8 ms·

While I'm not intending to be heavy-handed and reductionist, I think the (macro) trend(s) we've seen in (domestic) startup investment since 2008-2009 can satisf

While I'm not intending to be heavy-handed and reductionist, I think the (macro) trend(s) we've seen in (domestic) startup investment since 2008-2009 can satisfactorily explain this behavior. Disinflation & deflation, capital flows and political friction preventing effective (any?) fiscal policy have produced an environment where private capital set on a given rate of return on investment is chasing increasingly risky organizations [1][2]. Large firms have been sitting on enormous sums of cash; e.g., why is it that the most capitalized company on earth isn't investing aggressively. In lieu of investment, many of these firms have been focused on engineering stock buybacks. So, the thesis: why are so many firms pouring money into startups with increasingly questionable fundamentals? Because hands previously gripping bundles of capital have (nominally) more capital than they did with decreasing options for productive investment and downward pressure on returns. 1. http://www.economist.com/blogs/freeexchange/2015/04/puzzles http://www.economist.com/blogs/freeexchange/2015/04/puzzles 2. http://krugman.blogs.nytimes.com/?s=low+inflation+return+investment http://krugman.blogs.nytimes.com/?s=low+inflation+return+inv... P.S. I recognize that I'm probably a bit left field for this group as I'm not a libertarian, I support strong regulation and I question the marginal value of lots of Valley products.

