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> Already we can see that the public markets can’t possibly absorb all the unicorns at their current prices. Is there any evidence to back up this assertion? S

> Already we can see that the public markets can’t possibly absorb all the unicorns at their current prices. Is there any evidence to back up this assertion? Seems to me that companies are voluntarily choosing to stay private, not that public equity markets can't handle the unicorns. (edit: Or is he saying that unicorns are overpriced because private investors value these companies more highly than public equity market participants would?) All in all, business models that can't handle marginally higher financing costs probably weren't all that healthy to begin with. Rising rates should shake out the weaker hands, in a form of creative destruction.

paulpauper 11y ago
It's just unsubstantiated assumption, which is common when journalists cover things they have little knowledge about. If the public market can't 'absorb' it, then the prices will fall. A marketplace exists at these high pries because that's what people are willing to pay.
- myth_buster 11y ago
  absorb all the unicorns at their current prices As to the second point, the "high prices" are in the private market and yes "that's what people (in private market) are willing to pay". But that doesn't imply it would be the same in public market.
  - paulpauper 11y ago
    The EMH says it shouldn't matter too much. The transition from private to public adds more liquidity for traders, but in accordance to the EMH it should work both ways (50% chance of buying or selling). Those who wanted to buy but couldn't will do so now that the shares are public, and some will sell. There should be no expected edge shorting companies that go public, after taking into account borrowing costs and other factors. The evidence suggests such a strategy would probably break-even, in accordance with the EMH. https://qph.is.quoracdn.net/main-qimg-ef1c7da1ddf19c2c7c7d90c689cd5c80?convert_to_webp=true https://qph.is.quoracdn.net/main-qimg-ef1c7da1ddf19c2c7c7d90...
    - someguydave 11y ago
      Yes but how efficient is the market for private equity? It seems like all kinds of information in the private equity market is potentially hidden from bidders, including past prices.
      - paulpauper 11y ago
        A VC fund averages slightly better than the market, suggesting possible inefficiencies
        theseatoms 11y ago
        But VC funds take on significantly more risk than a broad market, long-only index fund. So VCs need to yield a proportionately higher return, if we're comparing apples to apples. https://en.wikipedia.org/wiki/Sharpe_ratio https://en.wikipedia.org/wiki/Sharpe_ratio
    - deleted 11y ago
      [deleted]
    - whatok 11y ago
      Liquidity absolutely has a massive impact on prices. Less liquidity = less price discovery = greater volatility.
  - JonFish85 11y ago
    "that's what people (in private market) are willing to pay" And on top of that, investors paying those amounts are also able to influence their investment in ways they couldn't do as easily in public markets, whether it's buying a board seat, setting up multipliers, dilution protections and last in / first out agreements (and I'm sure others that I'm not even aware of).
- pkaye 11y ago
  By why are they willing to pay these high prices now vs a few years ago? What has changed in the economy or investing climate and is it sustainable?
  - paulpauper 11y ago
    these companies (snapchat, uber, dropbox, pinterest, etc) are rapidly growing, that's a major why
    - toomuchtodo 11y ago
      Are any of these profitable (except maybe, possibly Uber)?
      - ropiku 11y ago
        The problem is even if they could be profitable, they choose to invest all the money they can in growing rather than making a profit. So it's hard to know.
  - edgyswingset 11y ago
    Totally inexperienced opinion here: We're in an advertising bubble. Remember the ridiculousness surrounding the "Yo" app? People running around in circles about how it can be a great way to increase brand awareness due to the simplicity of it all? How it can connect with so many different apps? Yeah ... it's panned out exactly like its detractors predicted: sharp declines in downloads, hype is dead, and people have moved on to the next social app fad. Another factor I'm noticing is international money. Uber didn't start approaching ridiculous valuation levels until Chinese investors started getting on the train.
    - shostack 11y ago
