9 ms·

The Great Public Market Reckoning

107 points by twic 7y ago

netfl0 7y ago
Corporate structures are designed to disperse liabilities in a tragedy of the commons sort of way. Therefore, what is the moral rationale for a “private” corporation, or for that matter any liability limiting instrument for private parties. Public corporate ownership makes a lot of sense to me. (I was hoping this would spur interesting discussion)
- seibelj 7y ago
  If the failure of a business means personal financial (and perhaps criminal, as history shows) ruin then very few people would start businesses. Limited Liability for both the managers and shareholders is absolutely critical, unless you want everything operated by the same people who run the DMV.
  - rdtwo 7y ago
    Only large companies can be truly be limited liability enterprises. Small business have to give personal guarantees for everything and you can bet that small business owners will be prosecuted to the fullest extent of the law if they screw up llc or not. It’s only the big players that are really allowed to benefit from the corporate veil.
    - snagglegaggle 7y ago
      It's possible to create a small LLC but there's a minefield of actions that could let a judge rule the LLC to be a "legal fiction" and to pop the bubble of limited liability. Such rulings are usually applied to small LLCs, and as far as I know to enforce debt. Why this bubble can not be popped in seemingly any other case, especially when criminal acts have been committed, is what GP is complaining about, and was the expected outcome by critics of limited corporations when they were introduced.
  - pjc50 7y ago
    Limited liability is what allows "managers" and "shareholders" to be separated in the first place, and thereby allows the raising of huge amounts of capital. If liability is unlimited, would you really hand over unlimited liability to managers without extremely close oversight? No. So shareholders would have to directly run the business. Worse, would the shareholders hand over unlimited liability to a voting process in which they might lose to other shareholders? Conversely, it's both unfair and pointless to make the mere managers, who are staff and not contributors of capital, liable for the business operations. There are exceptions to this but they tend to be small to medium low-capital businesses. Accountancy and law firms often operate as partnerships, for example. No, the LLC is a primitive of operation on which the economy is built. It's not going anywhere. But if people start using it as an excuse to dump externalities on the public, there is going to be a policy response imposing some kind of "corporate social responsibility". But none of that is relevant here. This is the good old fashioned over-investment by the over-wealthy in schemes they thought would pay back by monopolizing future profits. > If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.
    - gnopgnip 7y ago
      Most law firms will be limited liability partnerships these days, and will have professional liability insurance.
- simonh 7y ago
  I disagree with you, but don't understand the down-votes. It's a popular point of view with a long history and deserves to be addressed. You're quite right in that corporate structures do disperse liabilities. It's there in the name - limited liability company. However there are well established standard mechanisms for balancing out that real and tangible benefit, which are taxation and regulation. Public corporate ownership is all very well, I'm not in principle against it in certain areas. However what I suspect you are advocating is enforced public ownership, i.e. the prohibition of private companies and socialisation of the entire economy. That hits two big problems. The first problem is purely practical really - it doesn't work. It's been tried over and over again, and is a recipe for disaster. Now I'm not saying all public companies will fail, not at all it can work fine for some activities particularly utilities and social services. I'm saying that resorting to public ownership across whole economies fails. Every time. The second issue should really be the first in terms of priorities really. Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple. Capitalism is just the exercise of individual freedoms and rights of ownership over property and capital, and free association with others. That's it. That's all it is. You don't even really need limited liability, although I think that is a reasonable and well proven enhancement when balanced by appropriate regulation in the public interest.
  - netfl0 7y ago
