In the battle for top talent in the technology sector, the allure of perks such as free massages and unlimited vacation has lost some of its luster, by some accounts.
Job sweeteners have become almost a necessity, even in an uncertain economy, as top talent is no longer seeing the value of switching jobs.
“They’ve seen too many of their friends take jobs at companies that fail, or sign on with entrepreneurs who don’t know how to manage,” Ryan Armbrust, managing director at ff Venture Capital, told CNBC recently. That means job seekers are looking for benefits that are both quantitative and qualitative, he said.
“When options don’t seem to have present value and every company looks the same at face value, companies are forced to resort to incentives, like offering SoulCycle classes and Warby Parker sunglasses,” Ambrust added.
According to Silicon Valley watchers, the list of possible perks are virtually endless. Future tech pioneers can expect activities like ping pong, personal trainers, afternoon meditation sessions, group fitness, and beverages on tap. For veterans, trips to Puerto Rico are no foreign concept, and some of the more adventurous firms let employees bring their pets to work — or even let you sleep on the job.
Still, some argue that on-the-job bonuses don’t necessarily move the pendulum for many workers.
“The perks typically play a marginal influence on the decision making process because most companies are offering the same benefits,” said David Saad, co-founder of SpringSprout, a New York-based recruiting firm. “The main factors that engineers consider now include depth of technical challenge, caliber of the team, personal interest in product, compensation, and more recently, if the company offers a social good element.”
Firms are also more open to accepting engineers from “bootcamp” programs, instead of candidates with years of industry experience. “The cost of lost productivity from not having enough engineers heavily outweighs the cost of any barriers to getting engineers on-board,” Saad said.
According to the firm, more influential factors are a company’s willingness to relocate potential recruits, or sponsor them for foreign visas. According to data from SingleSprout, they’ve seen a 30 percent increase in relocation offers to bring people to New York City.
Back rubs, out-of-town trips and other things “are nice to haves, but they are not swaying people anymore,” Natan Fisher, SpringSprout’s other co-founder added.
Yet in the war for talent, tech companies like Google (GOOGL), Apple (AAPL)and Facebook (FB), have a separate battle to wage. Silicon Valley giants have repeatedly come under fire for the anemic ranks of women and people of color among their work force. In 2015, female engineers made up an average of just 7 percent of tech teams they’ve worked with, a small increase from 5 percent in the previous year.
SingleSprout’s founders told CNBC they are more frequently asked to dedicate more resources for targeting programs and companies that employ minority engineers, as the tech industry scrambles to improve its diversity.
Armbrust, of ff Venture Capital, noted more coding schools are attracting more and more women, who will now be entering the work force.
While he expects to see this growth continue, he cautioned it will take time.
“Educators are doing a better and better job supporting women within these fields, but we will need continued focus here in the future to create a balanced workforce,” Armbrust said.
VCs have pumped up the value of the “unicorn” startups. Now tech IPOs are in trouble. Good luck getting out.
Of all the Silicon Valley IPOs in the past couple of years, Lending Club’s might have been the surest bet of all.
The San Francisco peer-to-peer lender is a star in the world of “fintech,” a growing sector made up of financial technology companies bent on disrupting the traditional banking sector. Its backers include venture capital royalty such as Kleiner Perkins and Union Square Ventures, not to mention Google (GOOG) and Alibaba (BABA). The startup’s gold-plated board of directors includes luminaries such as John Mack, the former CEO of Morgan Stanley (MS); former Treasury Secretary Larry Summers; and Mary Meeker, the one-time doyenne of Internet IPOs who is now a Kleiner partner. In other words, Lending Club (LC) had assembled a very smart-money crowd. Its much-buzzed-about offering was viewed, understandably, as a slam dunk.
In December 2014, led by underwriters at Morgan Stanley and Goldman Sachs (GS), Lending Club priced its shares at $15, above the high end of the proposed range of $12 to $14. The IPO was 20 times oversubscribed and instantly gave the company a market value of nearly $6 billion. On the first day of trading, Lending Club’s stock jumped almost 70% before pulling back to close at $23.42 a share, a one-day pop of 56%. For shareholders who got out quickly, it went in the books as another very successful offering.
Then reality set in. Lending Club’s stock peaked about a week after its IPO, at nearly $26 a share, and has been retreating ever since. Never mind that the startup delivered extraordinary financial results in its first year as a public company: Lending Club’s operating revenue was up more than 100% in the first nine months of 2015 compared with the same period in 2014, and its Ebitda, a measure of earnings before subtracting expenses such as interest and taxes, was up more than 200%. The stock recently traded around $8 a share, nearly 50% below its $15 IPO price.
