5 ms·

For Billion-Dollar Companies, Venture Deals Outstrip Going Public

43 points by gdilla 12y ago

michaelvkpdx 12y ago
The tech industry is just a vehicle for money laundering by the rich now. At least IPOs gave engineers and workers a chance to win a lottery ticket. Developers, stop slaving away for the VC's. You are wasting your time and have no chance of getting paid until we reform the economic foundation of our trade.
- mahyarm 12y ago
  Well you do get secondaries, but it's usually only something like 10% of vested stock, while your still working there. The lack of a public market also makes it far more risky to hold the stock for long term capital gains tax rates. I agree the lack of IPOs make equity earnings less valuable to the typical employee.
  - thecage411 12y ago
    I wish more people knew this. Even if you beat the odds and the startup you work for goes places, you may only get 10%-15% of the proceeds now, and be hoping for the rest even further out in the future. Almost certainly better to just work for a public company from the start.
    - pedalpete 12y ago
      Are you saying you only get 10-15% of the proceeds of YOUR vested stock? So if I have 1% of a $100m company, my shares would only get me $100k, not $1m? Can you explain or link to a source of more information?
      - throwaway7808 12y ago
        If you have 1%, most likely you are an early employee. There's a formula: VCs and founders get reach, early employees get screwed and employees get their market salaries.
      - rhc2104 12y ago
        Petalpete - the comment above refers to pre-ipo sales of employee stock. A bunch of private companies that hit billion dollar valuations let employees sell some of their shares. That person is claiming that those sales allow employees to sell 10-15% of their vested stock. Of course, if they do that, they still keep the other 85-90%.
        thecage411 12y ago
        This is exactly what I meant, thanks for filling in the details.
    - lanstein 12y ago
      You can opt to sell in the IPO/secondary, but otherwise you're generally free to trade when the trading window is open for current employees (typically) 180 days give or take post-IPO.
phkahler 12y ago
Some possible explanations: 1) Inflation - a billion dollars isn't what it used to be. 2) Stock market bubble causing investors to look elsewhere. 3) Founders are younger - they aren't looking to retire yet so let it grow, let it grow, don't need an exit yet.
- mahyarm 12y ago
  The bar for becoming a billion dollar company is less nowadays of course. If you multiply the inflation rates from 2000 to now, you get a %36.77 amount of inflation since 2000. Todays billion dollar companies are approximately the year 2000's $750mm companies. http://forecast-chart.com/forecast-inflation-rate.html http://forecast-chart.com/forecast-inflation-rate.html
- gdilla 12y ago
  Also some founders are able to trade equity for big cash in a funding round http://www.businessinsider.com/snapchats-founders-pocket-10-million-in-addition-to-the-60-million-round-2013-6 http://www.businessinsider.com/snapchats-founders-pocket-10-...
deleted 12y ago
[deleted]
jnks 12y ago
It appears there's only room for 11 or 12 big IPOs per year. If the current trend holds and late-stage investors are creating more private unicorns than the public can bear, we have a problem. The fallout from this mismatch wouldn't look like a tanking stock market. Just a lot of formerly impressive companies quietly being acquired for a relative firesale. I suspect Box and Square are both in this situation.
prostoalex 12y ago
Raising money in public markets nowadays makes the company significantly less agile. Marc Andreessen has been advocating staying private for as long as possible in quite a few places, including here http://www.vox.com/2014/6/26/5837638/the-ipo-is-dying-marc-andreessen-explains-why http://www.vox.com/2014/6/26/5837638/the-ipo-is-dying-marc-a...
- timr 12y ago
  Being a company that's large enough to go public makes a company significantly less agile. But of course, I'm totally shocked that a venture investor would argue for companies doing things that benefit venture investors.
  - prostoalex 12y ago
    Well, before he was a venture investor he ran a company. And, generally speaking, VCs tend to be supportive of IPOs.
imjk 12y ago
The VC model is more conducive to the Greater fool theory: http://en.wikipedia.org/wiki/Greater_fool_theory http://en.wikipedia.org/wiki/Greater_fool_theory. While social psychology and public sentiment certainly plays into the valuation of public companies, being a public company typically restricts valuation to more standardized valuation models and scrutiny; it's much more transparent overall.
TheMagicHorsey 12y ago
We have the heightened burden of SEC regulations to thank for all these companies staying private. If the regulatory burdens were lower more companies might go to public markets to raise capital, instead of to VCs. The regulations are meant to protect the everyman, but the perverse result is that the opportunity to participate in these fantastic returns is now restricted to the executive tier at the startups, the rich accredited investors, the VCs, and the private equity firms. The rest of us are left out ... unless we become founders ourselves.
- ojbyrne 12y ago
  Except in the days before the "heightened burden of SEC regulation" IPO shares were largely only available to wealthy clients of the banks that underwrote the IPOs. The rest of us were just as left out.
  - refurb 12y ago
    Not sure I understand. IPO shares are still only available to the wealthy clients of the banks that underwrite them.
    - ojbyrne 12y ago
      That was my point - nothing has changed. The OP was suggesting things were better in the past.
      - sparky 12y ago
        Yeah, I think that comment conflates three things: 1) The regulatory burden of going public (Sarbanes-Oxley compliance et al.) pushes companies to stay private, which keeps the average Jane from investing in those companies via the public markets. 2) For those companies that are privately held (whether that's because of the regulations in #1 or for more fundamental reasons), separate regulations (accredited investor rules et al.) prevent the average Joe from investing privately. 3) On top of #1 and #2, market forces and norms give more investment opportunities (both public and private) to large, established players than individual laymen. For example: * Companies may prefer to take $1M each from 5 large investors than $1k each from 5000 people, both to reduce logistical burden and because those large investors statistically have other unique things to offer like expertise, advice, and connections. This is unfortunate for the small-time-but-sophisticated investor, but seems quite rational. * IPO shares only being offered to large friends and clients of the underwriter. The justification is reduced logistical overhead as in the previous case, but the true motivation is widely suspected to be cronyism.
emo_tards_on_hn 12y ago
But, if you don't IPO, how do you exit, leaving the muppets with the stock, whilst you run with the cash? Staying private means actually building something? Of value? That is not simply another shitty Rails site, or tries to skirt around regulations and pretends to be 'disrupting' things? Oh dear, this won't go down well at all with the chattering classes on HN!
vannevar 12y ago
Seems like this would be a natural consequence of the increasing concentration of wealth. The top 1% of the population control 43% of the wealth in the US. But for the 99%, much of that wealth is illiquid and not readily available for investment (particularly speculative investment). So I wouldn't be surprised if the 1% controlled as much as 90% of the liquid wealth available to invest in young companies, making it unnecessary to go to the public markets.
- throwaway7808 12y ago
  By the way, what's the minimum income, to be in top 1% of incomes in the US?
  - idlewords 12y ago
    Around half a million dollars. Source: http://www.brookings.edu/research/essays/2014/saving-horatio-alger http://www.brookings.edu/research/essays/2014/saving-horatio...

