14 ms·

US startups don’t want to go public anymore

327 points by zwieback 9y ago

dbuder 9y ago
IPOs used to be to raise money, now they are to cash out. If you really want to maintain control you do not float.
somberi 9y ago
A related read (1): A big trend in American business is the collapse in the number of listed companies. There were 7,322 in 1996; today there are 3,671. The number of companies doing initial public offerings (IPOs), meanwhile, has fallen from 300 a year on average in the two decades to 2000 to about 100 a year since. (1) - https://www.economist.com/news/business/21721153-company-founders-are-reluctant-go-public-and-takeovers-are-soaring-why-decline https://www.economist.com/news/business/21721153-company-fou...
- boulos 9y ago
  Interesting! I hadn’t seen this article, but now I’m curious how many of these were “fake” internet companies. Given it being 1996, it probably shouldn’t be too heavily dominated by fly by night internet companies (yet). I’d be curious how these numbers compare to say 1986 as another data point.
  - prostoalex 9y ago
    Even outside of the dotcom context the technology nowadays rewards consolidation. All publicly listed internet portals of the 90s (Yahoo, Infoseek, Excite, Ask Jeeves) have been essentially overrun by Google. Retail had to either consolidate, slim down or delist due to a private equity infusion, with AMZN emerging as a clear winner.
  - heymijo 9y ago
    Not sure that thesis holds water. Michael Mauboussin published the paper, "The Incredible Shrinking Universe of Stocks: The Causes and Consequences of Fewer U.S. Equities" in 2017 [0]. The Big Ideas: IPO's and being public are more expensive with less benefit while at the same time M&A has flourished. [0] http://www.cmgwealth.com/wp-content/uploads/2017/03/document_1072753661.pdf http://www.cmgwealth.com/wp-content/uploads/2017/03/document...
    - boulos 9y ago
      Thanks! This is a great read. The number of small cap companies that have been gobbled up by PE firms really shows through in these graphs.
  - rgbrenner 9y ago
    here's a more detailed article with a chart back to 1980: https://corpgov.law.harvard.edu/2017/05/18/looking-behind-the-declining-number-of-public-companies/ https://corpgov.law.harvard.edu/2017/05/18/looking-behind-th... This article suggests it's all micro-cap stocks: https://www.institutionalinvestor.com/article/b15nlcmsmn57fx/why-vanguard-isnt-freaking-out-about-fewer-public-companies https://www.institutionalinvestor.com/article/b15nlcmsmn57fx...
- ad_hominem 9y ago
  I wasn't aware of that number, but I was just thinking recently about how many fewer banks there are today than there used to be. In 1995 there were 10K; as of last year there are less than 5K.[1] So a 50% drop in that timespan, mirroring your numbers. And the first article I came across looking for the latest 2017 number is about Amazon's interest in becoming a bank. Guess the trend validates the dystopian sci-fi trope of multinational conglomerates ruling everything in the future. [1]: https://www.bloomberg.com/gadfly/articles/2017-10-06/amazon-could-be-your-lender-and-upend-wall-street https://www.bloomberg.com/gadfly/articles/2017-10-06/amazon-...
  - jacobush 9y ago
    "There is no America. There is no democracy. There is only IBM and ITT, and AT&T, and Du Pont, Dow, Union Carbide and Exxon. Those are the nations of the world today."
  - icebraining 9y ago
    The reason the US had so many banks was due to regulations that tried to prevent interstate banks, and which were abolished in 1994: https://en.wikipedia.org/wiki/McFadden_Act https://en.wikipedia.org/wiki/McFadden_Act https://en.wikipedia.org/wiki/Bank_Holding_Company_Act https://en.wikipedia.org/wiki/Bank_Holding_Company_Act https://en.wikipedia.org/wiki/Riegle-Neal_Interstate_Banking_and_Branching_Efficiency_Act_of_1994 https://en.wikipedia.org/wiki/Riegle-Neal_Interstate_Banking...
    - ad_hominem 9y ago
      Interesting, but if you look at the graph banks were already well on a downward trend before 1994 - there were 14.4K banks in 1984, 13.4K in 1988, 12.5K in 1990, 11.7K in 1992.
  - BrainInAJar 9y ago
    ""It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals.... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many.... The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages.... It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish." - Marx. Capital Vol I, Ch 25 The idea isn't new, and isn't scifi.
jawns 9y ago
One other problem this creates, which the article doesn't touch on, is that many employees in the R&D economy are offered stock options in lieu of 401(k)s or a more liquid equivalent compensation. And an IPO is the most straightforward way to cash out. Yes, it's possible to cash out during an acquisition, but anecdotally, it seems as if more people holding stock options have gotten screwed during an acquisition than during an IPO.
- olliej 9y ago
  Yeah if I ever went to a non public “paid in stock” I would pay a lawyer to ensure my contract let me cash out whenever I wanted, and couldn’t be diluted, and didn’t have lower payout priority.
  - kelnos 9y ago
    I doubt any company would accept those terms. Unfortunately the power dynamic is on their side during these sorts of negotiations. Even if you're amazing in your field, special terms like that wouldn't fly.
    - olliej 9y ago
      I'll happily take payment in cash if you don't think that I'm worth paying in actual stock with actual value. If you're paying in stock with the argument that I'm buying into the company, then I should be able to realize that income. If you're paying in stock without actually saying I can cash out that stock why would I accept being underpaid. If you are an engineer that takes a salary+stock comp where the company gets to choose the value of "stock" -- is it salable, is it zero-value until we've repaid our creditors is being foolish. If a company is not willing to guarantee your ability to cash out they are /explicitly/ stating that the stock part of your salary is worth zero. If that's their claim I would expect a salary >200k to compensate.
      - kelnos 9y ago
        For better or worse, your expectations do not match reality in some (many?) cases. I'm sympathetic to the idea that many early employees get screwed over by promises of riches through equity, but the solution to that is education. Sometimes these big bets pay off; most of the time they do not. If you're unwilling to place one of those bets, that's fine: there are plenty of more mature (or better capitalized) companies that you can choose to work for instead. Some people are willing to make that bet, or have at least decided that the work is interesting enough to take a lower salary. You're free to look down on them for their decision, but I suppose that says more about you than about them.
chadwilken 9y ago
Equity aside I don’t see any good reason to go public other than raising some capital. You no longer are free to operate as you wish and instead have to focus on dividends and pleasing the holders.
- acchow 9y ago
  Not if the founders have majority voting rights.
  - kelnos 9y ago
    Even with majority voting rights, you're still subject to much more stringent accounting and reporting requirements, and Wall Street can and will punish you if you don't set and meet reasonable quarterly and yearly revenue guidance. A lower stock price means less access to future capital, so you still end up doing things to please the market.
- twinkletwinkle 9y ago
  That has been Matt Levine's thesis for a while, "Private markets are the new public markets". The public markets used to be the biggest source of capital, subject to stringent rules and regulations. Now you can get just as much money from the private capital markets, and it doesn't come with all the pesky rules around reporting.
  - altstar 9y ago
    It depends on how long cheap money will be available. It can be that the market is changing tack at the moment. A lot of capital is flowing in bonds at this moment.
  - drawkbox 9y ago
    > Now you can get just as much money from the private capital markets, and it doesn't come with all the pesky rules around reporting. This is true but having lots of small public investors sometimes makes it easier to maneuver than a handful of big fish / massive investors akin to many small customers compared to 1-2 big clients that dictate your fate. Public markets are similar to product development that targets many small customers compared to private markets that are like services / contracting that have a few or one big client, the latter is more risky and sometimes you are directed by the big fish rather than not being worried about having to please everyone. Public markets are directly tied to everything now, the stocks, bonds, wages, jobs, retirement, funding, etc. Equities were created to give everyone a chance to invest and ride the tide up with the big boats, if companies are already tapped by the time they go public, public markets, retirement and market based wealth will not be as robust.
