10 ms·

Fixing the ‘Brain Damage’ Caused by the I.P.O. Process

137 points by KKKKkkkk1 9y ago

jshaqaw 9y ago
Ask any of these CEOs if it would be cool to hear from there direct reports once a year or once a decade. This is just a whining plea for no accountability from managers. The right to execute a long term vision has to be earned by effective communication and superior execution. Just look at Amazon. No quarterly profits and it is the darling of a Wall Street. You don’t get to flounder around without a clear strategy or results and then complain people want to know every 90 days where things stand.
- sulam 9y ago
  Amazon is exceptional. Emulating Amazon will get most companies delisted.
  - hellbanner 9y ago
    Can you describe more about what practices would cause delisting?
    - piker 9y ago
      Running out of money by only spending on R&D and having your share price drop below listing thresholds, I think, is the implication.
      - sulam 9y ago
        Yeah, I don't think you'd even have to run out of money. There are plenty of companies generating a fair amount of cash flow that hover in the dangerous territory of < $3 a share. It only takes one bad quarter. Here's an example of a company that generates cash but only recently is in the safe-ish territory: https://finance.google.com/finance?q=LLNW https://finance.google.com/finance?q=LLNW (Not that I think they are emulating Amazon, mind you, just making the point that you can have a going concern, and still get delisted.) More broadly, unless you have an amazing business, you probably shouldn't emulate Amazon (or Google, or FB, or any other business that is depending on free cash flow to fund R&D as opposed to generating profits).
        goialoq 9y ago
        > the dangerous territory of < $3 a share. that's only dangerous until the stock does a reverse split.
      - s73ver_ 9y ago
        Share price doesn't dictate how much money they have. Amazon makes buttloads of money; they just choose to use it rather than give it back as dividends.
        piker 9y ago
        No. That wasn't implied either. Conversely, net profits do tend to be a positive indicator of share price. It's also incorrect to say that AMZN "makes buttloads of money", with sub-1 EPS[1] at a nearly $1,000 share price. [1] https://finance.google.co.uk/finance?q=NASDAQ%3AAMZN&fstype=ii&ei=2ZTDWZmnGsPDUbL9orAP https://finance.google.co.uk/finance?q=NASDAQ%3AAMZN&fstype=...
        s73ver_ 9y ago
        Just shy of $38 billion in one quarter revenue is "Buttloads of money". I wasn't necessarily relating it to the share price.
  - opportune 9y ago
    They're not "exceptional" they've just managed to find productive ways to reinvest their profits. The reason their stock is valued so much is partly because if he wanted/needed to, Bezos could wake up one day and cut all programs focused on expansion and return the saved costs / new profits as dividends. The reason this doesn't happen is that the money is (thought to be) better spent on increasing the size of the business. There's no reason other companies couldn't do this, although I expect the main limit to this strategy is the extent to which you can productively reinvest capital. This is a function of foresight/luck (e.g. branching into AWS) but also of the market you're in: to what extent do you begin to experience diminishing returns as you spend more money on improving your product? I think that with logistics, as with Amazon and e.g. Walmart, the returns diminish very slowly, or even increase with money spent (economies of scale).
- outoftacos 9y ago
  The piece doesn't really articulate a problem, if anything the reverse is true more often than not: management chases short term performance numbers to the detriment of the long term success of the company and long term shareholders. It's more just like "woah we're hip smart tech bros we need to fix the stock market!" even though none of their claims really have any merit. IPOs are still stupid for a lot of reasons, but stratifying shareholders (why is the answer to everything from the Valley always more stratification?) is neither here nor there.
brndnmtthws 9y ago
The ICO funding model seems much better: complete transparency, a truly free market, it's very difficult to manipulate the currency (i.e., magically issuing new coins aka share dilution), and it's easy to get around the stupidity of the US gov by incorporating somewhere with more liberal laws like, say, Switzerland. Why would you want to business by the rules in the US when the rules only exist to prop up rent seekers and the ruling elite?
- hellbanner 9y ago
  The SEC introduced "accredited investors" in the USA because scammers were taking money from people who didn't/couldn't research scams and lost fortunes in get-rich-quick stock schemes.
  - brndnmtthws 9y ago
    That's the story they (the SEC and friends) provide, but to me it seems more like they wanted to make it hard for people with limited means participate in the legalized get-rich-quick schemes. How about just let the market decide? Why do we have stupid rules that exclude poor people from investing?
