4 ms·

Tech Startups Choose to Stay Private in I.P.O. Standoff

36 points by chollida1 11y ago

seibelj 11y ago
If you are a founder and go out to raise money with the goal of becoming a unicorn, whether for ego / PR / hiring purposes, you are an idiot. I think a lot of companies wanted this label for no rational reason, and this is a symptom of that craze.
jpmattia 11y ago
> “I’m a little perplexed as to why this drought is continuing as it is,” said Jay R. Ritter As the old saying goes: Ain't nothing that price won't fix.
- ISL 11y ago
  Unless that gets priced into the private markets...
chollida1 11y ago
> Now, for only the fourth time since data the early 90s, there have been no tech company I.P.O.s in a quarter. > Since 1993, when the firm started collecting data, tech intial offerings have been absent from only three quarters: the third quarter of 2002, the first quarter of 2003 and the first quarter of 2009. Having liquidation event language in mezzanine rounds of funding isn't that new. I'm now wondering how long it will be until we see language that penalizes a company if it doesn't have a liquidation event in a certain time horizon in its series A or B rounds of funding.
- tryitnow 11y ago
  I think Spotify's recent funding (a loan!) penalizes it if it doesn't have a liquidity event.
  - mrgordon 11y ago
    Yeah this is relatively common
    - deleted 11y ago
      [deleted]
joshjkim 11y ago
admittedly 0 in the last quarter is unusual, but the trend is explainable, and it's weird that the article acts like there's some sort of mystery here, when the reasons for the trend seem pretty clear (and have been discussed at length before..): tech companies are not going public because 1. They don't have to (they can raise just as much $$ in the private markets with far less scrutiny) and 2. Going public is a huge pain that most people want to avoid (reporting, quarterly (read: short-term) goals, public scrutiny). Also, a bunch of other reasons, but that seems like the two most well-known factors that for some reason are not mentioned at all in the article..unless I'm missing something. The article hints that the market's poor reaction to recent IPOs is a major factor, but I'd say it's less than the two I mentioned above, though I can't quantify that here.
- maaku 11y ago
  Also second market lets employees cash in their options instead so there isn't internal demand for a liquidity event.
- x0x0 11y ago
  3 - they're (sometimes wildly) overvalued and an ipo with a hard price creates all sorts of pain (employees underwater, ratchets in previous financings, the need to come up with a business where revenue > expenses)
tryitnow 11y ago
A lot of folks are saying that companies don't have to raise money in the public markets. Yes, that's true, but... I'm skeptical. Simply put, the liquidity that comes with the public markets is a huge advantage - IF your company has its financial act together, otherwise, the scrutiny offsets the liquidity advantage. The history of financial markets is littered with examples where secrecy leads to wild overvaluations at best and fraud at worst. Instead of hypothesizing that we've entered a magical golden era where private markets provide all the financing but never require exits, it makes more sense to assume there is an epic amount of confusion, misguided expectations, and in some cases outright fraud. Every single financial cycle in history has witnessed these behaviors. Every. Single. One. Today's Silicon Valley is no different. In short, for all these great companies out there... How do you really know how they're doing financially? Do they even know how they're doing? Where's the evidence? Without audited books in compliance with GAAP, who can tell?
- joshjkim 11y ago
  I agree - put another way, bad-but-hyped companies are hiding in the private markets, because they can maintain a high-valuation with a strong PPT and unaudited financials vs. going public getting punished by the market for weak (maybe terrible) GAAP financials. but, like you said - we just don't know, and it appears they don't want us to know. and that makes me think: in general if someone is keeping something from the public, what are the chances its good vs. bad? I'd say it skews to the latter =) Sometimes, it's justifiable if the company really needs a private period to invest deeply in something the public markets may not understand, but I'd say mostly it's not - the ongoing markdowns by traditional investors is at least one indicator.
  - mrgordon 11y ago
    I don't entirely disagree but I will point out one thing with the mutual fund markdowns. If the fund's value declines as the public markets tank (e.g. briefly at the start of the year) then the holdings in the fund need to be marked down to compensate. If 5% of the fund is private company stock and the fund as a whole went down 10% with the market, then you would expect the private company stock to also get marked down ~10% to keep the accounting straight. This doesn't necessarily indicate a problem with those companies as the markets can and have bounced back and the private shares will likely rebound with the markets in many cases. Now of course there are also the Zenefits type companies mixed in that are just worth drastically less than previously estimated.
at-fates-hands 11y ago
It's interesting the article doesn't come right out and say this is the correction the market indicators have been hinting at for a while. It's all there in black and white: “Volatility has bred more practical thinking, especially on the shareholders’ side,” said Atish Davda, the chief executive of EquityZen, a marketplace for pre-I.P.O. companies. Only a third of the tech companies that went public last year are in the green today, meaning that many initial offering investors are already feeling some pain in their portfolios and are unwilling to take on new risk. It's not that there's no companies who want to go public, it's the investors who want to see solid revenue, more liquidity, and better business plans before letting these companies risk their money.
tim333 11y ago
You've got to consider the VC fund managers incentives here. It's not in general their money they are investing - they are getting a percentage on other people's money. If their companies stay private at some silly theoretical valuation they can go to investors and say look how clever we are, everything's up, invest more. If they float a company and it drops in value by 50% like Groupon, Etsy, Box etc then they no longer have the genius track record, the investors stop investing and they may cease to have a job. There's a similar perverse incentive keeping the valuations up - there are a lot of VCs out there but the few really good big startups have their pick of who to get to invest so the other VCs get to fight over so so companies and if one is investion at a 500m valuation then another that is being left out will be tempted to offer to invest at a 1bn valuation to out bid them. After all it's other people's money and they get a percentage on funds under management. If they don't bid up and don't 'invest' then that's less funds. I recently looked at some terms and conditions on being a 'limited partner' which basically means an investor in a fund and they were taking something like 20% in fees spread over a few years. It's probably a good deal less for larger investments but even so any VC that can persuade investors to put $200m into some company probably gets to pocket quite a few million regardless of how iffy the investment may be.

