5 ms·

I would summarise this post as: "Public markets didn't like a few bad Softbank backed IPOs. This clearly is not because only Masayoshi Son loves giant bonfires

by Lazare 7y ago

I would summarise this post as: "Public markets didn't like a few bad Softbank backed IPOs. This clearly is not because only Masayoshi Son loves giant bonfires they can shovel cash into, but instead means that public markets are just horribly broken, and everything we think we know about finance, economics, and the market is wrong." After listing a bunch of loss-making stinkers (Uber, Lyft, Peloton, Pinterest, Caspar) we get the line: > How is it that the hottest growth companies have stumbled out of the gate? If you have to ask the question of why public markets might not think a company whose business strategy is mailing people mattresses below cost is worth a billion dollars, then really, you're not going to understand the answer. Also, note this: > And B2B player Zoom, the videoconferencing software company, which had a juicy pop of 72% on its first day of trading, has seen its fortunes seesaw, falling from a high of $102 to roughly $88 at press time, even as the broader market, especially the tech sector, has been on a tear. Zoom is one of the only actual profitable companies discussed, but the author tosses them into the list of disasters like WeWork. But let's unpack that: They IPOed at $36 a share, and they're down to $88, and the lesson here is "oh man, public markets hate startups"? ...like, really? The entire article is just one long "wow, profitable companies are valuable, I wonder what deeper lesson entirely unrelated to profitably we can draw from this if we ignore the obvious answer". > But as they watch the public drubbing suffered by the likes of Adam Neumann [...] founders are more apt to see themselves as mistreated and even harassed by various gatekeepers If you are a founder, and the person you feel the closest kinship too is Adam Neumann, you probably don't deserve to be treated very well by the markets. The issue is you. What a infuriatingly obtuse article.

jdm2212 7y ago
When there's nothing interesting to be said about a subject, there's a really strong selection bias for only un-insightful things to be said about the subject. Like, no one's gonna write a whole medium post about "Companies with crappy business models get low valuations. Companies with good business models get better valuations"...
- jfengel 7y ago
  It would actually be a refreshing change for companies with bad business models to get worse valuations. Valuation is hard, and the article's whole fascination with IPO's is about the idea that the people setting the initial price will find out how wrong they were on the first day. There's a fetish for being hoping they were lowballing, and people rush in to pay more, such that the lucky first in line make a big score in a few hours. Even if people pay attention to fundamentals, it's tricky. It's not unreasonable for a company to try to raise money before they turn a profit. But so many people turn it into kabbala, dismissing any notion that the returns are related to the company's future earnings, instead looking to the runes to guess what other people's guesses are going to be.
mikekchar 7y ago
While I agree with you, I wouldn't be terribly unhappy if IPOs changed in the future. I'm actually quite worried that, as you say, people are looking at a company that is nearly 3x its IPO a year later and calling a flop. But I'm even more worried that a company with a value of $1 billion (after a $100 million series D) 2 years before IPO can have a market cap of ~$10 billion one year after an IPO -- and it's still seen as a failure by somebody. Because that's a bloody miracle. I'm not just worried about that, though. If we accept these numbers (which I mostly got from Bloomberg and Wikipedia), we're saying that a $100 million infusion of cash propelled the company to $10 billion market cap in only 3 years. And looking at the balance sheet: $330 million revenue in 2019. Net income $7.58 million. Total assets: $355 million. Total liabilities: $202 million. Annual operating expenses: $51 million. So I'm seeing a company with a $10 billion market cap, with earnings of $7 million a year, and about 2 years worth of operating expenses in assets after liabilities are taken into consideration. So I'm wondering what fueled that 10x increase in 3 years. Because on paper I don't think I'd be touching it with a 10 foot pole at it's price. It seems like only its promise to be the next Google or Amazon is what's keeping the price high. So that's what worries me about IPOs. People are expecting massive multipliers and even when they get them, some people are upset. But these massive IPOs also seem to be super fragile (at least in principal -- I have no idea if Zoom will be the next big thing or not). It doesn't seem like they are doing anything near the business necessary to justify their market positions. So I worry that someday the emperor will notice he has no clothes...
- shrimpx 7y ago
  I never understand this line of reasoning. It amounts to lamenting that the market is not predictable (accurately reflecting “real value”). If market positions were merely a function of “how the business is doing” then who needs a market? My point is a market has a huge amount of speculation in it.
  - mikekchar 7y ago
    That's not really what I'm saying. I'm saying that there is too much speculation. The bets are too big. I don't care one lick if people lose their shirts. The problem is that if we put a lot of money into ventures that have a very low probability of success, then that money is not at all efficient. The idea that you have to bet big to win big could very well guide us into recession (or worse). It wouldn't be the first time it has happened ;-)
morelikeborelax 7y ago
> Zoom is one of the only actual profitable companies discussed, but the author tosses them into the list of disasters like WeWork. But let's unpack that: They IPOed at $36 a share, and they're down to $88, and the lesson here is "oh man, public markets hate startups"? ...like, really? Two weeks after the article it is up to 105.51 pre-market for Monday 2nd March after a high of 120.54 Friday 28th Feb. Now while there resurgence has happened due to COVID-19 it's still there.

