5 ms·

Who to blame for failed IPOs?

22 points by akos 14y ago

Apocryphon 14y ago
Please excuse my ignorance, but- I thought the decline of public market IPOs for up and coming tech companies is because everyone is cautious to avoid repeating the mistakes of the dot-com bust?
- veyron 14y ago
  The dot com boom and bust were driven by a lack of understanding of the greater fool theory. People, for many reasons including 2008-9, MF Global, PfG Best, R Allen Stanford, Madoff, CFTC, TBTF, flash crash, TVIX, decided the investment environment is too toxic to play in.
gaius 14y ago
Techcrunch. Next question.
jameszol 14y ago
"We shall repeat here without apology--for the warning cannot be given too often--that the investor cannot hope for better than average results by buying new offerings, or 'hot' issues of any sort, meaning thereby those recommended for a quick profit. The contrary is almost certain to be true in the long run. The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition. (Any security analyst worth his salt could make up such a list.) Aggressive investors may buy other types of common stocks, but they should be on a definitely attractive basis as established by intelligent analysis." - p28 The Intelligent Investor (Revised Edition 2003) The IPO market partly thrives on the fact that there are highly speculative and/or uneducated investors out there willing to invest in any new offering. Investors must expect IPOs will fail without blame, in my opinion, and diversify accordingly. Unfortunately, the uneducated speculators are the ones that likely lose it all on something "guaranteed" to be hot.
ChuckMcM 14y ago
Oh this is priceless, "I wanna bubble! I wanna bubble! Waaaaaah!" TL;DR version : Companies go public later, non-qualified investors don't get a chance to invest during their growth phase, so 'regular' folks are missing out on that wealth creation. All of that is true, and 'regular folks' are also missing out on the wealth destruction. The author uses FaceBook as their stalking horse, they point out that people who invested when Facebook was only valued at 550M have done really well, and people who bought at the IPO price or since, haven't. But here is the rub. Is Facebook a good investment or not? If you have any sort of maturity as an investor at all you realize that more money is made by the real growth post IPO than is made leading up to the IPO. That is because it occurs over a longer time and starts from a bigger base. If you had invested in LinkedIn at their IPO (they have a credible business model, and traction) even after the 'pop' you would have paid between $90 and $95 a share. That same stock today is worth $108. That is a 13% gain in a bit over a year. Pretty good in an otherwise stumpy economy. If you bought Stratsys (NASDAQ:SSYS) last year like I did because I thought "gee, I think 3D printing is going to be a huge growth industry." You could be up 200% (I bought it around $25 and its up over $60 now.) The bottom line is that nothing 'bad' has happened to 'investing' but we appear to have successfully avoided re-creating the dot-com bubble craziness of the last century. But the author, perhaps reading glamorous stories of people who talked about how many 'Porsche units' of money they earned on their over valued stocks that day, has come to realize its not going to be like that. Ideally not ever, but at least until the old farts die who remember how crazy it was. Going middle-class => multi-millionaire => middle-class does something to a person. Maybe it turns their cynicism dial up to 11, I can't say for sure. But there is no sense complaining about not having a bubble happen.
- Apocryphon 14y ago
  "but we appear to have successfully avoided re-creating the dot-com bubble craziness of the last century." What this makes me wonder is what new and innovative way we as an economy will find to screw it all up and cause another bust. Hopefully less catastrophic than the last one.
  - ChuckMcM 14y ago
    Bubbles are by their nature destined to happen, tulips, tech stocks, condominiums, you name it. The formula is very similar to the Ponzi formula, take a commodity, have its value spike, let people who don't understand why it spiked into the game. Take all their money. Rinse and repeat. The trick, as always, is trying to be skeptical and check your data. Not always easy.
antidaily 14y ago
DHH
csense 14y ago
Who is to blame for failed IPO's? Sarbanes and Oxley. Startups don't want to deal with all the red tape of the Sarbanes-Oxley Act [1] and are putting off going public until either they're big enough that the cost of compliance is small compared to the total size of their business, or they're legally required to do so because the number of shareholders exceeds some threshold. (Facebook falls in the latter category.) If your company's large already, it kills growth prospects. It's a lot easier to turn a $40 million company into a $400 million company than it is to turn a $40 billion company like Facebook into a $400 billion company. [1] http://en.wikipedia.org/wiki/Sarbox http://en.wikipedia.org/wiki/Sarbox
- polarix 14y ago
  The article actually hints at this: "We the people have decided that big companies are more responsible when they report to a broad base of shareholders". So, by that logic, we the people are to blame -- for the overhead that fast growing companies now need to avoid by staying private longer.
shalmanese 14y ago
And yet, for all of these supposed wonderful benefits that rich people gain, average venture returns have remained stubbornly mediocre for the last decade. For every Facebook, there is a Color and the investors in Facebook were good but they were also lucky (cf. MySpace). It's not clear that companies should be IPOing any earlier, even despite SOX. Companies seem to have an easy enough time raising on the private market and they're raising at roughly appropriate valuations, as evidenced by low VC returns. Why would a company want retail investors if they can get the same amount of cash from a couple of investment firms?
malandrew 14y ago
I'm sorry but I fail to see why public markets investors should have the right to earn interest from economic growth for which they have absolutely no responsibility. The gravy growth train eventually stops somewhere and it seems perfectly fair that the farther you are from personally contributing to that growth that the less rewards you are entitled to. Most investors in Facebook from $0 market cap to about $10 billion, we professional investors that most likely contributed something to the company. Earlier investors probably had a lot more to contribute than late investors. There is practically nothing that Joe Consumer would be contributing besides cold hard cash that would help Facebook grow. Here's the World's tiniest violin playing for people who play it safe instead of taking on actual risk and personally contributing labor, smarts and connections to growth on a capital investment.
- suresk 14y ago
  For one, the FB IPO was the first time most people could play any part at all in Facebook as a company. It is a little bit difficult to figure out how to argue with someone who sees absolutely zero value in public markets, but let me ask you this - how does anyone who meaningfully participated in the building of Facebook (using your critera) convert their ownership of the company into cash? Are you arguing that all companies should just remain private and the shareholders simply receive dividends as a return on their investment?
notatoad 14y ago
Since when is the Facebook IPO a failure? Facebook sold a bunch of overvalued stock to pop-culture investors, made a bunch of money off it, and now everything is equalizing out to where it belongs. This is exactly what is supposed to happen.
- suresk 14y ago
  I'm a little surprised that so many people see Facebook's IPO as being unambiguously good for Facebook. In any transaction, extracting the most value out of your counter-party without regard for what benefit they are getting from the deal seems awfully shortsighted. Consider just a few of the problems this causes for Facebook: - Employees with stock have seen their FB-related wealth fall by nearly 50%. Of course, had the IPO been priced properly, they would have never have the "lost" wealth in the first place, but there is a psychological aspect that makes the current situation worse for most people. - Attracting new talent (of which they will need a lot of, since they need to grow relatively quickly in order to justify their P/E) will be harder with a poorly-performing stock. - Management will likely be distracted by unhappy shareholders and will likely make decisions differently than if the stock price were not creating pressure. You can certainly argue that IPOs where the stock makes a significant jump immediately are mispriced and bad for the company, but I have a hard time buying that companies are just fine to see their stock price cut by roughly 50% just months after IPO.
batgaijin 14y ago
Who set the initial pricing for Groupon and Facebook? Goldman Sachs. Thanks Techcrunch, you're really adding to the discussion with that swell research.