flyinghamster 9y ago
I can't help but think that some of this is a direct result of Wall Street f\ckery. When your prime directive becomes "engage in financial shenanigans to make this quarter's results look good, to prop up the stock price because shareholder value," your actual business becomes irrelevant. Contrast Family Video (privately held and still going strong) vs. Blockbuster Video (no longer a thing). Sure, video rental may not have enough money in it to satisfy the Wall Street vampires, but there's still enough life in it to make money. If you don't have to keep vampires happy, you can invest your profits into your business, or even into new ventures. Hilariously, there's a Family Video in my neck of the woods that moved across the street into the former Blockbuster location. They retained ownership of their original building* and are using that for a new business venture (a 24-hour fitness center). EDIT: In their new location, and many others, they have a Marco's Pizza attached. * There's another whole issue: owning your real estate rather than being beholden to a landlord.
- ams6110 9y ago
  Family Video carries porn, which Blockbuster never did.
  - zasz 9y ago
    Might that not be only possible because it is privately held?
    - olliej 9y ago
      Blockbuster was controlled by a fairly conservative group that deliberately chose not to carry porn. They even made that awful stripper movie (versayth anyone?) “sfw ” by using cutting edge CGI to add little triangle bras, apparently costing more than the original movie. Which I think they had to pull because that made it copyright infringement :)
      - curun1r 9y ago
        It wasn't just porn they didn't like, Blockbuster edited any movie they considered unsavory before the transition to DVD. The last movie I rented from Blockbuster was "Bad Lieutenant." The normal, R-rated cut is 91 minutes. The Blockbuster cut was under an hour. They cut so much of the movie that the plot no longer made sense. I was so annoyed I vowed never to rent from them again.
mychael 9y ago
Startup mergers and acquisitions are also trending downward. Translation for tech employees: - If you accepted a lower salary in exchange for equity, you most likely got a bad deal. - If you worked somewhere long enough to vest 100% of your options, you're probably underpaid (because people who hop around tend to earn more). https://techcrunch.com/2017/08/05/markets-are-strong-but-big-startup-ma-deals-just-arent-happening/ https://techcrunch.com/2017/08/05/markets-are-strong-but-big...
- vadimberman 9y ago
  > Startup mergers and acquisitions are also trending downward. That's not what the TechCrunch article actually says. The article says that the big mergers and acquisitions are down. But the big M&A are the economic equivalent of luxury real estate deals. Do you really care that a Hollywood celebrity can't sell his or her mansion at a nice price? Most people are interested in their segment. In fact, smaller M&A deals are on the rise: http://www.successfulacquisitions.net/ma-today-smaller-deals-are-on-the-rise/ http://www.successfulacquisitions.net/ma-today-smaller-deals..., and the chances are, your startup, if it does not go belly up, will end up in this category. Huge M&A are difficult to pull properly. The fact that there are fewer is a good thing. It will also make the evaluations more reality-based and not based on "but mommy, I wanna be a unicorn too".
  - mychael 9y ago
    Interesting. Thanks for sharing!
- dilyevsky 9y ago
  Doesn't matter if you vested everything or received refreshes, raises, etc. Your measly 10% raise every successful promotion once every 2 years is nothing compared to offers doubling for experienced engineers over the past 5-6 years (at least in SV).
privateSFacct 9y ago
Posting anonymously. Some quick factors not discussed. 1) Massive compliance overhead. Going public and maintaining public status can be a real nightmare. For example staff generally "get" what a financial statement audit is about - are the numbers correct. And when they aren't everyone gets that a system should be improved. And the auditor makes some notes about areas to improve based on their work, and the difficulty and errors noted in checking the actual numbers. This is the audit most private companies go through - and it actually works pretty well. A public company under SOX - now you have an audit of the numbers (great) and you have a kind of meta audit of the system (internal control) that got to those numbers (ugh). The cost / benefit of this second part is not clear to most staff. It's huge checklists, everyone get's checklist fatigue, and no one dares change a system after the auditors have been through etc. You literally can ask, why in the world do we do crazy procedures X/Y/Z? Because the auditors accepted it and we are too scared to change it. All critical thinking goes out the window. And folks start driving workarounds to the systems to get stuff done (double ugh and big actual risks). Read some PCAOB reports for "audit failures". These aren't actual "audit failures" - no numbers were wrong. But it'll be things like - the auditor read over the calculations, checked underlying documents, recalculated numbers sat in on some meetings, but STILL didn't do enough to assess internal control over some calculation. OK - I'll save the rest for later, but the idea that the private markets are the new public markets rings true to me. These are folks who can weigh actual cost / benefit of compliance cost vs losing money on an investment. Most are going to stick to something like a regular audit. Multiply by 100x in every dimension?
- tabtab 9y ago
  Most such rules are in place because slimebags abused the system, and in some cases taking the world economy with it. I'm all for making more efficient auditing rules, but one has to be careful not the throw the baby out with the bathwater. Perhaps have compliance tiers such that smaller co's can optionally be in a riskier and less audited stock system or level. However, we probably don't want too much of the economy in that pool. As it is, private investors may be willing to take on riskier and even dodgier companies who don't want auditors snooping around. That's fine: if the rich want to gamble with dodgy companies via private investment, go for it.
xivzgrev 9y ago
It's not all gloom and doom. Who are buying these companies? Google, facebook, amazon, Microsoft, etc. All public companies. If it's a good buy, stock appreciates immediately and in longer term.
- s2g 9y ago
  The endless stream of small companies to the conglomerates is doom and gloom. Buy you or crush you. If you get really lucky you end up at Snap and are fighting for your life against a company an order of magnitude larger.
aaavl2821 9y ago
some of these reasons are quite spurious. the amount of detail you need to disclose about your r&d is nowhere near a level of detail that would help competitors, and is probably less than would be disclosed through the press anyway. alphabet discloses almost nothing about many of its subsidiaries, and big public pharma companies generally dont even list any drugs earlier than phase 2 in public filings the whole GAAP thing is also a weak argument. investors know that tech startups arent going to have tons of tangible assets and pp&e and actually like capital-light models. investors are smart enough to figure out when gaap is useful for valuation and when it isnt
- kelnos 9y ago
  I don't think the issue is really any confusion around whether or not GAAP is appropriate for many companies, it's just that there's no alternate standard, and that can be confusing. My understanding is that "non-GAAP" can encompass a variety of different methods of calculating performance, and it's harder for an investor to evaluate if the chosen method actually represents the business well, or if it was just chosen because it yielded the best numbers.
  - monocasa 9y ago
    There's IFRS.
idlewords 9y ago
One obvious reason that's never mentioned is that staying private gives capital more leverage over labor. It's easy to lock in a workforce for round after round of startup funding as they wait for an IPO that will convert their paper wealth into something tangible.
m3kw9 9y ago
Because they think they can ICO? Lol
glangdale 9y ago
It's interesting that a bunch of startups in Australia have just gone public, some of which seem amazingly early-stage. I worked for a startup (ultimately exited to Intel) and recognise the stage that these guys are at as "pretty damn early" (the bit where you're almost living or dying based on B2B customer prepayments, etc) and am amazed that you can now apparently do this while public. Ouch. Would hate to have had to file a quarterly public report showing our wounds to the public...
fbonetti 9y ago
They don’t want to go public because they have insane valuations yet aren’t profitable. Going public would mean losing a significant amount of paper wealth. The stock market doesn’t value “world changing technology” (flimsy startups) as highly as investors in Silicon Valley.