43 points by gdilla 12y ago

The tech industry is just a vehicle for money laundering by the rich now. At least IPOs gave engineers and workers a chance to win a lottery ticket. Developers, stop slaving away for the VC's. You are wasting your time and have no chance of getting paid until we reform the economic foundation of our trade.

mahyarm 12y ago
Well you do get secondaries, but it's usually only something like 10% of vested stock, while your still working there. The lack of a public market also makes it far more risky to hold the stock for long term capital gains tax rates. I agree the lack of IPOs make equity earnings less valuable to the typical employee.
- thecage411 12y ago
  I wish more people knew this. Even if you beat the odds and the startup you work for goes places, you may only get 10%-15% of the proceeds now, and be hoping for the rest even further out in the future. Almost certainly better to just work for a public company from the start.
  - pedalpete 12y ago
    Are you saying you only get 10-15% of the proceeds of YOUR vested stock? So if I have 1% of a $100m company, my shares would only get me $100k, not $1m? Can you explain or link to a source of more information?
    - throwaway7808 12y ago
      If you have 1%, most likely you are an early employee. There's a formula: VCs and founders get reach, early employees get screwed and employees get their market salaries.
    - rhc2104 12y ago
      Petalpete - the comment above refers to pre-ipo sales of employee stock. A bunch of private companies that hit billion dollar valuations let employees sell some of their shares. That person is claiming that those sales allow employees to sell 10-15% of their vested stock. Of course, if they do that, they still keep the other 85-90%.
      - thecage411 12y ago
        This is exactly what I meant, thanks for filling in the details.
  - lanstein 12y ago
    You can opt to sell in the IPO/secondary, but otherwise you're generally free to trade when the trading window is open for current employees (typically) 180 days give or take post-IPO.

phkahler 12y ago

Some possible explanations: 1) Inflation - a billion dollars isn't what it used to be. 2) Stock market bubble causing investors to look elsewhere. 3) Founders are younger - they aren't looking to retire yet so let it grow, let it grow, don't need an exit yet.

