Why no IPO?

My partner, Bill Gurley, wrote an interesting post in his Above the Crowd blog, responding to Matt Richtel's piece about the dearth of venture-backed IPO's in the quarter. To summarize, Matt's contention is that the IPO drought was caused by lack of demand (e.g., Wall Street doesn't like what Sand Hill Road is selling); Bill's contention is that the drought was caused by lack of supply (e.g., CEO's don't want to be public). Bill is right.

Why don't CEO's want to be public? The usual explanations relate to the perceived public and governmental hostility towards public companies and their CEO's. Sarbanes-Oxley. Reg FD. FAS 123. Shareholder derivative litigation. I was a public company CEO under this legal regime, and I can attest to the fact that it well and truly sucks. Sarbox compliance costs a fortune (particularly for a smaller company) and creates a climate of fear in the management ranks. Reg FD turns the CEO into a stump-speech politician and raises the spectre of litigation every time you open your mouth (although, the incarceration of career criminals like Bill Lerach and his cohorts will reduce this a bit). FAS 123 has created a culture of financial obfuscation, in which most companies keep two sets of books, reducing the very transparency the rules sought to foster.

But I think there is a simpler reason why nobody wants to go public: greed. Historically, the IPO was the rocket sled to huge wealth creation for the CEO. This was further reinforced during the bubble. This is, however, no longer the case -- selling your company for cash is far more expedient, unless you are fortunate enough to be the CEO of Google.

My experience is a case in point. I was able to sell around 7% of my JAMDAT stock into the IPO (and this, even grudgingly, as the investment bankers were worried that too much "secondary selling" would look bad to investors). I was advised to sell no more than 15-20% of my holdings annually through a 10b5 programmed selling plan -- I sold a couple of thousand shares, weekly, at whatever price the stock opened at Tuesday morning. And some brain dead short would post a comment on the Yahoo message boards every time a Form 4 hit the internet, saying, "Lasky is selling, the company must be tanking!"

After 18 months, I had put away a decent amount of money in human terms, but not that much at all in modern CEO terms (I recognize that the waterline for CEO comp has risen dramatically over the last 40 years, and that is certainly part of the problem; but in the era of outrageous income inequality in which we live, you measure success against your peers, not your father's peers). Then, suddenly, EA bought JAMDAT for cash, and I got a check for 6X the money I had dribbled into my bank account over the previous year and a half, in one day. The discounted present value of the stream of programmed sales I had teed up for the next 5 years made this cash sale even more valuable to me -- depending on the discount rate and the risk of my programmed sales occurring at or above the $27 per share price EA paid, you could argue it was worth almost twice as much to me to get the money all at once, up front.

Going public is risky. You have intense quarterly pressure to make revenue and earnings numbers. The market is brutally efficient at pricing your stock, and brutally efficient at sending it into free fall when they think something may be wrong. Everything you do is scrutinized and criticized. The SEC is just waiting for you to slip up -- you are essentially presumed guilty until proven innocent. The legal and regulatory regime is a bitch to navigate. And, on top of it all, everyone in the process begrudges the founder/CEO who takes money off the table -- it's perceived as a sign of weakness. The Street wants you to buy more of the stock in which you often have 100% of your net worth tied up.

Nevertheless, I wouldn't give back the seven quarters that I got to sit in that chair. It was exhilarating. I commanded the bully pulpit for my fledgling industry. I made many deserving employees and investors tons of money. I had a powerful currency, which I put to work. It was awesome.

But if we, as venture capitalists, want to create incentives for our CEO's to take their companies public, we have to solve the greed problem. We can't have the trade sale be so vastly more attractive than the IPO. Part of this is about reducing personal risk and regulatory pain, but it's also about structuring compensation to help foster the IPO as a result.

Euro 2008: The Final

The better team won.  There's no question.  Spain played well enough to win the final, and consistently played well throughout the tournament.  Unless you are a die hard German homer, you have to say they were second best.

Germany started well.  The Spanish defense looked confused for the first 10-12 minutes, and Germany had good possession in midfield.  Then Spain seemed to relax and get some penetration, and Germany suddenly lost the initiative. Torres hit the post with a header in the 22nd minute, and came back and scored in the 33rd on sheer determination, beating Lahm and then Lehmann on a dead run.

Spain controlled the match for the next 25 minutes with their usual mix of one-touch passing and midfield possession.  They also played brilliant defense -- they were so well-organized that they always seemed to be in Germany's passing lanes, and either Puyol, or Senna, or Sergio Ramos made the plays when they were called upon.  Iniesta and Xavi were awesome in Germany's half.

