6 ms·

I talked to a friend just before Christmas whose firm made a good portion of their returns on the insight that VC firms, IPO participants and the market in gene

I talked to a friend just before Christmas whose firm made a good portion of their returns on the insight that VC firms, IPO participants and the market in general all have gaps in how they evaluate the worth of a company and the fact that this gap has grown significantly in the past 5 years. Previously, companies went public much sooner and you could expect a match, not an exact one, but in the same ball park, between the VC valuation and wall street valuations. This helped lead to rising share prices after the IPO. Now with longer gestation periods leading to more fund raises, the VC's get paid, but its the IPO participants and the employee's who get screwed. Once a company is public its GAAP that matters and GAAP analysis usually assigns a revenue multiple to a company that is based on its sector and assumed growth. This multiple is almost always much smaller than what the company's publicly stated valuation. This leads to a bunch of broken IPO's as companies stretch to IPO at a certain price to meet mezzanine level funding requirements. If you can get borrow, almost certainly dependent on how much you pay on commissions to brokers, then atleast up until this year you could have made decent money shorting most tech IPO's, most other industries don't yet suffer from a phobia of becoming public.

Florin_Andrei 10y ago
> the VC's get paid, but its the IPO participants and the employee's who get screwed How unsurprising.
1_2__3 10y ago
I've gone through 6 startup IPOs since 1999 in the valley, and have watched as it went from a way to reward employees to a whole lot of voodoo bullshit. I'm a little stunned when I see people still talking about the startups they work for and possibly making it big - that doesn't happen anymore. You are being lied to.
- hkmurakami 10y ago
  Genuinely curious what you think has changed. Liquidity events are certainly much later than they used to be. What else has had negative effects? Late stage ratchet terms?
- beachstartup 10y ago
  if the founder(s) of the company got really rich, but the company is still owned by VCs, there is almost definitely "voodoo bullshit" going on. it's customary to take some money to alleviate the everyday financial stresses of life and to maybe buy a decent house because people have families, but the original intent behind the IPO was designed to align everyone's incentives. when they aren't aligned i.e. when there is a super-class of owners that already cashed out, it's going to end badly for the people who aren't in control. everyone who got in early is already rich or completely exited, and more idiots keep piling onto the funding rounds... hmm... what does that sound like?
- xor1 10y ago
  Unless you are extremely close with the founders.
JumpCrisscross 10y ago
> GAAP analysis usually assigns a revenue multiple to a company that is based on its sector and assumed growth GAAP is an accounting framework [1]. It defines, for example, how one may and may not recognise revenues [2]. GAAP does not tell investors how to value a company. "GAAP Analysis" isn't a thing (gap analysis is [3], but that's a management tool). That said, yes, public-company investors tend to look at Revenue, EBITDA or P/E multiples. But so do late-stage VCs. Both ascribe high valuations when expected growth provides for it, e.g. Amazon or Tesla or Uber. A multiple gap has emerged between the late-stage private company market (at least at the top end) and comptable public companies. But it has nothing to do with "GAAP analysis" (which isn't a thing) or mezzanine funding (which most VC-backed companies don't take on). [1] https://en.m.wikipedia.org/wiki/Generally_accepted_accounting_principles https://en.m.wikipedia.org/wiki/Generally_accepted_accountin... [2] http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=1351027207987 http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=135102720... [3] https://en.m.wikipedia.org/wiki/Gap_analysis https://en.m.wikipedia.org/wiki/Gap_analysis
- apetresc 10y ago
  It's pretty clear that what he means by "GAAP analysis" is "valuation based on GAAP revenue", as opposed to "valuation based on bullshit cooked revenue metrics", like the fanciful definitions that Groupon tried to convince everyone about.
pb 10y ago
VCs don't get to take their profits until after the company exits. If they invest at a high valuation and then it IPOs at some lower price, there is no gain and the VC gets zero carry.
- rrdharan 10y ago
  That's not true with liquidation preferences? The reported valuations in the press that come out after some random funding round are calculated with simple arithmetic but don't take into account the preferences...
- kcanini 10y ago
  VC still gets that sweet 2% management fee per year.
gravyboat 10y ago
You would have to be an idiot at this point to accept options/stock as an employee for an SF start up. They'll squeeze the options until you make nothing from them.

Florin_Andrei 10y ago

> the VC's get paid, but its the IPO participants and the employee's who get screwed How unsurprising.

1_2__3 10y ago

I've gone through 6 startup IPOs since 1999 in the valley, and have watched as it went from a way to reward employees to a whole lot of voodoo bullshit. I'm a little stunned when I see people still talking about the startups they work for and possibly making it big - that doesn't happen anymore. You are being lied to.

hkmurakami 10y ago
Genuinely curious what you think has changed. Liquidity events are certainly much later than they used to be. What else has had negative effects? Late stage ratchet terms?
beachstartup 10y ago
if the founder(s) of the company got really rich, but the company is still owned by VCs, there is almost definitely "voodoo bullshit" going on. it's customary to take some money to alleviate the everyday financial stresses of life and to maybe buy a decent house because people have families, but the original intent behind the IPO was designed to align everyone's incentives. when they aren't aligned i.e. when there is a super-class of owners that already cashed out, it's going to end badly for the people who aren't in control. everyone who got in early is already rich or completely exited, and more idiots keep piling onto the funding rounds... hmm... what does that sound like?
xor1 10y ago
Unless you are extremely close with the founders.

JumpCrisscross 10y ago

> GAAP analysis usually assigns a revenue multiple to a company that is based on its sector and assumed growth GAAP is an accounting framework [1]. It defines, for example, how one may and may not recognise revenues [2]. GAAP does not tell investors how to value a company. "GAAP Analysis" isn't a thing (gap analysis is [3], but that's a management tool). That said, yes, public-company investors tend to look at Revenue, EBITDA or P/E multiples. But so do late-stage VCs. Both ascribe high valuations when expected growth provides for it, e.g. Amazon or Tesla or Uber. A multiple gap has emerged between the late-stage private company market (at least at the top end) and comptable public companies. But it has nothing to do with "GAAP analysis" (which isn't a thing) or mezzanine funding (which most VC-backed companies don't take on). [1] https://en.m.wikipedia.org/wiki/Generally_accepted_accounting_principles https://en.m.wikipedia.org/wiki/Generally_accepted_accountin... [2] http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=1351027207987 http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=135102720... [3] https://en.m.wikipedia.org/wiki/Gap_analysis https://en.m.wikipedia.org/wiki/Gap_analysis

apetresc 10y ago
It's pretty clear that what he means by "GAAP analysis" is "valuation based on GAAP revenue", as opposed to "valuation based on bullshit cooked revenue metrics", like the fanciful definitions that Groupon tried to convince everyone about.

pb 10y ago

VCs don't get to take their profits until after the company exits. If they invest at a high valuation and then it IPOs at some lower price, there is no gain and the VC gets zero carry.

rrdharan 10y ago
That's not true with liquidation preferences? The reported valuations in the press that come out after some random funding round are calculated with simple arithmetic but don't take into account the preferences...
kcanini 10y ago
VC still gets that sweet 2% management fee per year.

gravyboat 10y ago

You would have to be an idiot at this point to accept options/stock as an employee for an SF start up. They'll squeeze the options until you make nothing from them.