    - blawson 9y ago
      Because when those poor people make one bad choice they lose everything, and the state has to take care of them.
      - brndnmtthws 9y ago
        Yeah, just like the government bailouts during the 2008 financial crisis[1]. Except the US gov doesn't bail out poor people. [1]: https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008#Government_responses https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
        ericd 9y ago
mathattack 9y ago
Here's my problem with the Long Term Stock Exchange idea... What makes the tech echosystem thrive is the flexible capital and labor model. Anyone can get a little money to chase their idea. The small ideas get starved for capital and labor until they get market validation. Then the capital and labor chases them. And that's how great companies grow so quickly in a land of startups. Anything that restricts mobility of labor hinders this and should be fought. (Example: Non-competes, cost-prohibitive real estate, etc) Anything that restricts mobility of capital should be fought too. To have capital available for great ideas, it should be easy to flee ideas that aren't working out. (This is also why share buybacks from mature companies are fine - the capital get recycled)
- dasil003 9y ago
  I agree with you in principle. The problem is that status quo encourages very short term thinking that has caused a lot of damage. I think it's at least worth toying around with longer-term incentives to see what can come out of it. I'm not super excited about 5 or 10 year vests (especially 20 years into my tech career without an FU nest egg), but it's a far lesser evil than non-competes or astronomical real estate (the latter being the thing that will likely drive me away for the sake of my family).
  - mathattack 9y ago
    I'm not sure I follow you on real estate. Does the OP's proposal for long term capital fix that? Best I can tell, the one thing that will fix expensive real estate is autonomous cars. (Parking can be converted to housing, and longer commutes become tolerable)
    - dasil003 9y ago
      Actually I was just reflecting your examples, not citing things which the proposal would fix.
      - mathattack 9y ago
mbesto 9y ago
Good analysis from Matt Levine on how Social Capital Hedosophia Holdings Corp (SPAC trying to eliminate the headache of IPOs) is actually more expensive than going public. > A final thing about SPACs is that they are so expensive. Banks charge a rack rate of about 7 percent for initial public offerings, though big sexy tech IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather more lavishly. Hedosophia's sponsor -- a Cayman Islands company owned by Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In exchange for that nominal payment, and their work on finding a company to take public, they get 20 percent of the SPAC's stock. (They are also are putting in another $12 million or so to buy warrants in connection with its IPO.) A 20 percent fee for taking a company public is just ... more ... than a 7 percent fee. And that's not even counting the 5.5 percent fee that Credit Suisse charged for taking Hedosophia public! Something like a quarter of every dollar that investors are putting into Hedosophia is going to compensate financiers for doing the work of (ultimately) taking a unicorn public, which is a funny way to make that process more efficient. https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-ipos-and-spacs https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-...
- probe 9y ago
  Careful, it's not more expensive for the company, just the financiers. By investing in this SPAC, you're basically willing to 1) eat the fees to bring a unicorn public earlier, and 2) and actually participate in a potentially "hot" unicorn that you're trusting Chamath will find. For the company, you get to go public at 1) just the reverse merger fees which is significantly lower than IPO fees, and 2) at less time than going public (basically 1-2 months for the merger to go through)
  - JumpCrisscross 9y ago
    > it's not more expensive for the company, just the financiers This is not how spreads work. (The problem is related to determining where the burden of a tax falls.) If an investor is willing to pay $10 for a company, an IPO gives the company $9 and the banker $1. That same investor would pay $8 for 80% of what those $10 would have bought. The price to the company is, out the door, lower. I’ll give the SPAC sponsors credit for beating the VCs and investment bankers at the fee game. They get a wider spread than the bankers. (IPO fees aren’t allowed, by law, to go to 20%.) And they get VC carry for what’s essentially a flip. Except it’s better than carry—there’s no hurdle! They could lose 80% of investors’ money and they’ll still get their 20%. Disclaimer: I am not a lawyer. This is neither legal nor securities advice.
neilwilson 9y ago