Naturally, Lending Club CEO and co-founder Renaud Laplanche wishes the stock price were higher. But he’s trying to look past short-term vicissitudes. “Part of the main reason for going public was to continue to establish Lending Club’s brand and credibility,” he says. “We’re building a big company. It’s going to take a very long time, but we want to do it in the public eye with full transparency. I think from that standpoint, we got rewarded. I think the Lending Club brand is a lot more established now than it was a year ago.”
That may be true with customers and bankers, but ask any retail investor who made a bet on Lending Club at around $20 a share about the company’s brand today, and the response is likely to be a grimace followed by a torrent of vitriol.
Unfortunately the Lending Club story is not an isolated case. Time and time again during the current IPO cycle, Wall Street underwriters–egged on by ambitious CEOs, hungry venture capitalists, and favored institutional investors–have hyped one technology IPO after another. The bankers price the offerings for perfection, watch them soar on the first day of trading to deliver the coveted first-day spike, and don’t stick around to offer an explanation after the shares plunge below the first-day price. (Morgan Stanley and Goldman Sachs declined to comment for this story.)
Welcome to the world of zombie tech stocks–once-highflying IPOs wandering aimlessly in the wasteland of the public equity markets and understandably unloved by investors. Many have familiar names, such as Zynga (down about 75% from its IPO price), Twitter (down 30%), and Groupon (down 85%). Online craft marketplace Etsy recently traded 56% below last year’s price at IPO and 77% under its first-day close. Others that are less well-known–like Nimble Storage (67% below IPO price)–have been just as disappointing.
To be fair, some major tech IPOs have soared in recent years, among them LinkedIn lnkd, Tesla Motors tsla, and, after a rocky and controversial start, Facebook fb. But these are the exceptions. The detritus far outnumber the success stories, raising the question, Is the method by which companies go public as broken and inequitable as it ever was? That would certainly seem to be the case. And the problem is especially acute when it comes to tech companies for which relentless forward momentum is key not only to pleasing investors but also to attracting talent and keeping their competitive edge.
This set of facts doesn’t bode well for the current wave of talked-up technology companies in the IPO pipeline–the so-called unicorns, or private startups valued at $1 billion or more by their investors. This once-rare species of startup has proliferated lately in Silicon Valley and beyond–from headliners such as Uber and Airbnb to lower-profile newcomers like Apttus and HelloFresh. Last year Fortune identified more than 80 unicorns for a cover story on the phenomenon; by our most recent count, that number has grown to 173.
According to CB Insights, a research firm that tracks venture capital investments, private investors have plowed some $362 billion into startups in just the past five years.
That means that a tremendous backlog of potential technology IPOs is building up just as the stock market is beginning to look very wobbly after its nearly seven-year bull run. Indeed, U.S. stock indexes began 2016 with their worst first-two-week period in history. The S&P 500 fell 8% in the first 10 trading days, and the S&P tech sector underperformed the broader market by a full percentage point.
For an already weakening tech IPO market, the turbulence in stocks is a punch to the stomach. In mid-January, IPO research specialists Renaissance Capital put out a special report called “Exploring the Disappearing Technology IPO.” The trends it identified were not encouraging. From 2012 through 2014, according to Renaissance, there were an average of 36 venture-backed tech IPOs per year. But in 2015 that number dropped to 23, and only seven of those offerings happened in the second half of the year, partly because of a stock market correction in August. Though the average time from founding to IPO reached a high for tech deals in 2015, the profitability of the typical technology company going public has plunged into negative territory over the past couple of years. The median Ebitda for tech companies going public in 2015 was -$9 million.
All signs point to a continued slowdown in tech IPO activity in 2016, says Kathleen Smith, a principal at Renaissance and the company’s manager of IPO-focused ETFs. She says it won’t take long for the unicorns to feel the chill as well. “What’s happening now is just going to take the bottom out of these private valuations, many of which are imaginary,” says Smith. “And this valuation reset is going to have a very negative effect on new funding.”
It appears that a reckoning is coming in the tech world. The combined value ascribed to the 173 unicorns by their investors is a stunning $585 billion–an especially astonishing figure given that so many of them aren’t even close to profitable. Sky-high valuations–driven in part by unicorn mania and an influx of money from nontraditional (and less disciplined) venture investors–have limited the number of potential acquirers for a lot of the buzziest companies.
A number of startups may have hoarded enough capital to ride out the rough patch, but even those that survive could experience mass defections and morale-killing “down rounds.” In mid-January, for example, check-in app company Foursquare raised $45 million in new venture funding but was forced to accept a valuation of less than half the $650 million value it was given by its investors a few years ago. “I imagine there’s going to be some pivots in some business models,” says John Gabbert, founder and CEO of VC data provider PitchBook.