by Lazare 7y ago

jdm2212 7y ago

When there's nothing interesting to be said about a subject, there's a really strong selection bias for only un-insightful things to be said about the subject. Like, no one's gonna write a whole medium post about "Companies with crappy business models get low valuations. Companies with good business models get better valuations"...

jfengel 7y ago
It would actually be a refreshing change for companies with bad business models to get worse valuations. Valuation is hard, and the article's whole fascination with IPO's is about the idea that the people setting the initial price will find out how wrong they were on the first day. There's a fetish for being hoping they were lowballing, and people rush in to pay more, such that the lucky first in line make a big score in a few hours. Even if people pay attention to fundamentals, it's tricky. It's not unreasonable for a company to try to raise money before they turn a profit. But so many people turn it into kabbala, dismissing any notion that the returns are related to the company's future earnings, instead looking to the runes to guess what other people's guesses are going to be.

mikekchar 7y ago

While I agree with you, I wouldn't be terribly unhappy if IPOs changed in the future. I'm actually quite worried that, as you say, people are looking at a company that is nearly 3x its IPO a year later and calling a flop. But I'm even more worried that a company with a value of $1 billion (after a $100 million series D) 2 years before IPO can have a market cap of ~$10 billion one year after an IPO -- and it's still seen as a failure by somebody. Because that's a bloody miracle. I'm not just worried about that, though. If we accept these numbers (which I mostly got from Bloomberg and Wikipedia), we're saying that a $100 million infusion of cash propelled the company to $10 billion market cap in only 3 years. And looking at the balance sheet: $330 million revenue in 2019. Net income $7.58 million. Total assets: $355 million. Total liabilities: $202 million. Annual operating expenses: $51 million. So I'm seeing a company with a $10 billion market cap, with earnings of $7 million a year, and about 2 years worth of operating expenses in assets after liabilities are taken into consideration. So I'm wondering what fueled that 10x increase in 3 years. Because on paper I don't think I'd be touching it with a 10 foot pole at it's price. It seems like only its promise to be the next Google or Amazon is what's keeping the price high. So that's what worries me about IPOs. People are expecting massive multipliers and even when they get them, some people are upset. But these massive IPOs also seem to be super fragile (at least in principal -- I have no idea if Zoom will be the next big thing or not). It doesn't seem like they are doing anything near the business necessary to justify their market positions. So I worry that someday the emperor will notice he has no clothes...

shrimpx 7y ago
I never understand this line of reasoning. It amounts to lamenting that the market is not predictable (accurately reflecting “real value”). If market positions were merely a function of “how the business is doing” then who needs a market? My point is a market has a huge amount of speculation in it.
- mikekchar 7y ago
  That's not really what I'm saying. I'm saying that there is too much speculation. The bets are too big. I don't care one lick if people lose their shirts. The problem is that if we put a lot of money into ventures that have a very low probability of success, then that money is not at all efficient. The idea that you have to bet big to win big could very well guide us into recession (or worse). It wouldn't be the first time it has happened ;-)

morelikeborelax 7y ago

> Zoom is one of the only actual profitable companies discussed, but the author tosses them into the list of disasters like WeWork. But let's unpack that: They IPOed at $36 a share, and they're down to $88, and the lesson here is "oh man, public markets hate startups"? ...like, really? Two weeks after the article it is up to 105.51 pre-market for Monday 2nd March after a high of 120.54 Friday 28th Feb. Now while there resurgence has happened due to COVID-19 it's still there.