22 points by akos 14y ago

Please excuse my ignorance, but- I thought the decline of public market IPOs for up and coming tech companies is because everyone is cautious to avoid repeating the mistakes of the dot-com bust?

veyron 14y ago
The dot com boom and bust were driven by a lack of understanding of the greater fool theory. People, for many reasons including 2008-9, MF Global, PfG Best, R Allen Stanford, Madoff, CFTC, TBTF, flash crash, TVIX, decided the investment environment is too toxic to play in.

gaius 14y ago

Techcrunch. Next question.

jameszol 14y ago

"We shall repeat here without apology--for the warning cannot be given too often--that the investor cannot hope for better than average results by buying new offerings, or 'hot' issues of any sort, meaning thereby those recommended for a quick profit. The contrary is almost certain to be true in the long run. The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition. (Any security analyst worth his salt could make up such a list.) Aggressive investors may buy other types of common stocks, but they should be on a definitely attractive basis as established by intelligent analysis." - p28 The Intelligent Investor (Revised Edition 2003) The IPO market partly thrives on the fact that there are highly speculative and/or uneducated investors out there willing to invest in any new offering. Investors must expect IPOs will fail without blame, in my opinion, and diversify accordingly. Unfortunately, the uneducated speculators are the ones that likely lose it all on something "guaranteed" to be hot.

ChuckMcM 14y ago

Oh this is priceless, "I wanna bubble! I wanna bubble! Waaaaaah!" TL;DR version : Companies go public later, non-qualified investors don't get a chance to invest during their growth phase, so 'regular' folks are missing out on that wealth creation. All of that is true, and 'regular folks' are also missing out on the wealth destruction. The author uses FaceBook as their stalking horse, they point out that people who invested when Facebook was only valued at 550M have done really well, and people who bought at the IPO price or since, haven't. But here is the rub. Is Facebook a good investment or not? If you have any sort of maturity as an investor at all you realize that more money is made by the real growth post IPO than is made leading up to the IPO. That is because it occurs over a longer time and starts from a bigger base. If you had invested in LinkedIn at their IPO (they have a credible business model, and traction) even after the 'pop' you would have paid between $90 and $95 a share. That same stock today is worth $108. That is a 13% gain in a bit over a year. Pretty good in an otherwise stumpy economy. If you bought Stratsys (NASDAQ:SSYS) last year like I did because I thought "gee, I think 3D printing is going to be a huge growth industry." You could be up 200% (I bought it around $25 and its up over $60 now.) The bottom line is that nothing 'bad' has happened to 'investing' but we appear to have successfully avoided re-creating the dot-com bubble craziness of the last century. But the author, perhaps reading glamorous stories of people who talked about how many 'Porsche units' of money they earned on their over valued stocks that day, has come to realize its not going to be like that. Ideally not ever, but at least until the old farts die who remember how crazy it was. Going middle-class => multi-millionaire => middle-class does something to a person. Maybe it turns their cynicism dial up to 11, I can't say for sure. But there is no sense complaining about not having a bubble happen.