There is also certain to be increased pressure from the VC community for any tech company on the verge of readiness to seek the “exit” of the IPO process even as it is shrinking. But every IPO currently trading below its IPO price creates a negative feedback loop, making the odds of the average unicorn getting out a little longer every day. And it doesn’t help that the process is fundamentally rigged against them.
To appreciate the extent of the tech IPO problem, it helps to understand a bit about the IPO process itself. The system has long been designed to benefit the Wall Street underwriters and their favored clients–venture capital and buyout firms, as well as the big institutional buyers of IPOs–at the expense of individual and retail investors, who have been brainwashed into thinking they are getting their hands on the Next Big Thing.
The venture capitalists or private equity investors–who finance the company while it is private–also have a big say in the IPO process. They want to make money on their investment, of course, and generally the most they possibly can. They push the underwriters relentlessly to get the highest price possible for the IPO, securing for them the biggest profit. But near the end of the process they begin to remember that they’re not selling all their shares in the IPO. At that point they actually prefer a dynamic in which the stock is actively hyped–to generate enthusiastic demand for it–but the “float,” or the percentage of the company’s shares sold in the IPO, is kept small (say, around 15%) to curtail supply.
High demand for something in short supply leads to one outcome: a higher and higher price for the stock when it finally hits the market. That way the VCs can double dip: They can crow a bit and notch a big gain on their initial investment (perhaps even selling some shares in the offering), but can also know that they were clever in hanging on to most of their stock, especially when the stock moves up smartly on the first day of trading.
The big Wall Street underwriters set the rules of the game. “Morgan Stanley and Goldman Sachs will tell you it’s not a successful IPO unless there’s a 20% to 30% pop,” says John Buttrick, a partner at Union Square Ventures. “That’s the way they get graded with their clients: Did the stock trade up after pricing? Much of the IPO machine is focused on generating a sugar-rush spike in the trading price during the two to four weeks after IPO. After that, the market takes over: ‘Sorry, not my problem.’ They profess to take a long-term view, but the data shows post-IPO stocks are very volatile in the case of tech IPOs, and that is not a problem the underwriters try to address.”
Another important constituency for IPOs is the big institutional buyers of them–mutual fund firms such as Fidelity, T. Rowe Price, and the Capital Group. They like the first-day pop too, because that means they make money instantly. Twenty-five years ago Peter Lynch, when he was running Fidelity’s Magellan Fund, used to refer to IPOs as “sunset stocks”–as in, “the sun never sets on an IPO in my portfolio.”
Interestingly, it’s a system that has also defied innovation. In the past decade or so, some clever new ways have been created for companies to raise the equity capital they need without going the IPO route. There are now a number of secondary markets where equity capital can be raised privately and where insiders can sell their stock to new investors in order to get some liquidity in ways that were never before available. The JOBS Act, which took effect in 2013, allowed smaller companies to file prospectuses privately and raise capital much more discreetly than in the past, as a way to get some of the benefits of a public offering without the many negatives of excessive scrutiny and regulation. These changes have in fact helped enable the rise of the unicorns. And yet Wall Street hardly appears to have lost its leverage in the IPO process. If anything, the opposite is true.
The aftermath of the financial crisis–a world in which there are fewer and fewer underwriters, and many of the European banks have all but disappeared from the underwriting market–has reinforced the power of the established IPO underwriters to keep the status quo working for them and their best customers.
That means that despite the hype that still surrounds them, the growing universe of unicorns out there has little choice but to submit to the IPO cartel if it wants to raise a significant amount of equity capital. For every Uber, which seemingly attracts as much capital as it wants in the private market at increasingly stratospheric valuations, there are a hundred companies that must submit to the powers that be when it comes to raising new money.
As an example of how regular investors get the short end of this process, consider the cautionary tale of GoPro (gpro), the company behind every adventure athlete’s favorite digital camera–perfect for attaching to your head so that you can record your wild-ass snowboarding and base-jumping exploits.
Remember how cool Nick Woodman, GoPro’s founder and CEO, seemed in all those interviews that cropped up before and after his company’s IPO? When GoPro went public, in June 2014, at $24 a share, the company raised $491 million, and the lead underwriters at J.P. Morgan Chase, Citigroup, and Barclays pocketed more than $28 million in fees. Right on cue, GoPro’s stock sprinted up nearly 50%, delivering that all-important pop. Within three months, on Sept. 30, 2014, it was near $95 a share, giving the company a market value of more than $13 billion.
These days Woodman isn’t talking so much. (He declined a request to be interviewed for this story.) For months GoPro’s share price has been plummeting faster than a mountain biker on a headlong descent. In mid-January, trading in GoPro’s stock had to be temporarily halted after the company warned of disappointing fourth-quarter results and said it planned to lay off 7% of its workforce. Lawyers representing shareholders quickly slapped the company with class-action lawsuits. GoPro’s shares recently traded for less than $12, more than 50% below its IPO price.