Around the hour mark, Spain lost it and Germany had their best chances to score.  Germany just had a poor attack.  They couldn't get the build-up against the Spanish defense. I expected better from Kuranyi -- he was weak off the bench.  The German pressure lasted only 6 or 7 minutes, and then Spain went back on the attack: Sergio Ramos had an open header stopped by Lehmann, and Frings stopped an Iniesta bullet right on the goal line.  

Spain closed it out in style.  They were so committed to attack that they almost went up 2-0 in the 80th minute, when Guiza's knock down just missed Senna, the supposed holding midfielder, charging 70 meters on an open goal.  In the 80th minute, up 1-0.  You expect that from Brazil, but not a European side.  Spain had a 13-4 advantage in shots, 7-1 in shots on target.

Man of the Match:  Many candidates.  Casillas played a remarkable match -- but he didn't really have much to do. Puyol was awesome, but only for the first 60 minutes; after that, he had a fair number of howlers and was lucky Germany didn't make more of his mistakes. Xavi provided great service -- including the through pass for Torres' goal. Torres was a fury, scored the game-winner, and could have scored two more, so he's a clear candidate. But for me, Iniesta caused Germany the most problems throughout the match, and when I think about who changed the tenor of the match, it was him.

Spain were fun to watch in every one of their 6 matches -- creative, positive, organized (they didn't concede a goal in the knock-out stage against Italy, Russia and Germany).  Superb offensive production -- 12 goals in the tournament.  The only unbeaten side.

Great final.  Great tournament.  Great champion. 

Euro 2008: Russia 0:3 Spain

Spain won this one going away. Not even close. Throughout the tournament, Spain has played a quick-passing, ball control offense, but has seemingly struggled to finish chances (this strikes me as a bit odd, since Spain scored a decent 10 goals in 5 matches, but hey, what do I know). This time, at least in the second half, they kept possession and scored goals.

Except for an occasional dangerous shot here or there, Russia didn't even show up. I thought the Spanish defense did a great job neutralizing Arshavin -- he was a non-factor for most of the match. I think we underestimate the tenacity of Puyol and the rest of the Spanish defenders, because we are so mesmerized by Spain's classy attacking style. Spain outshot Russia 18-6, and in shots-on-goal it was 11-1. Total domination.

The only black spot was the first half injury to David Villa, the tournament's leading scorer. He's apparently out for the final (as, it is rumored, is the German captain Ballack). But the Spanish side is so deep that it probably won't matter that much. They could go to either Fabregas or Guiza (who redeemed his mediocre performance against Italy with a much better one against Russia). My fear is that Aragones goes to a 4-5-1 with Fabregas in attacking midfield and Torres as the lone striker -- I think he'd be better off playing the 4-4-2 that got them to the finals in the first place. I don't think Torres can function well in the 4-5-1.

So, on to the dream final, with the two pre-tournament favorites. I really hope that Spain can beat the smug, dreary Germans. From what we've seen so far, I think it's very possible. They have to score first -- they don't want to be chasing against the Germans. If they stay in their game, play possession, and don't concede free kicks (where the German advantage in the air will come into play), they should be fine.

This match needs an early goal to open it up -- I have a suspicion that if we don't get that early goal we may be in for another match like the Spain-Italy quarter-final, with Spain attacking but not scoring, and Germany absorbing pressure and trying to get a long ball to Klose or Podolski on the counter. I just hope not. Spain 2, Germany 1, in regulation.

Euro 2008: Turkey 2:3 Germany

Well, I was wrong about the score, but I was right about the Turks.  Man, they are tough. I underestimated the sheer will of the Turkish second string -- mostly guys from the great Turkish clubs like Besiktas, Galatasaray, and Fenerbahce. They were playing with only three or four of their starters, and yet they managed to score two excellent goals against Germany.

Turkey came out and really took it to the Germans, who seemed listless for the first 20 minutes. Altintop showed great initiative, and Turkey looked dangerous around Germany's goal -- particularly when Kasim hit the crossbar.  The goal in the 22nd minute was kind of flukey, but it came off a well-executed throw in and cross.  Germany came quickly back and scored within 5 minutes.  Then, with 11 minutes to go, and the international video feed down, Klose got in front of the Turkish keeper and headed in what looked like a sure winner.  But of course Turkey came back and Semih scored a terrific redirect past Lehmann at the near post. 2-2 with about 5 minutes to go -- it had to be extra time.

But Germany had a little magic left -- a fantastic bit of skill on a one-two that released Lahm on the left side of the goal, and he finished like a striker, into the top corner.  Over, fittingly, in the 90th minute.

