WTF is the denominator effect?

The last few weeks have just been dreadful for asset managers. Not only have the markets tanked the past few weeks (if slightly recovered from their lows since the signing of the U.S. stimulus bill), but the daily volatility of different assets is making it very hard to keep portfolios balanced. As an example, the key benchmark for oil is under $20 a barrel in the United States, a lot not seen in almost two decades.

So let’s talk about something that is quite stressful for a lot of VCs in this context: the so-called denominator effect.

Before we get to what the denominator effect portends for VCs, let’s define it. In the limited partner world, LPs are allocators of capital, which just means that they invest money in a collection of assets following a strategy. For instance, these LPs might have strategy of something like: “I want 60% equities, and 40% bonds” or perhaps something like “40% equities, 30% bonds, 10% VC, 10% hedge funds, and 10% natural resources.”

Every fund has its own goals. Some funds need more immediate liquidity to pay for operations (i.e. college endowments) while others focus much more on the future and don’t mind long hold periods on their assets (i.e. sovereign wealth funds). The role of a portfolio manager is to invest in assets in such a way as to match these objectives.

As part of operating any portfolio, a fund manager regularly rebalances it to make sure that the underlying assets align with the chosen strategy. If you personally use a modern asset management service like Wealthfront, then you are already familiar with this: every period (which could be months, quarters, years, etc.), the service transfers money between your assets to reset your portfolio back to its original strategy. So if you want 60% stocks, but your portfolio is at 70% right now, the service will automatically sell 10% of those assets in order to invest in other assets.

The primary fraction here is (the capital within an asset class) divided by (the total capital of the portfolio). Yes, it’s really simple math.

Here’s where it starts to get complicated though. Let’s say for illustration that you are managing a $1 million portfolio, and you have 70% ($700,000) invested in NASDAQ, which is relatively liquid, and the other 30% ($300,000) is invested in VC funds, which are highly illiquid since they can take ten years or more to be returned to you.

Let’s say your fund was balanced as of February 19, when the NASDAQ hit an all-time high close of 9,817.18. Since that time, NASDAQ has lost 20.57% in value according to Yahoo Finance. That means your overall portfolio is now worth about $856,010, or $556,010 for equities and still $300,000 for VC.

Even though you haven’t increased or decreased your investment in VC, your portfolio is now heavily skewed toward that asset class. Equities represent $556,010 / $856,010 = ~65% of your portfolio, while VC now represents ~35%, up from the intended 30% in your original strategy.

Given that skew, you should rebalance … but you can’t. Since VC funds have a ten-year fund cycle (if not longer), you can’t simply sell some VC assets and buy equities to rebalance your portfolio. The portfolio manager is effectively stuck.

That’s the “denominator effect” — a decline in the value of one asset should result in other assets being sold to properly rebalance a portfolio, but many assets like venture capital, private equity, real estate, natural resources and others can be quite hard to sell in the short-to-medium term.

Fractional ownership

That’s the outline of what the denominator effect is, but what does it mean in practice for VCs and ultimately for founders?

For VCs, the big challenge today is that many of their LPs are precisely in the situation described above, with over-investment in VC as an asset class and a huge liquidity crunch that they have to work through. LPs want (or in some cases, must) scale down their VC investments in order to make their funds function. Not only will they cut back investments in new funds, they don’t even want to invest in the funds they have already committed to.

The irony here is that given the declining valuations for a lot of startups, this is precisely the time to invest more. That’s the fundamental tension of the denominator effect — it isn’t about psychology or investor reticence driven by fear, but rather strategic considerations that are rational for a fund’s key objectives.

LPs have a couple of strategies on how to cope. One is that they sometimes have a bit of flexibility with their general partners to wait out the storm, since they can push them to slow down the pace of investing in order to reduce the volume of capital calls. In addition, they can halt the number of new funds they invest in or just stretch out the time it takes to make a new investment in order to spread their investments more evenly.

And then there is the secondary market, in which LPs sell their VC fund stakes in order to secure liquidity — a sliver of a market, but one that is quite interesting nonetheless. My colleague Connie Loizos talked a bit more about this angle last week, finding that these transactions will take some time to be consummated while the market discovers what startups are currently worth.

In short, due to the denominator effect, LPs are going to do whatever they need to do to rebalance their portfolios in the coming months. If the markets happen to rapidly recover, they might quickly reopen their investments in VC and other alternative assets. But if the markets stay sour for longer, then expect further downward gravitational pull on the VC asset class as portfolio managers reset their portfolios to where they need them. It’s the tyranny of fifth grade mathematics and a complex financial system.