Or perhaps we can drop the insane valuations of service companies whose value is in their staff not their assets, just pay people properly in the first place and have companies go back to earning profit and paying dividends to investors. Or is that too rad for Silicon Valley? I know that we're all supposed to live off pension funds, but the idea is that is after retirement not before through selling over inflated stock to them.
- tomcam 9y ago
  > we can drop the insane valuations of service companies Awesome! But... how?
- rpowers 9y ago
  Strongly agree with you.
deleted 9y ago
[deleted]
warcher 9y ago
I feel like.... maybe some of these guys are feeling the hangover from other people's money, and trying to have it both ways. It's far from easy to bootstrap, but you basically solve all the problems these guys are talking about if you can survive it. The problem, of course, is that your unit economics have to work, you have to have the personal patience and resources to get to profitability, and you have to survive a potential funded competitor using their financial leverage to sell at or near a loss and torch your position in the market. So a lot of folks take the money, but you take the money, you gotta pay it back. An IPO is ultimately just kicking the can down the road, and taking on a new set of guys that are going to cash out your venture debt for public debt. Who also expect to be paid back. I don't see a way out of this devil's bargain short of, you know, delivering on the milestones you talked about in your pitch deck, or in your roadshow. But spare me the crocodile tears, huh? You took the money, you gotta pay back the money. Plus interest. And a lot of these IPOs, they had to make big promises when they went public-- big multiples, big projections, to support big valuations. Now you are sitting on a big pile of teachers' pension money and you have to deliver.
bedhead 9y ago
My prediction is that Chamath will use this SPAC to purchase Social Capital's VC investments. The conflict of interests are simply too great and I've seen this stuff before - it's almost always by design.
- sjg007 9y ago
  Makes sense. A payout on a payout.
kecoco0207 9y ago
Other solutions are currently in place to solve the IPO and liquidity problem. EquityZen is a platform that lets employees sell shares before IPO: https://equityzen.com/?utm_source=news.ycombinator.com%2Fitem%3Fid%3D15284893&utm_medium=Hacker%20News&utm_campaign=Hacker_News&utm_term=news https://equityzen.com/?utm_source=news.ycombinator.com%2Fite...
mikikian 9y ago
Color me skeptical and maybe one of the attorneys on HN could jump in, but solving the brain damage of an IPO reason seems like a red herring to me. SPAC could have value in a down market, when the IPO market is closed and a company is forced to raise a down round. Ratchets would kick in and founders would lose equity. If the SPAC, after fees, is able to offer a higher valuation to the company then its best alternative, it might actually work to benefit the company. I haven't seen anyone comment about this down market scenario this past week and wondering if someone smarter than me had any thoughts?
lifeisstillgood 9y ago
Want long term investors in your company - why not offer extra voting rights after specified periods of holding registered shares - one year one vote, 10 years 5 votes. There are many things companies can do to encourage long term, stockholder engagement - starting a random new stock exchange seems to be a long way down the list
throwaway2048 9y ago
Why are reverse mergers not more popular? Seems like there is quite an opening for somebody to spin up assetless shell companies, take them public and then sell them off the private companies that want to go public, and denying market makers and underwriters their huge rake, and sidestep most of the other issues surrounding an IPO.
valuearb 9y ago
"Currently, an investor who owns one share for a month, or even a day, has the same voting power as someone who has owned a share for years. Mr. Ries wants what he calls “tourists” — short-term shareholders — to have less voting power than long-term shareholders, whom he calls “citizens of the republic.” Over time, shareholders of companies on the LTSE would gain more votes based on their length of ownership." This is really a poorly thought out idea that's hugely counter-productive. You own your shares for 10 years and have mucho voting rights, but need to sell them. Now you have to sell them to someone who will get virtually no voting rights at the time of purchase. So all this does is make your shares way less valuable. It will end up creating "phantom sale" markets where you continue to serve as the shareholder of record, but agree to vote your mucho votes the way the purchaser wants you to. The real problem isn't short term holders. The real problem is that shareholders aren't owners. The SEC won't let shareholders pick the boards of their own companies. Companies are owned by their managers now, and they are the short term thinkers using their incentive stock options to drive their decisions.