      You cited one defunct app that never went anywhere as evidence of an advertising bubble? While I definitely think display and video CPMs are overvalued compared to what they drive (which attribution solutions will help correct), there is strong measurable value that Google, FB and Bing are delivering from a post-click measurement standpoint. But let's just conveniently ignore these companies that drive billions in revenue for their customers.
- 6502nerdface 11y ago
  > If the public market can't 'absorb' it, then the prices will fall. A marketplace exists at these high pries because that's what people are willing to pay. One structural difference between the private market and the public market is that in the public market, it's possible to short-sell a company's stock, and this is an important component in how the market settles on a price. In the private market, it's usually impossible to short-sell, so private prices may be biased upward relative to what they "would be" in a public market. I'm not sure how big this effect is, though; just pointing out one reasonable possible source of difference between private and public pricing here.
  - chimeracoder 11y ago
    > In the private market, it's usually impossible to short-sell Not just that, but in the private markets, it's usually impossible to sell at all unless the company decides to let you (ie, unless it's beneficial to the company, or at least better for the company than the alternatives). This fact alone strongly implies that prices will always inherently have an upward bias; it's actually quite difficult to conclude otherwise.
    - dmix 11y ago
      > This fact alone strongly implies that prices will always inherently have an upward bias Can you expand on this? Do you mean the incentive is to push for a constantly higher price because you have to hold on to it?
      - prostoalex 11y ago
        A decline in stock price of a publicly traded company is an everyday trivial occurrence. A decline in stock price of a private company implies a down round, which triggers all sorts of ratchets and provisions, usually binds the company to all sorts of new limiting ratchets and provisions, and is generally perceived as a severely negative event for investors, management and employees.
      - 6502nerdface 11y ago
- mwilkison 11y ago
  The author is a VC, not a journalist.
  - dmix 11y ago
    From the authors linkedin: Managing Director and Co-Founder Garage Technology Ventures Harvard University AB, History of Science Stanford University Graduate School of Business MBA, Finance, Economics, Public Management He seem's to have a sufficient background to support such an analysis. https://www.linkedin.com/in/billreichert https://www.linkedin.com/in/billreichert
    - theseatoms 11y ago
      Then I'm guessing it's more a matter of his readership's level of finance knowledge. Seems like he's dumbing it down for TC.
sbov 11y ago
The math behind the public markets being able to absorb all the unicorns at their current valuations does seem a bit suspect: http://fortune.com/2015/10/16/unicorns-ipo-market/ http://fortune.com/2015/10/16/unicorns-ipo-market/
melted 11y ago
How does a company stay private if it's underpaying its employees, and their only chance of breaking even is the IPO? Or alternatively, why would employees choose to stay after the company decides not to IPO?
- gozur88 11y ago
  I worked at a company like that in the late '90s. For years we were perennially "six months away" from IPO until the bubble burst. When people realized the IPO was never actually going to happen there were some pretty large salary adjustments. Eventually (after I left) they were bought by a competitor.
wilshiredetroit 11y ago
the math might be suspect, and it might just be straight assumption by the writer.. but it doesnt mean it cant be true - or isnt true
jgalt212 11y ago
The math is a bit tricky, but it gets even murkier when you look at all the extra rights/ratchets/etc that series D gets over C over B over A over common. As such if last private valuation is $1B, common shareholders (and probably series A and B) as well will be pushing for any IPO valuation well in excess of $1B so that C and D don't get all the money and A, B and common are not underwater. All that being said, C & D have powerful reps on on the board who often don't vote with the interests of the common holders despite their fiduciary duty to do so. The NY Times had and article on this conflict of interest problem a few weeks back. I will try to find link and repost. Edit: Link to article on board members and inherent conflicts between different share classes. http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html?_r=0 http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-...