- draw_down 9y ago
  No, that isn't why.
- varjag 9y ago
  The uncomfortable on point answer buried in the discussion. VCs learned their dotcom bust lesson well. The cycle can drag much longer if you don't go public. The exit target now is a sale to an existing public buyer, skipping the market validation stage altogether.
aaavl2821 9y ago
I'm sure many private company employees wish they would go public so they can enjoy the liquid stock appreciation that google / apple / fb / amazon / netflix etc employees have liquid stock in a growing company is one of the most powerful currencies for attracting and maintaining talent. private company stock is generally valued at at least a 30% discount to public stock, and for an early-stage startup it is hard to place any value on private stock at all
tvural 9y ago
I would also point out that short sellers and "activist investors" are a significant downside to being public. Essentially you give investors focused on these strategies a financial incentive to destroy the company's long-term value. Activism has been a big problem for drug companies where investors will try to fire all the scientists so that profits will go up for a few years.
- dannyw 9y ago
  LTSE is trying to solve this by vesting voting rights over time. I’m curious to see if it succeeds.
  - godzillabrennus 9y ago
    On that note Eric Ries just released a new book at the end of last year, it's called "The Startup Way".
  - lostdog 9y ago
    Seems backwards. You should get more voting rights if you lock yourself into holding the stock for >5 years.
    - rayshan 9y ago
      This is correct. Shareholders may increase the voting power of their shares up to 10x over 10 years by registering their shares on the company’s books. (I work at LTSE)
- wbl 9y ago
  If they can control the company it's because people don't see the longterm value.
  - kozikow 9y ago
    Not if too many people participating in the stock market are speculators rather than long-term investors.
agorabinary 9y ago
Don't go public. Look at major companies like Facebook that have become massive user data and time exploiting machines for the sake of increasing share price. Stay private and recognize what place your product has in the world - many ideas CAN be billion dollar ideas if they pervert their original vision, but many ideas ought to remain much smaller and focused to stay true to themselves, not investors. And is this article really arguing that Americans are underinvested in the stock market and not grossly overinvested?
- doomlaser 9y ago
  SpaceX, Valve, Dell (for now?) — what are other good US technology examples?
  - jjcm 9y ago
    Valve is great when things are interesting to work on, but I wouldn't consider them a company that are role models. The downside to Valve is since everyone is their own boss, maintenance becomes something no one does. They need to solve that problem before I'd consider them a good company role model.
    - Silent_Tempest 9y ago
      So what companies do you consider to be "role models"?
    - quickthrower2 9y ago
      Could they pay a higher salary for maintenance to compensate? Like a reverse auction. Then it becomes something that the people who are most desperate for money will do.
    - Matheus28 9y ago
      And it's not like they're a video game developer anymore ;)
vuln 9y ago
It's easier to break the law when no one can check your books. ;)
ChuckMcM 9y ago
"One issue is the narrowing of investment opportunities for working Americans." -- really? Only 54% of American's hold any form of stock at all, and most of those only have stock in the form of a mutual fund. "Another source of disquiet is intensifying industry concentration." -- concentration or horizontal scaling? One of the things I disliked about working at Google was their claim they owned all my work at all times because they were literally in every single business associated with technology[1]. "Finally, there’s the societal benefit that stems from the institution of public capital markets." -- again what societal benefit is that? Startups, and by that I mean venture based ones, not the local pizza restaurant or nail salon, absolutely would love to "go public" and have some nice liquid event. But they screwed a lot of people at the turn of the century out of their money and as a result that route was closed down. There are at least hundreds of companies that start, grow a bit, and get acquihired or otherwise consumed by big companies. The people then do their time (18 - 24 months typically) at BigCo and then roll out to do it again. If they could go public and take your money without consequence I'm sure they would :-). [1] No, this probably would not hold up in court, but it was what legal told me when I asked them for a definitive statement.
- keenerd 9y ago
  > their claim they owned all my work at all times How do they respond if you attempt to negotiate salary based on the expectation of putting in 8760 hours per year?
tanilama 9y ago
Maybe their valuation is too high that they can't fulfill ROI?
rotskoff 9y ago
I consider this a symptom of the massive wealth inequities in contemporary America. As other comments have pointed out, this phenomenon is not unique start-ups. The most direct cause of the IPO decline is a lack of necessity. Public markets used to provide crucial injections of capital for investment and growth. Currently venture capitalists control enough wealth to provide those investments directly. This point is made most dramatically by looking at the growth of private equity investment through the early naughts. Some relevant plots can be found in [1] which uses the data to advocate for deregulation, which I do not believe gets at the underlying issue. [1] https://www.cato.org/cato-handbook-policymakers/cato-handbook-policy-makers-8th-edition-2017/securities-regulation https://www.cato.org/cato-handbook-policymakers/cato-handboo...
- hkmurakami 9y ago
  The people who fund the VCs are pension funds and endowments. I don't think that actually reflects the wealth divide.
  - adamson 9y ago
    I think massive endowments (foundations, trusts, universities, etc) are pretty clear effects of a large wealth divide
    - dmix 9y ago
      Most of those endowments are pension funds for teachers and other non-wealthy jobs... The majority of the stock market is owned by a few funds as well. Both are individually poor examples of the wealth inequality as a driver of trends in the capitalization of tech businesses... One is an alternative to the other. And typically the biggest investors/funds/endowments do both as a diversification strategy.
      - psadri 9y ago
        Wondering if these funds may be obligated to work in the interest of their investors vs just maximize dollar value. For example, should a factory worker retirement fund invest in robotic companies that automate workers out of a job? I suppose the argument is that if they don’t someone else will.
thisisit 9y ago
And the reason is because there is lot of money to be had in private markets, especially with companies like Softbank raising and giving out tons of money. If we dig further, this is an after-effect of keeping the interest rates low for a long time. That means access to credit is much easier. So, there is no rush to profitability and going public. But, given that interest rates are now slowly rising I predict we might see more and more companies going public and IPO to raise money.
jalcazar 9y ago
For the most part, only rich people can hand their cash over to venture capitalists and private equity groups to invest in young firms. That means small-time investors have no way of investing in most of the new, fast-growing startups, according to the authors. Seems like authors aren't considering ICOs as a new form of IPOs for startups. Any computer and finance literate person can invest, not only small American residents. Volatility is higher in ICOs and there are practically no regulations, so investors should be more careful. Nonetheless, the underlying basic concepts are the same
- deleted 9y ago
  [deleted]
- jacquesm 9y ago
  I haven't seen an ICO yet that is even close to as realistic a proposition as your typical IPO would be. ICO's are for the most part simply scams. For an IPO to take place you have to have a business first.
- sethammons 9y ago
  > so investors should be careful. How? For companies that have gone through an IPO, there is GAAP, SOX, SOC2 controls, etc. These were all designed to help investors be informed so they can manage risk. With ICOs, what have you got? "Trust us, we've not written a bug into our system that will give us unlimited coin to offload after the price reaches a certain point."
  - jalcazar 9y ago
    Understanding finance, risk, time valuation, researching the team behind the startup, understanding the white paper, not investing more than what they can afford to lose, reading reviews and comments online, automating orders to sell before the tokens reached a certain price.
