It's pretty interesting that FAANG doing venture capital is basically like legal insider trading.
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.
That's not really insider trading. Matt Levine pops up here all the time, and one of the really distilled mantras he has:
inside trading isn't about fairness, it's about theft.
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.
> 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
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.
First off, the best deals in VC have no real data. Some big part of fund-making today (Vintage 2020) will happen at the seed and pre-seed stage with pro rata rights. So what good is all of Facebook's data about some app that may only exist as an idea right now. Like "disappearing photos" or "miming song lyrics on video."
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.
> They clearly have data on web traffic, consumer usage, advertising spend, etc. that other VC firms and investors generally don't have access to.
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...
It's no accident Facebook got a deal because they had great data; there is public documentation that Facebook acquried WhatsApp (and likely IG) using data tracking users from a VPN service they bought for much less: https://www.buzzfeednews.com/article/charliewarzel/why-faceb...
Others have mentioned that "insider trading" isn't the right terminology here. But more generally, I honestly don't think this is an issue from antitrust perspective. Imagine that instead Facebook granted exclusive access to all of that data to an external VC firm for a fee. IANAL but my impression is that relationship would be perfectly legal - just like similar arrangements between, e.g., hedge funds and satellite data companies.
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.
As many others have pointed out, this isn't insider trading. To drive home the point of how much insider trading laws aren't about fairness, consider this:
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.
I remember reading an argument at the time, probably from Daring Fireball, that Zuckerberg has such a feeling for growth of social media by then, that he could see that Instagram was a great deal, also the same for WhatsApp.
Facebook will next give preferential treatments to startups it has stakes in through more access to data and users, while putting those who choose to not take Facebook's money at a disadvantage.
If you're competing in any way, building in any part of the social media space, this is an invitation to have your product copied as soon as you see any traction.
Facebook doesn't need the money. It's looking for you to do the R&D.
I would guess it's more about the money than you think.
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)
This will not work. If they are that good with information, they must be building products after products that people will love. Tell me one last known successful launch by Facebook in the last 2 years, outside tweaking their existing products.
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.
These kinds of articles about VCs and companies offering to invest big funds used to give me hope, but now that I've participated in bootstrapping a startup, I see these articles as bad news.
They're going to fund my competition... Give them easy money and keep funding them until they get that big corporate exit and I'm out of business because my margins are too small and I can't afford bulk discount on Facebook advertising like they can with all that free money they got.
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.
> I'm out of business because my margins are too small and I can't afford bulk discount
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.)
Noob question but if you've already bootstrapped your startup, aren't you ahead of the competition and likely to get the funding, instead of the funding going to your competitor.
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).
Disclosure: I worked for WhatsApp, including while owned by Facebook, and Facebook is assigned my twoish [1] patents.
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.
Naturally. How else are they going to monetize the data they have on business traffic?
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.
A lot of people are rightly concerned here that Facebook will run this arm in a cutthroat way so as to stifle innovation and competition. Though they might, I have no reason to believe that’s because they want to usurp and control every technology they invest in. I think Facebook knows that their core products and business lines are under threat of attrition, and the margins on ad revenue will get tighter. A venture arm, coupled with one of the world’s beefiest analytics muscle, will probably return more than their core businesses, and insulate them from a potential turn away from social media as a profitable vertical.
That’s what I thought they were doing with Oculus originally. Same with WhatsApp, then they started to commingle the branding.
my (stupid) theory is fb/goog/youtube are now trying to help small businesses as much as possible on their platforms to drive more traffic and revenue since expansion is tapping out at some point
I would dread having Facebook on my board. I intend to treat my future users very well and wouldn’t want somebody with 1-2/5ths ownership in my company pushing me to chase their data
This makes sense to me. Facebook knows that consumers are finicky when it comes to social networks and they need to stay on top of the latest fads. Once new social networks catch fire Facebook needs to do anything possible to gain control of them, and venture investing is one way to do that.
If you were an investor in Facebook, instead of Facebook investing excess cash, wouldn't you prefer Facebook to return the excess cash to investors? Then if you agree that investing in startups is a winner, you could reinvest the cash through some venture fund? Or if you disagree and feel that there's a better use for the cash, such as investing in index funds or paying off your student loans or buying a yacht or whatever, you could do that instead.
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."
[+] [-] a13n|5 years ago|reply
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.
[+] [-] gimmeThaBeet|5 years ago|reply
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.
[+] [-] objclxt|5 years ago|reply
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.
[+] [-] an_opabinia|5 years ago|reply
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.
[+] [-] Mikeb85|5 years ago|reply
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...
[+] [-] malux85|5 years ago|reply
Is Google Analytics free out of the kindness of their heart? NO. It's free because you can spot up and coming winners.
[+] [-] emcq|5 years ago|reply
[+] [-] tfehring|5 years ago|reply
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.
[+] [-] cortesoft|5 years ago|reply
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.
[+] [-] unknown|5 years ago|reply
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[+] [-] bryanrasmussen|5 years ago|reply
[+] [-] pwdisswordfish2|5 years ago|reply
[+] [-] unknown|5 years ago|reply
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[+] [-] unknown|5 years ago|reply
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[+] [-] bigpumpkin|5 years ago|reply
[+] [-] kortilla|5 years ago|reply
[+] [-] tyre|5 years ago|reply
Facebook doesn't need the money. It's looking for you to do the R&D.
[+] [-] a13n|5 years ago|reply
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)
[+] [-] thirtythree|5 years ago|reply
[+] [-] hvaoc|5 years ago|reply
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.
[+] [-] ericflo|5 years ago|reply
Oculus Quest
[+] [-] cryptica|5 years ago|reply
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.
[+] [-] __s|5 years ago|reply
[+] [-] JumpCrisscross|5 years ago|reply
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.)
[+] [-] fizixer|5 years ago|reply
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).
[+] [-] ChicagoDave|5 years ago|reply
[+] [-] toast0|5 years ago|reply
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.
[+] [-] fheilz|5 years ago|reply
[+] [-] raverbashing|5 years ago|reply
This is the kind of money I wouldn't say no except for a very good reason.
[+] [-] riazrizvi|5 years ago|reply
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.
[+] [-] beager|5 years ago|reply
That’s what I thought they were doing with Oculus originally. Same with WhatsApp, then they started to commingle the branding.
[+] [-] hi5eyes|5 years ago|reply
[+] [-] gentleman11|5 years ago|reply
[+] [-] zacharycohn|5 years ago|reply
[+] [-] gentleman11|5 years ago|reply
[+] [-] juanbyrge|5 years ago|reply
[+] [-] shoo|5 years ago|reply
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."
-- http://www.efficientfrontier.com/ef/700/agency.htm
[+] [-] smabie|5 years ago|reply
[+] [-] gentleman11|5 years ago|reply
[+] [-] kgraves|5 years ago|reply
Sadly, I doubt there is any company that can take them on.
[+] [-] a13n|5 years ago|reply
[+] [-] cameronbrown|5 years ago|reply
[+] [-] uptownfunk|5 years ago|reply
[+] [-] ponker|5 years ago|reply
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[+] [-] jasonvorhe|5 years ago|reply
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?
[+] [-] moogly|5 years ago|reply