Apocryphon 14y ago
"but we appear to have successfully avoided re-creating the dot-com bubble craziness of the last century." What this makes me wonder is what new and innovative way we as an economy will find to screw it all up and cause another bust. Hopefully less catastrophic than the last one.
- ChuckMcM 14y ago
  Bubbles are by their nature destined to happen, tulips, tech stocks, condominiums, you name it. The formula is very similar to the Ponzi formula, take a commodity, have its value spike, let people who don't understand why it spiked into the game. Take all their money. Rinse and repeat. The trick, as always, is trying to be skeptical and check your data. Not always easy.

antidaily 14y ago

DHH

csense 14y ago

Who is to blame for failed IPO's? Sarbanes and Oxley. Startups don't want to deal with all the red tape of the Sarbanes-Oxley Act [1] and are putting off going public until either they're big enough that the cost of compliance is small compared to the total size of their business, or they're legally required to do so because the number of shareholders exceeds some threshold. (Facebook falls in the latter category.) If your company's large already, it kills growth prospects. It's a lot easier to turn a $40 million company into a $400 million company than it is to turn a $40 billion company like Facebook into a $400 billion company. [1] http://en.wikipedia.org/wiki/Sarbox http://en.wikipedia.org/wiki/Sarbox

polarix 14y ago
The article actually hints at this: "We the people have decided that big companies are more responsible when they report to a broad base of shareholders". So, by that logic, we the people are to blame -- for the overhead that fast growing companies now need to avoid by staying private longer.

shalmanese 14y ago

And yet, for all of these supposed wonderful benefits that rich people gain, average venture returns have remained stubbornly mediocre for the last decade. For every Facebook, there is a Color and the investors in Facebook were good but they were also lucky (cf. MySpace). It's not clear that companies should be IPOing any earlier, even despite SOX. Companies seem to have an easy enough time raising on the private market and they're raising at roughly appropriate valuations, as evidenced by low VC returns. Why would a company want retail investors if they can get the same amount of cash from a couple of investment firms?

malandrew 14y ago

I'm sorry but I fail to see why public markets investors should have the right to earn interest from economic growth for which they have absolutely no responsibility. The gravy growth train eventually stops somewhere and it seems perfectly fair that the farther you are from personally contributing to that growth that the less rewards you are entitled to. Most investors in Facebook from $0 market cap to about $10 billion, we professional investors that most likely contributed something to the company. Earlier investors probably had a lot more to contribute than late investors. There is practically nothing that Joe Consumer would be contributing besides cold hard cash that would help Facebook grow. Here's the World's tiniest violin playing for people who play it safe instead of taking on actual risk and personally contributing labor, smarts and connections to growth on a capital investment.

suresk 14y ago
For one, the FB IPO was the first time most people could play any part at all in Facebook as a company. It is a little bit difficult to figure out how to argue with someone who sees absolutely zero value in public markets, but let me ask you this - how does anyone who meaningfully participated in the building of Facebook (using your critera) convert their ownership of the company into cash? Are you arguing that all companies should just remain private and the shareholders simply receive dividends as a return on their investment?

notatoad 14y ago

Since when is the Facebook IPO a failure? Facebook sold a bunch of overvalued stock to pop-culture investors, made a bunch of money off it, and now everything is equalizing out to where it belongs. This is exactly what is supposed to happen.

suresk 14y ago
I'm a little surprised that so many people see Facebook's IPO as being unambiguously good for Facebook. In any transaction, extracting the most value out of your counter-party without regard for what benefit they are getting from the deal seems awfully shortsighted. Consider just a few of the problems this causes for Facebook: - Employees with stock have seen their FB-related wealth fall by nearly 50%. Of course, had the IPO been priced properly, they would have never have the "lost" wealth in the first place, but there is a psychological aspect that makes the current situation worse for most people. - Attracting new talent (of which they will need a lot of, since they need to grow relatively quickly in order to justify their P/E) will be harder with a poorly-performing stock. - Management will likely be distracted by unhappy shareholders and will likely make decisions differently than if the stock price were not creating pressure. You can certainly argue that IPOs where the stock makes a significant jump immediately are mispriced and bad for the company, but I have a hard time buying that companies are just fine to see their stock price cut by roughly 50% just months after IPO.

batgaijin 14y ago

Who set the initial pricing for Groupon and Facebook? Goldman Sachs. Thanks Techcrunch, you're really adding to the discussion with that swell research.