- sjg007 9y ago
  You could ICO as an alternative to IPO I would guess as long as you meet the same requirements. In this case the ICO token would be your stock. So ICOs have the potential to disrupt wall street stock recording and transactions. Essentially remove wall street entirely if you want. Is that good or bad? Exchanges have stop loss and other braking mechanisms/regulations.. Are those desirable?
indubitable 9y ago
I'm surprised to see so few mention a more direct ostensible 'fiduciary duty.' Going public, especially without share tiering aimed at letting the owners keep control, involves yielding control of your company to shareholders. And this often creates a conflict of interest. Shareholders, generally, are not holding shares because of any affinity for a company. They're holding shares because they think those shares will appreciate and give them more capital. SpaceX is a great example. They don't want to go public simply because their longterm goal is not something that has an immediately apparent path to monetization. And on top of that it's also very high risk. Elon is driven by ideology which is, in my opinion, a great thing. But it's not something that would work well at a public company. As another example take something like Steam - the primary PC gaming platform. In spite an effective platform monopoly, they've chosen to never 'squeeze' their position. And they're doing better than ever for it. On the other hand they could likely multiply their short to mid term revenue in exchange for killing themselves in the long run. When the owners of a company are more interested in increasing their net worth, than in creating a solid long term company - it creates a major conflict of interest. In theory my argument should fall flat because of market efficiency. If making decisions so obviously hurts a company's longterm outlook, then that should theoretically be factored into the price of a stock. But in reality quarterlies seem to drive the market.
- TeMPOraL 9y ago
  > In theory my argument should fall flat because of market efficiency. If making decisions so obviously hurts a company's longterm outlook, then that should theoretically be factored into the price of a stock. But in reality quarterlies seem to drive the market. It shouldn't. Market efficiency is precisely why we'd "lose" SpaceX if it went public now. The market does not optimize for the best future of mankind. It optimizes for short-term profits (those who don't get outcompeted by those who do). It's a powerful solution to some problems, not all problems.
RestlessMind 9y ago
There are a few comments here about how private investors are able to provide sufficient funding that startups don't have to go to public markets anymore. If that is the case, then the self-correcting market mechanism should be : startups don't go public sooner -> employee options are worthless -> employees realize this and start asking for salaries in line with public companies -> private investors don't have enough capital to compete on "liquid compensation" with public companies -> startups are forced to go public Though I think there is still fair bit of time before this happens; too many people still cling to their beliefs in the lottery tickets aka "perpetually illiquid startup options"
abtinf 9y ago
That is a lot of words without once mentioning Sarbanes-Oxley.
pmoriarty 9y ago
If a startup that hires you is not interested in ever going public does that mean that the stock options they give you are not likely to ever be worth anything?
- PhilipA 9y ago
  If the company sells privately to another company it still counts. The article is talking about IPO's. There are other means to exercise your stocks.
- sjg007 9y ago
  Maybe depends on if you can sell them to someone. It breaks the social contract though.
- fbonetti 9y ago
  Yes.
BuisnessGrowth1 9y ago
The road to hell is paved with good intentions... The government has paved most of the road when it comes to small businesses (including startups) being stifled by regulations and either going offshore, remaining private, and so on... Basically the government sucks at almost anything. Why do people advocate for their growth and increasing power?
- CryptoPunk 9y ago
  >>Basically the government sucks at almost anything. Why do people advocate for their growth and increasing power? Because people don't know what and who to trust. There is so much information out there, and so many conflicting claims about it all means, that there's no easy way to tease out what's true. Anyone advocating for a particular policy comes across as an ideologue, because they cannot possibly convey the body of facts that informs their position, meaning what they mostly present is fervent belief and insistence that they are right.
known 9y ago
Unlike Capitalism, Globalization is Zero-sum
- sjg007 9y ago
  Would you please explain why?
Annatar 9y ago
People have had it with stock market manipulations where a few Wall Street crooks make off with all the money and the rest are left holding the bag, plus nobody wants the overhead of GAAP. Surprise surprise. Poor Wall Street crooks, where is the new yacht going to come from now, and what’s even scarier, who is going to pay for it now that noone trusts them any more?
ataturk 9y ago
Here's what happened: The VCs and their investors realized they don't want a stock market with an SEC sniffing around. They cut out the middle man and keep all the winnings for themselves, cutting out the public completely. It makes sense for those huge endowments to do that--it squeezes every penny out that it can. They don't even leave a single crumb for Mom & Pop investor because Mom & Pop can't get in on these deals. And before you say "pension funds" I say: Nearly 100% of those are dangerously underfunded, so there's some major fuckery going on there.
sjg007 9y ago
I guess the model has changed. This is bad for your average unicorn startup employee though, liquidity for any real purpose is limited. There's no price transparency and there's no upside. Maybe this is a strategy to push for deregulation. But it is fleecing the public in another way by restricting assets for purchase even if the goal was to prevent outright fraud originally. All of that money has gone into housing, the stocks that we can buy... But there is also massive consolidation being driven by technology. So there will only be a few winners by definition. This is why China and Russia closed their tech markets to US companies.
gwbas1c 9y ago
I remember listening to a radio broadcast in 2002 explaining the Internet stock bubble. One thing it pointed out is that, in the late 1990s, startups went public much faster than they normally did. It seems the broadcast implied that an average startup, prior to the 1990s bubble, took about 10-15 years to go public. According to the broadcast, a company would go public once the business model was proven. Going public wasn't an "exit" as we consider it now. Maybe we're just seeing a return to normal?
maherbeg 9y ago
Would it help to change the rules such that whatever "shares" (RSUs or otherwise) are granted to private company employees count towards the private company shareholder limit? You would either have to go public or compensate employees at public company salaries.
turc1656 9y ago
This was something I never considered as part of the model of the US market. I have long considered US equities to be overbought based on P/E ratios and other fundamentals when viewed on a historical perspective. However, I never took into consideration (even though I was acutely aware of it) that there are thousands less public companies now than 20 years ago. When you view it as a supply/demand, it becomes more obvious. There was ~27 trillion that people had in the US market in 2016, from the numbers I am looking at. And that's with roughly 3,800 companies, giving us an average market cap of about 7.1 billion. If that number were to go back up to ~7,500, all else being equal we would very likely see those market caps cut in half as the funds dispersed across the rest of the market. Yes, this is a vast simplification and there are many factors at play like fundamental ratios and proper valuations to determine what companies are worth. But I think this is something that is certainly a factor and not something I had considered before.
segmondy 9y ago
Perhaps US startups can't go public because they will get exposed like Snap? How many private startups/unicorns today are truly crushing it? Very few. Going public was a great way to extract money from the public, but not so much these days. The money is being extracted before hand. VCs are getting paid irrespective of how the companies perform. The money being risked is not their money, but money raised indirectly from the public. Your 401k or pension might be part of the billion+ that Uber raised. :D Acquisition is a great way to exit for those with skin in the game, angels and series A investors who are more likely to risk their own capital.

