Fidelity just wrote down the value of their Snapchat investment by 25%. You can read about it here.

It reminded me of when I learned the accounting rules on how these investments have to be valued. In terms of process, if you imagined a bunch of Fidelity analysts creating spreadsheets to come to some agreement on a quarterly fair value number, you’re right — but there’s a pretty complicated history here.

The Fair Value Trend

First, some background on the popularity of fair value measurement in financial accounting and its and steady rise over the last few decades. This article offers a great explanation on why:

One explanation for the rise of fair value accounting is that finance theory — in particular, the idea that financial markets are efficient and their prevailing prices are reliable measures of value — permeated academic accounting research in the 1980s and 1990s, thus changing opinions on the relative merits of historical cost and fair value.

Why is this relevant to Snapchat? Because the accounting rules around how assets are supposed to be “marked to market” are motivated by this idea. And that’s what brings us to TOPIC 820 (FKA FAS 157), proposed by the Financial Accounting Standards Board in 2006.

FAS 157 (AKA TOPIC 820)

FAS 157 was the big rule change that injected a heavy dose of “mark-to-market” into our early stage world.

FAS 157 became effective for fiscal years beginning November 15, 2007 and thereafter. According to the Summary: This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.

…defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

When you compared this to the old methodology, the latter seemed very intuitive and straight forward. In Brad Feld’s rant/post on FAS 157, he reminisces about the good old days:

Since the beginning of the VC business, valuation methodologies were generally consistent and straightforward. They were usually some variation of:

1. Value your investments at your cost.
2. If a financing happens at an increased valuation and is led by a new investor, write your investment up to the new price per share.
3. If a financing happens at a decreased valuation regardless of whether or not there is a new investor, write your investment down to the new price per share.
4. If bad things are happening, you can take a discretionary write down based on your best judgement.
5. If good things are happening, you should not take a discretionary write up. Only write things up in case #2.
6. If the company is public, use the publicly traded price but discount it due to illiquidity (usually 25%).

But no longer. In a nutshell, FAS 157 created a lot of pain. The whole exercise of arriving at a fair value on illiquid (Level 3) assets is much harder than getting an asset price for a publicly traded stock. Here’s Fred Wilson writing about it in 2009: The Valuation Blues (aka How FAS157 Is Tortuous). To start, their process involves creating spreadsheets, finding a handful of private and public comparables, calculating revenue and EBITDA multiples, quantifying traction, and getting a baseline comp. And that’s for each portfolio company!

So in summary, fair value measurement in venture capital is complicated voodoo. Topic 820 provides the guidelines that Fidelity uses to value their to portfolio. In the last quarter, their data and analysis required them to write-down the valuation of their Snapchat shares. If you read Fred Wilson’s post, you can see there are scenarios where the methodology produces non-intuitive results because of the reliance on market comparables. It’s something to keep an open mind about while you’re reading all these headlines about the sky falling at Snapchat.

As an aside, I wonder if GPs were expecting mutual funds to be so aggressive with their fair value accounting. I’m curious to see how this write-down affects the other VC funds holding Snapchat equity. Will they incorporate this signal from Fidelity and mark down their shares too? The answer to that question provides good insight into how a broad unicorn devaluation could unwind faster than we expected.

This was originally posted on John’s Medium.

This article was written by Kelly Hoey via Inc. It can be viewed in its original form here. 

Stories Matter: Beyond a purple female panda as the lead character, Pan the Fearless Beribolt is not like most kids’ stories. It was created by serial entrepreneur, Suzanne Xie, an immigrant from China who spent the first years of her life searching for her parents. She found them at age four, when they could finally afford to bring her to America.

Suzanne Xie sits at the dream intersection of creativity and technology. Suzanne is the founder of Hullabalu, a children’s media company reinventing storytelling. Hullabalu launched in 2013, and created “The Adventures of Pan,” the only original, episodic, interactive story series made especially for iPad. The newest book in the Pan Adventure Series (Book 5 The Shadow Stone) continues the perilous adventure for Pan, Chase and Locke as they must find a way to break out of prison, prevent an ancient evil from coming back to power, and locate Pan’s parents, all while avoiding the watchful eye of the villainous General Garin….