The drunken HQ Trivia finale before it shut down was insane

“Not gonna lie. This f*cking sucks. This is the last HQ ever” yelled host Matt Richards . And it just got crazier from there.The farewell game of HQ Trivia before it shut down last night was a beautiful disaster. The hosts cursed, sprayed champagne, threatened to defecate on the homes of trolls in the chat window, and begged for new jobs. Imagine Jeopardy but Trebek is blacked-out.

Yesterday HQ Trivia ran out of money, laid off its 25 employees, and shut down. It was in talks to be acquired, but the buyer pulled out last minute and investors weren’t willing to pour any money into the sagging game show. It had paid out $6 million in prizes from its $15 million-plus in venture capital.

But HQ was in steady decline since February 2018 when it peaked at over 2.3 million concurrent players to just tens of thousands. The games grew repetitive, prize money was split between too many winners, original host and quiz daddy Scott Rogowski was let go, and the startup’s staff failed in an attempt to mutiny and oust the CEO. You can read how it all went down here.

But rather than wither away, the momentary cultural phenemenon went out with a bang. “Should HQ trivia shut down? No? Yes? Or f*ck no!” Richards cackled.

You can watch the final show here, and we’ve laid out some of Richards and co-host Anna Roisman’s choicest quotes from HQ’s last game:

  • “If you just got here, this is HQ Trivia. It’s a live mobile gameshow. We’re gonna read about 34 questions and then you’re gonna win about 2 cents and you’re gonna fucking loooooove it” -Roisman
  • “This $5 prize is coming out of my own pocket. We ran out of money. we just kept giving it away. We gave it all to the players to you, you loyal HQties” -Richards
  • “Take this time now to buy some extra lives, you never know when you’re going to need them. I wish we had an extra life for the company. I’m sorry. I fucking can’t. I’m gonna cry. My dogs eat $200 worth of food a day. My dogs are gonna starve” -Richards
  • “Why are we shutting down? I don’t know. Ask our investors. What am I going to do with my fish tank? I think our investors ran out of money” -Richards
  • “Who likes healthy snacks! That’s why the investors stopped giving us money, because there wasn’t any fucking snacks in this bitch. We were snackless. Who the fuck can work in a place without snacks!” -Richards
  • “I met a couple who told me HQ is part of their foreplay” -Richards
  • “Who’s going to miss the HQ chat? I’m going to miss all those people telling me I don’t have eyebrows or to do the Carlton” -Richards
  • “Maybe we should close every night. These are the nicest f*cking comments I’ve ever seen. Wow, you’re finally telling me I look hot. I tried for a year and ahalf -Roisman
  • [Reading comments] “‘won’t miss you at all, good riddance'” -Roisman. “Who said that? Let’s find that mothefucker and sh*t on his porch” -Richards
  • “Hire everyone! All the people who don’t have jobs they fucking rock!” -Richards
  • [While doing a headtand] “Someone hire me! I’m fucking talented” -Roisman
  • “We should have unionized a long time ago” -Richards
  • [To his girlfriend] “Hello baby! I don’t got a job, you still love me?” -Richards
  • “We bought this giant bottle of champagne for when we hit 3 million players” -Richards (HQ never got there)
  • [Shakening it up and opening to a disappointing trickle] “It wasn’t as big as I thought it was gonna be” -Richards.  “That’s what she said. It was anti-climactic” -Roisman. “Much like this episode” -Richards. “Much like this app” -Roisman
  • “They gave me like two double shots of tequila” -Richards, on why he was drunk

Then things really went off the rails at 41 minutes in, cued up here:

  • [Upon a bunch of people getting a question wrong] “Y’all fucking fucked up!  You are dumb! I’m kidding, you’re not dumb. You fucked up. It happens” -Richards
  • [Reading the final question together] “What does Subway call it’s employees? Ham hands, sandwich artists, or beef sculptors?”
  • “520 people are splitting $5. Send me your Venmo requests and I’ll send you your fraction of a penny” -Richards

Farewell, HQ Trivia, you glorious beast.

Court rules Mike Rothenberg must fork over more than $31 million to settle SEC allegations

Mike Rothenberg, the once high-flying VC bent on bringing the party to Silicon Valley, must now pay a whopping $31.4 million to settle a California federal court ruling in favor of Security and Exchange Commission allegations.