It’s been a painful reversal. But many of GoPro’s institutional investors from the IPO probably still have fond memories of the stock. That’s because they got to buy it at $24 and watch it soar to $36–then unload it for a quick 50% gain. What’s not to like?
And if both the venture capitalists and the institutional investors are happy with the first-day pop, then the underwriters are happy too, because their biggest repeat customers are both the private investors and the big institutional investors. To be sure, their high fees–the underwriting charge in the GoPro IPO was 6%–are nice too. But the real goal is making sure that their customers are happy and do business with them again and again. At Goldman Sachs, one of the firm’s mantras is to be “long-term greedy,” and the IPO underwriting process is a perfect example of how it puts that philosophy into practice. It’s one of the few businesses in the world today that has remained virtually impervious to disruption by Silicon Valley.
William Hambrecht has been talking about changing the way IPOs are underwritten and priced for close to 20 years, since he left his firm Hambrecht & Quist (which was then sold to what is now J.P. Morgan Chase) and started W.R. Hambrecht & Co. in 1998 with the hope of upending the way the Wall Street cartel manages and markets IPOs. One of the firm’s high-water marks came early in its existence when it was one of the underwriters of the Google IPO, in August 2004. (There were 31 underwriters in all, led by Morgan Stanley and Credit Suisse First Boston.)
Eleven years on, people may no longer remember how controversial it was at the time for Google to have adopted Hambrecht & Co.’s auction strategy for what became the most important company in a generation. After conducting an online Dutch auction for the Google shares, in which investors named the price they would pay and orders were filled in the order of those who bid the highest price, the underwriters priced the Google IPO at $85 a share, below expectations. The stock closed on the first day at about $100 a share, up 17%. (In the end the lead underwriters didn’t strictly adhere to the auction strategy in its purest form.)
Experimenting with a different IPO pricing model certainly didn’t hurt Google. The tech giant’s stock is up some 1,500% from its IPO, and the company (renamed Alphabet last year) has a market value approaching $500 billion, second only to Apple’s AAPL. Its stock chart looks like one side of the Matterhorn. But very few other companies have been willing to go public the way Google did, through an auction process. (Some have, including Morningstar morn, up more than 400% from its IPO, and Interactive Broker Group ibkr, up about 50%.) Rather than a turning point, the Google IPO is remembered more as a historical footnote.
Hambrecht thinks the way IPOs are manufactured and sold remains a problem. “It really is a system that is broken,” he says. He thinks the “traditional approach” needs to change but knows that the big underwriters won’t do it, despite their understanding, intellectually, that the auction approach is a fairer system. They just make too much money as things currently stand. “The underwriters stick to the traditional approach because, first of all, it allows them to discount the pricing,” he continues. “It gives them selective allocation to their best customers. And they’ve tried to keep a knowledge advantage, so it’s really a proprietary product through the first six months or a year of the trading. All of those things enhance the profitability to the underwriter.”
He says that when, say, Alibaba pops from $68 a share to $115 a share, as it did in the first few months after its IPO, the underwriters cash in because their institutional clients have made a lot of money and pay them back in kind over time. “The people who buy it in the aftermarket are the shareholders who end up, in effect, holding the bag,” he says. Hambrecht doubts that the system will ever change unless a reform is forced on the banks legislatively (as was briefly considered after the Facebook IPO) or their vicelike grip on the large IPO business is disrupted. “It’s deeply entrenched,” he says.
In fact, Hambrecht is so resigned to the inevitable power of the name-brand underwriters that he’s decided he won’t try to fight them anymore. Instead, he’s returned to what he did once upon a time at Hambrecht & Quist: Taking smaller startups public. His latest eponymous firm, Hambrecht & Co., specializes in underwriting for companies that have valuations below the unicorn threshold and garner less interest from the big banks.
Despite the deck being stacked against them during the underwriting process, some executives at newly public companies say they wouldn’t change a thing. In this camp are James Park, the co-founder and CEO of Fitbit fit, and William Zerella, its chief financial officer.
Last June, Fitbit, a maker of fitness tracking devices, priced its IPO at $20 a share, above its indicated range. Morgan Stanley was the lead underwriter. The stock opened up 52% right away and ended up about that much, giving the company a market value of $6.5 billion and making Park nearly a demi-billionaire. In November the company completed a secondary offering, at $29 a share–below the $31.68 a share where it had closed the day before–in which 14 million of the 17 million shares sold came from its VC financiers. It was, in part, a move to reduce the downward pressure on the stock as the expiration of the six-month lockup period loomed. These days, after a poorly received new-product offering, Fitbit trades below its IPO price.