idlewords 11y ago
I think this is a pretty clear failure of capitalism, since the whole point of having greedy, top-hat-wearing capitalists chasing profits is to have them re-invest that profit in the hopes of making more. In the meantime, they compete with each other and end up magically allocating resources in a socially useful way. Instead, big companies sit on their profits (like you say), while startups compete for the attention of a small group of investors who behave for all the world like the central planners of old, deciding how to allocate money based on their own tastes, interests, and gut feelings, rather than anything resembling a market test. Goes off to have red flag dry-cleaned
- 7Figures2Commas 11y ago
  Correction for you: I think this is a pretty clear failure of corporatism...
  - seiji 11y ago
    capitalism is capital-ism which is predicated on literally: the more capital you have, the more revenue you get in return (which lets you buy more capital, which lets you sell more things and receive more revenue). Except, these days, nobody needs to continue buying capital or purchasing labor with their revenue. You can sit back on your unlimited money makers, receive hundreds of billions of dollars in profit, then just hoard it. In a knowledge/skills economy, you can't grow by throwing money at people (since only a chosen few hundred or few thousand are driving things forward anyway). In fact, once you're at virtual peak productivity, investing more would only make things worse due to increased internal coordination costs (meetings! knowledge sharing!) and internal politicking (no—I want to run the new project and I'll turn everybody else against you until it happens!). If you don't have a use for $100 billion dollars today, why would you turn around and invest it to get $500 billion dollars you also have no use for?
  - rodgerd 11y ago
    No true Scotsman.
- irln 11y ago
  I think this is a failure of anything that has very few actors making decisions. Central planning (not a political statement) does not work well in economies.
- rgarrett88 11y ago
  I think the failure is in the tax code. Large corporations able are able hire expensive lobbyists and accountants to pay much lower taxes than smaller upstarts. This gives them an advantage and allows them to crush innovative smaller companies before they can scale. Until we fix the tax code to favor small businesses this problem will continue to grow.
  - shawnee_ 11y ago
    Tax code isn't really a problem for companies that have little to no profit -- which is most "small upstarts". The great fallacy of most political debate on economics is that taxes hurt small business. Extortionate rents hurt small businesses far more than taxes do. The way the original tax code was written was to give either individuals or the small businesses they work for a break -- up to a certain point [source: https://books.google.com/books?id=ogUNAAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&hl=en#v=onepage&q&f=false https://books.google.com/books?id=ogUNAAAAYAAJ&printsec=fron...]. But to necessarily kick in at some critical point where 1 + 1 = 1. This is a theoretical stage where potential for exploitation deserves a slight downward pressure (partnerships operating as a single business unit, corporations of 1+ people subjected to a single tax bill). Tax higher incomes at higher rates ... makes sense: Try and keep disproportionate wealth all to yourself, pay more in taxes (forced payments to social welfare). Generously reward your workers, and hey -- it's theoretically possible to pay everybody decently, reward external shareholders, and to minimize tax paid to the social welfare system. But the problem is REITs, especially private ones. And especially when VCs are the landlords; they're making money even when "they're not" making money. Which is the core of the issue that rgarrett88 got: lobbying - yes. The NAR, especially. But that's another tangent entirely.
- snowwrestler 11y ago
  I don't understand this. When big companies "sit on their profits," that capital is invested somewhere. It's not like companies have big Scrooge McDuck tanks full of gold coins. The capital might be invested in fairly generic, low-return assets but it's still invested and doing work somehwere. It doesn't mean it's a failure of capitalism. Capital allocation doesn't need to agree with your (or anyone in particular's) preferences at every point in time, for capitalism to work.
  - idlewords 11y ago
    As best I can tell, it's invested in US treasuries and corporate bonds [http://www.theguardian.com/business/2015/feb/02/apple-cash-mountain-grows http://www.theguardian.com/business/2015/feb/02/apple-cash-m...]. It's doing much less work than if Apple paid it out as a dividend, or spent it on Bentleys for all its employees, or invested it in creating some new product category. And we don't see a penny of it paid as taxes.
    - aetherson 11y ago
      If it's effectively taken out of circulation, it deflates all other currency.
- sbuttgereit 11y ago
  A failure of capitalism? I have to question the premise. Capitalism does not have as a goal some social-utilitarian purpose. Capitalism is practiced by individuals for their own self-interest. Sometimes they work together for a shared self-interest (e.g. corporations, investor groups) or they work against each other as needed (competition). But you cannot take self-interest out of the equation and still have capitalism. Every trade (be that stock for cash, or work for cash, etc.) is predicated on each of the parties fulfilling their individual needs and wants to the degree that they can. On it's own terms, capitalism hasn't failed at all. What you can say is that capitalism has failed to mollify those that seek non-capitalistic goals. This is true of some so-called capitalists who experience guilt in pursuing their self-interest as well. If your view is that capitalists are "greedy, top-hat-wearing" types that fail to meet your social welfare goals, then my bet is your characterization masks a larger purpose. Primarily at bringing them down, probably in favor of the central planners of old (or some degree thereof). Perhaps the real question should be: why would companies and individuals with captial choose to sit on it, or choose to spend it on relatively worthless start-ups? Why would a capitalist choose to sit on cash or buy-back shares if there are other, more profitable avenues to invest those funds? I think if you take a critical look at it you might find that there's still a fair amount of central planning behind what we'd like to think is a capitalist economy.
  - cwyers 11y ago