137 points by KKKKkkkk1 9y ago

Ask any of these CEOs if it would be cool to hear from there direct reports once a year or once a decade. This is just a whining plea for no accountability from managers. The right to execute a long term vision has to be earned by effective communication and superior execution. Just look at Amazon. No quarterly profits and it is the darling of a Wall Street. You don’t get to flounder around without a clear strategy or results and then complain people want to know every 90 days where things stand.

sulam 9y ago
Amazon is exceptional. Emulating Amazon will get most companies delisted.
- hellbanner 9y ago
  Can you describe more about what practices would cause delisting?
  - piker 9y ago
    Running out of money by only spending on R&D and having your share price drop below listing thresholds, I think, is the implication.
    - sulam 9y ago
      Yeah, I don't think you'd even have to run out of money. There are plenty of companies generating a fair amount of cash flow that hover in the dangerous territory of < $3 a share. It only takes one bad quarter. Here's an example of a company that generates cash but only recently is in the safe-ish territory: https://finance.google.com/finance?q=LLNW https://finance.google.com/finance?q=LLNW (Not that I think they are emulating Amazon, mind you, just making the point that you can have a going concern, and still get delisted.) More broadly, unless you have an amazing business, you probably shouldn't emulate Amazon (or Google, or FB, or any other business that is depending on free cash flow to fund R&D as opposed to generating profits).
      - goialoq 9y ago
        > the dangerous territory of < $3 a share. that's only dangerous until the stock does a reverse split.
    - s73ver_ 9y ago
      Share price doesn't dictate how much money they have. Amazon makes buttloads of money; they just choose to use it rather than give it back as dividends.
      - piker 9y ago
        No. That wasn't implied either. Conversely, net profits do tend to be a positive indicator of share price. It's also incorrect to say that AMZN "makes buttloads of money", with sub-1 EPS[1] at a nearly $1,000 share price. [1] https://finance.google.co.uk/finance?q=NASDAQ%3AAMZN&fstype=ii&ei=2ZTDWZmnGsPDUbL9orAP https://finance.google.co.uk/finance?q=NASDAQ%3AAMZN&fstype=...
        s73ver_ 9y ago
        Just shy of $38 billion in one quarter revenue is "Buttloads of money". I wasn't necessarily relating it to the share price.
- opportune 9y ago
  They're not "exceptional" they've just managed to find productive ways to reinvest their profits. The reason their stock is valued so much is partly because if he wanted/needed to, Bezos could wake up one day and cut all programs focused on expansion and return the saved costs / new profits as dividends. The reason this doesn't happen is that the money is (thought to be) better spent on increasing the size of the business. There's no reason other companies couldn't do this, although I expect the main limit to this strategy is the extent to which you can productively reinvest capital. This is a function of foresight/luck (e.g. branching into AWS) but also of the market you're in: to what extent do you begin to experience diminishing returns as you spend more money on improving your product? I think that with logistics, as with Amazon and e.g. Walmart, the returns diminish very slowly, or even increase with money spent (economies of scale).
outoftacos 9y ago
The piece doesn't really articulate a problem, if anything the reverse is true more often than not: management chases short term performance numbers to the detriment of the long term success of the company and long term shareholders. It's more just like "woah we're hip smart tech bros we need to fix the stock market!" even though none of their claims really have any merit. IPOs are still stupid for a lot of reasons, but stratifying shareholders (why is the answer to everything from the Valley always more stratification?) is neither here nor there.

brndnmtthws 9y ago

The ICO funding model seems much better: complete transparency, a truly free market, it's very difficult to manipulate the currency (i.e., magically issuing new coins aka share dilution), and it's easy to get around the stupidity of the US gov by incorporating somewhere with more liberal laws like, say, Switzerland. Why would you want to business by the rules in the US when the rules only exist to prop up rent seekers and the ruling elite?