327 points by zwieback 9y ago

IPOs used to be to raise money, now they are to cash out. If you really want to maintain control you do not float.

A related read (1): A big trend in American business is the collapse in the number of listed companies. There were 7,322 in 1996; today there are 3,671. The number of companies doing initial public offerings (IPOs), meanwhile, has fallen from 300 a year on average in the two decades to 2000 to about 100 a year since. (1) - https://www.economist.com/news/business/21721153-company-founders-are-reluctant-go-public-and-takeovers-are-soaring-why-decline https://www.economist.com/news/business/21721153-company-fou...

boulos 9y ago
Interesting! I hadn’t seen this article, but now I’m curious how many of these were “fake” internet companies. Given it being 1996, it probably shouldn’t be too heavily dominated by fly by night internet companies (yet). I’d be curious how these numbers compare to say 1986 as another data point.
- prostoalex 9y ago
  Even outside of the dotcom context the technology nowadays rewards consolidation. All publicly listed internet portals of the 90s (Yahoo, Infoseek, Excite, Ask Jeeves) have been essentially overrun by Google. Retail had to either consolidate, slim down or delist due to a private equity infusion, with AMZN emerging as a clear winner.
- heymijo 9y ago
  Not sure that thesis holds water. Michael Mauboussin published the paper, "The Incredible Shrinking Universe of Stocks: The Causes and Consequences of Fewer U.S. Equities" in 2017 [0]. The Big Ideas: IPO's and being public are more expensive with less benefit while at the same time M&A has flourished. [0] http://www.cmgwealth.com/wp-content/uploads/2017/03/document_1072753661.pdf http://www.cmgwealth.com/wp-content/uploads/2017/03/document...
  - boulos 9y ago
    Thanks! This is a great read. The number of small cap companies that have been gobbled up by PE firms really shows through in these graphs.
- rgbrenner 9y ago
  here's a more detailed article with a chart back to 1980: https://corpgov.law.harvard.edu/2017/05/18/looking-behind-the-declining-number-of-public-companies/ https://corpgov.law.harvard.edu/2017/05/18/looking-behind-th... This article suggests it's all micro-cap stocks: https://www.institutionalinvestor.com/article/b15nlcmsmn57fx/why-vanguard-isnt-freaking-out-about-fewer-public-companies https://www.institutionalinvestor.com/article/b15nlcmsmn57fx...
ad_hominem 9y ago
I wasn't aware of that number, but I was just thinking recently about how many fewer banks there are today than there used to be. In 1995 there were 10K; as of last year there are less than 5K.[1] So a 50% drop in that timespan, mirroring your numbers. And the first article I came across looking for the latest 2017 number is about Amazon's interest in becoming a bank. Guess the trend validates the dystopian sci-fi trope of multinational conglomerates ruling everything in the future. [1]: https://www.bloomberg.com/gadfly/articles/2017-10-06/amazon-could-be-your-lender-and-upend-wall-street https://www.bloomberg.com/gadfly/articles/2017-10-06/amazon-...
- jacobush 9y ago
  "There is no America. There is no democracy. There is only IBM and ITT, and AT&T, and Du Pont, Dow, Union Carbide and Exxon. Those are the nations of the world today."
- icebraining 9y ago
  The reason the US had so many banks was due to regulations that tried to prevent interstate banks, and which were abolished in 1994: https://en.wikipedia.org/wiki/McFadden_Act https://en.wikipedia.org/wiki/McFadden_Act https://en.wikipedia.org/wiki/Bank_Holding_Company_Act https://en.wikipedia.org/wiki/Bank_Holding_Company_Act https://en.wikipedia.org/wiki/Riegle-Neal_Interstate_Banking_and_Branching_Efficiency_Act_of_1994 https://en.wikipedia.org/wiki/Riegle-Neal_Interstate_Banking...
  - ad_hominem 9y ago
    Interesting, but if you look at the graph banks were already well on a downward trend before 1994 - there were 14.4K banks in 1984, 13.4K in 1988, 12.5K in 1990, 11.7K in 1992.
- BrainInAJar 9y ago
  ""It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals.... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many.... The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages.... It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish." - Marx. Capital Vol I, Ch 25 The idea isn't new, and isn't scifi.

jawns 9y ago

One other problem this creates, which the article doesn't touch on, is that many employees in the R&D economy are offered stock options in lieu of 401(k)s or a more liquid equivalent compensation. And an IPO is the most straightforward way to cash out. Yes, it's possible to cash out during an acquisition, but anecdotally, it seems as if more people holding stock options have gotten screwed during an acquisition than during an IPO.

olliej 9y ago
Yeah if I ever went to a non public “paid in stock” I would pay a lawyer to ensure my contract let me cash out whenever I wanted, and couldn’t be diluted, and didn’t have lower payout priority.
- kelnos 9y ago
  I doubt any company would accept those terms. Unfortunately the power dynamic is on their side during these sorts of negotiations. Even if you're amazing in your field, special terms like that wouldn't fly.
  - olliej 9y ago
    I'll happily take payment in cash if you don't think that I'm worth paying in actual stock with actual value. If you're paying in stock with the argument that I'm buying into the company, then I should be able to realize that income. If you're paying in stock without actually saying I can cash out that stock why would I accept being underpaid. If you are an engineer that takes a salary+stock comp where the company gets to choose the value of "stock" -- is it salable, is it zero-value until we've repaid our creditors is being foolish. If a company is not willing to guarantee your ability to cash out they are /explicitly/ stating that the stock part of your salary is worth zero. If that's their claim I would expect a salary >200k to compensate.
    - kelnos 9y ago
      For better or worse, your expectations do not match reality in some (many?) cases. I'm sympathetic to the idea that many early employees get screwed over by promises of riches through equity, but the solution to that is education. Sometimes these big bets pay off; most of the time they do not. If you're unwilling to place one of those bets, that's fine: there are plenty of more mature (or better capitalized) companies that you can choose to work for instead. Some people are willing to make that bet, or have at least decided that the work is interesting enough to take a lower salary. You're free to look down on them for their decision, but I suppose that says more about you than about them.

chadwilken 9y ago

Equity aside I don’t see any good reason to go public other than raising some capital. You no longer are free to operate as you wish and instead have to focus on dividends and pleasing the holders.

acchow 9y ago
Not if the founders have majority voting rights.
- kelnos 9y ago
  Even with majority voting rights, you're still subject to much more stringent accounting and reporting requirements, and Wall Street can and will punish you if you don't set and meet reasonable quarterly and yearly revenue guidance. A lower stock price means less access to future capital, so you still end up doing things to please the market.
twinkletwinkle 9y ago
That has been Matt Levine's thesis for a while, "Private markets are the new public markets". The public markets used to be the biggest source of capital, subject to stringent rules and regulations. Now you can get just as much money from the private capital markets, and it doesn't come with all the pesky rules around reporting.
- altstar 9y ago
  It depends on how long cheap money will be available. It can be that the market is changing tack at the moment. A lot of capital is flowing in bonds at this moment.
- drawkbox 9y ago
  > Now you can get just as much money from the private capital markets, and it doesn't come with all the pesky rules around reporting. This is true but having lots of small public investors sometimes makes it easier to maneuver than a handful of big fish / massive investors akin to many small customers compared to 1-2 big clients that dictate your fate. Public markets are similar to product development that targets many small customers compared to private markets that are like services / contracting that have a few or one big client, the latter is more risky and sometimes you are directed by the big fish rather than not being worried about having to please everyone. Public markets are directly tied to everything now, the stocks, bonds, wages, jobs, retirement, funding, etc. Equities were created to give everyone a chance to invest and ride the tide up with the big boats, if companies are already tapped by the time they go public, public markets, retirement and market based wealth will not be as robust.