    I mean, when Adam Smith says "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," he's not saying that in support of self-interest, he's saying that in support of OUR DINNER. The point of capitalism as economic system is not that self-interest is inherently good but that self-interest can be yoked to "some social-utilitarian purpose." Of course, Adam Smith's opinion of corporations was "The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own," and he thought they'd all die out unless they were propped up like the East India Company, so it's not like the Wealth of Nations is much of a guide to what we call capitalism nowadays. But still.
- Double_Cast 11y ago
  Capitalism does not oblige anyone to invest their capital immediately and whenever possible. If the majority of the market chooses to withhold its capital, then withholding capital is likely a rational response to market conditions. > Hutt goes for the heart of Keynes’s prescription for recovery, which was to get idle resources moving, whether that is money, capital, or labor. If something isn’t being employed right now, it is being wasted. > Hutt responded at length that there is nothing uneconomic or necessarily inefficient about an idle resource. It is the decision of the owner to hold back when faced with a long-term plan, a judgment call concerning risk, a high reservation wage, or a demand for larger cash balances. https://mises.org/library/theory-idle-resources-0 https://mises.org/library/theory-idle-resources-0
darkmighty 11y ago
Yes and I believe even emerging markets have dried down a little recently. None of the BRICs is looking like a great opportunity (considering risks), interest rates have been very low both in EU and US. As much as the sums seem enormous, software startups are comparably cheap, which mitigates their high risk -- e.g. look at industries like oil, mining, real estate, chemical.
deleted 11y ago
[deleted]
eru 11y ago
> Large firms have been sitting on enormous sums of cash; e.g., why is it that the most capitalized company on earth isn't investing aggressively. In lieu of investment, many of these firms have been focused on engineering stock buybacks. Ie they have essentially been paying dividends. Working as intended.
- yorkedork 11y ago
  What is it that's working as intended? The process of buying back shares of your own company? If you read what I wrote carefully, you should notice something that I didn't say: AAPL has a bunch of cash and is using it to fund its stock buyback program. Thus, capitalism has failed. In fact, I was attempting to elucidate the OP's topic. I believe a reasonable interpretation to be: why are so many startups with weak fundamentals and/or specious business models receiving so much funding via private equity? My response to this question was to observe macro-level phenomena and speculate that the _emergence_ of this dynamic was due to a broad-based failure in matching capital with desired investment risk and return. I mentioned Apple to demonstrate what a capital hoarder has done (which is to reinvest in its own equity) in relief against private equity firms. In a global environment where demand for safe assets exceeds supply, less risk-averse firms are chasing further risk to maintain their desired level of return. None of these points, I thought, required a race to defend attacks against capitalism; however, in the interest of demonstrating my sincerity, I'll share a couple of my own positions I believe are loosely-relevant to the broader discussion: * Capitalism maximizes human capital: no * Efficient markets hypothesis: wrong-headed, at best * Moralizing capital: one of the most socially and politically toxic behaviors It is my view that capitalism is a set of prescriptions which seek to define and regulate economic behavior. Further, it seems misguided to say simply that capitalism has succeeded or that it failed. A better alternative might be to say: given a set of expectations, a capitalist environment produced correct or incorrect results. Or, a more politically-charged example: capitalism has succeeded (or failed) in maximizing, e.g., environmental capital, human capital, social welfare or aggregate happiness. In any case, I now regret side-tracking myself and I don't find it particularly relevant to be debating the merits of capitalism in this context.
  - 11y ago
slsii 11y ago
There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes. The cash is collecting dust abroad, and large tech companies are waiting for a tax holiday, for which there is precedent [0]. There are a number of fascinating reasons why companies may hold cash (e.g., it's been suggested that companies with CEOs that grew up during the Great Depression hold (held) more cash than those that didn't). [1] That said, it does appear that taxes seem to be one of the more significant (if not the most significant) reason in our current economic climate. [0] https://en.wikipedia.org/wiki/Repatriation_tax_holiday https://en.wikipedia.org/wiki/Repatriation_tax_holiday [1] http://www.rhsmith.umd.edu/files/Documents/Departments/Finance/Dittmar.pdf http://www.rhsmith.umd.edu/files/Documents/Departments/Finan...
- yorkedork 11y ago
  >There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes. Absolutely. I'll claim no authority to speak on corporate tax policy (at least from the perspective of firms); on the face of it, I can imagine that it might be reasonable to suggest that tax policy is the major contributor to the dynamics of firm investment behavior. I wasn't, however, really sincerely questioning why, e.g., AAPL is accumulating cash or necessarily correlating that fact with domestic investments. It was sloppy writing on my part, but my intent was only to give an obvious example of capital accumulation. Surely, cash is not the only means of firms funding investments. Firm investment behavior will be guided by a variety of factors; my thought was to point to macroeconomic factors like insufficient aggregate demand, capital flight from EM and persistent deflationary pressure to provide simpler explanation to the conclusions of the OP.
- nazka 11y ago
  To add more to that on MoneyMorning[1]: "But why does the cash keep piling up? Why doesn't Apple spend it? One issue is that Apple is holding most of that cash overseas to avoid paying the steep 35% U.S. corporate tax. As of Q3, almost 90% ($181 billion) remains offshore." There is great video and article about it on Bloomberg[2]. A lot of companies are on the same boat not just Apple. [1]http://moneymorning.com/2015/07/27/how-much-cash-does-apple-have-nasdaq-aapl/ http://moneymorning.com/2015/07/27/how-much-cash-does-apple-... [2]http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s-181-billion-headache-apple-s-cash-held-overseas http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s...