    > Public corporate ownership is all very well, I'm not in principle against it in certain areas. I assume you're not against the publicly traded stock market, just clarifying since others may interpret this as such. > However what I suspect you are advocating is enforced public ownership. This is not the conclusion I come to, I do not believe my original post suggests this. > Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple. This was not my viewpoint. I am imagining quite the opposite. If the liability is dispersed, so should ownership. If the ownership is private, the liability should be private. I believe both are critically necessary. These feels like a conservative(dictionary version) viewpoint.
    - simonh 7y ago
      Ok, that’s a terminology issue. The term public ownership generally means owned by the government, it’s public in the sense that it’s therefore owned by the people. See the Wikipedia article on public property. Dispersed private ownership is new to me. Huw would that work, mandatory dispersal of shares to all citizens? What happens for new citizens? How do citizens take advantage of their rights, just like any shareholder? What if the vast majority simply sell their shares? I’m not clear how this would all work. I also don’t see how this brings corporate behaviour under control, without taxes and regulation which we can do anyway.
turk73 7y ago
IPOs these days are more about "finding new and/or ultimate bagholders" than anything else. Up yours GoPro.
WisNorCan 7y ago
> And what we are seeing, for the most part, is that margins matter. Both gross margins and operating margins. No kidding. Of course margin (and cash flow) matters. That is the very definition of valuation. The tricky part is timing. Are current margins likely to be the same as future margins? There are some businesses that are investing heavily in their business to grow new categories (e.g. AMZN) or build the network. In those cases, you won’t see strong margin and cash flow early on. Uber is a special case where they are losing money even at scale. Uber is a great idea, but far overvalued by investors like SoftBank. It needs to drop down below $10B. That will also mean laying off most of the employees and raising prices. WeWork is the same. They just got their faster.
- sharemywin 7y ago
  AWS is a software company masquerading as a retail company. Where it's different from those others is it's selling innovative software services to others.
- southerndrift 7y ago
  Uber is preparing for a future with self-driving cars. If they are the network to rent those cares, they will make back everything and more. The manufacturers and even the self-driving software won't matter. All that matters is being the app that summons the rides. The network is not as defensible as facebook, but all the other players would have to stick together to dethrone them.
  - vkou 7y ago
    What stops me from getting a billion dollars in investor money, developing an Uber-clone app, buying a bunch of self-driving cars, and renting them out as taxis in the top five metro areas in North America? The network is not 'not quite as defensible as Facebook'. The network is not defensible at all. The Uber app adds no unique value to the user. The Uber logo on the cars adds no unique value to the user. If the cars are off-the-shelf self-driving vehicles, then there is no sane reason why anyone would care whether or not they are riding in an Uber, or a Vkouber. It's not like all the hooballaa about licensed and vetted and non-asshole higher-quality drivers is at all relevant in a self-driving car world. The only thing you'll be competing on is price. You know which industry operates this way? The airline industry. And do you know what's the easiest way to have a small fortune? Start with a much larger fortune and invest it into an airline.
vinceguidry 7y ago
Summary: Companies with software-like margins should be valued like software companies, companies that sell something other than software should be valued like traditional businesses. This hasn't been the case for the last five years, these last few IPO flops have shown us the light.
bgilroy26 7y ago
I was surprised that Spotify had such a low profit margin -- 26% -- and I found an article[1] that explains that royalties are the biggest factor. They go on to explain that Netflix's solution to the royalties squeeze has been to launch original content. I wonder why Spotify and Tidal don't have recording studios launching new music? Do they figure the library of existing music is so massive that they can't ever get ahead of it with original content? It can't be that existing music studios have been running so efficiently that they can't be successfully undercut by one or two companies who have a grip on most music listening behavior. [1] https://www.statista.com/chart/13406/gross-margin-of-spotify-and-netflix/ https://www.statista.com/chart/13406/gross-margin-of-spotify...
