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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 t

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.
  - chollida1 11y ago
    > 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. Umm, no that's not any where close to how fund accounting works. Each position is valued independently and then summed up to give the value of hte fund. If the fund accountant can make the case that the private positions are worth more now than they were a month ago then they go up regardless of what the NAV of the fund is. Similarly if the fund believe that their private positions are worth less then they get marked down, again independent of what the fund's worth. I mean, by your logic if the fund holds a public stock that doubled in the past month but the fund went down, then you'd have to mark down the public stock, in this case I'm using a public stock as we know exactly what its worth. Which is absolutely ridiculous.
    - mrgordon 11y ago
      > I mean, by your logic if the fund holds a public stock that doubled in the past month but the fund went down, then you'd have to mark down the public stock, in this case I'm using a public stock as we know exactly what its worth. This is not my logic at all and it makes no sense. Why would the fund need to mark down public stock when the value of that stock is already explicitly known? The fund's NAV is, by definition, a summation of the values of its holdings. The liquid holdings such as public stocks have clear values that are readily available. Thus any other change in the NAV of the fund would come from its illiquid investments, no? I agree my comment wasn't exactly correct in that the NAV is a summation of the liquid asset values and estimates of the illiquid asset values, not the other way around as I perhaps implied. But what I mean is that the valuation process for illiquid assets is difficult and imprecise and the valuation committee will naturally tend to assume that the value of illiquid equities generally move with the rest of the market in the absence of other new information. It would take a strong conviction in your illiquid investments to say that they maintained their value while nearly all of the liquid investments lost 10%, 20%, etc.

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.
- chollida1 11y ago
  > 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. Umm, no that's not any where close to how fund accounting works. Each position is valued independently and then summed up to give the value of hte fund. If the fund accountant can make the case that the private positions are worth more now than they were a month ago then they go up regardless of what the NAV of the fund is. Similarly if the fund believe that their private positions are worth less then they get marked down, again independent of what the fund's worth. I mean, by your logic if the fund holds a public stock that doubled in the past month but the fund went down, then you'd have to mark down the public stock, in this case I'm using a public stock as we know exactly what its worth. Which is absolutely ridiculous.
  - mrgordon 11y ago
    > I mean, by your logic if the fund holds a public stock that doubled in the past month but the fund went down, then you'd have to mark down the public stock, in this case I'm using a public stock as we know exactly what its worth. This is not my logic at all and it makes no sense. Why would the fund need to mark down public stock when the value of that stock is already explicitly known? The fund's NAV is, by definition, a summation of the values of its holdings. The liquid holdings such as public stocks have clear values that are readily available. Thus any other change in the NAV of the fund would come from its illiquid investments, no? I agree my comment wasn't exactly correct in that the NAV is a summation of the liquid asset values and estimates of the illiquid asset values, not the other way around as I perhaps implied. But what I mean is that the valuation process for illiquid assets is difficult and imprecise and the valuation committee will naturally tend to assume that the value of illiquid equities generally move with the rest of the market in the absence of other new information. It would take a strong conviction in your illiquid investments to say that they maintained their value while nearly all of the liquid investments lost 10%, 20%, etc.