idlewords 11y ago

I think this is a pretty clear failure of capitalism, since the whole point of having greedy, top-hat-wearing capitalists chasing profits is to have them re-invest that profit in the hopes of making more. In the meantime, they compete with each other and end up magically allocating resources in a socially useful way. Instead, big companies sit on their profits (like you say), while startups compete for the attention of a small group of investors who behave for all the world like the central planners of old, deciding how to allocate money based on their own tastes, interests, and gut feelings, rather than anything resembling a market test. Goes off to have red flag dry-cleaned

7Figures2Commas 11y ago
Correction for you: I think this is a pretty clear failure of corporatism...
- seiji 11y ago
  capitalism is capital-ism which is predicated on literally: the more capital you have, the more revenue you get in return (which lets you buy more capital, which lets you sell more things and receive more revenue). Except, these days, nobody needs to continue buying capital or purchasing labor with their revenue. You can sit back on your unlimited money makers, receive hundreds of billions of dollars in profit, then just hoard it. In a knowledge/skills economy, you can't grow by throwing money at people (since only a chosen few hundred or few thousand are driving things forward anyway). In fact, once you're at virtual peak productivity, investing more would only make things worse due to increased internal coordination costs (meetings! knowledge sharing!) and internal politicking (no—I want to run the new project and I'll turn everybody else against you until it happens!). If you don't have a use for $100 billion dollars today, why would you turn around and invest it to get $500 billion dollars you also have no use for?
- rodgerd 11y ago
  No true Scotsman.
irln 11y ago
I think this is a failure of anything that has very few actors making decisions. Central planning (not a political statement) does not work well in economies.
rgarrett88 11y ago
I think the failure is in the tax code. Large corporations able are able hire expensive lobbyists and accountants to pay much lower taxes than smaller upstarts. This gives them an advantage and allows them to crush innovative smaller companies before they can scale. Until we fix the tax code to favor small businesses this problem will continue to grow.
- shawnee_ 11y ago
  Tax code isn't really a problem for companies that have little to no profit -- which is most "small upstarts". The great fallacy of most political debate on economics is that taxes hurt small business. Extortionate rents hurt small businesses far more than taxes do. The way the original tax code was written was to give either individuals or the small businesses they work for a break -- up to a certain point [source: https://books.google.com/books?id=ogUNAAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&hl=en#v=onepage&q&f=false https://books.google.com/books?id=ogUNAAAAYAAJ&printsec=fron...]. But to necessarily kick in at some critical point where 1 + 1 = 1. This is a theoretical stage where potential for exploitation deserves a slight downward pressure (partnerships operating as a single business unit, corporations of 1+ people subjected to a single tax bill). Tax higher incomes at higher rates ... makes sense: Try and keep disproportionate wealth all to yourself, pay more in taxes (forced payments to social welfare). Generously reward your workers, and hey -- it's theoretically possible to pay everybody decently, reward external shareholders, and to minimize tax paid to the social welfare system. But the problem is REITs, especially private ones. And especially when VCs are the landlords; they're making money even when "they're not" making money. Which is the core of the issue that rgarrett88 got: lobbying - yes. The NAR, especially. But that's another tangent entirely.
snowwrestler 11y ago
I don't understand this. When big companies "sit on their profits," that capital is invested somewhere. It's not like companies have big Scrooge McDuck tanks full of gold coins. The capital might be invested in fairly generic, low-return assets but it's still invested and doing work somehwere. It doesn't mean it's a failure of capitalism. Capital allocation doesn't need to agree with your (or anyone in particular's) preferences at every point in time, for capitalism to work.