But despite the stock’s roller-coaster ride, Park and Zerella say they couldn’t be happier with how the IPO was handled. Zerella credits his bankers for the way they ran the process. “They understood our story and were very helpful in articulating it to the Street,” he says, although it also helped that Fitbit is a leader in its space and very profitable.
Park says that he and his management team were excited by the IPO and by being on the floor of the New York Stock Exchange when the stock first traded. He has no regrets about not pricing the IPO higher to get more of the offering proceeds for the company. Park says he understands the players at the table have to get their cut. “I think the worst outcome would have been for it to trade below the offering price [in the days after the IPO],” he says. “It was a delicate dance, and I feel that we struck the right balance in the price of the deal. And the pop on the first day really gave the company a lot of great momentum in the press and with employees.”
Other perks: Park says the Fitbit IPO let the world know just how profitable his company is–with Ebitda margins of around 23%–and how, despite some formidable competition from Apple and others, Fitbit remains the industry leader. He points out that Fitbit now has a currency to use for potential acquisitions and says that going public has given the company’s employees something to root for together–its stock price. “It’s been a great event,” he says. “It really cements us as a world-class company.”
Laplanche of Lending Club, for his part, tries to put his company’s IPO experience in the most charitable light. But he can’t help scratching his head about how the stock has traded since those hype-filled early weeks after the IPO. He says that if the stock hadn’t jumped past $25 a share and had just traded at around $15, there would have been less disappointment, especially for the retail investors. “That being said, if they made a long-term investment, then I’m very confident that we’re going to continue to deliver great results,” he says.
No thanks to the standard IPO process. One of the reasons behind the volatility of Lending Club’s share price is the simple matter of supply and demand. The underwriters at Goldman and Morgan Stanley argued for a float of between 10% and 15% of the shares outstanding, and in the end it was around 15%. That created scarcity value initially, leading to the coveted opening-day pop. That’s the good news. The bad news came at the end of the six-month lockup period, when the Lending Club’s VC investors started selling their shares into the market.
Whether it’s a coincidence or not, Lending Club’s share price moved from about $19 in early June 2015 to a low of around $11 three months later–in effect tracking the increase in supply of stock during the year as the venture capitalists started unloading their stakes in the company.
Laplanche, of course, understands these supply-demand dynamics. But he’s not sure less sophisticated investors appreciate the subtleties of lockup periods and floats. “It can be a bit frustrating, particularly for people who wonder, Okay, what’s wrong with the company? Is there something there that drives the stock price?” he says. “I think we’re a good case study for it because we continue to report good news after good news, so there’s really no fundamental you can point to to explain the stock performance. Really, all that’s left is supply and demand of shares.”
All indicators point to Lending Club being more than strong enough financially to soar past its post-IPO doldrums. In an increasingly tough environment for tech companies, some of its peers may not be.
The modern day space race doesn’t pit country against country. It’s a game of thrones of sorts among three billionaires: Elon Musk, Jeff Bezos, and Richard Branson.
Under the guise of “we compete in a friendly way,” Branson engaged in a little trash-talk at the World Economic Forum in Davos, Switzerland.
“Our spaceship comes back and lands on wheels. Theirs don’t,” he told CNBC’s “Squawk Box” in an interview that aired Friday. “Because ours is shaped like an airplane, we hope to do point-to-point air travel one day. Theirs is not.”
To be fair, he said that Musk, founder of SpaceX, and Bezos, founder of Blue Origin, would probably give reasons why theirs are better than Branson’s Virgin Galactic effort.
Branson, who said he’s friends with Musk but does not know Bezos well, stressed that competition is good. “You need competition. And the public will benefit from the three of us getting out there and competing.”
Besides space, Branson’s Virgin conglomerate runs branded businesses worldwide in industries including mobile phones, airlines, financial services, music, as well as health and wellness.
Musk, also a serial entrepreneur, is the founder and chief of electric automaker Tesla (TSLA). He’s also chairman of energy company, SolarCity (SCTY). Bezos is founder and chief of Amazon (AMZN) and the owner of The Washington Post.
During his CNBC interview, Branson also addressed the most pressing concern for financial markets: the depressed price of oil that’s seen somewhat of a bounce recently.
He said he sees oil prices likely staying low for a long time, but he believes that’s a good thing for the global economy.
“There’s no need to try to make up a recession [case],” he said. “This is going to be the greatest boost to the economy you could imagine. And everyone is going to have money in their pockets to spend,” because of cheaper gasoline prices.
Depressed oil, which also translates into lower jet fuel prices, has been a boon to the airline industry and passengers.
When the oil hedges that many carriers engage in to lock-in steady costs come off, “they can afford to reduce fares,” Branson said. “And that will stimulate demand on planes. And they can also afford to make some decent profits.”
