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Term Sheet — Thursday, August 4

August 4, 2016, 1:26 PM UTC

So You Want To Short the Startup Market? (Part 2)

This is Erin Griffith filling in for Dan while he’s on vacation. Send deal news and tips here. Feedback is welcome on Twitter.

On Wednesday I covered the various ways an investor could attempt to short the startup market, should they be so inclined.

A few readers chimed in to suggest finding a way to bet against private real estate funds aimed at startup and tech workers, including Menlo Equities Absolute Return Fund (it acquires and develops office property specifically in technology-oriented markets in the U.S.) and Essex Property Trust, a publicly traded residential REIT that operates in the San Francisco Bay Area.

Another, much simpler, approach would be to short a “basket” of 10 or so tech companies that have gone public in the last two to three years. Most have been lackluster.

But today I’m covering the only firm I could find that has the sole purpose of betting against the startup market: Snow Ventures.

The firm's founder, Alexander Campbell, spent the financial crisis on the prop desk at Lehman Brothers. Later, as an entrepreneur-in-residence at Thrive Capital, he learned about venture capital. He saw plenty of parallels between the VC world and the over-leveraged investment banks of the mid-2000s: lots of structure, illiquidity, people protecting themselves with random clauses and documents that are difficult to unravel, “viscious, nasty” debt, and a general lack of transparency in the market.

“I saw a lot of early investors, founders and employees getting subordinated, not really understanding that if your company takes $400 million on a $1.5 billion post-money valuation, it means you just got pushed 100 spots back in the cafeteria line,” Campbell says. What’s worse, he saw lots of founders and startup employees take the tiny amount of liquidity they had and plow it into another illiquid asset—San Francisco real estate.

So Campbell started his own fund aimed at helping the people who own startup shares—founders and employees, mostly—balance their risk. According to Campbell, even sophisticated people in the startup world don’t always realize how much macroeconomic risk they’re taking on. In Silicon Valley, particularly during past few boom years, macro factors like interest rates, oil prices, and the Chinese economy can seem like distant, irrelevant concerns. But the startup economy is absolutely tied to the macro environment, Campbell says. And right now he believes the the startup economy looks like “a country that’s running an account deficient that’s depending on foreign capital for liquidity.” The front door of Snow Ventures’ website declares: Winter is coming.

It’s tough to play the doomsayer in Silicon Valley, where it's normal or even encouraged to take irrational risks. (It's even worse to be the one profiting off of the failures of others. A big theme in the 2015 film The Big Short is the ethical implications of betting against people losing their homes.) Campbell admits that. Responses to his fund vary, he says. Employees and very early stage investors want to hedge. The early stage investors "are doing the hard work of taking the coffee meetings,” he says. “They know the system is subordinating them and they don’t have enough liquidity to hedge.”

Currently, Snow Ventures is managing a small amount of money from friends and family, using the strategy I described in yesterday's Term Sheet. The firm shorts publicly traded stocks that are exposed to the startup market and overvalued (Campbell counts Facebook and Chinese tech companies in this group) as well as publicly traded hedge funds that have large stakes in these companies.

The plan is to put together enough capital to ask a bank to “make a market” for Snow Ventures, similar to what Michael Burry of Scion Capital did in The Big Short.

The only problem is that the startup bubble could collapse before Campbell's fund is up and running. “If the market is down, it’s not the best time to buy protection,” he says.

Campbell isn’t hoping for a downturn in the startup market. But “if it were to happen, this is what you would want to do,” he says.

 Correction: Yesterday’s Term Sheet incorrectly reported the buyer for Portland, Ore.-based children's clothing label Hanna Andersson. L Catterton acquired the company. Sun Capital Partners was the seller. Apologies for the error.

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 Wal-Mart is in talked to acquire e-commerce startup for as much as $3 billion, according to the Wall Street Journal. Jet, which launched last year to take on Amazon, has raised $545 million in venture funding and is valued at $1.4 billion. Read more.


 RocketSpace, a tech campus and accelerator based in San Francisco, announced its first institutional round of funding. China's HNA Group will invest $336 million into the company. 

 Go-Jek, an on-demand motorcycle taxi service that competes with Uber and Grab in Indonesia, has raised $550 million at a valuation of $1.3 billion, TechCrunch reports. The deal could be announced this week. Read more.

 VIPKID, a Chinese education platform that connects kids with native English speakers for online language lessons, has raised $100 million in Series C funding from investors including Yunfeng Capital and Sequoia, TechCrunch reports. Read more.

 Yeildbot, an online advertising startup based in New York, has raised $35 million in funding from Staley Capital.

 Drizly, a Boston-based alcohol delivery startup, has raised $15 million in Series B funding in a round led by Polaris Partners with participation from existing investors.