flyinghamster 9y ago

I can't help but think that some of this is a direct result of Wall Street f\ckery. When your prime directive becomes "engage in financial shenanigans to make this quarter's results look good, to prop up the stock price because shareholder value," your actual business becomes irrelevant. Contrast Family Video (privately held and still going strong) vs. Blockbuster Video (no longer a thing). Sure, video rental may not have enough money in it to satisfy the Wall Street vampires, but there's still enough life in it to make money. If you don't have to keep vampires happy, you can invest your profits into your business, or even into new ventures. Hilariously, there's a Family Video in my neck of the woods that moved across the street into the former Blockbuster location. They retained ownership of their original building* and are using that for a new business venture (a 24-hour fitness center). EDIT: In their new location, and many others, they have a Marco's Pizza attached. * There's another whole issue: owning your real estate rather than being beholden to a landlord.

ams6110 9y ago
Family Video carries porn, which Blockbuster never did.
- zasz 9y ago
  Might that not be only possible because it is privately held?
  - olliej 9y ago
    Blockbuster was controlled by a fairly conservative group that deliberately chose not to carry porn. They even made that awful stripper movie (versayth anyone?) “sfw ” by using cutting edge CGI to add little triangle bras, apparently costing more than the original movie. Which I think they had to pull because that made it copyright infringement :)
    - curun1r 9y ago
      It wasn't just porn they didn't like, Blockbuster edited any movie they considered unsavory before the transition to DVD. The last movie I rented from Blockbuster was "Bad Lieutenant." The normal, R-rated cut is 91 minutes. The Blockbuster cut was under an hour. They cut so much of the movie that the plot no longer made sense. I was so annoyed I vowed never to rent from them again.

mychael 9y ago

Startup mergers and acquisitions are also trending downward. Translation for tech employees: - If you accepted a lower salary in exchange for equity, you most likely got a bad deal. - If you worked somewhere long enough to vest 100% of your options, you're probably underpaid (because people who hop around tend to earn more). https://techcrunch.com/2017/08/05/markets-are-strong-but-big-startup-ma-deals-just-arent-happening/ https://techcrunch.com/2017/08/05/markets-are-strong-but-big...

vadimberman 9y ago
> Startup mergers and acquisitions are also trending downward. That's not what the TechCrunch article actually says. The article says that the big mergers and acquisitions are down. But the big M&A are the economic equivalent of luxury real estate deals. Do you really care that a Hollywood celebrity can't sell his or her mansion at a nice price? Most people are interested in their segment. In fact, smaller M&A deals are on the rise: http://www.successfulacquisitions.net/ma-today-smaller-deals-are-on-the-rise/ http://www.successfulacquisitions.net/ma-today-smaller-deals..., and the chances are, your startup, if it does not go belly up, will end up in this category. Huge M&A are difficult to pull properly. The fact that there are fewer is a good thing. It will also make the evaluations more reality-based and not based on "but mommy, I wanna be a unicorn too".
- mychael 9y ago
  Interesting. Thanks for sharing!
dilyevsky 9y ago
Doesn't matter if you vested everything or received refreshes, raises, etc. Your measly 10% raise every successful promotion once every 2 years is nothing compared to offers doubling for experienced engineers over the past 5-6 years (at least in SV).

privateSFacct 9y ago

Posting anonymously. Some quick factors not discussed. 1) Massive compliance overhead. Going public and maintaining public status can be a real nightmare. For example staff generally "get" what a financial statement audit is about - are the numbers correct. And when they aren't everyone gets that a system should be improved. And the auditor makes some notes about areas to improve based on their work, and the difficulty and errors noted in checking the actual numbers. This is the audit most private companies go through - and it actually works pretty well. A public company under SOX - now you have an audit of the numbers (great) and you have a kind of meta audit of the system (internal control) that got to those numbers (ugh). The cost / benefit of this second part is not clear to most staff. It's huge checklists, everyone get's checklist fatigue, and no one dares change a system after the auditors have been through etc. You literally can ask, why in the world do we do crazy procedures X/Y/Z? Because the auditors accepted it and we are too scared to change it. All critical thinking goes out the window. And folks start driving workarounds to the systems to get stuff done (double ugh and big actual risks). Read some PCAOB reports for "audit failures". These aren't actual "audit failures" - no numbers were wrong. But it'll be things like - the auditor read over the calculations, checked underlying documents, recalculated numbers sat in on some meetings, but STILL didn't do enough to assess internal control over some calculation. OK - I'll save the rest for later, but the idea that the private markets are the new public markets rings true to me. These are folks who can weigh actual cost / benefit of compliance cost vs losing money on an investment. Most are going to stick to something like a regular audit. Multiply by 100x in every dimension?

tabtab 9y ago
Most such rules are in place because slimebags abused the system, and in some cases taking the world economy with it. I'm all for making more efficient auditing rules, but one has to be careful not the throw the baby out with the bathwater. Perhaps have compliance tiers such that smaller co's can optionally be in a riskier and less audited stock system or level. However, we probably don't want too much of the economy in that pool. As it is, private investors may be willing to take on riskier and even dodgier companies who don't want auditors snooping around. That's fine: if the rich want to gamble with dodgy companies via private investment, go for it.

xivzgrev 9y ago

It's not all gloom and doom. Who are buying these companies? Google, facebook, amazon, Microsoft, etc. All public companies. If it's a good buy, stock appreciates immediately and in longer term.

s2g 9y ago
The endless stream of small companies to the conglomerates is doom and gloom. Buy you or crush you. If you get really lucky you end up at Snap and are fighting for your life against a company an order of magnitude larger.

aaavl2821 9y ago

some of these reasons are quite spurious. the amount of detail you need to disclose about your r&d is nowhere near a level of detail that would help competitors, and is probably less than would be disclosed through the press anyway. alphabet discloses almost nothing about many of its subsidiaries, and big public pharma companies generally dont even list any drugs earlier than phase 2 in public filings the whole GAAP thing is also a weak argument. investors know that tech startups arent going to have tons of tangible assets and pp&e and actually like capital-light models. investors are smart enough to figure out when gaap is useful for valuation and when it isnt

kelnos 9y ago
I don't think the issue is really any confusion around whether or not GAAP is appropriate for many companies, it's just that there's no alternate standard, and that can be confusing. My understanding is that "non-GAAP" can encompass a variety of different methods of calculating performance, and it's harder for an investor to evaluate if the chosen method actually represents the business well, or if it was just chosen because it yielded the best numbers.
- monocasa 9y ago
  There's IFRS.

idlewords 9y ago

One obvious reason that's never mentioned is that staying private gives capital more leverage over labor. It's easy to lock in a workforce for round after round of startup funding as they wait for an IPO that will convert their paper wealth into something tangible.