TechCrunch deemed Rothenberg a ‘virtual gatsby’ back in 2016, when we first broke the news about the downfall of his venture capital firm, Rothenberg Ventures. It seemed he took it as a compliment, changing his instagram handle to @virtualgatsby. Indeed, the name seemed appropriate for a man who seemingly lived a party boy lifestyle and spent lavishly to woo startup founders — including going on Napa Valley wine tours, holding an annual ‘founder field day’ where he rented out the whole San Francisco Giants’ baseball stadium and spending unsparingly to executive produce a video for Coldplay.

But the party life came to a halt when top leadership jumped ship and the SEC started looking into the books. The SEC formally charged Rothenberg in August of 2018 for misappropriating millions of dollars of his investors’ capital and funneling that money into his own bank account. Rothenberg settled with the SEC at the time and, as part of the settlement, was barred from the brokerage and investment advisory business for five years.

Rothenberg was later caught up in several lawsuits, including one from Transcend VR for fraud and breach of contract, which ended in a settlement. Another suit between Rothenberg and his former CFO, David Haase, ended with Rothenberg being ordered to pay $166,000 in damages.

But there was more to come from the SEC, following a forensic audit in partnership with the firm Deloitte showing the misuse or misappropriation of $18.8 million in investor funding. Under that examination, Deloitte showed Rothenberg had used the money either personally, to float his flashy lifestyle, or for other extravagances such as building a race car team and a virtual reality studio. Rothenberg has now been ordered to pay back the $18.8 million he took from investors, another $9 million in civil penalties, plus $3.7 million in interest.

Neither the SEC nor Rothenberg have responded for comment. It’s also important to note none of the charges so far have been criminal but were handled in civil court, as the SEC does not handle criminal cases. 

Through all of it, Rothenberg never admitted any guilt for his actions and it is important to note that, because of this in admission of any wrongdoing, he will be able to practice again after the bar is lifted in five years. He’s also made some decent early investments in startups like Robinhood and many investor sources TechCrunch spoke to over the years seemed quite loyal to him as an investor, despite the charges, employee mass exodus and fund implosion that followed. 

And it seems this saga is not over yet. Rothenberg told MarketWatch in a recent interview that he thought the ruling was, “historically excessive and vindictively punitive,” that he planned to appeal it and would be suing Silicon Valley Bank, which Rothenberg used to funnel several investments, over the matter. 

Rothenberg Ventures already filed suit against Silicon Valley Bank in August of 2018, the same day the SEC filed formal charges against Rothenberg himself. In that suit, Rothenberg alleged negligence, fraud and deceit on the part of the bank and sought a trial before jury. Silicon Valley Bank said it would defend against the case at the time.

We’ve reached out to Silicon Valley Bank and are waiting to hear back. The real question is, if Rothenberg were to come back to investing in Silicon Valley, would anyone still trust him? 

What is this weird Twitter army of Amazon drones cheerfully defending warehouse work?

Here is a strange little online community to puzzle at. Amazon has developed an unnerving, Stepford-like presence on Twitter in the form of several accounts of definitely real on-the-floor workers who regurgitate talking points and assure the world that all is right in the company’s infamously punishing warehouse jobs.

After Flamboyant Shoes Guy called out the phenomenon, I found 15 accounts (please don’t abuse them — they get enough of that already). All with “Amazon smiles” as their backgrounds and several with animals as profile pictures. All have the same bio structure: “(Job titles) @(warehouse shorthand location). (Duration) Amazonian. (2- or 3-item list of things they like.)” All have “FC Ambassador📦” in their name. All have links to an Amazon warehouse tour service.

And all ceaselessly communicate upbeat messages about how great it is to work at an Amazon warehouse and assuring everyone that they are not being forced to do this. The messages all seem cut from the same cloth, frequently along the same exact patterns:

The workers say that they don’t receive compensation for being ambassadors; it’s a “totally optional role” they have taken on voluntarily (Update: turns out they are paid to do this). They also claim to be warehouse employees in the ordinary sense. If so, they’re putting their numbers at risk by taking the time out to bang out long tweets hourly on how great they’re doing.

Their most frequent topics of conversation are how they get bathroom breaks, the pleasant temperature of the warehouses, the excellent benefits and suitable wages, friendly management and how the job isn’t monotonous or tiring at all. FC Ambassador Carol, for example, is downright elated to be a picker, and is clearly a Bezos admirer.

You can practically hear the smile on her face.

I have a friend who worked as a picker for a while, admittedly some years back. He said it was some of the most mind-numbing yet physically demanding work he’s ever done. I understand that some folks may just be happy to have a job with full pay and benefits — I’d never begrudge anyone that, I’ve sure felt that — but the unanimous and highly specific positivity on display in these ambassador accounts really seems like something else.

