablet. and on apple tv.

? i am emily chang.

This is "bloomberg west." megadeals are happening and other startups are raising mega rounds of funding.

Private equity firms, hedge funds, mutual funds, pouring money into silicon valley at an unprecedented rate.

The latest example is blackrock, leading an investment in corn chip works just two months after a big word he'll for dropbox.

Peter sits on the board of fortune works -- fortune works -- hortonworks.

Jon erlichman is also with us from l.a.. so, these mega rounds of funding, there have been what, 11 nine figure rounds this year?


How did you make the decision to make -- raise more money as opposed to going public?

We have a fiduciary responsibility to make sure the company is ready to go public.

We are finding such pressure from public market investors and hedge funds to participate early , they fight for ipo when they realize they could go directly to the company.

It allows us to build a company that has the foundation to be not a groupon or zynga in the public market, where we have predictability in the performance of six court orders.

We know what the future looks like.

We have also started a relationship with our long-term capital base.

The company gets to know them, they are engaged.

It puts real pressure on the traditional market, because there is a new actor in the late stage occupied by these public investors.

Your partner was on a couple of weeks ago saying that there are ridiculous amounts of capital chasing deals right now.

Do you think it is ridiculous?

And do you think it is all bubbly?

Being a child of the last bubble tom i saw what happened to companies when capital is free.

You start to take routes to customers that in many cases are not durable.

The challenge that we have as directors when we have a flood of capital is to try to maintain fiduciary responsibility and discipline the muscle memory or having an economic model that works when capital is not free.

The question at the top for us is less capital availability, because you need to, competitively, have access to it.

What do you do in terms of how it affects your business building for the long-term?

That becomes a big problem when you have to face this underlying model without free capital.

It won't work.

If there is a structural problem of not generating long-term returns for the investors.

This is the issue right now.

In spite of that there are some extraordinary companies that deserve these valuations.

And there are a bunch that don't. as the market gets more fraught, we will wind up pushing the boundaries.

Which ones don't deserve a category?

This can be a question of competitive advantage.

Can the economic model support increasing returns to scale?

Something that we obsess on is leverage in the market model.

If you are spending more per quarter to acquire customers, successively that is a massive red flag.

Those to me stand out in the don't category.

But at the moment, everyone thinks that growth equals valuation.

So, that is the game on the field and the game that in some cases should not be played but is because the model is unsupported.

Here in los angeles, you have snap chat.

A company benchmark is invested in.

They got a lot of headlines when they said thanks but no thanks to facebook.

I spoke to entrepreneurs around that time who said that they would have liked to have seen the sale of that is this as a validation of the l.a. market.

What do you think about selling as opposed to the longer road or going public down the road and how that helps to validate a market, silicon beach or silicon valley?

I would have the opposite respective if i was in l.a. the single most important thing is building an iconic company.

Every great company, going back to facebook, face an opportunity to sell early.

When they were given a multibillion-dollar offer that they rejected because there had -- because they have their gaze on the horizon.

It is the biggest problem i see in new york, there is a much more short-term mindset around monetization.

The valley has this belief, this background purpose to build the next google.

You cannot build the next google if you sell before you release it -- realize your potential.

In engaging their horizons, they are looking at what the full potential looks like.

As investors, that is the game that we play.

We worked shoulder to shoulder with the seams so that they can realize their full potential.

Along that road, your convention gets challenged.

There is a number that is put in front of you that is irrationally large tom a you'd have to stay irrational to stay independent.

The best thing is that they will get theirs, but you cannot do that if you sell it.

All right, john, let's continue this conversation after a quick break.

More with peter next about the landscape in social.

? welcome back to "bloomberg west." we are back with peter fenton from benchmark." an early investor in twitter, benchmark, take it away john.

We are talking about different areas where companies are being built, l.a., new york, or silicon valley, you have obviously made the decision to relocate from san francisco to silicon valley.

Now that you have done that, how are you measuring success?

What has it done for the benchmark ran?

Wax san francisco became an epicenter post the success of salesforce as a place to build tech companies.

The reasons for that are fascinating to us.

A somewhat unintended consequence, some notoriety around those google buses, but it gave young engineers the option to live in seven cisco and take the bus.

Given the choice of living in suburbia or the city as a young engineer, you picked the city.

That started the process.

From a benchmark standpoint, we were shoulder to shoulder with entrepreneurs, measuring success by time with companies.

For all of us in the partnership that has gone up meaningfully by being in san francisco.

Looking at two thirds of our investments over the last five years, and there is something going on that is not resolved between the technology industry integrating more deeply into historic san francisco.

It is something that we are now obsessed with, because it has created tension, as you would expect with one community being hyper successful and the rest of the broader community needs to be brought into that success, which is a real opportunity for our industry.

Let's talk about one of the nearby companies often mentioned in terms of your success, twitter.

We talk about that here in los angeles as well because of the ties to television, the oscars, ellen.

You have talked to us about the ties between twitter and television for a long time.

In terms of twitter versus facebook, at -- if you had to pick one is the second screen, which alternately wins?

I do not think it is an either/or in that sense.

Twitter has always been compared to facebook in a way that misses the uniqueness of what twitter has built.

It is utility, an invention is a company, where their model is like a human powered network, much like others that we now use in our daily life.

Twitter has established itself as a parallel channel.

We are not taking away hours.

We are not trying to measure time on site.

We are trying to be a parallel, if you will, complementary channel to television.

Facebook has a different model.

They both have a role to play.

Twitter has been very symbolic and the content industry in terms of staying engaged with an online experience, amplifying through the success of what twitter is doing.

Wax when it comes to the twitter of social, facebook, instagram, snapshot, does someone win?

How does this involve?

What is the dominant social network years from now?

The question that we ask is the chewing gum question.

If you lose your flavor after six, or pick your timeframe, it is a question of durability.

Snap chat is an example of -- was this a fad?

There are fads in the industry.

But you took a chance and it worked.

It gets to the old saying, the medium is the message.

The tools that we create create us as much as we create them.

Snap chat has created a flourishing set of human behavior that did not exist before.

The carefree, you are in control of your emotions, reflecting them to your friends in a private way, to me that is a different experience from what existed before.

We are big believers in the plurality of these networks, where if you look at your phone or is not one app that does everything.

Increasingly there are purpose built apps.

We think that that allows for an emerging ecosystem.

Your fenton, a benchmark, -- peter fenton, a benchmark, thank you -- of benchmark, thank you for stopping by.




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