But let’s not get head of where our hero entrepreneur’s story began. Art is more than imitating life in each installment of Hullabalu’s “The Adventures of Pan”–and our digital hero’s journey is very much the startup founder’s life. Pan, the lead character is after all, Suzanne.

I know Suzanne having met her in the summer of 2012 when she pitched me the original idea for Hullabalu (more offline characters less immersive tech). It was Suzanne’s story, vision and experience as a startup founder which caught my eye (and angel investment). Suzanne’s personal story is very much the American Dream (immigrant, serial founder and a female founder) infuses each episode of Pan. More importantly for the storyline, it is the driving force behind Hullabalu’s big storytelling vision. Suzanne was born in 1984 in China (Jiangxi Province). When she was just over a year old, her parents immigrated to the United States. Suzanne remained behind in China with her grandparents who raised her until she was almost 5 years-old–the age when her parents could finally afford to bring her to America to live with them. The incredible sacrifices her parents made to create a better life for her is part of Suzanne’s entrepreneur DNA. She frequently reflects on their bravery, sacrifice, and incredible work ethic as she builds Hullabalu (her third startup) and carefully crafts each storyline. Every episode of Pan’s epic adventures distills the core values of leading with integrity into a fantastical and enriching story that aims to guide kids toward a high-achieving life path.

“Pan isn’t perfect. She makes mistakes, sometimes really silly ones, and learns from them. All the trouble Pan causes make her a stronger character in the end. Stories and parables have been used for centuries to entertain and educate kids and adults alike, and Pan is here to remind us that learning is a life-long process best experienced through trial and error, and action.”–Suzanne Xie

Redefining The Hero Of The Hero’s Journey

Every generation has been defined by a new medium. Every new medium has been defined by a storyteller. Today’s medium is mobile and Suzanne is determined not only to be that next leader on tablet–but she’s determined to have a strong female character at the center of the story. Pan is the only female heroine on tablet leading a team of both male and female characters. When developing the Pan series, Suzanne only found sparse examples of female heroines in stories for children, and those heroines were girls leading girls (Powerpuff Girls, My Little Pony) or lone female heroines (Dora, Olivia, etc.). Why couldn’t a girl (who happens to be a purple panda) lead an adventure through a magical world, plus cross cultural lines to make friends with warrior bunnies and find her inner courage along the way?

Suzanne further infuses each storyline with timeless lessons (courage, perseverance, and integrity) drawn from leadership institutions she admires, such as Harvard Business School, Boy & Girl Scouts and the U.S. Army.

Stories Powered by Technology…and Touch

Great storytelling may set you apart, but great technology gets you ahead. Suzanne and her team at Hullabalu are not just focused on the storyline: they are creating an entirely new genre of immersive, responsive media for a digital-first generation born into a world of tablets versus Saturday morning cartoons. Suzanne firmly believes it is the future of stories.

“We started Hullabalu to create the most engaging and enriching stories in the world. It was important to us to have strong heroes that kids could learn from, as stories shape children from an early age. With this in mind, we set out to create an entirely new genre of immersive, responsive media for a generation born into a digital world. The burgeoning medium of interactive stories is important. It’s the first step to inspiring kids to explore the world around them and learn about themselves along the way.”–Suzanne Xie

So Hullabalu is at its core, a technology company. The startup’s ability to create engaging stories depends as equally on its own proprietary technology as it does on the imagination behind Pan’s animated world. Suzanne and her team have built an animation infrastructure called Pegasus, which lets them build each new story in a fraction of the time it would take traditional animation studios (Disney himself would swoon). Layered on top of Pegasus is a data engine that makes Hullabalu’s content more engaging over time.

Developing Leadership is a Life-long Process

Suzanne learned at a young age the meaning of the American dream. Now with her third startup venture, she’s on a quest to translate those leadership values into each mobile adventure she creates. While achievement for Pan is a necessity for survival, Suzanne’s goal is for each story to inspire kids to reach for success and to do so with integrity.