“I remember $149 a barrel,” he recalled, with U.S. and global crude around $31 per barrel early Friday. “If you can’t make money today, you can’t make money ever in the airline industry.”
Reflecting on what some market watchers consider a bubble in so-called privately held unicorns, Branson said: “There’s always something of a bubble in the Valley,” referring to Silicon Valley. Unicorn companies are start-ups with market values exceeding $1 billion.
There are many good pre-initial public offering (IPO) companies, Branson acknowledged, but he warned that others are going to “fall flat on their face.”
White House and congressional staffers have asked Silicon Valley executives for new talks in Washington, D.C., to resolve a standoff over encrypted communication tools in the wake of the Paris terrorist attacks, people familiar with the matter said.
The approaches are among the most concrete signs of how last week’s bombings and shootings have put a new spotlight on the debate about whether American companies should be allowed to offer ultrasecure messaging tools.
There is no evidence the Paris attacks have changed technology companies’ view that strong encryption protects consumers, and that providing a way for police to eavesdrop would open the door to exploitation by criminals and repressive governments.
Late Thursday, the Information Technology Industry Council, whose members include Apple and Microsoft Corp., said in a statement, “Weakening security with the aim of advancing security simply does not make sense.”
But Apple Inc., Google parent Alphabet Inc., Facebook Inc. and others face a difficult public-relations dance, because executives don’t want to be seen as brushing off the implications of a tragedy.
“It’s not the ideal time to be out there touting the benefits of encryption,” said an attorney who has worked on encryption issues.
There is no evidence Islamic State attackers in Paris relied on scrambled communications. Some used run-of-the-mill text messages, which can be easily monitored if a suspect is known, according to French media reports.
The Paris attacks came amid an 18-month feud between Washington and Silicon Valley that began when Apple and Google released new smartphone software that the companies said they cannot unlock, even if faced with a court order.
Top U.S. law-enforcement officials have said the software would cripple some criminal investigation. Talks aimed at ensuring law enforcement access to certain messaging systems and devices reached a stalemate in the fall. Unwilling to dictate product specifications to some of the nation’s most successful companies, the administration decided not to push for a change in law.
The Paris attacks may complicate efforts to reach a near-term compromise. “There is a solution out there and there’s a way to get to it but this isn’t the month to be starting down that path,” said James Lewis, a cybersecurity expert and former Clinton administration official who has consulted with tech companies and government.
He and the Center for Strategic and International Studies, where he is a senior fellow, had planned a forum on encryption policy this fall. After the Paris attacks, he postponed it.
Since Paris, Sens. John McCain, (R, Ariz.), Dianne Feinstein, (D, Calif.) and other lawmakers have said they want to ensure investigators can access the content of encrypted communications.
Mr. McCain has aid he wants to pursue legislation.
Apple has said it would never build a government backdoor into its products, because doing so would create security vulnerabilities that can be exploited by criminals. On its website, Apple says encryption protects trillions of online transactions daily and eliminating it would expose people to many risks.
“I don’t know a way to protect people without encrypting,” Apple Chief Executive Tim Cook said last month at The Wall Street Journal’s technology conference, WSJD Live. “You can’t have a backdoor that’s only for the good guys.”
Rachel Whetstone, former head of communications and public policy at Google, said in February that governments don’t have and should not get backdoors to access Google user data because the company has a duty to keep users’ information private. A person familiar with the company’s thinking said Google’s views on encryption haven’t changed.
Even if Apple and Google could be convinced to cooperate, tech executives say there are dozens of other encrypted communication systems. Most encryption techniques are publicly known and terror organizations could build their own alternatives, they said. “The cat is already out of the bag,” added one executive.
One technology executive acknowledged mixed feelings. “While I continue to feel that outlawing end-to-end encryption would be both ineffective and a slippery slope for society, I’m also aware that I have limited knowledge of all the scary things happening in the world today,” said Ted Livingston, chief executive of Kik Interactive Inc., developer of the Kik Messenger messaging application.
The Waterloo, Ontario, company’s app doesn’t store the content of messages on the company’s servers. That means, the company says, it can only give authorities data on users, not transcripts of what they say to each other. It faced some negative publicity following reports in The Wall Street Journal and elsewhere that Islamic State operatives see this feature as advantageous and use the app.
Written by Danny Yadron, Alistair Barr, Daisuke Wakabayashi of The Wall Street Journal
As the stock markets took the proverbial roller coaster ride in Shanghai and Shenzhen, with many fearing economic misery, Neil Shen was in San Francisco, describing China as a land of financial opportunity.