- ghaff 7y ago
  >can't be successfully undercut by one or two companies who have a grip on most music listening behavior. Well, that was the great claim for Netflix, wasn't it? That the availability of mass amounts of data would allow them to create shows attuned to viewer desires. How has that worked out? Netflix has some good shows but also at least the usual percentage of stinkers and cookie cutter riffs on a popular concept. See also targeted advertising and lots of other areas where data is pitched as a magic elixir.
- cujo 7y ago
  My hunch is that it is a combination of things. Looking at netflix, their move to original offerings has essentially transformed them into their own channel + some extra outside junk just to keep the line blurred. To me, the endgame there is that netflix will cease to have any outside content eventually. If spotify/tidal follows that path they become a label with their own streaming service. Maybe they don't want to go that route. Also, I imagine the technology is getting to the point where it wouldn't be unreasonable for labels to start up their own streaming services. If spotify/tidal decides they're going to be their own label, and the current labels decide they're going to start up streaming services, spotify/tidal is at a disadvantage without the back catalogs. Honestly, I'm amazed spotify is doing as well as they are considering apple, google, and amazon's offerings in the space.
- pjc50 7y ago
hodder 7y ago
In reality, the public has just woken up to the fact that VCs were dumping bags of shit on them at absurdly inflated valuations, and that many of these bags of shit are destined for bankruptcy due to cash burn - they are commonly outright frauds designed to siphon cash from the uneducated public investor class to enrich VCs and founders. Fuck greedy VCs if they want to dump their money into frauds and flip it onto the public. Fuck these criminals to hell. I hope they go bankrupt if they don't figure out that that is the real shit going on here. VCs: Quit whining about the public using their brains to avoid your fucking scams.
- ghaff 7y ago
  From where I sit, it looks like, at least this time round, the general public is pretty well tuned into the flea-ridden dogs that VCs and other investment funds are trying to dump onto the public markets. So a bunch of these SV darlings crash and burn. To a first approximation, no one cares and it seems a useful lesson at the end of the day.
  - hodder 7y ago
    Exactly. The public is waking up and VCs are stuck holding the bags of shit. Good. Fuck them for trying to pull the wool over the eyes of the public to get rich. They deserve what they are getting.
    - networkimprov 7y ago
      The Theory of the Greater Fool operates in most asset markets, not only publicly traded securities. And "the public" wields it as often as any private asset manager.
      - pessimizer 7y ago
        It's not foolish to be an early investor in a promisingly marketed multilevel marketing scam. The greater fool is the very late investor, who is as far from quality information that would allow them to make a good decision about the buy as they could possibly be. So calling them fools is unfair; they're the target of a bunch of misinformation and hype which was the actual product that the initial investors were betting on.
twic 7y ago
What gobsmacked me about this is the complete lack of introspection or contrition. > If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company. > If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software. > But we have not been doing it that way in the late-stage private markets for the last five years. > I think we may start now that the public markets are showing us how. This presents the situation as if the connection between gross margin and valuation is some new discovery - "Cool, we've learned something about how to price companies! - and not a basic fact of business that everyone has been screaming about for a decade, but that many VCs have simply been ignoring.
- bpt3 7y ago
  Do you feel like this specific VC should be held responsible for the irrational behavior that has been taking place? It is entirely possible that the author is fully aware of the trend and avoided involvement in overvalued companies in anticipation of this return to rational behavior.