Will a purple panda change the world? Suzanne hopes so. Pan is imperfect and courageous. She’s a flawed, growing leader who is intent on self-improvement and determined to succeed (spoiler alert: Pan’s challenges make her a stronger character). Throughout Pan’s journey, Suzanne and her creative team remind us that learning is a life-long process best experienced through trial and error, and interactive technology. As Pan’s popularity grows globally (Hullabalu’s first stories in the iTunes store have hit #1 in books in 38 countries including the United States, China, India and Saudi Arabia, and all those downloads equate to children all over the world have spending over 70 years engaging with Pan and her adventures), Suzanne and her team at Hullabalu teach the startup community another very valuable lesson: female founders can be successful startup leaders too.

 

This post was originally posted on TechCrunch here.

People have been talking about the death for Flash for years and years, and now it seems like the nails are finally being driven into the coffin, particularly in the online ad industry.

But Rob Cromer, co-founder and CEO of New York City startup Adcade, said the shift to the HTML5 format won’t be easy for everyone. There are teams of designers and developers who’ve spent years working with Flash products and workflows, and you can’t expect all of them to become proficient in HTML5 immediately.

That’s why Adcade is launching a new version of its Epoch ad builder, which is supposed to allow designers and developers to create HTML5 ads using familiar tools.

We’ve written previously about Adcade’s Adscript framework for building HTML5 ads. Adcade has been using Adscript to create ads for its clients, but with Epoch, the startup is moving toward a self-serve model, combining a straightforward framework for developers with an interface for designers to create ads without any coding at all.

“We said, all right, we’ve got this amazing tech, so how can we create an interface to turn this into a self-service model and take the political complications of the ad industry out of it?” Cromer said.

As far as “political complications” go, there are other WYSIWYG ad builders, including Celtra and Flite, but Cromer noted that they’re usually tied to a specific company’s ad server. Adcade, on the other hand, is focused entirely on the ad builder, resulting in ads that can run on any ad platform, including DoubleClick, Sizmek and Atlas.

Cromer and his co-founder/CTO Buzz Wiggins demonstrated Epoch for me, taking digital storyboard from Photoshop and turning it into ad in just a couple of minutes. Since Adcade’s LightSpeed technology exports a file from Photoshop with working layers, they pretty much had a functional ad from the start. However, they also quickly added animation effects in both the drag-and-drop view, and then in the code view. And a live preview showed them how their ad would look on multiple devices as they made their changes.

I don’t build a ton of ads myself, but the demo seemed to live up to Cromer’s claims of simplicity. Still, it felt a little old-fashion to be talking so much about display and banner ads, particularly given the current excitement about native ads and the worries about ad blocking.

“A massive, multi-billion dollar industry not going to collapse overnight because of ad blockers,” Cromer said. Instead, it’s going to “force us to ask the questions we should be asking anyway,” like figuring out the kinds of ads that consumers won’t mind seeing. Epoch can be a part of that solution, he said, because it offers an “extensible platform” that ad agencies that experiment with.

“I think traditional banner advertising is always going to have a have a place,” he added. “It’s a fast way for people to get their message across at scale.”

Epoch is available for $99 per user per month. Cromer said Adcade intentionally set the price point low so that it becomes a tool that’s used across the industry: “We want the entire ecosystem to come into it.”

TechCrunch readers who sign up for Epoch with the promo code “TECHCRUNCH” will get 25 percent off their first month.

This post was written by Brad Harrison

Last night, I had two great meetings scheduled back-to-back.

The first meeting was set up by an entrepreneur who I’ve known for about seven years.  I’ve been actively mentoring him to include recommending jobs that I thought would further develop his potential.  He asked me to meet with another entrepreneur whom he thought might be a perfect fit for one of our portfolio companies.  As he suspected, she is awesome, smart, articulate and happens to be extremely passionate about one area where we have both an investment and the potential opportunity for her to play a major role.

The second meeting was with a CEO of one of our portfolio companies where I am also on the board. Because I am involved in multiple ways, we spend a lot of time evaluating different strategic initiatives to grow the business. The reason for this meeting was to discuss an initiative that we both thought would be great for the business, but we had a disagreement on the execution strategy. I was upset because I thought he had initially cut me out of the process and was now asking me and my team to help him on certain things. These are things that would have never been an issue if we had executed the plan more inline with my original thinking. Turns out, there was a breakdown in communication and if we had simply had another conversation about the issue, we probably could have found a solution that worked better for both of us. I still love him, but it’s always good to have open and frank conversations to clear the air.