m3kw9 9y ago

Because they think they can ICO? Lol

glangdale 9y ago

It's interesting that a bunch of startups in Australia have just gone public, some of which seem amazingly early-stage. I worked for a startup (ultimately exited to Intel) and recognise the stage that these guys are at as "pretty damn early" (the bit where you're almost living or dying based on B2B customer prepayments, etc) and am amazed that you can now apparently do this while public. Ouch. Would hate to have had to file a quarterly public report showing our wounds to the public...

fbonetti 9y ago

They don’t want to go public because they have insane valuations yet aren’t profitable. Going public would mean losing a significant amount of paper wealth. The stock market doesn’t value “world changing technology” (flimsy startups) as highly as investors in Silicon Valley.

draw_down 9y ago
No, that isn't why.
varjag 9y ago
The uncomfortable on point answer buried in the discussion. VCs learned their dotcom bust lesson well. The cycle can drag much longer if you don't go public. The exit target now is a sale to an existing public buyer, skipping the market validation stage altogether.

aaavl2821 9y ago

I'm sure many private company employees wish they would go public so they can enjoy the liquid stock appreciation that google / apple / fb / amazon / netflix etc employees have liquid stock in a growing company is one of the most powerful currencies for attracting and maintaining talent. private company stock is generally valued at at least a 30% discount to public stock, and for an early-stage startup it is hard to place any value on private stock at all

tvural 9y ago

I would also point out that short sellers and "activist investors" are a significant downside to being public. Essentially you give investors focused on these strategies a financial incentive to destroy the company's long-term value. Activism has been a big problem for drug companies where investors will try to fire all the scientists so that profits will go up for a few years.

dannyw 9y ago
LTSE is trying to solve this by vesting voting rights over time. I’m curious to see if it succeeds.
- godzillabrennus 9y ago
  On that note Eric Ries just released a new book at the end of last year, it's called "The Startup Way".
- lostdog 9y ago
  Seems backwards. You should get more voting rights if you lock yourself into holding the stock for >5 years.
  - rayshan 9y ago
    This is correct. Shareholders may increase the voting power of their shares up to 10x over 10 years by registering their shares on the company’s books. (I work at LTSE)
wbl 9y ago
If they can control the company it's because people don't see the longterm value.
- kozikow 9y ago
  Not if too many people participating in the stock market are speculators rather than long-term investors.

agorabinary 9y ago

Don't go public. Look at major companies like Facebook that have become massive user data and time exploiting machines for the sake of increasing share price. Stay private and recognize what place your product has in the world - many ideas CAN be billion dollar ideas if they pervert their original vision, but many ideas ought to remain much smaller and focused to stay true to themselves, not investors. And is this article really arguing that Americans are underinvested in the stock market and not grossly overinvested?

doomlaser 9y ago
SpaceX, Valve, Dell (for now?) — what are other good US technology examples?
- jjcm 9y ago
  Valve is great when things are interesting to work on, but I wouldn't consider them a company that are role models. The downside to Valve is since everyone is their own boss, maintenance becomes something no one does. They need to solve that problem before I'd consider them a good company role model.
  - Silent_Tempest 9y ago
    So what companies do you consider to be "role models"?
  - quickthrower2 9y ago
    Could they pay a higher salary for maintenance to compensate? Like a reverse auction. Then it becomes something that the people who are most desperate for money will do.
  - Matheus28 9y ago
    And it's not like they're a video game developer anymore ;)

vuln 9y ago

It's easier to break the law when no one can check your books. ;)

ChuckMcM 9y ago

"One issue is the narrowing of investment opportunities for working Americans." -- really? Only 54% of American's hold any form of stock at all, and most of those only have stock in the form of a mutual fund. "Another source of disquiet is intensifying industry concentration." -- concentration or horizontal scaling? One of the things I disliked about working at Google was their claim they owned all my work at all times because they were literally in every single business associated with technology[1]. "Finally, there’s the societal benefit that stems from the institution of public capital markets." -- again what societal benefit is that? Startups, and by that I mean venture based ones, not the local pizza restaurant or nail salon, absolutely would love to "go public" and have some nice liquid event. But they screwed a lot of people at the turn of the century out of their money and as a result that route was closed down. There are at least hundreds of companies that start, grow a bit, and get acquihired or otherwise consumed by big companies. The people then do their time (18 - 24 months typically) at BigCo and then roll out to do it again. If they could go public and take your money without consequence I'm sure they would :-). [1] No, this probably would not hold up in court, but it was what legal told me when I asked them for a definitive statement.

keenerd 9y ago
> their claim they owned all my work at all times How do they respond if you attempt to negotiate salary based on the expectation of putting in 8760 hours per year?

tanilama 9y ago

Maybe their valuation is too high that they can't fulfill ROI?

rotskoff 9y ago

I consider this a symptom of the massive wealth inequities in contemporary America. As other comments have pointed out, this phenomenon is not unique start-ups. The most direct cause of the IPO decline is a lack of necessity. Public markets used to provide crucial injections of capital for investment and growth. Currently venture capitalists control enough wealth to provide those investments directly. This point is made most dramatically by looking at the growth of private equity investment through the early naughts. Some relevant plots can be found in [1] which uses the data to advocate for deregulation, which I do not believe gets at the underlying issue. [1] https://www.cato.org/cato-handbook-policymakers/cato-handbook-policy-makers-8th-edition-2017/securities-regulation https://www.cato.org/cato-handbook-policymakers/cato-handboo...

hkmurakami 9y ago
The people who fund the VCs are pension funds and endowments. I don't think that actually reflects the wealth divide.
- adamson 9y ago
  I think massive endowments (foundations, trusts, universities, etc) are pretty clear effects of a large wealth divide
  - dmix 9y ago
    Most of those endowments are pension funds for teachers and other non-wealthy jobs... The majority of the stock market is owned by a few funds as well. Both are individually poor examples of the wealth inequality as a driver of trends in the capitalization of tech businesses... One is an alternative to the other. And typically the biggest investors/funds/endowments do both as a diversification strategy.
    - psadri 9y ago
      Wondering if these funds may be obligated to work in the interest of their investors vs just maximize dollar value. For example, should a factory worker retirement fund invest in robotic companies that automate workers out of a job? I suppose the argument is that if they don’t someone else will.

thisisit 9y ago

And the reason is because there is lot of money to be had in private markets, especially with companies like Softbank raising and giving out tons of money. If we dig further, this is an after-effect of keeping the interest rates low for a long time. That means access to credit is much easier. So, there is no rush to profitability and going public. But, given that interest rates are now slowly rising I predict we might see more and more companies going public and IPO to raise money.

jalcazar 9y ago

For the most part, only rich people can hand their cash over to venture capitalists and private equity groups to invest in young firms. That means small-time investors have no way of investing in most of the new, fast-growing startups, according to the authors. Seems like authors aren't considering ICOs as a new form of IPOs for startups. Any computer and finance literate person can invest, not only small American residents. Volatility is higher in ICOs and there are practically no regulations, so investors should be more careful. Nonetheless, the underlying basic concepts are the same

deleted 9y ago
[deleted]
jacquesm 9y ago
I haven't seen an ICO yet that is even close to as realistic a proposition as your typical IPO would be. ICO's are for the most part simply scams. For an IPO to take place you have to have a business first.
sethammons 9y ago
> so investors should be careful. How? For companies that have gone through an IPO, there is GAAP, SOX, SOC2 controls, etc. These were all designed to help investors be informed so they can manage risk. With ICOs, what have you got? "Trust us, we've not written a bug into our system that will give us unlimited coin to offload after the price reaches a certain point."
- jalcazar 9y ago
  Understanding finance, risk, time valuation, researching the team behind the startup, understanding the white paper, not investing more than what they can afford to lose, reading reviews and comments online, automating orders to sell before the tokens reached a certain price.
sjg007 9y ago
You could ICO as an alternative to IPO I would guess as long as you meet the same requirements. In this case the ICO token would be your stock. So ICOs have the potential to disrupt wall street stock recording and transactions. Essentially remove wall street entirely if you want. Is that good or bad? Exchanges have stop loss and other braking mechanisms/regulations.. Are those desirable?