It’s no secret, after all, that Amazon has an image problem when it comes to labor. Reports have for years described grueling labor at these “fulfillment centers,” where footsore workers must meet ever-increasing daily goals, their time rigidly structured and room for advancement cramped. Just recently Gizmodo’s Brian Menegus has had a couple of great stories on current — not past — labor conditions at the company, and of course there have been dozens of such stories detailing exploitation or generally poor conditions over the last few years. And not just here in the U.S., either.

Certainly Amazon may have improved those conditions. And certainly they would want to get the message out. But these accounts are equally certainly not the grassroots advocacy they seem to be. (There’s already a parody account, naturally, or perhaps one of the ambassadors slipped the leash.)

I’ve asked Amazon for more details on what this program really consists of, and how it comes to pass that warehouse workers are being not paid to monitor Twitter, regularly rebutting critics with clearly canned stats and the kind of forced humor one would imagine they would indulge in if their overalls hid a shock collar. I’ll update this post if I hear back.

Update: Amazon says these “FC ambassadors are employees who have experience working in our fulfilment centers. It’s important that we do a good job of educating people about the actual environment inside our fulfillment centers, and the FC ambassador program is a big part of that along with the fulfilment center tours we provide.”

And yes, they are paid to do this. Being an “FC ambassador” is a full-time job, it seems. I’ve asked for further details, since the ambassadors seem to imply they do this just as a bit of extra responsibility at their regular job because they like teaching others so much.

It’s Friday so relax and watch a hard drive defrag forever on Twitch

It’s been a while since I defragged — years, probably, because these days for a number of reasons computers don’t really need to. But perhaps it is we who need to defrag. And what better way to defrag your brain after a long week than by watching the strangely satisfying defragmentation process taking place on a simulated DOS machine, complete with fan and HDD noise?

That’s what you can do with this Twitch stream, which has defrag.exe running 24/7 for your enjoyment.

I didn’t realize how much I missed the sights and sounds of this particular process. I’ve always found ASCII visuals soothing, and there was something satisfying about watching all those little blocks get moved around to form a uniform whole. What were they doing down there on the lower right hand side of the hard drive anyway? That’s what I’d like to know.

Afterwards I’d launch a state of the art game like Quake 2 just to convince myself it was loading faster.

There’s also that nice purring noise that a hard drive would make (and which is recreated here). At least, I thought of it as purring. For the drive, it’s probably like being waterboarded. But I did always enjoy having the program running while keeping everything else quiet, perhaps as I was going to bed, so I could listen to its little clicks and whirrs. Sometimes it would hit a particularly snarled sector and really go to town, grinding like crazy. That’s how you knew it was working.

The typo is, no doubt, deliberate.

The whole thing is simulated, of course. There isn’t really just an endless pile of hard drives waiting to be defragged on decades-old hardware for our enjoyment (except in my box of old computer things). But the simulation is wonderfully complete, although if you think about it you probably never used DOS on a 16:9 monitor, and probably not at 1080p. It’s okay. We can sacrifice authenticity so we don’t have to windowbox it.

The defragging will never stop at TwitchDefrags, and that’s comforting to me. It means I don’t have to build a 98SE rig and spend forever copying things around so I have a nicely fragmented volume. Honestly they should include this sound on those little white noise machines. For me this is definitely better than whale noises.

This robot maintains tender, unnerving eye contact

Humans already find it unnerving enough when extremely alien-looking robots are kicked and interfered with, so one can only imagine how much worse it will be when they make unbroken eye contact and mirror your expressions while you heap abuse on them. This is the future we have selected.

The Simulative Emotional Expression Robot, or SEER, was on display at SIGGRAPH here in Vancouver, and it’s definitely an experience. The robot, a creation of Takayuki Todo, is a small humanoid head and neck that responds to the nearest person by making eye contact and imitating their expression.

It doesn’t sound like much, but it’s pretty complex to execute well, which, despite a few glitches, SEER managed to do.

At present it alternates between two modes: imitative and eye contact. Both, of course, rely on a nearby (or, one can imagine, built-in) camera that recognizes and tracks the features of your face in real time.

In imitative mode the positions of the viewer’s eyebrows and eyelids, and the position of their head, are mirrored by SEER. It’s not perfect — it occasionally freaks out or vibrates because of noisy face data — but when it worked it managed rather a good version of what I was giving it. Real humans are more expressive, naturally, but this little face with its creepily realistic eyes plunged deeply into the uncanny valley and nearly climbed the far side.