What I didn’t expect was the overlap between these two entrepreneurs last night. It provided an interesting environment where the entrepreneurs were talking about the value that we create as investors, but in very different contexts. Being in this position and industry, I have seen just about every roadblock that start-ups and growing companies encounter and most importantly, how to get past them. There were a couple of thoughts and insights that I wanted to share with you:

(1) If someone isn’t a fit either with work ethic or company culture, you need to make a change as soon as possible.  Most entrepreneurs really struggle when filling key positions early in their company’s evolution- as they should.  So the thought of spending six months to recruit a VP of Engineering, COO or Head of Marketing, and then realizing two weeks into the relationship that you made a mistake, is very emotionally taxing and terrible for morale. But that’s where we come in – our CEO said that pushing him and his co-founder to fire someone had totally changed the morale and company culture for the better and removed a huge weight from the founders already stressful lives.

(2) We all make mistakes, so make sure you discuss your mistakes to ensure they doesn’t happen again.  Being an entrepreneur often requires you to make decisions about things where you may have little or no experience. While we try and always make ourselves available as a sounding board for our entrepreneurs, inevitably they are going to make some decisions without any input. And in some cases, these decisions might not be the right decision for the business. Don’t linger on the mistake, move on and focus on being better next time.

(3) Building an awesome company should be fun. As we’ve discussed in the past, the level of stress that most entrepreneurs feel can be overwhelming, especially when you’ve raised money from friends and family. But it’s important to remember that you can’t perform at your best if you are constantly stressed, yelling at your team, or trying to do everything by yourself. Great companies are born out of great leaders – so spend time developing a positive and healthy company culture with regular team activities outside of the office.

As always, I hope this helps.

This post was originally published here by Corey Miller, Analyst at Scout Ventures.

Most people have heard of WeChat. Connie Chan recently wrote a great piece on the app and how it has grown into a behemoth in China. Basically, the gist is that what started as a messaging app has grown into a platform of sorts that hosts an abundance of other services within the app. This is the main reason why messaging apps such as Whatsapp, Kik, Viber, and Line have received remarkable valuations. The potential is clear: create an app that can essentially power other services (payments, bookings, chat, social media, etc) within itself and eventually grow into a consumer-centric giant. I’l refer to this strategy from here on out as an Application as a Platform (AaaP).

Although this approach has certainly succeeded in countries such as China, India, Brazil and many others, it hasn’t really taken off in the US. There certainly is the potential for it, though, since the most popular apps are owned/provided by large companies. Basically, as the number of apps continues to grow, so does the noise—and as a result, people continue to turn to established companies to act as gatekeepers for their attention.  So to take that one step further, if people are actively using relatively few apps on a consistent basis,  why not combine the features of many apps into one app that users spend most of their time in.

So, where does this leave us today? In the US, we are definitely starting to see companies attempt to emulate the WeChat model. Facebook should be the first to come to mind. As soon as Facebook launched Messenger as a standalone app, you could kind of see where they were going. Already, they’ve launched payments within Messenger, are testing an AI/Personal Assistant feature, and have continuously lobbied for apps to connect to it as well.  They even refer to Messenger as a platform on their website. In an ideal world, from a Facebook perspective, users could ditch apps such as iMessage, Venmo, Square, gaming apps, SMS, AI’s, etc and use Messenger as their go-to.

Snapchat is another emerging player in this space. The app, which is thefastest growing social network, has a very clear opportunity to monopolize on their wide-reaching user base. Besides ads, their Discover feature aims to be a place where users (who are mostly of the younger demographic) can gather news. You can definitely start to see Snapchat as an emerging AaaP then, especially as it adds potential features such as payments and commerce. Therefore, the potential becomes a scenario where users eventually replace news apps, payment apps, product-discovery apps with Snapchat.

It’s clear that Uber is not stopping at personal transportation. Aiming to be your on-demand solution for basically everything, you could see Uber to start to evolve into an AaaP. In this silo, a user can: order transportation, order food, and send/deliver shipments—thus effectively replacing the Postmates and Shyps of the world.

Although these apps are attempting to become emerging platforms, we should not forget the sleeping giants in the room: Apple and Google. If, one day, Apple decided to open up an iMessage API in the next iOS update, you could see a sort of native AaaP start to emerge. I don’t necessarily envision a scenario like this playing out since Apple likes to control every aspect of the user experience, but it’s worth noting they could do it if they determined the value was there.