hellbanner 9y ago
The SEC introduced "accredited investors" in the USA because scammers were taking money from people who didn't/couldn't research scams and lost fortunes in get-rich-quick stock schemes.
- brndnmtthws 9y ago
  That's the story they (the SEC and friends) provide, but to me it seems more like they wanted to make it hard for people with limited means participate in the legalized get-rich-quick schemes. How about just let the market decide? Why do we have stupid rules that exclude poor people from investing?
  - blawson 9y ago
    Because when those poor people make one bad choice they lose everything, and the state has to take care of them.
    - brndnmtthws 9y ago
      Yeah, just like the government bailouts during the 2008 financial crisis[1]. Except the US gov doesn't bail out poor people. [1]: https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008#Government_responses https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
      - ericd 9y ago

mathattack 9y ago

Here's my problem with the Long Term Stock Exchange idea... What makes the tech echosystem thrive is the flexible capital and labor model. Anyone can get a little money to chase their idea. The small ideas get starved for capital and labor until they get market validation. Then the capital and labor chases them. And that's how great companies grow so quickly in a land of startups. Anything that restricts mobility of labor hinders this and should be fought. (Example: Non-competes, cost-prohibitive real estate, etc) Anything that restricts mobility of capital should be fought too. To have capital available for great ideas, it should be easy to flee ideas that aren't working out. (This is also why share buybacks from mature companies are fine - the capital get recycled)

dasil003 9y ago
I agree with you in principle. The problem is that status quo encourages very short term thinking that has caused a lot of damage. I think it's at least worth toying around with longer-term incentives to see what can come out of it. I'm not super excited about 5 or 10 year vests (especially 20 years into my tech career without an FU nest egg), but it's a far lesser evil than non-competes or astronomical real estate (the latter being the thing that will likely drive me away for the sake of my family).
- mathattack 9y ago
  I'm not sure I follow you on real estate. Does the OP's proposal for long term capital fix that? Best I can tell, the one thing that will fix expensive real estate is autonomous cars. (Parking can be converted to housing, and longer commutes become tolerable)
  - dasil003 9y ago
    Actually I was just reflecting your examples, not citing things which the proposal would fix.
    - mathattack 9y ago

mbesto 9y ago

Good analysis from Matt Levine on how Social Capital Hedosophia Holdings Corp (SPAC trying to eliminate the headache of IPOs) is actually more expensive than going public. > A final thing about SPACs is that they are so expensive. Banks charge a rack rate of about 7 percent for initial public offerings, though big sexy tech IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather more lavishly. Hedosophia's sponsor -- a Cayman Islands company owned by Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In exchange for that nominal payment, and their work on finding a company to take public, they get 20 percent of the SPAC's stock. (They are also are putting in another $12 million or so to buy warrants in connection with its IPO.) A 20 percent fee for taking a company public is just ... more ... than a 7 percent fee. And that's not even counting the 5.5 percent fee that Credit Suisse charged for taking Hedosophia public! Something like a quarter of every dollar that investors are putting into Hedosophia is going to compensate financiers for doing the work of (ultimately) taking a unicorn public, which is a funny way to make that process more efficient. https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-ipos-and-spacs https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-...

probe 9y ago
Careful, it's not more expensive for the company, just the financiers. By investing in this SPAC, you're basically willing to 1) eat the fees to bring a unicorn public earlier, and 2) and actually participate in a potentially "hot" unicorn that you're trusting Chamath will find. For the company, you get to go public at 1) just the reverse merger fees which is significantly lower than IPO fees, and 2) at less time than going public (basically 1-2 months for the merger to go through)
- JumpCrisscross 9y ago
  > it's not more expensive for the company, just the financiers This is not how spreads work. (The problem is related to determining where the burden of a tax falls.) If an investor is willing to pay $10 for a company, an IPO gives the company $9 and the banker $1. That same investor would pay $8 for 80% of what those $10 would have bought. The price to the company is, out the door, lower. I’ll give the SPAC sponsors credit for beating the VCs and investment bankers at the fee game. They get a wider spread than the bankers. (IPO fees aren’t allowed, by law, to go to 20%.) And they get VC carry for what’s essentially a flip. Except it’s better than carry—there’s no hurdle! They could lose 80% of investors’ money and they’ll still get their 20%. Disclaimer: I am not a lawyer. This is neither legal nor securities advice.

