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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.

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.
      - chatmasta 9y ago
        What you’re referring to is activist investing, or what is more descriptively known in most cases as activist divesting. Activist groups put pressure on funds to invest in, or divest from, certain assets. For example, my college’s endowment was invested to varying degrees in the oil/energy industries. A bunch of forestry school grad students organized a “divestment campaign” to pressure the investment office to divest from anti-environment assets. I’m not sure how effective they were in the end, but they sure made a lot of noise. So yes, endowments/pensions/sovereign wealth funds are certainly obligated to listen to their “constituents” if you will, but only by societal contract. A big enough PR storm should be sufficient to drive investment or divestment, if enough people are emotional and aggressive in marketing their argument.
  - closeparen 9y ago
    The interest on university endowments funds financial aid.
    - marnett 9y ago
      He is not arguing usage but existence. The existence of large endowments surely displays wealth inequality, regardless of the utilitarian nature that may result as the outcome.
      - closeparen 9y ago
        Large institutions are wealthier than individuals? Large institutions are wealthier than small institutions? Neither of these realities are surprising or concerning in any of the ways that wealth disparity between individuals is.
    - Chathamization 9y ago
      > Schools spend an average of a little more than 4 percent of their endowment funds annually. --- > “Endowments aren’t generally used to lower tuition,” said Richard Vedder, an economist at Ohio University, testified before the House Ways and Means Committee last year. “Typically less than 20 cents of every dollar of endowment income is used for scholarships to lower fees for students. Making college more affordable is not the dominant use of endowment resources.” --- > Critics note that a lot of endowment money goes toward glitzy student centers, athletic fields and pricey academic buildings. From here: http://wfae.org/post/colleges-pressured-spend-more-endowment-funds-student-aid#stream/0 http://wfae.org/post/colleges-pressured-spend-more-endowment...
      - closeparen 9y ago
        An endowment is there to provide investment income over tens/hundreds of years. Spending even 100% of that year's capital gains would be grossly irresponsible. The article you linked is calling for 5% vs. 4%... sure there are probably some institutions being too stingy, but on the whole, taking small distributions is the point.
      - 9y ago
- 0xB31B1B 9y ago
  You’re forgetting family offices. Family offices are huge and growing LPs in PE and VC.
- jacquesm 9y ago
  Don't forget about LPs, a typical fund can take in 100's of millions from just a few 10's of LPs.
- vannevar 9y ago
  Some of them certainly are. But what fraction? Is there a breakdown somewhere of the sources of VC funds?
tptacek 9y ago
The last serious study of VC performance I read suggested that, as an asset class, venture capital underperforms the S&P 500. Pension funds invest in VC not to get access to sweet sweet unicorn dollars, but because their portfolio strategies require them to have decorellated investments. I've been in the industry long enough to remember working in it when it was very easy for tech companies to go public. It did not work out well for retail investors.
- aianus 9y ago
  Why would VC investments be decorrelated with the stock market? Big exits are usually IPOs, no?
  - azernik 9y ago
    Decorrelation is a matter of degree, not a binary. VC funds are less tightly correlated with, say, the oil industry than the chemical industry is.
    - manishsharan 9y ago
      (I am not a finance guy so pardon my dumb question ) How do do startups serve decorrelation of fund portfolio? Startups valuation has to have some degree of correlation to the industry they serve. By this I am supposing that if you have a healthcare startup, its valuation would be strongly related to the performance of the healthcare sector. So if you have say healthcare stocks in your funds' portfolio, would investing in a healthcare startup serve decorrelation ?
      - closeparen 9y ago
        That is why you invest in a VC who invests in a number of startups in different industries.
      - georgeecollins 9y ago
        Startups often don't correlate very well with the industry they are in because they usually don't have the same business model. So I don't think Uber correlates with to transportation stocks, or Air BnB correlates to resorts, or 23 me correlates to Pharma etc. There is a cycle to start ups, but it is related to the broader economic outlook and the price of capital.
mixmastamyk 9y ago
A complimentary factor may be the lower capital requirements to get something off the ground these days.
hueving 9y ago
Venture capital isn't just a few rich people funding all the startups. There are massive funds for regular working class people like California's teachers that invest in these things. VC grew because it got mature and turned out to work well (for recent history) and it provided a way to avoid the stresses of public market oversight while a fledgling startup is pivoting every few months and making no money. It doesn't appear to have anything to do with wealth inequality and you didn't really provide any evidence to back up that assertion. Maybe when all you have is a hammer everything looks like a nail?
- tyu100 9y ago
  This point is really important. The biggest private equity players are invariably pension plans. Canada has been particularly good at letting quality managers run their public pensions and they have outsize importance now.
- xevb3k 9y ago
  Most VCs raise from institutional funds (like banks) don’t they? VCs overall, perform quite poorly. But they’re useful for banks, they need somewhere to put money as a hedge against more traditional investments (and currency devaluations in general I guess). For them it’s just a different risk class, and therefore useful for diversifying their risk.
  - tptacek 9y ago
    No, raising money from banks is called debt financing.
    - CPLX 9y ago
      No it's not necessarily. Debt and equity are distinct asset classes. Banks invest portions of their balance sheet in both.
- crdoconnor 9y ago
  >There are massive funds for regular working class people like California's teachers that invest in these things. CALPERS "textbook example of the principal-agent problem" being all over VC is very bad for teachers: https://www.nakedcapitalism.com/2018/02/calpers-chief-investment-office-ted-eliopoulos-now-touting-venture-capital-even-though-cant-improve-returns.html https://www.nakedcapitalism.com/2018/02/calpers-chief-invest... "Companies staying private longer is bad for investors. Eliopoulos described the motivation as “more companies staying private.” But that doesn’t mean this behavior creates an investment opportunity. In fact, it prevents the monetization that investors need to realize returns. It might be different if these VC backed companies were growing up to throw off tons of free cash flow, but as far as we can tell, that is seldom if ever the case. As we wrote regarding Uber, a prime example of this behavior: Kalanick had maintained he wanted Uber to stay private as long as possible. That may be a fad with some unicorns, but it’s not the way for a shareholder to maximize his net worth, so it’s a preference that raises questions about the founders’ ulterior motives. Needless to say, that desire put him at odds with his investors." The reason late stage VC investments historically were attractive was that certain marquee investors would help validate the venture shortly before a planned IPO. The limited time between the investment and the IPO (and the investors’ reputation helping assure the IPO would be priced at a healthy premium to the last pre-IPO round) meant the odds of a healthy quick profit were high. With more companies staying private longer, these conditions aren’t operative.
numismatex 9y ago
It's not just a lack of necessity. Going public means being answerable in a different manner, to a different group of people. There are also less complications that arise to force out founders and executives. There's been many a case where a company will be bought, or a board will be brought in to shareholder demand, and the person or people behind the company are ousted with little to say or do about it. Add to this that to go public, you must meet a great many requirements that staying private doesn't demand and you have a winning recipe for avoiding many complications should you decide to stay private. So, there are a great many reasons not to become a publicly traded company.
jbob2000 9y ago
That's a bit of a simplistic view. It costs a LOT of money to do an IPO. Considering most startups make a few million a year in niche markets, it's hardly worthwhile to invest in going public.