Major props to Turkey. What a performance.  They are clearly on the international stage to stay.  Germany won, but they looked beatable: shaky under pressure around their goal, unable to maintain possession in midfield, and reliant on counter-attacking against a depleted and stretched Turkish defense.  May work against Russia, but probably not as well against Spain.

Euro 2008: Redux & Semi-finals Preview

Ok, let's admit it.  Euro 2008 has been insane.  The quality of play has been excellent and a significant number of the matches have been on the knife's edge until the final whistle.  

The semi-finals will be Germany v. Turkey and Russia v. Spain.  I think you could have gotten long odds on this foursome before the tournament.  Of the four, only Germany was a stone cold favorite. The bugbear of Spanish failure in major tournaments argued for one or both of the Group of Death teams -- Holland, Italy or France -- to be in the semi's.  Certainly not Spain and Russia.  If it had to be two Group D teams, it was more likely Sweden than Russia.

But ... Germany struggled out of Group B behind the Croats; Turkey rallied bravely to beat Switzerland, then Czech Republic, then Croatia; Russia reversed their early fortunes and beat Sweden and Holland; and Spain cruised through their group before outlasting Italy in a shootout. So there you have it.  

The top five matches for me were: 

5.  Holland 4:1 France

4.  Croatia 2:1 Germany

3.  Turkey 3:2 Czech Republic

2.  Spain 0:0 Italy

1.  Holland 1:3 Russia

I think the Croatia-Turkey match was technically "better" than the Holland-France match, and would have been my #3 if the Croats had won it in extra time as it looked like they would.  But the junk Turkey goal at the end and their shootout win just ruined it for me.  I like Turkey, but that was a terrible ending to an amazing performance by Croatia in this tournament.

Turkey-Czech Republic was one of the best football matches I have ever watched.  It had everything -- high stakes (a guaranteed place in the second round for the winner, the possibility of penalties if it ended in a draw), tons of goals, and one of the most remarkable comebacks ever, as Turkey overcame a two goal lead in the last 15 minutes.  It was glorious.  Ultimately, though, I felt it was more drama than quality. 

Spain-Italy was actually drab as football matches go.  Italy played very negative football, with an occasional long ball or free kick aimed at Toni.  Bleh. Spain tried to lay siege with possession and skill, but couldn't finish.  0-0 for 120 minutes.  Not normally my favorite kind of match.

But I watched it with my Spanish father-in-law and my football-crazed seven year old, wearing their red jerseys, and we were hanging on every half-chance.  My son was so nervous he was literally bouncing up and down on the couch. When golden boy Fernando Torres was substituted for the totally overrated Guiza, we booed (we were right, too -- Torres had been inspiring, while Guiza was ineffective and then proceeded to miss a penalty in the shootout).  When Casillas saved Di Natale's penalty and Fabregas stepped up and buried his match-winner (his first ever penalty kick in an international -- no pressure, kid), we were ecstatic.

But it was the relentless and beautiful Russian offensive onslaught against the Dutch that really made it my match of the tournament so far.  The Russians should have been scared of the Dutch, who scored the most goals of any team in the group stage (nine, allowing only one), crushed France, Italy and Romania and looked destined for the final.  Somebody forgot to mention this to Andrei Arshavin.  He terrorized the Dutch in the first 50 minutes -- I thought he had three outright chances that he basically made by himself.  When Pavlyuchenko scored the first goal, no way could you say it was against the run of play.  Russia should have won it outright, but Holland came back and Van Nistelrooy stole a goal in the last couple of minutes.  

In the second period of extra time, Arshavin, whose fitness was unbelievable, put the Dutch away.  First, he made a crazy run down the left to the end line and crossed to the far post for Torbinski's go-ahead goal.  It was Arshavin's third aggressive, dangerous cross in extra-time.  Then minutes later he took a long throw-in and turned the defender brilliantly, slotting the ball through Van Der Saar's legs for the kill shot.  Awesome football. 

Predictions for the semi's?  You have to see Germany as the heavy favorite against Turkey.  But I think it may be closer than the pundits think.  Turkey are very tough, both physically and mentally.  They are just too depleted from injuries.  I think it's 2-0, Germany.  But I wouldn't be surprised if it goes to extra time 0-0 and the Germans have to struggle to win it.

Spain will have their hands full with Russia.  Both teams are young, fast and skillful.  Spain is more experienced, better at defending, and has more international stars; Russia has the motivation, the better coach, and the one guy who can make a play when he needs to most. Spain abused Russia 4:1 in the first match of the group stage, but Arshavin was on the bench due to a red card suspension he picked up in qualifying (against Andorra -- is that even a country?), and Russia clearly didn't have their sea legs early in the tournament.  Too close to call, but it feels like 2:1 Spain in a wide-open match.