 Spot.IM, an Israel-based social engagement platform for digital media companies, has raised $13 million in funding from Index Ventures, AltaIR and Norma Investments Limited.

 AirHelp, a New York-based startup that helps air passengers find compensation for delayed, canceled, or overbooked flights, has raised $12 million in Series A funding from Khosla Ventures and Evan Williams, according to TechCrunch. Read more. 

 Homebase, a San Francisco-based provider of timekeeping and scheduling software, has raised $6 million in Series A financing led by Khosla Ventures, with Baseline Ventures and Cowboy Ventures participating.

 Owlchemy Labs, a virtual reality and video game developer based in Austin, Texas, has raised $5 million in series A funding from Qualcomm Ventures, HTC, The VR Fund, Colopl Next, Capital Factory, and Austin entrepreneurs.

 Safanad Limited has made an undisclosed investment in CentralColo, a data centers operator for retail and wholesale services based in Silicon Valley. 

 SiteZeus, a Tampa, Fla.-based provider of location intelligence technology, has secured $1.5 million in led by Chuck Cooper, formerly CIO of Paylocity.


 Ardian is acquiring Ascendi Group’s stake in Ascendi PT II, an owner and operator of five motorways in North Portugal and Lisbon. Ardian will pay Ascendi a consideration of 600 million euros ($668 million), to which 53 million euros ($59 million) can be added.

 Dyal Capital Partners, a fund managed by Neuberger Berman Group, has bought a less than 15% stake in H.I.G. Capital, a PE firm based in Miami.

 Tengram Capital Partners is acquiring a majority stake in Algenist, a San Francisco-based skincare brand, from TerraVia, a nutrition and specialty ingredients company also based in San Francisco. TerraVia will receive approximately $20 million and retain approximately 20% of the company at close.

 Thomas H. Lee Partners has acquired Give and Go Prepared Foods, a manufacturer of baked goods based in Toronto. Give and Go has also concurrently acquired NAFTA CAT, a Toronto-based manufacturer of edible craft products.

 Excelle Sports, New York-based a women’s sports coverage platform, received strategic investments from Ropart Asset Management and The Madison Square Garden Company. Terms were not disclosed.

 Canada Pension Plan Investment Board has invested $280 million in Advance Disposal Services, a waste collection company based in Ponte Vedra, Fla. Advanced Disposal is owned by Highstar Capital.

 Jensen Hughes, a Baltimore-based fire protection engineering and consulting business, has acquired CASE Forensics, a Seattle-based provider of forensic science and engineering consulting services. Jensen Hughes is owned by Gryphon Investors. Terms were undisclosed.

 Apollo Global Management has acquired AmQuip Crane Rental, a Trevose, Penn-based provider of rental lifting services, from Clearlake Capital Group. Financial terms weren’t announced.


 First Hawaiian, the Honolulu-based bank controlled by France's BNP Paribas SA (EPA: BNP), has raised $485 million in an IPO, giving it a market valuation of about $3.21 billion. Goldman Sachs & Co, Bank of America Merrill Lynch and BNP Paribas are among the underwriters for the offering. Read more.


 ECI Partners and Livingbridge have sold their investment in Reed & Mackay, a corporate travel management company, to Inflexion. The sale generated a return of 3.4x to investors.

 Ripple, a San Francisco and Oakland-based news startup that draws on community contributors for coverage, has acquired Hoodline, another news platform also based in San Francisco that focuses on neighborhood coverage. Hoodline had raised funding from Sherpa Ventures and angel investors. Terms were not disclosed.


 Penn National Gaming (NYSE: PENN), an operator of gaming and racing facilities based in Wyomissing, Penn., acquired Rocket Games, a developer of social casino games based in San Francisco, California. The deal is worth $60 million with earn-outs going as high as $110 million.


 Arlington Capital Partners has raised $700 million for its fourth fund, which had a target of $575 million.

 Powerplant Ventures has raised $42 million for a new fund that aims to invest in emerging plant-centric companies.


 Kelly Rodriques has resigned as executive vice president of wealth services of Opus Bank and as CEO of PENSCO Trust, a subsidiary of Opus. Rodriques, who has led PENSCO since March 2010, will serve as a consultant to Opus. Curtis Glovier joins PENSCO as the new CEO from Fortress Investment Group.

 James M. Neissa has joined Rothschild & Co Group as Head of Rothschild & Co North America. Previously he worked as Joint Global Head of Investment Banking and a member of the Global Executive Committee at UBS. Lee LeBrun will also join Rothschild Global Advisory as Head of M&A in North America. LeBrun previously worked as Co-Head of M&A – Americas at UBS.

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