In the end, it doesn’t seem that this market will evolve the same way as it has in China. Yes, users will continue to spend time in fewer and fewer silos, but it might not be a winner take all space. Uber could emerge as the on-demand AaaP, Snapchat as a content consumption AaaP, and Facebook as a social AaaP. Or maybe the United States consumer is a different beast altogether, and customers will stay loyal to an abundance of different apps (Venmo, Postmates, Shyp, etc. may very well have a permanent place in the mobile ecosystem).

Regardless of the end result, one thing is clear: as the mobile ecosystem matures, the emergence of new apps is becoming less and less common. As a result, dominant apps are beginning to integrate multiple functionalities into their silos to frame themselves as AaaPs. It certainly will be interesting to see the outcome of these developments in the coming years.

I recently sat down with Andrew Cohen, CEO and Founder of Brainscape. This is a summary of our conversation, which highlights Andrew’s background, vision, and his company. Answers to these questions are summarized responses.

How would you describe your original vision for Brainscape?

In 2011, I started Brainscape with the ambitious vision to help people study faster and more efficiently than ever before. Often, you’ll see founders’ vision change over time for a variety of reasons such as attempting to find better product-market fit or because his/her original idea simply wasn’t a great business idea. But I’ve remained steadfast in my original vision to alter the learning space for the better.

What is your background? How did you come up with the idea for Brainscape?

In 2006, I originally created my own prototype to study foreign languages while abroad. By 2011, after working as an eLearning consultant for a few years, I decided to take the plunge into the startup world and focus on building my vision full-time. At this point in my life, I had gained valuable working experience in the education space that, of course, directly applied to Brainscape.

How many people are on your team? How have you handled expansion?

It originally started with just me. After gaining initial traction and funding, I began to make 1-2 hires per year. Today, we have a total of 8 employees: four engineers and four operations/bizdev.

How did you find your first hire? What kind of position were you looking for?

Looking back, I wish I had spent more time looking for technical hires. Instead, I chose to focus more on finding education leaders who could help me with business and product development. When I realized I needed a full-time CTO, I decided to hire Jeff Holiday by doing an acqui-hire of his flashcard start-up (which was just him at the time). I think if I chose to start with a technical co-founder, the overall process would’ve run much more smoothly.

How did you meet Brad and Scout Ventures?

I actually met Brad at a party, funny enough. As you know, Brad is a sociable guy, and we just hit it off when we met. After a while, we started to discuss Brainscape and it went from there. He really bought into my vision and wanted to dig deeper in the ed-tech space. With his experience in business development and scaling startups, it became a natural fit for Scout to become an investor.

How would you describe your initial fundraising process? What do you wish you knew back then that you know now?

I touched a little bit on this before, but again, I wish I started with a technical co-founder, or at least knew how to write code myself. Originally, I figured that I could outsource building the initial product since it was cheaper to do so. But I quickly realized that outsourcing development takes much longer than building in-house because outsourced developers simply aren’t as committed to the cause as you’d like. So in the end, it costs about the same to develop in-house. I also wish I started with more of a lean-startup approach where I could have put out a minimal viable product and iterated upon that. Instead, I think I took too long developing the initial product.

Who is your customer and how do you go after them?

Our main customers are high school and college students that are trying to study more efficiently. We typically acquire new users through social and organic means such as word of mouth. We get pretty good, unsolicited, media coverage as well, such as being named one of Time’s must have back to school apps (Link Here). One of the main challenges we have is keeping churn relatively low. To combat this, we are consistently iterating on our user experience and developing new initiatives (which are in our development pipeline).

What is your revenue model?

We currently sell individual premium products and lessons. They are developed through partnerships we have with experts in their fields. Long-term, we want to develop a premium subscription model to focus on recurring revenue.

What are you current thoughts on the ed-tech sector?

I think the future really lies in adaptive learning. In my opinion, that combined with advances in cognitive science leads to a future where learning as we know it can be completely altered and developed more efficiently. More specifically, as companies develop faster iteration cycles through direct feedback mechanisms, knowledge will be acquired faster and cheaper than ever before.

This post was originally published here by Corey Miller, Analyst at Scout Ventures.