36 points by chollida1 11y ago

If you are a founder and go out to raise money with the goal of becoming a unicorn, whether for ego / PR / hiring purposes, you are an idiot. I think a lot of companies wanted this label for no rational reason, and this is a symptom of that craze.

jpmattia 11y ago

> “I’m a little perplexed as to why this drought is continuing as it is,” said Jay R. Ritter As the old saying goes: Ain't nothing that price won't fix.

ISL 11y ago
Unless that gets priced into the private markets...

chollida1 11y ago

> Now, for only the fourth time since data the early 90s, there have been no tech company I.P.O.s in a quarter. > Since 1993, when the firm started collecting data, tech intial offerings have been absent from only three quarters: the third quarter of 2002, the first quarter of 2003 and the first quarter of 2009. Having liquidation event language in mezzanine rounds of funding isn't that new. I'm now wondering how long it will be until we see language that penalizes a company if it doesn't have a liquidation event in a certain time horizon in its series A or B rounds of funding.

tryitnow 11y ago
I think Spotify's recent funding (a loan!) penalizes it if it doesn't have a liquidity event.
- mrgordon 11y ago
  Yeah this is relatively common
  - deleted 11y ago
    [deleted]

joshjkim 11y ago

admittedly 0 in the last quarter is unusual, but the trend is explainable, and it's weird that the article acts like there's some sort of mystery here, when the reasons for the trend seem pretty clear (and have been discussed at length before..): tech companies are not going public because 1. They don't have to (they can raise just as much $$ in the private markets with far less scrutiny) and 2. Going public is a huge pain that most people want to avoid (reporting, quarterly (read: short-term) goals, public scrutiny). Also, a bunch of other reasons, but that seems like the two most well-known factors that for some reason are not mentioned at all in the article..unless I'm missing something. The article hints that the market's poor reaction to recent IPOs is a major factor, but I'd say it's less than the two I mentioned above, though I can't quantify that here.