- idlewords 11y ago
  As best I can tell, it's invested in US treasuries and corporate bonds [http://www.theguardian.com/business/2015/feb/02/apple-cash-mountain-grows http://www.theguardian.com/business/2015/feb/02/apple-cash-m...]. It's doing much less work than if Apple paid it out as a dividend, or spent it on Bentleys for all its employees, or invested it in creating some new product category. And we don't see a penny of it paid as taxes.
  - aetherson 11y ago
    If it's effectively taken out of circulation, it deflates all other currency.
sbuttgereit 11y ago
A failure of capitalism? I have to question the premise. Capitalism does not have as a goal some social-utilitarian purpose. Capitalism is practiced by individuals for their own self-interest. Sometimes they work together for a shared self-interest (e.g. corporations, investor groups) or they work against each other as needed (competition). But you cannot take self-interest out of the equation and still have capitalism. Every trade (be that stock for cash, or work for cash, etc.) is predicated on each of the parties fulfilling their individual needs and wants to the degree that they can. On it's own terms, capitalism hasn't failed at all. What you can say is that capitalism has failed to mollify those that seek non-capitalistic goals. This is true of some so-called capitalists who experience guilt in pursuing their self-interest as well. If your view is that capitalists are "greedy, top-hat-wearing" types that fail to meet your social welfare goals, then my bet is your characterization masks a larger purpose. Primarily at bringing them down, probably in favor of the central planners of old (or some degree thereof). Perhaps the real question should be: why would companies and individuals with captial choose to sit on it, or choose to spend it on relatively worthless start-ups? Why would a capitalist choose to sit on cash or buy-back shares if there are other, more profitable avenues to invest those funds? I think if you take a critical look at it you might find that there's still a fair amount of central planning behind what we'd like to think is a capitalist economy.
- cwyers 11y ago
  I mean, when Adam Smith says "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," he's not saying that in support of self-interest, he's saying that in support of OUR DINNER. The point of capitalism as economic system is not that self-interest is inherently good but that self-interest can be yoked to "some social-utilitarian purpose." Of course, Adam Smith's opinion of corporations was "The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own," and he thought they'd all die out unless they were propped up like the East India Company, so it's not like the Wealth of Nations is much of a guide to what we call capitalism nowadays. But still.
Double_Cast 11y ago
Capitalism does not oblige anyone to invest their capital immediately and whenever possible. If the majority of the market chooses to withhold its capital, then withholding capital is likely a rational response to market conditions. > Hutt goes for the heart of Keynes’s prescription for recovery, which was to get idle resources moving, whether that is money, capital, or labor. If something isn’t being employed right now, it is being wasted. > Hutt responded at length that there is nothing uneconomic or necessarily inefficient about an idle resource. It is the decision of the owner to hold back when faced with a long-term plan, a judgment call concerning risk, a high reservation wage, or a demand for larger cash balances. https://mises.org/library/theory-idle-resources-0 https://mises.org/library/theory-idle-resources-0

darkmighty 11y ago

Yes and I believe even emerging markets have dried down a little recently. None of the BRICs is looking like a great opportunity (considering risks), interest rates have been very low both in EU and US. As much as the sums seem enormous, software startups are comparably cheap, which mitigates their high risk -- e.g. look at industries like oil, mining, real estate, chemical.

deleted 11y ago

[deleted]

eru 11y ago

> Large firms have been sitting on enormous sums of cash; e.g., why is it that the most capitalized company on earth isn't investing aggressively. In lieu of investment, many of these firms have been focused on engineering stock buybacks. Ie they have essentially been paying dividends. Working as intended.