Any of the possible finals will produce intriguing story lines.  Clearly, Germany-Spain would be the marquee matchup, but Germany-Russia would be intense, too.  Russia-Turkey would have the European football world reeling -- more even than the improbable Greek run in 2004.  I can't wait.

Moving to Blogger

I'm moving Bizpunk to Blogger.  I have to move my web server up to northern California over the summer, and I want to have a stable site in the interim.  I may go back to my Typo blog after I move, but I'm here for now.

I'll try to back-fill my old posts here when I pull them off the server.

DICE

DICE is always an interesting gathering. If GDC is (or at least was) a combination job fair and tech seminar for the video game industry rank and file, and E3 was the sales and marketing orgy, then DICE is where the industry celebrates creativity and the craft -- and occasionally where the creatives confront the suits.

I was there to do one of the two Autodesk-sponsored "Fight Club" sessions. My old friend Keith Boesky and I took opposing sides of the consolidation debate. I was pro, Keith was con. In the second session, Kelly Flock and Min Kim, from Nexon, debated packaged goods vs. online. It was a lively and amusing format, with questions and catcalls coming from all sides of a stage in the middle of the crowd.

There were a couple of uncomfortable moments. A guy from Sierra Online spoke out to dispute our contention that big video game companies can't innovate creatively. He said Sierra was innovating creatively. Huh? I could only feel pity as I imagined Activision shutting Sierra Online down, as they will certainly do after the merger with Vivendi is complete.

The second uncomfortable moment came when a strange guy in a baggy, cream-colored linen suit, wearing wrap-around, Paris Hilton shades, approached the microphone. He rudely suggested that I had no business talking about innovation because I published JAMDAT Bowling. This is a common fanboy posture, which I have heard many times before. It completely misapprehends the nature of innovation in mobile gaming -- a casual, accessible, immensely fun game that you can play with one thumb on a tiny screen while in line at the theater is the very essence of innovation. What made this confrontation remarkable is that the oddly dressed fellow was Mark Ollila, the head of games at Nokia. Wow. Maybe he thought he was being funny. Maybe he was bitter about the failing high-end mobile game startup he founded, Telcogames. [UPDATE: Telcogames has since gone bankrupt, torching its creditors]

I also attended a couple of the big hall lectures. The one by the senior team from Blizzard made me realize something. Blizzard is lionized for its creative independence as a developer, but remember that Blizzard has been owned by a large corporation of one sort or another since 1994. They were only independent, in the business sense, for 3 of the 17 years they have been operating. So, I wonder how useful their comments about killing bad projects, taking as much time as necessary, etc., are to actual developers, since Blizzard hasn't had to worry about the common developer headaches of payroll, milestone-based cash flow, or securing a publisher for their next project. They've been attached to a corporate teat throughout their period of peak creativity.

Their genius (aside from their immense and obvious game-making genius) seems to be in keeping the suits at bay. They have the amazing ability to retain their creative independence while under the corporate boot. It's a lesson for Activision and EA to learn (happily, from reports I heard of John Riccitiello's comments on Friday, he seems to have learned it).

The other illuminating lecture I saw was by Robin Kaminsky from Activision. She gave a brave talk about the limits of creativity and the importance of marketing -- a tough message to deliver to the DICE crowd. It was very thoughtful and well-researched (but her presentation materials were appalling -- Robin, go read Presentation Zen right now!).

What caught my attention was that Robin's talk showed, precisely, why the suits will never vanquish the creatives. Activision has been masterful at getting behind hits. Whether it was MechWarrior, or Quake 3, or Tony Hawk's Pro Skater in my era there; Spider-man, Call of Duty, or Guitar Hero in this era, they max out hits like no other publisher.

But that marketing machine is dependent on the existence of great games. Robin talked at length about engineering Call of Duty 4's success. But that was relatively safe -- Call of Duty had several successful previous incarnations, it was being built by an A+ team at Infinity Ward, and COD itself was built on the genre-making success of EA's Medal of Honor. Same with Guitar Hero -- that was the creative brainchild of Harmonix, and it was Red Octane who took the market-acceptance risk, shipping a game with a plastic guitar. The contrast between Blizzard's approach and Activision's was stark. Should make for an interesting merger.

Packaged goods executives come from industries where you can create products by consumer and market research. But in creative businesses, it's impossible to do research on something nobody has ever seen before. That's the realm of creative genius and risk. There is a quote that I've heard attributed to both Tripp Hawkins and Dan Scherlis: that a video game genre is just a successful product and its imitators. The packaged goods marketers have been great at mining existing genres, but not so good at creating the new ones.