Shen heads the Chinese operations of Silicon Valley venture capital firm Sequoia Capital. Two days before, Shen had joined Airbnb in announcing that the American room-sharing startup was entering the Chinese market with backing from Sequoia and another venture fund called China Broadband Capital. Arriving on the tenth anniversary of Sequoia China, he told us during at sit-down at WIRED’s San Francisco offices in mid-August, the deal was part of the firm’s larger effort to move “top American companies” into his home country. Airbnb, he explained, would follow the blueprint that Sequoia helped set in guiding LinkedIn’s business-centric social network into China.
Yes, the Chinese stock markets continue to rumble, sending ripples across markets in Europe and the U.S., and the country’s overall economy in indeed slowing down after a quarter century of unprecedented growth. But despite all this, China remains an enormous opportunity for US internet companies—remember: it’s the world’s second largest economy—and after years on the outside looking in, many companies are now crossing the frontier. That includes not only Airbnb and LinkedIn but ride-hailing startup Uber, which launched in China last year and recently poured another billion dollars into the country, and the online collaboration outfit Evernote, which says it now serves more than 11.5 million local Chinese. What’s more, according to a recent report , Google is eying a return to mainland China, after pulling out nearly a decade ago when Chinese hackers allegedly attacked its internal computing systems.
Shen, 47, one of China’s most successful investors in in the words of Forbesand the co-founder and former CEO of Chinese travel giant Ctrip , acknowledges that the Chinese market still presents a labyrinth of challenges for U.S. companies—particularly internet companies—and he makes a point of restating the obvious: not every online outfit can find success in the country. The Chinese government bans services like Facebook and Twitter because they can so easily spread dissent, and other companies will struggle to navigate both government regulation and the unique landscape of the local market. But he believes that certain American companies can thrive in China, even as the nation’s economy slows.
Shen straddles the U.S. and China markets like few others. Born in China’s Zhejiang province and raised in Shanghai, he studied business at Yale in the late ’80s and worked as a Wall Street investment banker with Citigroup in the early ’90s handling “emerging markets.” At the time, that meant Latin America. But in the middle of the decade, when the Chinese capital markets opened up, he joined Lehman Brothers in Hong Kong and later served as head of Chinese capital markets for Deutsche Bank. Then, as the internet boomed, he founded Ctrip, together with an old junior high school classmate, and in 2005, with the company’s market cap at $1.5 billion, he joined Sequoia, helping the firm launch its first Chinese fund.
“What we didn’t want was to set up a franchise operation, set up a dual-brand operation, or invest remotely. But, also, we didn’t want to control things centrally. If you take a bunch of American guys from Silicon Valley and they become the decision makers for what you do in China, that’s a formula for disaster,” says Sequoia partner Doug Leone . “[Shen] had the Chinese flavor, but he also understood what it meant to do business with American partners.”
With $6 billion under management, Sequoia China has proven unusually successful. At one point, according to Forbes , citing Chinese state figures, the firm held stakes in companies with a market capitalization of $400 billion. With the recent market downturn, this figure is surely much lower, but Shen believes Sequoia is well positioned for the long haul, mainly because it very much blends the American with the Chinese. “Sequoia is a global brand. But [Sequoia China] is very localized,” he says. “We make all the local decisions, including management decisions. Some investments may not make sense in the U.S., but they make sense in China.”
This is the same basic approach the firm takes in ushering the likes of Airbnb and LinkedIn into China. These companies seek to establish their own Chinese offices, but they’re doing so in tandem with local investors (including Sequoia Capital). And according to Shen, they aim to run these operations like local businesses—not merely as the branch offices of larger operations back in the U.S. This, Shen believes, is what other American companies have failed to do in the past.
It’s Not Evernote. It’s 印象笔记
Due to government restrictions, some U.S. internet operations have entered China without really entering China. Microsoft and Amazon offer their cloud computing services through local partners. “Governments have a role to play in protecting their citizens,” Microsoft CEO Satya Nadella told us this past fall, as we discussed the company’s Chinese cloud business. “You just have to have a framework to accommodate that.” Shen would agree, though companies like Airbnb and LinkedIn have retained more control of their Chinese operations through joint ventures. (Microsoft owns and published MSN.)
“Clearly, they don’t need our money, with a $40 billion market cap,” Shen says of Linkedin, “but they need our help to navigate the competitive dynamics and government regulation.” And even if the parent company retains control of the local operation, he says, the local operation must be given a certain degree of autonomy. “You can’t just come in a hire a Chinese GM. You won’t get the best of the Chinese talent,” he says. “The best talent is very entrepreneurial. They want to run their own business. For LinkedIn China, we hired someone on the ground to be their China GM, but he’s called the China CEO.”