maaku 11y ago
Also second market lets employees cash in their options instead so there isn't internal demand for a liquidity event.
x0x0 11y ago
3 - they're (sometimes wildly) overvalued and an ipo with a hard price creates all sorts of pain (employees underwater, ratchets in previous financings, the need to come up with a business where revenue > expenses)

tryitnow 11y ago

A lot of folks are saying that companies don't have to raise money in the public markets. Yes, that's true, but... I'm skeptical. Simply put, the liquidity that comes with the public markets is a huge advantage - IF your company has its financial act together, otherwise, the scrutiny offsets the liquidity advantage. The history of financial markets is littered with examples where secrecy leads to wild overvaluations at best and fraud at worst. Instead of hypothesizing that we've entered a magical golden era where private markets provide all the financing but never require exits, it makes more sense to assume there is an epic amount of confusion, misguided expectations, and in some cases outright fraud. Every single financial cycle in history has witnessed these behaviors. Every. Single. One. Today's Silicon Valley is no different. In short, for all these great companies out there... How do you really know how they're doing financially? Do they even know how they're doing? Where's the evidence? Without audited books in compliance with GAAP, who can tell?

joshjkim 11y ago
I agree - put another way, bad-but-hyped companies are hiding in the private markets, because they can maintain a high-valuation with a strong PPT and unaudited financials vs. going public getting punished by the market for weak (maybe terrible) GAAP financials. but, like you said - we just don't know, and it appears they don't want us to know. and that makes me think: in general if someone is keeping something from the public, what are the chances its good vs. bad? I'd say it skews to the latter =) Sometimes, it's justifiable if the company really needs a private period to invest deeply in something the public markets may not understand, but I'd say mostly it's not - the ongoing markdowns by traditional investors is at least one indicator.
- mrgordon 11y ago
  I don't entirely disagree but I will point out one thing with the mutual fund markdowns. If the fund's value declines as the public markets tank (e.g. briefly at the start of the year) then the holdings in the fund need to be marked down to compensate. If 5% of the fund is private company stock and the fund as a whole went down 10% with the market, then you would expect the private company stock to also get marked down ~10% to keep the accounting straight. This doesn't necessarily indicate a problem with those companies as the markets can and have bounced back and the private shares will likely rebound with the markets in many cases. Now of course there are also the Zenefits type companies mixed in that are just worth drastically less than previously estimated.

at-fates-hands 11y ago

It's interesting the article doesn't come right out and say this is the correction the market indicators have been hinting at for a while. It's all there in black and white: “Volatility has bred more practical thinking, especially on the shareholders’ side,” said Atish Davda, the chief executive of EquityZen, a marketplace for pre-I.P.O. companies. Only a third of the tech companies that went public last year are in the green today, meaning that many initial offering investors are already feeling some pain in their portfolios and are unwilling to take on new risk. It's not that there's no companies who want to go public, it's the investors who want to see solid revenue, more liquidity, and better business plans before letting these companies risk their money.

tim333 11y ago

You've got to consider the VC fund managers incentives here. It's not in general their money they are investing - they are getting a percentage on other people's money. If their companies stay private at some silly theoretical valuation they can go to investors and say look how clever we are, everything's up, invest more. If they float a company and it drops in value by 50% like Groupon, Etsy, Box etc then they no longer have the genius track record, the investors stop investing and they may cease to have a job. There's a similar perverse incentive keeping the valuations up - there are a lot of VCs out there but the few really good big startups have their pick of who to get to invest so the other VCs get to fight over so so companies and if one is investion at a 500m valuation then another that is being left out will be tempted to offer to invest at a 1bn valuation to out bid them. After all it's other people's money and they get a percentage on funds under management. If they don't bid up and don't 'invest' then that's less funds. I recently looked at some terms and conditions on being a 'limited partner' which basically means an investor in a fund and they were taking something like 20% in fees spread over a few years. It's probably a good deal less for larger investments but even so any VC that can persuade investors to put $200m into some company probably gets to pocket quite a few million regardless of how iffy the investment may be.