| | | | | The Weekend Pitch | May 9, 2021 ![]() | | Presented by Deloitte | | | | | The investment world lost a visionary this week with the death of David Swensen, the longtime investment chief of Yale's endowment.
Swensen's pioneering approach to long-term asset management left an indelible mark on endowments and pensions. The worlds of private equity and venture capital no doubt owe a debt of gratitude to his emphasis on alternative investments. Swensen was also an educator who left behind generations of students to carry on his legacy.
We'll have more on Swensen later in the newsletter, but first we turn to Robinhood, which had a terrible, horrible, no good, very bad week. I'm James Thorne, and this is The Weekend Pitch. You can reach me at james.thorne@pitchbook.com or follow me @jamescthorne. | | | | | |  | Warren Buffett's remarks during Berkshire Hathaway's annual meeting kicked off a rough week for Robinhood.
(Eric Francis/Getty Images) | | | A series of skirmishes thrust Robinhood's growing pains into public view once again, underscoring the company's mounting policy risks. Last Sunday, the online brokerage was criticized by the most respected investor in America, Warren Buffett, who worried that the platform caters to a gambling instinct and turns stocks into casino chips.
A day later, Robinhood blasted the "elites," who it believes are standing in the way of open market access.
"If the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing," Jacqueline Ortiz Ramsay, Robinhood head of public policy communications, wrote in a blog post.
Then on Tuesday, Robinhood's nascent crypto trading service temporarily crashed amid a frenzy for dogecoin. (For the uninitiated, dogecoin is a cryptocurrency created as a joke that is an homage to a meme of a Shiba Inu.) Robinhood was later forced to defend itself against an accusation that it was a "dogecoin whale" that holds around $25 billion of the cryptocurrency.
Gary Gensler, chairman of the SEC, testified before the House Financial Services Committee on Thursday about the risks posed by Robinhood.
Like Buffett, Gensler is concerned that platforms like Robinhood turn stocks into a game, prompting users to make more trades. This heightened activity is then made profitable through payment for order flow, a controversial practice of routing trades to market makers in exchange for cash.
Robinhood reportedly earned $331 million from payment for order flow in the most recent quarter. Of that, nearly two-thirds is said to have come from options trading.
Robinhood can write off Buffett, but not the SEC. And it would do well to heed the Oracle of Omaha's advice: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." There are many signs that we are living in greedy times, and that should make Robinhood fearful.
The Federal Reserve this week warned that frothy asset prices were "vulnerable to significant declines should investor risk appetite fall." It's not just public equities: Venture capital valuations grew sharply in the first quarter to build on last year's already elevated figure, especially for large late-stage rounds, according to the latest PitchBook-NVCA Venture Monitor. As for cryptocurrencies, well, you know that story.
For better or worse, Robinhood has emerged as a home for the greedy. In a seemingly fearless market, its customer base has ballooned to more than 13 million.
As Robinhood prepares for an IPO later this year, the company might consider what will happen—and who might get blamed— if and when that greed turns to fear. In a stock rout, will the hordes of meme stock traders follow Buffett's oft-quoted advice, or will they panic and sell?
A market correction could be a bloodbath for novice day traders, especially those who trade options or on margin. If the GameStop saga is any indication, regulators and politicians have already selected Robinhood as their favorite scapegoat.
Here's a modest proposal: Instead of sparring with Buffett, the company could use its platform to encourage the sort of common sense behavior that he has long proselytized. Robinhood already knows how to do this. The company's gamified interface can be used for good by implementing behavioral tricks that nudge people toward longer holding periods, diversified portfolios and other sensible goals.
Criticism aside, Robinhood has much to celebrate, and it deserves credit for introducing a new generation of investors to equities. Moreover, its plan that reportedly would allow users to participate in upcoming IPOs—including its own—could be revolutionary.
It is unclear how dependent Robinhood's business model is on active trading, or whether it can wean itself off the fat checks that payment for order flow provides.
But the company's upcoming S-1 filing should clarify the matter by showing just how important those order flow payments are. It may be that long-term investors aren't a particularly good fit for Robinhood's business.
Even if that's the case, Robinhood would be wise to put its users' financial health first, protecting both a generation of investors and its own self-interest.
As Buffett has said, "The most important thing to do if you find yourself in a hole is to stop digging." | | | | | | | | | | | | Planning post-SPAC life as a public company | | Life as a newly public company requires processes, policies and people to manage governance, IT, financial reporting and tax. Many of these actions have to be taken before the first day of trading, or in the days and weeks immediately after the de-SPAC transaction.
