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I genuinely do not understand US securities law. One needs to be a "qualified" investor to invest in startups; these investors trade shares among themselves (no

• InclinedPlane 14y ago
  How about facebook? That was one of the most artful manipulations of the IPO system ever conceived. They didn't even make a majority of the company public, and yet managed to rake in a preposterous amount of money and cash out all of the early investors to an absolutely ridiculous degree. The stock is still down nearly 30% from the IPO level.
  • antr 14y ago
    You are right, Groupon is not alone, FB and Zynga are the two other which come to mind in these recents times.
  • gus_massa 14y ago
    Facebook lost "only" a 27% of the initial price (maximal lost was 53%). Groupon lost 80% of the initial price (maximal lost was 90%)!
• wpietri 14y ago
  The valuations for startups are generally pretty defensible. Any serious valuation number is based on somebody actually buying shares at that price, generally a professional investor with a lot of experience. The price of a thing is what the thing will bring. Whether or not they're realistic is hard to say because they are bets on wildly unpredictable situations. Not long after Amazon IPOed, I considered shorting the stock because I thought it was wildly overvalued. Now it's worth circa 100x what it was worth then. Qualified investors are just people with enough money that they are presumed to know what they're doing. The reason non-qualified investors generally can't buy in early is precisely because the SEC is protecting them from getting taken for a ride. The whole "going public" thing is mainly about disclosing enough that you're following the investor protection rules. I agree that Groupon is a hot mess, but I don't expect that any rules were broken, and I don't know what new rule could have prevented it without doing more harm than good. Do you have something in mind? My guess is that the people who bought Groupon stock made one of two classic mistakes. One is buying shares because they like the product. The other is buying because it's hot. I've seen professional investors make those mistakes too, and learn some valuable lessons thereby. It's sad that a lot of people had to learn those lessons with Groupon. But the SEC isn't there to protect people from ignorance or bad trading strategies. They're just there to stop fraud and cheating.
  • antr 14y ago
    Just for disclosure, before doing the "startup thing", I worked for several years in the finance/investment/"vampire-squid" industry, so I've seen both side of the table (as a qualified investor). I've spent endless amounts of time in several non-tech IPOs, and public-to-private transactions. I can safely say that "I know how the investment industry works". (i) price != value. For argument sake, lets say you go off to an pay $1 million for a 500 sqft in Portola. Is the price of the house $1 million, yes, you paid for it. Is it worth it, no. Investors are specialist at making both terms look the same. (ii) Groupon is Groupon. Groupon is not Silicon Valley, Groupon is not Amazon, Groupon does not represent any other company/industry other than itself. Do not go the Amazon, Webvan, etc. route, because mixing stories does not make the story any more right. Groupon's fundamentals: revenue growth, customer-acquisition-cost, customer lifetime value, gross margins, working capital needs and cash flow generation were "not there". They never were. The IPO value could not be justified with even the most basic arithmetic. To justify the +$13bn valuation Groupon, well read this from 465 days ago (pre Groupon IPO comments) http://news.ycombinator.com/item?id=3270349 http://news.ycombinator.com/item?id=3270349 (iii) How could of this be prevented? The SEC could of asked (and should ask) 1,2,3,4,5, etc independent companies (be it McKinsey, an auditor such as KPMG or any corporate finance boutique) to provide a Fairness Opinion on the valuation (the right incentives should be put in place to avoid any conflict of interest in the future from potential revenues/business arising from the company one is analysing). If there is a large discrepancy between the Fairness Opinion and IPO price the IPO should be cancelled and any share trade should only be between qualified investors (but not in the stock exchange). If I were an investor, I would strongly vote against this... but now that I'm not, I can say this is an effective way of avoiding this pump and dump schemes.
    • brianchu 14y ago
      1) Yes, price does not necessarily mean value. But that is a really philosophical tangent (What is "value", bla bla bla etc.) that is pretty irrelevant. For all intents and purposes the two are interchangeable on the market. For all intents and purposes, the value of something economically is the highest price someone will pay for it. 2) >Groupon is Groupon. Groupon is not Silicon Valley, Groupon is not Amazon, Groupon does not represent any other company/industry other than itself. Do not go the Amazon, Webvan, etc. route, because mixing stories does not make the story any more right. This argument is true in a tautological sense, but doesn't really provide a reason against comparing Groupon to other companies when valuing it. Yes, the fundamentals of Groupon matter, but growth in the abstract (not just YOY revenue growth) is difficult to evaluate. People will turn to other ways to evaluate companies, typically by comparing a company to other companies in the same sector. To give you an extreme example of this principle, VCs really don't care about an early startup's fundamentals. They'll look at the strength of the team and they'll evaluate (in a hand-wavy fashion, I acknowledge) the idea of the startup, and the reason they'll value, say, a YC startup with 3 co-founders at $6 million despite no revenue is because in their experience, they've seen companies with strong technical+operational teams return 100x. Yes, this example is not directly applicable to Groupon, since they did have revenue numbers to look at, but no doubt some people evaluated Groupon based on the idea of ecommerce growth. I never thought Groupon was a good stock to buy. But I remember at the time that even though I saw that the fundamentals were weak, I personally could not be sure of myself because I saw my mother and many of her female friends (also mothers) buy tons and tons of Groupons. Hindsight is 20/20. 3) That is a terrible idea. How do you define "fairness?" Again, given that the inherent definition of "value" is essentially (in a market economy) the highest price someone is willing to pay, I don't see any situation in which a company's IPO would be canceled. In fact, this appears to be a de-facto price ceiling since you are essentially capping the valuation at whatever the SEC/auditor determines is the fair valuation, regardless of what people are willing to pay, something you will get virtually no economist to agree to. Last I heard, the SEC is not in the business of setting IPO prices (yes, you might argue that they're not technically setting the price, but the end result is that they are setting the price).
• brnstz 14y ago
  > I genuinely do not understand US securities law. I just finished watching Econ 252 lectures from Open Yale, and the basic evolution of US securities law is explained pretty well. I highly recommend it. http://oyc.yale.edu/economics/econ-252-11 http://oyc.yale.edu/economics/econ-252-11 Generally speaking, regulation is a whack-a-mole game. In the 90s tech boom, companies typically went public as soon as possible to raise capital, and thus were subject to more scrutiny early on. Obviously that is not happening now. Perhaps the regulation needs to catch up with the current reality.