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.
    - chatmasta 9y ago
      What you’re referring to is activist investing, or what is more descriptively known in most cases as activist divesting. Activist groups put pressure on funds to invest in, or divest from, certain assets. For example, my college’s endowment was invested to varying degrees in the oil/energy industries. A bunch of forestry school grad students organized a “divestment campaign” to pressure the investment office to divest from anti-environment assets. I’m not sure how effective they were in the end, but they sure made a lot of noise. So yes, endowments/pensions/sovereign wealth funds are certainly obligated to listen to their “constituents” if you will, but only by societal contract. A big enough PR storm should be sufficient to drive investment or divestment, if enough people are emotional and aggressive in marketing their argument.
- closeparen 9y ago
  The interest on university endowments funds financial aid.
  - marnett 9y ago
    He is not arguing usage but existence. The existence of large endowments surely displays wealth inequality, regardless of the utilitarian nature that may result as the outcome.
    - closeparen 9y ago
      Large institutions are wealthier than individuals? Large institutions are wealthier than small institutions? Neither of these realities are surprising or concerning in any of the ways that wealth disparity between individuals is.
  - Chathamization 9y ago
    > Schools spend an average of a little more than 4 percent of their endowment funds annually. --- > “Endowments aren’t generally used to lower tuition,” said Richard Vedder, an economist at Ohio University, testified before the House Ways and Means Committee last year. “Typically less than 20 cents of every dollar of endowment income is used for scholarships to lower fees for students. Making college more affordable is not the dominant use of endowment resources.” --- > Critics note that a lot of endowment money goes toward glitzy student centers, athletic fields and pricey academic buildings. From here: http://wfae.org/post/colleges-pressured-spend-more-endowment-funds-student-aid#stream/0 http://wfae.org/post/colleges-pressured-spend-more-endowment...
    - closeparen 9y ago
      An endowment is there to provide investment income over tens/hundreds of years. Spending even 100% of that year's capital gains would be grossly irresponsible. The article you linked is calling for 5% vs. 4%... sure there are probably some institutions being too stingy, but on the whole, taking small distributions is the point.
    - 9y ago
0xB31B1B 9y ago
You’re forgetting family offices. Family offices are huge and growing LPs in PE and VC.
jacquesm 9y ago
Don't forget about LPs, a typical fund can take in 100's of millions from just a few 10's of LPs.
vannevar 9y ago
Some of them certainly are. But what fraction? Is there a breakdown somewhere of the sources of VC funds?