paulpauper 11y ago

It's just unsubstantiated assumption, which is common when journalists cover things they have little knowledge about. If the public market can't 'absorb' it, then the prices will fall. A marketplace exists at these high pries because that's what people are willing to pay.

myth_buster 11y ago
absorb all the unicorns at their current prices As to the second point, the "high prices" are in the private market and yes "that's what people (in private market) are willing to pay". But that doesn't imply it would be the same in public market.
- paulpauper 11y ago
  The EMH says it shouldn't matter too much. The transition from private to public adds more liquidity for traders, but in accordance to the EMH it should work both ways (50% chance of buying or selling). Those who wanted to buy but couldn't will do so now that the shares are public, and some will sell. There should be no expected edge shorting companies that go public, after taking into account borrowing costs and other factors. The evidence suggests such a strategy would probably break-even, in accordance with the EMH. https://qph.is.quoracdn.net/main-qimg-ef1c7da1ddf19c2c7c7d90c689cd5c80?convert_to_webp=true https://qph.is.quoracdn.net/main-qimg-ef1c7da1ddf19c2c7c7d90...
  - someguydave 11y ago
    Yes but how efficient is the market for private equity? It seems like all kinds of information in the private equity market is potentially hidden from bidders, including past prices.
    - paulpauper 11y ago
      A VC fund averages slightly better than the market, suggesting possible inefficiencies
      - theseatoms 11y ago
        But VC funds take on significantly more risk than a broad market, long-only index fund. So VCs need to yield a proportionately higher return, if we're comparing apples to apples. https://en.wikipedia.org/wiki/Sharpe_ratio https://en.wikipedia.org/wiki/Sharpe_ratio
  - deleted 11y ago
    [deleted]
  - whatok 11y ago
    Liquidity absolutely has a massive impact on prices. Less liquidity = less price discovery = greater volatility.
- JonFish85 11y ago
  "that's what people (in private market) are willing to pay" And on top of that, investors paying those amounts are also able to influence their investment in ways they couldn't do as easily in public markets, whether it's buying a board seat, setting up multipliers, dilution protections and last in / first out agreements (and I'm sure others that I'm not even aware of).
pkaye 11y ago
By why are they willing to pay these high prices now vs a few years ago? What has changed in the economy or investing climate and is it sustainable?
- paulpauper 11y ago
  these companies (snapchat, uber, dropbox, pinterest, etc) are rapidly growing, that's a major why
  - toomuchtodo 11y ago
    Are any of these profitable (except maybe, possibly Uber)?
    - ropiku 11y ago
      The problem is even if they could be profitable, they choose to invest all the money they can in growing rather than making a profit. So it's hard to know.
- edgyswingset 11y ago
  Totally inexperienced opinion here: We're in an advertising bubble. Remember the ridiculousness surrounding the "Yo" app? People running around in circles about how it can be a great way to increase brand awareness due to the simplicity of it all? How it can connect with so many different apps? Yeah ... it's panned out exactly like its detractors predicted: sharp declines in downloads, hype is dead, and people have moved on to the next social app fad. Another factor I'm noticing is international money. Uber didn't start approaching ridiculous valuation levels until Chinese investors started getting on the train.
  - shostack 11y ago
    You cited one defunct app that never went anywhere as evidence of an advertising bubble? While I definitely think display and video CPMs are overvalued compared to what they drive (which attribution solutions will help correct), there is strong measurable value that Google, FB and Bing are delivering from a post-click measurement standpoint. But let's just conveniently ignore these companies that drive billions in revenue for their customers.
6502nerdface 11y ago
> If the public market can't 'absorb' it, then the prices will fall. A marketplace exists at these high pries because that's what people are willing to pay. One structural difference between the private market and the public market is that in the public market, it's possible to short-sell a company's stock, and this is an important component in how the market settles on a price. In the private market, it's usually impossible to short-sell, so private prices may be biased upward relative to what they "would be" in a public market. I'm not sure how big this effect is, though; just pointing out one reasonable possible source of difference between private and public pricing here.
- chimeracoder 11y ago
  > In the private market, it's usually impossible to short-sell Not just that, but in the private markets, it's usually impossible to sell at all unless the company decides to let you (ie, unless it's beneficial to the company, or at least better for the company than the alternatives). This fact alone strongly implies that prices will always inherently have an upward bias; it's actually quite difficult to conclude otherwise.
  - dmix 11y ago
    > This fact alone strongly implies that prices will always inherently have an upward bias Can you expand on this? Do you mean the incentive is to push for a constantly higher price because you have to hold on to it?
    - prostoalex 11y ago
      A decline in stock price of a publicly traded company is an everyday trivial occurrence. A decline in stock price of a private company implies a down round, which triggers all sorts of ratchets and provisions, usually binds the company to all sorts of new limiting ratchets and provisions, and is generally perceived as a severely negative event for investors, management and employees.
    - 6502nerdface 11y ago
mwilkison 11y ago
The author is a VC, not a journalist.
- dmix 11y ago
  From the authors linkedin: Managing Director and Co-Founder Garage Technology Ventures Harvard University AB, History of Science Stanford University Graduate School of Business MBA, Finance, Economics, Public Management He seem's to have a sufficient background to support such an analysis. https://www.linkedin.com/in/billreichert https://www.linkedin.com/in/billreichert
  - theseatoms 11y ago
    Then I'm guessing it's more a matter of his readership's level of finance knowledge. Seems like he's dumbing it down for TC.

sbov 11y ago

The math behind the public markets being able to absorb all the unicorns at their current valuations does seem a bit suspect: http://fortune.com/2015/10/16/unicorns-ipo-market/ http://fortune.com/2015/10/16/unicorns-ipo-market/

melted 11y ago

How does a company stay private if it's underpaying its employees, and their only chance of breaking even is the IPO? Or alternatively, why would employees choose to stay after the company decides not to IPO?

gozur88 11y ago
I worked at a company like that in the late '90s. For years we were perennially "six months away" from IPO until the bubble burst. When people realized the IPO was never actually going to happen there were some pretty large salary adjustments. Eventually (after I left) they were bought by a competitor.

wilshiredetroit 11y ago

the math might be suspect, and it might just be straight assumption by the writer.. but it doesnt mean it cant be true - or isnt true

jgalt212 11y ago

The math is a bit tricky, but it gets even murkier when you look at all the extra rights/ratchets/etc that series D gets over C over B over A over common. As such if last private valuation is $1B, common shareholders (and probably series A and B) as well will be pushing for any IPO valuation well in excess of $1B so that C and D don't get all the money and A, B and common are not underwater. All that being said, C & D have powerful reps on on the board who often don't vote with the interests of the common holders despite their fiduciary duty to do so. The NY Times had and article on this conflict of interest problem a few weeks back. I will try to find link and repost. Edit: Link to article on board members and inherent conflicts between different share classes. http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html?_r=0 http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-...