neilwilson 9y ago

Or perhaps we can drop the insane valuations of service companies whose value is in their staff not their assets, just pay people properly in the first place and have companies go back to earning profit and paying dividends to investors. Or is that too rad for Silicon Valley? I know that we're all supposed to live off pension funds, but the idea is that is after retirement not before through selling over inflated stock to them.

tomcam 9y ago
> we can drop the insane valuations of service companies Awesome! But... how?
rpowers 9y ago
Strongly agree with you.

deleted 9y ago

[deleted]

warcher 9y ago

I feel like.... maybe some of these guys are feeling the hangover from other people's money, and trying to have it both ways. It's far from easy to bootstrap, but you basically solve all the problems these guys are talking about if you can survive it. The problem, of course, is that your unit economics have to work, you have to have the personal patience and resources to get to profitability, and you have to survive a potential funded competitor using their financial leverage to sell at or near a loss and torch your position in the market. So a lot of folks take the money, but you take the money, you gotta pay it back. An IPO is ultimately just kicking the can down the road, and taking on a new set of guys that are going to cash out your venture debt for public debt. Who also expect to be paid back. I don't see a way out of this devil's bargain short of, you know, delivering on the milestones you talked about in your pitch deck, or in your roadshow. But spare me the crocodile tears, huh? You took the money, you gotta pay back the money. Plus interest. And a lot of these IPOs, they had to make big promises when they went public-- big multiples, big projections, to support big valuations. Now you are sitting on a big pile of teachers' pension money and you have to deliver.

bedhead 9y ago

My prediction is that Chamath will use this SPAC to purchase Social Capital's VC investments. The conflict of interests are simply too great and I've seen this stuff before - it's almost always by design.

sjg007 9y ago
Makes sense. A payout on a payout.

kecoco0207 9y ago

Other solutions are currently in place to solve the IPO and liquidity problem. EquityZen is a platform that lets employees sell shares before IPO: https://equityzen.com/?utm_source=news.ycombinator.com%2Fitem%3Fid%3D15284893&utm_medium=Hacker%20News&utm_campaign=Hacker_News&utm_term=news https://equityzen.com/?utm_source=news.ycombinator.com%2Fite...

mikikian 9y ago

Color me skeptical and maybe one of the attorneys on HN could jump in, but solving the brain damage of an IPO reason seems like a red herring to me. SPAC could have value in a down market, when the IPO market is closed and a company is forced to raise a down round. Ratchets would kick in and founders would lose equity. If the SPAC, after fees, is able to offer a higher valuation to the company then its best alternative, it might actually work to benefit the company. I haven't seen anyone comment about this down market scenario this past week and wondering if someone smarter than me had any thoughts?

lifeisstillgood 9y ago

Want long term investors in your company - why not offer extra voting rights after specified periods of holding registered shares - one year one vote, 10 years 5 votes. There are many things companies can do to encourage long term, stockholder engagement - starting a random new stock exchange seems to be a long way down the list

throwaway2048 9y ago

Why are reverse mergers not more popular? Seems like there is quite an opening for somebody to spin up assetless shell companies, take them public and then sell them off the private companies that want to go public, and denying market makers and underwriters their huge rake, and sidestep most of the other issues surrounding an IPO.

valuearb 9y ago

"Currently, an investor who owns one share for a month, or even a day, has the same voting power as someone who has owned a share for years. Mr. Ries wants what he calls “tourists” — short-term shareholders — to have less voting power than long-term shareholders, whom he calls “citizens of the republic.” Over time, shareholders of companies on the LTSE would gain more votes based on their length of ownership." This is really a poorly thought out idea that's hugely counter-productive. You own your shares for 10 years and have mucho voting rights, but need to sell them. Now you have to sell them to someone who will get virtually no voting rights at the time of purchase. So all this does is make your shares way less valuable. It will end up creating "phantom sale" markets where you continue to serve as the shareholder of record, but agree to vote your mucho votes the way the purchaser wants you to. The real problem isn't short term holders. The real problem is that shareholders aren't owners. The SEC won't let shareholders pick the boards of their own companies. Companies are owned by their managers now, and they are the short term thinkers using their incentive stock options to drive their decisions.