107 points by twic 7y ago

Corporate structures are designed to disperse liabilities in a tragedy of the commons sort of way. Therefore, what is the moral rationale for a “private” corporation, or for that matter any liability limiting instrument for private parties. Public corporate ownership makes a lot of sense to me. (I was hoping this would spur interesting discussion)

seibelj 7y ago
If the failure of a business means personal financial (and perhaps criminal, as history shows) ruin then very few people would start businesses. Limited Liability for both the managers and shareholders is absolutely critical, unless you want everything operated by the same people who run the DMV.
- rdtwo 7y ago
  Only large companies can be truly be limited liability enterprises. Small business have to give personal guarantees for everything and you can bet that small business owners will be prosecuted to the fullest extent of the law if they screw up llc or not. It’s only the big players that are really allowed to benefit from the corporate veil.
  - snagglegaggle 7y ago
    It's possible to create a small LLC but there's a minefield of actions that could let a judge rule the LLC to be a "legal fiction" and to pop the bubble of limited liability. Such rulings are usually applied to small LLCs, and as far as I know to enforce debt. Why this bubble can not be popped in seemingly any other case, especially when criminal acts have been committed, is what GP is complaining about, and was the expected outcome by critics of limited corporations when they were introduced.
- pjc50 7y ago
  Limited liability is what allows "managers" and "shareholders" to be separated in the first place, and thereby allows the raising of huge amounts of capital. If liability is unlimited, would you really hand over unlimited liability to managers without extremely close oversight? No. So shareholders would have to directly run the business. Worse, would the shareholders hand over unlimited liability to a voting process in which they might lose to other shareholders? Conversely, it's both unfair and pointless to make the mere managers, who are staff and not contributors of capital, liable for the business operations. There are exceptions to this but they tend to be small to medium low-capital businesses. Accountancy and law firms often operate as partnerships, for example. No, the LLC is a primitive of operation on which the economy is built. It's not going anywhere. But if people start using it as an excuse to dump externalities on the public, there is going to be a policy response imposing some kind of "corporate social responsibility". But none of that is relevant here. This is the good old fashioned over-investment by the over-wealthy in schemes they thought would pay back by monopolizing future profits. > If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.
  - gnopgnip 7y ago
    Most law firms will be limited liability partnerships these days, and will have professional liability insurance.
simonh 7y ago
I disagree with you, but don't understand the down-votes. It's a popular point of view with a long history and deserves to be addressed. You're quite right in that corporate structures do disperse liabilities. It's there in the name - limited liability company. However there are well established standard mechanisms for balancing out that real and tangible benefit, which are taxation and regulation. Public corporate ownership is all very well, I'm not in principle against it in certain areas. However what I suspect you are advocating is enforced public ownership, i.e. the prohibition of private companies and socialisation of the entire economy. That hits two big problems. The first problem is purely practical really - it doesn't work. It's been tried over and over again, and is a recipe for disaster. Now I'm not saying all public companies will fail, not at all it can work fine for some activities particularly utilities and social services. I'm saying that resorting to public ownership across whole economies fails. Every time. The second issue should really be the first in terms of priorities really. Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple. Capitalism is just the exercise of individual freedoms and rights of ownership over property and capital, and free association with others. That's it. That's all it is. You don't even really need limited liability, although I think that is a reasonable and well proven enhancement when balanced by appropriate regulation in the public interest.
- netfl0 7y ago
  > Public corporate ownership is all very well, I'm not in principle against it in certain areas. I assume you're not against the publicly traded stock market, just clarifying since others may interpret this as such. > However what I suspect you are advocating is enforced public ownership. This is not the conclusion I come to, I do not believe my original post suggests this. > Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple. This was not my viewpoint. I am imagining quite the opposite. If the liability is dispersed, so should ownership. If the ownership is private, the liability should be private. I believe both are critically necessary. These feels like a conservative(dictionary version) viewpoint.
  - simonh 7y ago
    Ok, that’s a terminology issue. The term public ownership generally means owned by the government, it’s public in the sense that it’s therefore owned by the people. See the Wikipedia article on public property. Dispersed private ownership is new to me. Huw would that work, mandatory dispersal of shares to all citizens? What happens for new citizens? How do citizens take advantage of their rights, just like any shareholder? What if the vast majority simply sell their shares? I’m not clear how this would all work. I also don’t see how this brings corporate behaviour under control, without taxes and regulation which we can do anyway.

turk73 7y ago

IPOs these days are more about "finding new and/or ultimate bagholders" than anything else. Up yours GoPro.

WisNorCan 7y ago

> And what we are seeing, for the most part, is that margins matter. Both gross margins and operating margins. No kidding. Of course margin (and cash flow) matters. That is the very definition of valuation. The tricky part is timing. Are current margins likely to be the same as future margins? There are some businesses that are investing heavily in their business to grow new categories (e.g. AMZN) or build the network. In those cases, you won’t see strong margin and cash flow early on. Uber is a special case where they are losing money even at scale. Uber is a great idea, but far overvalued by investors like SoftBank. It needs to drop down below $10B. That will also mean laying off most of the employees and raising prices. WeWork is the same. They just got their faster.

sharemywin 7y ago
AWS is a software company masquerading as a retail company. Where it's different from those others is it's selling innovative software services to others.
southerndrift 7y ago
Uber is preparing for a future with self-driving cars. If they are the network to rent those cares, they will make back everything and more. The manufacturers and even the self-driving software won't matter. All that matters is being the app that summons the rides. The network is not as defensible as facebook, but all the other players would have to stick together to dethrone them.
- vkou 7y ago
  What stops me from getting a billion dollars in investor money, developing an Uber-clone app, buying a bunch of self-driving cars, and renting them out as taxis in the top five metro areas in North America? The network is not 'not quite as defensible as Facebook'. The network is not defensible at all. The Uber app adds no unique value to the user. The Uber logo on the cars adds no unique value to the user. If the cars are off-the-shelf self-driving vehicles, then there is no sane reason why anyone would care whether or not they are riding in an Uber, or a Vkouber. It's not like all the hooballaa about licensed and vetted and non-asshole higher-quality drivers is at all relevant in a self-driving car world. The only thing you'll be competing on is price. You know which industry operates this way? The airline industry. And do you know what's the easiest way to have a small fortune? Start with a much larger fortune and invest it into an airline.