Since no two post-SPAC companies will be the same, the plan and workload will need to be tailored for each company, with likely many of the work streams running on parallel tracks. After a de-SPAC transaction, a company must address a number of matters that can be broadly categorized into six work streams.
Read the full report | | | | | | | | | David Swensen ran Yale University's endowment for more than 30 years, and through his influence reshaped entire asset classes. He died of cancer this week at 67.
Swensen's approach, known as the Yale model or endowment model and described in his book "Pioneering Portfolio Management," is famous for its emphasis on alternative assets like hedge funds, private equity and venture capital. Versions of the model have since been widely adopted, and several large endowments are now run by Swensen's many protégés.
Yale's endowment stood at $31.2 billion as of last year and has returned 9.9% annually over the last two decades, easily outpacing US stocks despite lagging them in recent years. More than 40% of its holdings are in private equity and venture capital.
Under Swensen, the endowment has also been near the front of a movement to marry ethics with investing. It has forsworn private prisons, retailers of assault weapons and any company that fails to account for climate change. Last year, Swensen asked the endowment's money managers to disclose data on the diversity of their teams and signaled his intent to hold them accountable for hiring and training underrepresented groups.
After his passing, colleagues, former students and investors shared their appreciation:
"[H]e was a teacher, mentor and partner to nearly everyone he encountered. His legacy will live on in the incredible diaspora of Yale endowment alums who practice their profession in the long shadow that David's mentorship casts."
—Scott Kupor, managing partner at Andreessen Horowitz
"David Swensen was a legendary man whose impact on Yale can't be easily described. The measure of who he is is in how many people counted him a friend, a mentor and champion. He was all of those things to me. What a life."
— Ann Miura-Ko, co-founding partner at Floodgate
"He left a remarkable legacy: a distinctive investment model anchored in humanism, and a commitment to sharing his knowledge."
—William Goetzmann, professor of finance at Yale | | | | | | "Institutional LPs are overrun and out of slots for VC funds."
—Lindel Eakman, a partner with Foundry Group, which manages an LP effort alongside its direct venture investing strategy | | | | | | ... Cyber bets are on the rise? PitchBook analysts forecast cybersecurity spending will bounce back strongly in 2021 after only growing 7.9% in 2020. - In the first quarter, venture-backed security companies raised $4.4 billion, an increase of 75% over the same period a year ago, according to PitchBook data.
- The market in 2021 is expected to be worth $157.8 billion, with 10.8% growth year-over-year. This is partly a reflection of a spate of high-profile cyberattacks like the Sunburst attack on SolarWinds and Hafnium attack on Microsoft Exchange. Read more in our Information Security Q1 VC Update.
| | | | | | | Tiger Global reportedly has already set out to raise a targeted $10 billion fund, just weeks after the firm pulled together a $6.7 billion fund. The Financial Times report of Tiger's latest effort may be seen as a sign of the increasing pace of megafund creation. But PitchBook data shows that the time of fundraising between funds is actually in line with historical trends (source: Funds overview page in platform/all fund classes globally). | | | | | |  | President Joe Biden has proposed a major investment in semiconductor manufacturing and research.
(Doug Mills/Getty Images) | | | | | Some of the most active investors in VC-backed semiconductor companies have ties to the Chinese government, including Shenzhen Capital Group and CAS Investment Management, according to PitchBook data. Read about that and the quarterly record in global VC investing in chip-industry startups. | | | | | | In 1845, Warrant Officer John Gregory's ship vanished in the Arctic while on an expedition to find the Northwest Passage. Now, DNA may offer a clue as to what exactly happened. [The New York Times]
The case for moving back to your hometown. [The Atlantic]
Many business owners and residents in London believe in the city's ability to recover after the pandemic. But inequalities in housing, health and opportunity are leading some to wonder if a return to "business as usual" is for the best. [Financial Times]
The chip shortage keeps getting worse, so why can't we just make more of them? The answer is both simple and complicated. [Bloomberg]
It's no secret that Facebook has been caught up in regulatory and PR nightmares in recent years. But CEO Mark Zuckerberg has a plan to repair the social media giant's image with … more of himself. [The Information] | | | | | | | | | | | This edition of The Weekend Pitch was written by James Thorne and Alec Davis. It was edited by Alec Davis and Kate Rainey.
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