Eye contact mode has the robot moving on its own while, as you might guess, making uninterrupted eye contact with whoever is nearest. It’s a bit creepy, but not in the way that some robots are — when you’re looked at by inadequately modeled faces, it just feels like bad VFX. In this case it was more the surprising amount of empathy you suddenly feel for this little machine.

That’s largely due to the delicate, childlike, neutral sculpting of the face and highly realistic eyes. If an Amazon Echo had those eyes, you’d never forget it was listening to everything you say. You might even tell it your problems.

This is just an art project for now, but the tech behind it is definitely the kind of thing you can expect to be integrated with virtual assistants and the like in the near future. Whether that’s a good thing or a bad one I guess we’ll find out together.

Elon Musk tweets he’ll “bet ya a signed dollar” that Thai cave rescuer is a “pedo”

Elon Musk seems not only intent on burning all the goodwill he earned for trying to help last week’s Thai cave rescue, but roll around in its ashes. In a series of extraordinarily offensive, now deleted tweets, the SpaceX and Tesla CEO called a British diver who participated in last week’s dangerous rescue mission a “pedo guy,” adding in another tweet “bet ya a signed dollar it’s true.”

Musk’s tantrum was triggered by an interview the diver, Vern Unsworth, gave CNN International last Friday, in which he said Musk could stick the small submarine he had SpaceX engineers build “where it hurts.” Though the submarine was intended to help the 12 boys stranded with their soccer coach navigate flooded cave passageways, Unsworth, who helped plan the rescue operation and recruited other cave diving experts, said it “had absolutely no chance of working.”

Unworth added that Musk “had no conception of what the cave passage was like. The submarine, I believe, was about 5 foot 6 long, rigid, so it wouldn’t have gone round corners or round any obstacles. It wouldn’t hadn’t have made the first 50 meters into the cave from the dive start point.” When the reporter mentioned that Musk had gone into the cave on Tuesday, Unsworth said he was “asked to leave very quickly. And so he should have been.”

The rescue mission, made even more challenging by monsoon season, claimed the life of a Thai Navy seal before all boys were saved last week.

This is not the first time that Musk has clashed with a member of the cave rescue team. As confirmation came in that the last group of boys and their coach had been freed on July 10, the head of the rescue mission, Narongsak Osatanakorn, told reporters that “although [Musk’s] technology is good and sophisticated it’s not practical for this mission.”

In response, Musk dismissed the credentials of Ostanakorn, who led the joint command center coordinating the operation and is former acting governor of Chiang Rai, the province where the cave is located. In a tweet he said Ostanakorn was “described inaccurately as ‘rescue chief'” and “is not the subject matter expert” (the Columbus Dispatch reports that Ostanakorn holds a Master’s degree from Ohio State University, where he studied geodetic engineering and surveying).

Though Musk’s dismissal of Ostanakorn brought him a round of criticism, many still gave him credit for his efforts. After all, engineering a submarine in a few days to save a group of children is an impressive and laudable feat. While Musk is known for going on strange Twitter rants, his attack on Unsworth is an entirely different stratosphere. In addition to defaming Unsworth in a particularly heinous way, the implication that a British diver would only go to Thailand, one of the world’s top diving destinations, for child sex tourism is problematic and arguably racist, as many people have pointed out.

TechCrunch has contacted SpaceX for comment on Musk’s remarks.

Apple devices are butt dialing 911 from its refurbishing facility – 20 times per day

 Since October, emergency responders in Elk Grove and Sacramento County, California have received over 1,600 false alarm 911 calls coming from an Apple repair and refurbishing site in the area.
It’s not clear if the calls are coming from Apple’s iPhones or Watches but each time a call originates out of the Elk Grove facility, there’s no one on the other end of the line and… Read More

The iced tea company that changed its name to include ‘blockchain’ retracts on bitcoin mining operation

 Remember the iced tea company that changed its name to Long Blockchain and immediately shot up by 500 percent on the stock market? Well, it turns out it may not be getting into the blockchain after all. The company has decided to back off from its pledge to buy 1,000 bitcoin mining machines — just six weeks after it said it would be doing so. Read More

Ello Again…

 The social networking platform splashed onto the tech scene promoting itself as an ad-free rival to Facebook. Soon millions of people (including yours truly) signed on just to see what all the fuss was about. The platform quickly ballooned to nearly 3 million community members in a short few months. The problem was no one knew what the hell this thing was. The logo was just a black dot with a… Read More