vinceguidry 7y ago

Summary: Companies with software-like margins should be valued like software companies, companies that sell something other than software should be valued like traditional businesses. This hasn't been the case for the last five years, these last few IPO flops have shown us the light.

bgilroy26 7y ago

I was surprised that Spotify had such a low profit margin -- 26% -- and I found an article[1] that explains that royalties are the biggest factor. They go on to explain that Netflix's solution to the royalties squeeze has been to launch original content. I wonder why Spotify and Tidal don't have recording studios launching new music? Do they figure the library of existing music is so massive that they can't ever get ahead of it with original content? It can't be that existing music studios have been running so efficiently that they can't be successfully undercut by one or two companies who have a grip on most music listening behavior. [1] https://www.statista.com/chart/13406/gross-margin-of-spotify-and-netflix/ https://www.statista.com/chart/13406/gross-margin-of-spotify...

ghaff 7y ago
>can't be successfully undercut by one or two companies who have a grip on most music listening behavior. Well, that was the great claim for Netflix, wasn't it? That the availability of mass amounts of data would allow them to create shows attuned to viewer desires. How has that worked out? Netflix has some good shows but also at least the usual percentage of stinkers and cookie cutter riffs on a popular concept. See also targeted advertising and lots of other areas where data is pitched as a magic elixir.
cujo 7y ago
My hunch is that it is a combination of things. Looking at netflix, their move to original offerings has essentially transformed them into their own channel + some extra outside junk just to keep the line blurred. To me, the endgame there is that netflix will cease to have any outside content eventually. If spotify/tidal follows that path they become a label with their own streaming service. Maybe they don't want to go that route. Also, I imagine the technology is getting to the point where it wouldn't be unreasonable for labels to start up their own streaming services. If spotify/tidal decides they're going to be their own label, and the current labels decide they're going to start up streaming services, spotify/tidal is at a disadvantage without the back catalogs. Honestly, I'm amazed spotify is doing as well as they are considering apple, google, and amazon's offerings in the space.
pjc50 7y ago

hodder 7y ago

In reality, the public has just woken up to the fact that VCs were dumping bags of shit on them at absurdly inflated valuations, and that many of these bags of shit are destined for bankruptcy due to cash burn - they are commonly outright frauds designed to siphon cash from the uneducated public investor class to enrich VCs and founders. Fuck greedy VCs if they want to dump their money into frauds and flip it onto the public. Fuck these criminals to hell. I hope they go bankrupt if they don't figure out that that is the real shit going on here. VCs: Quit whining about the public using their brains to avoid your fucking scams.

ghaff 7y ago
From where I sit, it looks like, at least this time round, the general public is pretty well tuned into the flea-ridden dogs that VCs and other investment funds are trying to dump onto the public markets. So a bunch of these SV darlings crash and burn. To a first approximation, no one cares and it seems a useful lesson at the end of the day.
- hodder 7y ago
  Exactly. The public is waking up and VCs are stuck holding the bags of shit. Good. Fuck them for trying to pull the wool over the eyes of the public to get rich. They deserve what they are getting.
  - networkimprov 7y ago
    The Theory of the Greater Fool operates in most asset markets, not only publicly traded securities. And "the public" wields it as often as any private asset manager.
    - pessimizer 7y ago
      It's not foolish to be an early investor in a promisingly marketed multilevel marketing scam. The greater fool is the very late investor, who is as far from quality information that would allow them to make a good decision about the buy as they could possibly be. So calling them fools is unfair; they're the target of a bunch of misinformation and hype which was the actual product that the initial investors were betting on.

twic 7y ago

What gobsmacked me about this is the complete lack of introspection or contrition. > If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company. > If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software. > But we have not been doing it that way in the late-stage private markets for the last five years. > I think we may start now that the public markets are showing us how. This presents the situation as if the connection between gross margin and valuation is some new discovery - "Cool, we've learned something about how to price companies! - and not a basic fact of business that everyone has been screaming about for a decade, but that many VCs have simply been ignoring.

bpt3 7y ago
Do you feel like this specific VC should be held responsible for the irrational behavior that has been taking place? It is entirely possible that the author is fully aware of the trend and avoided involvement in overvalued companies in anticipation of this return to rational behavior.