indubitable 9y ago

I'm surprised to see so few mention a more direct ostensible 'fiduciary duty.' Going public, especially without share tiering aimed at letting the owners keep control, involves yielding control of your company to shareholders. And this often creates a conflict of interest. Shareholders, generally, are not holding shares because of any affinity for a company. They're holding shares because they think those shares will appreciate and give them more capital. SpaceX is a great example. They don't want to go public simply because their longterm goal is not something that has an immediately apparent path to monetization. And on top of that it's also very high risk. Elon is driven by ideology which is, in my opinion, a great thing. But it's not something that would work well at a public company. As another example take something like Steam - the primary PC gaming platform. In spite an effective platform monopoly, they've chosen to never 'squeeze' their position. And they're doing better than ever for it. On the other hand they could likely multiply their short to mid term revenue in exchange for killing themselves in the long run. When the owners of a company are more interested in increasing their net worth, than in creating a solid long term company - it creates a major conflict of interest. In theory my argument should fall flat because of market efficiency. If making decisions so obviously hurts a company's longterm outlook, then that should theoretically be factored into the price of a stock. But in reality quarterlies seem to drive the market.

TeMPOraL 9y ago
> In theory my argument should fall flat because of market efficiency. If making decisions so obviously hurts a company's longterm outlook, then that should theoretically be factored into the price of a stock. But in reality quarterlies seem to drive the market. It shouldn't. Market efficiency is precisely why we'd "lose" SpaceX if it went public now. The market does not optimize for the best future of mankind. It optimizes for short-term profits (those who don't get outcompeted by those who do). It's a powerful solution to some problems, not all problems.

RestlessMind 9y ago

There are a few comments here about how private investors are able to provide sufficient funding that startups don't have to go to public markets anymore. If that is the case, then the self-correcting market mechanism should be : startups don't go public sooner -> employee options are worthless -> employees realize this and start asking for salaries in line with public companies -> private investors don't have enough capital to compete on "liquid compensation" with public companies -> startups are forced to go public Though I think there is still fair bit of time before this happens; too many people still cling to their beliefs in the lottery tickets aka "perpetually illiquid startup options"

abtinf 9y ago

That is a lot of words without once mentioning Sarbanes-Oxley.

pmoriarty 9y ago

If a startup that hires you is not interested in ever going public does that mean that the stock options they give you are not likely to ever be worth anything?

PhilipA 9y ago
If the company sells privately to another company it still counts. The article is talking about IPO's. There are other means to exercise your stocks.
sjg007 9y ago
Maybe depends on if you can sell them to someone. It breaks the social contract though.
fbonetti 9y ago
Yes.

BuisnessGrowth1 9y ago

The road to hell is paved with good intentions... The government has paved most of the road when it comes to small businesses (including startups) being stifled by regulations and either going offshore, remaining private, and so on... Basically the government sucks at almost anything. Why do people advocate for their growth and increasing power?

CryptoPunk 9y ago
>>Basically the government sucks at almost anything. Why do people advocate for their growth and increasing power? Because people don't know what and who to trust. There is so much information out there, and so many conflicting claims about it all means, that there's no easy way to tease out what's true. Anyone advocating for a particular policy comes across as an ideologue, because they cannot possibly convey the body of facts that informs their position, meaning what they mostly present is fervent belief and insistence that they are right.

known 9y ago

Unlike Capitalism, Globalization is Zero-sum

sjg007 9y ago
Would you please explain why?

Annatar 9y ago

People have had it with stock market manipulations where a few Wall Street crooks make off with all the money and the rest are left holding the bag, plus nobody wants the overhead of GAAP. Surprise surprise. Poor Wall Street crooks, where is the new yacht going to come from now, and what’s even scarier, who is going to pay for it now that noone trusts them any more?

ataturk 9y ago

Here's what happened: The VCs and their investors realized they don't want a stock market with an SEC sniffing around. They cut out the middle man and keep all the winnings for themselves, cutting out the public completely. It makes sense for those huge endowments to do that--it squeezes every penny out that it can. They don't even leave a single crumb for Mom & Pop investor because Mom & Pop can't get in on these deals. And before you say "pension funds" I say: Nearly 100% of those are dangerously underfunded, so there's some major fuckery going on there.

sjg007 9y ago

I guess the model has changed. This is bad for your average unicorn startup employee though, liquidity for any real purpose is limited. There's no price transparency and there's no upside. Maybe this is a strategy to push for deregulation. But it is fleecing the public in another way by restricting assets for purchase even if the goal was to prevent outright fraud originally. All of that money has gone into housing, the stocks that we can buy... But there is also massive consolidation being driven by technology. So there will only be a few winners by definition. This is why China and Russia closed their tech markets to US companies.

gwbas1c 9y ago

I remember listening to a radio broadcast in 2002 explaining the Internet stock bubble. One thing it pointed out is that, in the late 1990s, startups went public much faster than they normally did. It seems the broadcast implied that an average startup, prior to the 1990s bubble, took about 10-15 years to go public. According to the broadcast, a company would go public once the business model was proven. Going public wasn't an "exit" as we consider it now. Maybe we're just seeing a return to normal?

maherbeg 9y ago

Would it help to change the rules such that whatever "shares" (RSUs or otherwise) are granted to private company employees count towards the private company shareholder limit? You would either have to go public or compensate employees at public company salaries.

turc1656 9y ago

This was something I never considered as part of the model of the US market. I have long considered US equities to be overbought based on P/E ratios and other fundamentals when viewed on a historical perspective. However, I never took into consideration (even though I was acutely aware of it) that there are thousands less public companies now than 20 years ago. When you view it as a supply/demand, it becomes more obvious. There was ~27 trillion that people had in the US market in 2016, from the numbers I am looking at. And that's with roughly 3,800 companies, giving us an average market cap of about 7.1 billion. If that number were to go back up to ~7,500, all else being equal we would very likely see those market caps cut in half as the funds dispersed across the rest of the market. Yes, this is a vast simplification and there are many factors at play like fundamental ratios and proper valuations to determine what companies are worth. But I think this is something that is certainly a factor and not something I had considered before.

segmondy 9y ago

Perhaps US startups can't go public because they will get exposed like Snap? How many private startups/unicorns today are truly crushing it? Very few. Going public was a great way to extract money from the public, but not so much these days. The money is being extracted before hand. VCs are getting paid irrespective of how the companies perform. The money being risked is not their money, but money raised indirectly from the public. Your 401k or pension might be part of the billion+ that Uber raised. :D Acquisition is a great way to exit for those with skin in the game, angels and series A investors who are more likely to risk their own capital.