4 ms·

IPO is a fictional line. Is there really reason that there should be 100B+ post-IPO companies, but that there shouldn't be 100B+ pre-IPO companies? Laws regard

by solve 11y ago

IPO is a fictional line. Is there really reason that there should be 100B+ post-IPO companies, but that there shouldn't be 100B+ pre-IPO companies? Laws regarding IPOs create decent incentive to avoid an official IPO. Money follows the incentives.

pyre 11y ago
pre-IPO the list of investors is small, therefore if the company crashes and burns fewer things are affected. post-IPO they are publicly traded and anyone that can purchase stock can tie up their finances in the company.
JonFish85 11y ago
"Laws regarding IPOs create decent incentive to avoid an official IPO. Money follows the incentives." That's just the thing. If companies truly were profitable, in general wouldn't investors want to keep the company private? No overhead of having to manage SEC reporting, no oversight, nobody to answer to except themselves. The problem is, investors need the public markets to make money, because their money is not in the company actually turning a profit, it's in convincing the public that the company is worth whatever they say it is. Think Zynga/King. They were very profitable for awhile, but for their investors to make money, they didn't want to sit on $50m/mo profit, because their investments assumed that the company was worth billions. They knew the company was doomed in the long run (meaning they couldn't sustain the profits), so they ditched the company onto the public, cashed in their chips and walked away. Now the company is bleeding money. If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO. It's not a fictional line, it's a very distinct line. Investors have convinced the public that their company is worth however many billions, usually without ever having turned a profit. They want their money back.
- Eridrus 11y ago
  > If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO. Not really true, most venture funds have a fixed timeline where limited partners want to get their money back around 10 years. And they don't necessarily want just a steady stream coming back, they want their actual money, to invest in things that have just as much growth potential. Also, employees want a way to cash out, which is very difficult when a company is private. Not necessarily because the company is bad, but because you would much rather diversify your holdings. Even if an asset is making money, it isn't natural to want to keep that asset.
  - JonFish85 11y ago
    The problem is that all of these things assume an IPO as an exit. Funds aren't interested in building long-term profitable companies, they want to pump up the stock price as high as they can and get the exit, profitability be damned. Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on. It feels like the whole startup economy is operating on the "bigger sucker" plan these days. It's not about building sustainable businesses with solid profits, its about sprinting to an IPO and dumping the stock onto the public to let them deal with the consequences. Maybe I just have an overly bleak outlook on the current layout of startups (and I work for one).
    - spacehome 11y ago
      > Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on. This is the rational choice for the employee. Nobody wants more than 10% of their net worth wrapped up in a small nascent (read: very risky) asset. I'm sort of in the situation you describe, and I'd be very happy to sell my share at a steep discount to avoid the risk.
- nerfhammer 11y ago
  > If companies truly were profitable, in general wouldn't investors want to keep the company private? Not necessarily, you might want the stock to liquid so you can sell off some/all of your investment rather than wait for a trickle of income, and selling out will get taxed at a much lower cap gains rate rather than as ordinary income.
lmm 11y ago
Large private companies do exist. For a mature, profitable company the benefits of being public generally outweigh the costs, but there's plenty of room for diversity here.

by solve 11y ago

pyre 11y ago

pre-IPO the list of investors is small, therefore if the company crashes and burns fewer things are affected. post-IPO they are publicly traded and anyone that can purchase stock can tie up their finances in the company.

JonFish85 11y ago

"Laws regarding IPOs create decent incentive to avoid an official IPO. Money follows the incentives." That's just the thing. If companies truly were profitable, in general wouldn't investors want to keep the company private? No overhead of having to manage SEC reporting, no oversight, nobody to answer to except themselves. The problem is, investors need the public markets to make money, because their money is not in the company actually turning a profit, it's in convincing the public that the company is worth whatever they say it is. Think Zynga/King. They were very profitable for awhile, but for their investors to make money, they didn't want to sit on $50m/mo profit, because their investments assumed that the company was worth billions. They knew the company was doomed in the long run (meaning they couldn't sustain the profits), so they ditched the company onto the public, cashed in their chips and walked away. Now the company is bleeding money. If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO. It's not a fictional line, it's a very distinct line. Investors have convinced the public that their company is worth however many billions, usually without ever having turned a profit. They want their money back.

Eridrus 11y ago
> If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO. Not really true, most venture funds have a fixed timeline where limited partners want to get their money back around 10 years. And they don't necessarily want just a steady stream coming back, they want their actual money, to invest in things that have just as much growth potential. Also, employees want a way to cash out, which is very difficult when a company is private. Not necessarily because the company is bad, but because you would much rather diversify your holdings. Even if an asset is making money, it isn't natural to want to keep that asset.
- JonFish85 11y ago
  The problem is that all of these things assume an IPO as an exit. Funds aren't interested in building long-term profitable companies, they want to pump up the stock price as high as they can and get the exit, profitability be damned. Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on. It feels like the whole startup economy is operating on the "bigger sucker" plan these days. It's not about building sustainable businesses with solid profits, its about sprinting to an IPO and dumping the stock onto the public to let them deal with the consequences. Maybe I just have an overly bleak outlook on the current layout of startups (and I work for one).
  - spacehome 11y ago
    > Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on. This is the rational choice for the employee. Nobody wants more than 10% of their net worth wrapped up in a small nascent (read: very risky) asset. I'm sort of in the situation you describe, and I'd be very happy to sell my share at a steep discount to avoid the risk.
nerfhammer 11y ago
> If companies truly were profitable, in general wouldn't investors want to keep the company private? Not necessarily, you might want the stock to liquid so you can sell off some/all of your investment rather than wait for a trickle of income, and selling out will get taxed at a much lower cap gains rate rather than as ordinary income.

lmm 11y ago

Large private companies do exist. For a mature, profitable company the benefits of being public generally outweigh the costs, but there's plenty of room for diversity here.