yorkedork 11y ago
What is it that's working as intended? The process of buying back shares of your own company? If you read what I wrote carefully, you should notice something that I didn't say: AAPL has a bunch of cash and is using it to fund its stock buyback program. Thus, capitalism has failed. In fact, I was attempting to elucidate the OP's topic. I believe a reasonable interpretation to be: why are so many startups with weak fundamentals and/or specious business models receiving so much funding via private equity? My response to this question was to observe macro-level phenomena and speculate that the _emergence_ of this dynamic was due to a broad-based failure in matching capital with desired investment risk and return. I mentioned Apple to demonstrate what a capital hoarder has done (which is to reinvest in its own equity) in relief against private equity firms. In a global environment where demand for safe assets exceeds supply, less risk-averse firms are chasing further risk to maintain their desired level of return. None of these points, I thought, required a race to defend attacks against capitalism; however, in the interest of demonstrating my sincerity, I'll share a couple of my own positions I believe are loosely-relevant to the broader discussion: * Capitalism maximizes human capital: no * Efficient markets hypothesis: wrong-headed, at best * Moralizing capital: one of the most socially and politically toxic behaviors It is my view that capitalism is a set of prescriptions which seek to define and regulate economic behavior. Further, it seems misguided to say simply that capitalism has succeeded or that it failed. A better alternative might be to say: given a set of expectations, a capitalist environment produced correct or incorrect results. Or, a more politically-charged example: capitalism has succeeded (or failed) in maximizing, e.g., environmental capital, human capital, social welfare or aggregate happiness. In any case, I now regret side-tracking myself and I don't find it particularly relevant to be debating the merits of capitalism in this context.
- 11y ago

slsii 11y ago

There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes. The cash is collecting dust abroad, and large tech companies are waiting for a tax holiday, for which there is precedent [0]. There are a number of fascinating reasons why companies may hold cash (e.g., it's been suggested that companies with CEOs that grew up during the Great Depression hold (held) more cash than those that didn't). [1] That said, it does appear that taxes seem to be one of the more significant (if not the most significant) reason in our current economic climate. [0] https://en.wikipedia.org/wiki/Repatriation_tax_holiday https://en.wikipedia.org/wiki/Repatriation_tax_holiday [1] http://www.rhsmith.umd.edu/files/Documents/Departments/Finance/Dittmar.pdf http://www.rhsmith.umd.edu/files/Documents/Departments/Finan...

yorkedork 11y ago
>There's a very significant and logical reason why American corporations - particularly tech companies - are accumulating so much cash: repatriation taxes. Absolutely. I'll claim no authority to speak on corporate tax policy (at least from the perspective of firms); on the face of it, I can imagine that it might be reasonable to suggest that tax policy is the major contributor to the dynamics of firm investment behavior. I wasn't, however, really sincerely questioning why, e.g., AAPL is accumulating cash or necessarily correlating that fact with domestic investments. It was sloppy writing on my part, but my intent was only to give an obvious example of capital accumulation. Surely, cash is not the only means of firms funding investments. Firm investment behavior will be guided by a variety of factors; my thought was to point to macroeconomic factors like insufficient aggregate demand, capital flight from EM and persistent deflationary pressure to provide simpler explanation to the conclusions of the OP.
nazka 11y ago
To add more to that on MoneyMorning[1]: "But why does the cash keep piling up? Why doesn't Apple spend it? One issue is that Apple is holding most of that cash overseas to avoid paying the steep 35% U.S. corporate tax. As of Q3, almost 90% ($181 billion) remains offshore." There is great video and article about it on Bloomberg[2]. A lot of companies are on the same boat not just Apple. [1]http://moneymorning.com/2015/07/27/how-much-cash-does-apple-have-nasdaq-aapl/ http://moneymorning.com/2015/07/27/how-much-cash-does-apple-... [2]http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s-181-billion-headache-apple-s-cash-held-overseas http://www.bloomberg.com/news/articles/2015-07-22/tim-cook-s...