That may seem like a fine distinction, but whatever the semantics of the situation, LinkedIn certainly melded its operation to suit the local market. LinkedIn China offers a new version of the social network called “Red Rabbit,” a version that operates entirely in Chinese and was built specifically for the way Chinese consumers use mobile devices. This is nothing less than essential in China, where consumers tend to prefer home grown services.
“In China, almost everyone uses the mobile phone as their first identity. They aren’t happy about email registrations,” Shen says. “Red Rabbit was, from day one, mobile. It did not have a desktop version.”
This jibes with the approach taken by Evernote. Setting up a joint venture with China Broadband Capital, the company established a local office, launched a local version of its service on local servers, even gave the service a local name (印象笔记, or Yinxiang Biji). And according to Shen, the company turned to Sequoia China as it sought a local CEO (the fund did not invest in Yinxiang Biji, but Evernote is part of the larger Sequoia portfolio). Yinxiang Biji general manager Amy Gu studied at Stanford’s business school with one of the firm’s local employees.
Airbnb is moving into the China as concerns mount over the local stock markets. But the stock market should not be confused with the wider economy. “The stock market is not terribly important,” says David Dollar, a macroeconomist with The Brookings Institute who specializes in China, previously worked for the World Bank, and lived in China for nine years. “It’s small in China, and not that many people are involved.”
Economic data, mostly gathered from outside the government, indicates that the economy continues to slow, but much of this is the result of changes in what Dollar calls “the old economy”—industry, manufacturing, and exports. Though the services sector may be slowing as well, this is a national economy in transition. In many ways, it’s still maturing. “If you look at the direction of China’s real economy, it’s still on an upward trajectory—although it is slowing in some ways,” says Ann Lee, a professor of finance and economics at New York University, who previously served as a visiting professor of macroeconomics at Peking University in China. “It will take a while for China to develop new sectors, including the services sector.”
As a venture capitalist, Shen is gazing beyond the recent turmoil. “We’re looking very, very longterm,” he says. In fact, the drop in the market may actually work to the advantage of local investors. “Valuations in the primary capital market might come down, become more attractive to investors,” he says. “It could be more of an opportunity, instead of bad news.”
Prices for homes in Silicon Valley are notoriously steep, with tech money contributing to an inflated real estate market that continues to grow in value.
Zillow helped us pull data on the most expensive listings in 14 Silicon Valley towns: Palo Alto, Atherton, Cupertino, Menlo Park, Woodside, Saratoga, Portola Valley, Los Altos, Los Altos Hills, Los Gatos, Hillsborough, Morgan Hill, Mountain View, and San Jose.
Atherton, which consistently ranks among the most expensive zip codes in the country, made the most appearances on the list, with five of the top 11 most expensive homes overall. Several tech billionaires, including Microsoft cofounder Paul Allen, HP CEO Meg Whitman, and Google chairman Eric Schmidt, are known to own homes here.
From a Los Gatos mansion with its own helicopter pad to a historic 40-acre hill estate in Woodside, some of these Silicon Valley homes are pretty out-of-this-world.
11. 18001 Wagner Road, Los Gatos – $14.498 million
This seven-bedroom home in ritzy Atherton has a sweeping driveway lined with palm trees. Inside, you’ll find high ceilings, dramatic chandeliers, and a gourmet kitchen. Additional amenities include a sauna, swimming pool, and tennis court.
According to the listing, this Atherton home has more than 17,300 square feet of space. Amenities include a home theater, wine cellar, two-bedroom guesthouse, and an elevator to access all three floors.
7. 1225 San Raymundo Road, Hillsborough – $19.75 million
With more than 12,000 square feet of space, this Atherton home would make for a lavish family retreat that is just minutes away from “tech giants,” according to the listing. There’s a large pool, putting green, and a wine cellar that can hold up to 5,000 bottles.
5. 11627 Dawson Drive, Los Altos Hills – $23.995 million
In the southern part of Silicon Valley, this 13,000-square-foot Saratoga home has a dramatic entryway. Inside, you’ll find seven bedrooms, 12 bathrooms, a home theater, infinity pool, cabana, and an au pair suite.
This 9,000-square-foot home in Atherton belongs to a prominent Silicon Valley financier. The house sits on nearly three acres of land, complete with a guest house, pool, tennis court, and expansive gardens.
2. 700 Kings Mountain Road, Woodside – $28.89 million
This 14,000-square-foot mansion is set on park-like grounds in Woodside. According to the listing, the home boasts four separate master suites, a 13,000-bottle wine cellar, and “award-winning gardens.”
Built in 1941, the Flood Estate sits on more than 40 acres of gorgeous rolling hills. The property includes plentiful gardens, a gatehouse, tennis court, swimming pool, and colonial-style main house with nine bedrooms. Previously listed for $85 million in 2012, the price was chopped to $69.8 million in 2013, and then to $39.98 million in May 2015.