tptacek 9y ago

The last serious study of VC performance I read suggested that, as an asset class, venture capital underperforms the S&P 500. Pension funds invest in VC not to get access to sweet sweet unicorn dollars, but because their portfolio strategies require them to have decorellated investments. I've been in the industry long enough to remember working in it when it was very easy for tech companies to go public. It did not work out well for retail investors.

aianus 9y ago
Why would VC investments be decorrelated with the stock market? Big exits are usually IPOs, no?
- azernik 9y ago
  Decorrelation is a matter of degree, not a binary. VC funds are less tightly correlated with, say, the oil industry than the chemical industry is.
  - manishsharan 9y ago
    (I am not a finance guy so pardon my dumb question ) How do do startups serve decorrelation of fund portfolio? Startups valuation has to have some degree of correlation to the industry they serve. By this I am supposing that if you have a healthcare startup, its valuation would be strongly related to the performance of the healthcare sector. So if you have say healthcare stocks in your funds' portfolio, would investing in a healthcare startup serve decorrelation ?
    - closeparen 9y ago
      That is why you invest in a VC who invests in a number of startups in different industries.
    - georgeecollins 9y ago
      Startups often don't correlate very well with the industry they are in because they usually don't have the same business model. So I don't think Uber correlates with to transportation stocks, or Air BnB correlates to resorts, or 23 me correlates to Pharma etc. There is a cycle to start ups, but it is related to the broader economic outlook and the price of capital.

mixmastamyk 9y ago

A complimentary factor may be the lower capital requirements to get something off the ground these days.

hueving 9y ago

Venture capital isn't just a few rich people funding all the startups. There are massive funds for regular working class people like California's teachers that invest in these things. VC grew because it got mature and turned out to work well (for recent history) and it provided a way to avoid the stresses of public market oversight while a fledgling startup is pivoting every few months and making no money. It doesn't appear to have anything to do with wealth inequality and you didn't really provide any evidence to back up that assertion. Maybe when all you have is a hammer everything looks like a nail?

tyu100 9y ago
This point is really important. The biggest private equity players are invariably pension plans. Canada has been particularly good at letting quality managers run their public pensions and they have outsize importance now.
xevb3k 9y ago
Most VCs raise from institutional funds (like banks) don’t they? VCs overall, perform quite poorly. But they’re useful for banks, they need somewhere to put money as a hedge against more traditional investments (and currency devaluations in general I guess). For them it’s just a different risk class, and therefore useful for diversifying their risk.
- tptacek 9y ago
  No, raising money from banks is called debt financing.
  - CPLX 9y ago
    No it's not necessarily. Debt and equity are distinct asset classes. Banks invest portions of their balance sheet in both.
crdoconnor 9y ago
>There are massive funds for regular working class people like California's teachers that invest in these things. CALPERS "textbook example of the principal-agent problem" being all over VC is very bad for teachers: https://www.nakedcapitalism.com/2018/02/calpers-chief-investment-office-ted-eliopoulos-now-touting-venture-capital-even-though-cant-improve-returns.html https://www.nakedcapitalism.com/2018/02/calpers-chief-invest... "Companies staying private longer is bad for investors. Eliopoulos described the motivation as “more companies staying private.” But that doesn’t mean this behavior creates an investment opportunity. In fact, it prevents the monetization that investors need to realize returns. It might be different if these VC backed companies were growing up to throw off tons of free cash flow, but as far as we can tell, that is seldom if ever the case. As we wrote regarding Uber, a prime example of this behavior: Kalanick had maintained he wanted Uber to stay private as long as possible. That may be a fad with some unicorns, but it’s not the way for a shareholder to maximize his net worth, so it’s a preference that raises questions about the founders’ ulterior motives. Needless to say, that desire put him at odds with his investors." The reason late stage VC investments historically were attractive was that certain marquee investors would help validate the venture shortly before a planned IPO. The limited time between the investment and the IPO (and the investors’ reputation helping assure the IPO would be priced at a healthy premium to the last pre-IPO round) meant the odds of a healthy quick profit were high. With more companies staying private longer, these conditions aren’t operative.

numismatex 9y ago

It's not just a lack of necessity. Going public means being answerable in a different manner, to a different group of people. There are also less complications that arise to force out founders and executives. There's been many a case where a company will be bought, or a board will be brought in to shareholder demand, and the person or people behind the company are ousted with little to say or do about it. Add to this that to go public, you must meet a great many requirements that staying private doesn't demand and you have a winning recipe for avoiding many complications should you decide to stay private. So, there are a great many reasons not to become a publicly traded company.

jbob2000 9y ago

That's a bit of a simplistic view. It costs a LOT of money to do an IPO. Considering most startups make a few million a year in niche markets, it's hardly worthwhile to invest in going public.