mahyarm 12y ago
The bar for becoming a billion dollar company is less nowadays of course. If you multiply the inflation rates from 2000 to now, you get a %36.77 amount of inflation since 2000. Todays billion dollar companies are approximately the year 2000's $750mm companies. http://forecast-chart.com/forecast-inflation-rate.html http://forecast-chart.com/forecast-inflation-rate.html
gdilla 12y ago
Also some founders are able to trade equity for big cash in a funding round http://www.businessinsider.com/snapchats-founders-pocket-10-million-in-addition-to-the-60-million-round-2013-6 http://www.businessinsider.com/snapchats-founders-pocket-10-...

deleted 12y ago

[deleted]

jnks 12y ago

It appears there's only room for 11 or 12 big IPOs per year. If the current trend holds and late-stage investors are creating more private unicorns than the public can bear, we have a problem. The fallout from this mismatch wouldn't look like a tanking stock market. Just a lot of formerly impressive companies quietly being acquired for a relative firesale. I suspect Box and Square are both in this situation.

prostoalex 12y ago

Raising money in public markets nowadays makes the company significantly less agile. Marc Andreessen has been advocating staying private for as long as possible in quite a few places, including here http://www.vox.com/2014/6/26/5837638/the-ipo-is-dying-marc-andreessen-explains-why http://www.vox.com/2014/6/26/5837638/the-ipo-is-dying-marc-a...

timr 12y ago
Being a company that's large enough to go public makes a company significantly less agile. But of course, I'm totally shocked that a venture investor would argue for companies doing things that benefit venture investors.
- prostoalex 12y ago
  Well, before he was a venture investor he ran a company. And, generally speaking, VCs tend to be supportive of IPOs.

imjk 12y ago

The VC model is more conducive to the Greater fool theory: http://en.wikipedia.org/wiki/Greater_fool_theory http://en.wikipedia.org/wiki/Greater_fool_theory. While social psychology and public sentiment certainly plays into the valuation of public companies, being a public company typically restricts valuation to more standardized valuation models and scrutiny; it's much more transparent overall.

TheMagicHorsey 12y ago

We have the heightened burden of SEC regulations to thank for all these companies staying private. If the regulatory burdens were lower more companies might go to public markets to raise capital, instead of to VCs. The regulations are meant to protect the everyman, but the perverse result is that the opportunity to participate in these fantastic returns is now restricted to the executive tier at the startups, the rich accredited investors, the VCs, and the private equity firms. The rest of us are left out ... unless we become founders ourselves.

ojbyrne 12y ago
Except in the days before the "heightened burden of SEC regulation" IPO shares were largely only available to wealthy clients of the banks that underwrote the IPOs. The rest of us were just as left out.
- refurb 12y ago
  Not sure I understand. IPO shares are still only available to the wealthy clients of the banks that underwrite them.
  - ojbyrne 12y ago
    That was my point - nothing has changed. The OP was suggesting things were better in the past.
    - sparky 12y ago
      Yeah, I think that comment conflates three things: 1) The regulatory burden of going public (Sarbanes-Oxley compliance et al.) pushes companies to stay private, which keeps the average Jane from investing in those companies via the public markets. 2) For those companies that are privately held (whether that's because of the regulations in #1 or for more fundamental reasons), separate regulations (accredited investor rules et al.) prevent the average Joe from investing privately. 3) On top of #1 and #2, market forces and norms give more investment opportunities (both public and private) to large, established players than individual laymen. For example: * Companies may prefer to take $1M each from 5 large investors than $1k each from 5000 people, both to reduce logistical burden and because those large investors statistically have other unique things to offer like expertise, advice, and connections. This is unfortunate for the small-time-but-sophisticated investor, but seems quite rational. * IPO shares only being offered to large friends and clients of the underwriter. The justification is reduced logistical overhead as in the previous case, but the true motivation is widely suspected to be cronyism.

emo_tards_on_hn 12y ago

But, if you don't IPO, how do you exit, leaving the muppets with the stock, whilst you run with the cash? Staying private means actually building something? Of value? That is not simply another shitty Rails site, or tries to skirt around regulations and pretends to be 'disrupting' things? Oh dear, this won't go down well at all with the chattering classes on HN!

vannevar 12y ago

Seems like this would be a natural consequence of the increasing concentration of wealth. The top 1% of the population control 43% of the wealth in the US. But for the 99%, much of that wealth is illiquid and not readily available for investment (particularly speculative investment). So I wouldn't be surprised if the 1% controlled as much as 90% of the liquid wealth available to invest in young companies, making it unnecessary to go to the public markets.

throwaway7808 12y ago
By the way, what's the minimum income, to be in top 1% of incomes in the US?
- idlewords 12y ago
  Around half a million dollars. Source: http://www.brookings.edu/research/essays/2014/saving-horatio-alger http://www.brookings.edu/research/essays/2014/saving-horatio...