4 ms·

I'm curious given these kinds of deals, what the point of an IPO is anymore? For some of these companies the valuations are so high, and private capital so avai

by entee 11y ago

I'm curious given these kinds of deals, what the point of an IPO is anymore? For some of these companies the valuations are so high, and private capital so available that it seems incredibly unlikely that they'd get a better deal on the public markets. Who wants to abide by public market standards if you can avoid it? I wonder if there's a new model, kind of like large privately held companies such as Mars or Cargill, but with multiple investors. Granted, many of the tech companies getting these valuations have unclear economics, but what if they had real revenues, profits and paid a dividend? Honest question, why go public at all these days?

mathattack 11y ago
3 major reasons: 1 - After a certain point in time (based on # of shareholders) it becomes more onerous to be private, and you wind up with all the reporting responsibilities of being public. 2 - It's easier for a public company to engage on both sides of M&A. There's less quibbling about theoretical valuations since the company has a price. (When one private firm buys another with stock, there's 2 theoretical prices that need to be negotiated) 3 - For enterprise deals (not Snapchat) some customers prefer the stability of public ownership.
- entee 11y ago
  Cool, thanks! That said I wonder if 1 will always be that big an issue. What if you structure it so that you have a small number of large shareholders that represent larger groups? For example, in the case of stock options, a sort of labor union owns the stock, sits on the board and is responsible for distributing dividends to employees following a schedule of percentages. 2 is clearly troublesome, but perhaps more in the M than the A. If you acquire small companies, you may be able to do it in cash or again as some sort of contract entitling people to percentages of dividends. After all, that's kind of what a stock certificate used to be in practice, not just theory (yes oversimplification, but it seems people care far more about stock price than dividend these days). I wonder whether these issues will always be as troublesome. As these kinds of mega deals become more common, it seems quite possible that a sort of parallel private market could emerge. Anyway, thanks for the reasoning!
  - mathattack 11y ago
    The trend is against all three of these, but it's a slow trend. On #1 - the issue is individual employees each have shares tied to their hire date. It's possible that someone could do some kind of financial engineering to make it look like 1, but this hasn't been done yet. This is the issue that forced Facebook to go public. On #2 - If it's a cash purchase, the problem is less an issue. It gets tricky when the acquirer is significantly away from a funding event. The values of many high tech firms can be +500% or -80% just 6 months after a prior event. This has a massive impact on share-based acquisitions. Less of an issue with more mature companies. All this said, it's fairly easy to see a world 20 years from now where there are much fewer public firms.
    - entee 11y ago
      My guess is for these things to change (if they ever do) there would have to be a crisis event. Maybe after the next crash employees will be more reticent to take pure stock and will go for an alternate arrangement. Maybe the structures built for those arrangements will allow contracts for acquisitions to be structured differently. It's going to be interesting to see how long this private valuation explosion will last and what the fallout will be after it pops.
      - mathattack 11y ago
        A fully private market isn't great either. There's a lot of value for the investment community in general to know what the daily value of a given stock is. If you try to get this transparency via off-market transactions, aren't you just recreating the public market?
        entee 11y ago
        Oh totally. I think it would be a bad thing overall, but that doesn't mean it won't happen. If you have enough capital in a relatively small number of private entities, perhaps they will find it to their advantage to compromise a little on clarity, in exchange for more control or less regulation. Overall, I suspect a shadow market would be a bad thing, but it's hard to argue that for the moment there isn't something like a shadow market in silicon valley. I don't think it's a sustainable one, and it certainly is opaque (what's in those term sheets?), I'm just thinking of whether something similar could exist in a more permanent form.
- kchoudhu 11y ago
  I'm having a bit of a laugh here trying to imagine what an enterprise version of Snapchat might look like.
  - mathattack 11y ago
    It could be very useful. People may be more willing to share opinions if they know it won't be kept on record forever.
    - entee 11y ago
      Possibly also illegal though from a document preservation perspective.
randomname2 11y ago
The private valuations are not really comparable to the public market caps, given the conditions these private investors get. Maybe I'm being cynical, but given the exuberance of public tech stocks, and the bubbliness of the tech market in general, some may be impatient to cash out. Also see: "greater fool theory"
dataker 11y ago
Probably makes sense from a founder's perspective, but investors eventually need an exit( long-term or not).
foobarqux 11y ago
IPOs are now less necessary for raising funds than they are for cashing out shareholders.
JonFish85 11y ago
The biggest thought that comes to mind is that these companies don't actually make money. If Snapchat was pulling in the $33bn in revenue that Mars Inc. pulls in, then I imagine they would be much more likely to keep it private. But these companies' valuation is based on the idea that they have a huge market, and MAYBE they'll make money someday. Generally I believe that when these social network companies go public, their price-to-earnings is insanely high, meaning that in order for investors to receive value, they'd have to either hold the stock for a very long time, or be confident that the revenue will ramp up quickly enough to start making money very soon. Ultimately, a VC has taken the risk that the company can be sold to "someone else", whether acquisition or IPO. That's when they see the company as having it's maximum value to them. They're not in the business of creating a sustainable business, they're in the business of taking something small and making it big. Once they get a valuation that they feel can maximize their investment (either IPO or acquisition), they're happy to lock in their money and move on. Take Zynga or King for example. They were revenue machines when they were close to IPO. But investors knew the money-train was coming to a close, so they sold out and locked in their massive gains. The companies were very lucrative for a short period of time, so that drove up their IPO price. But VCs needed to get out before the popular games took a dive, which they inevitably did, and the investors got out at excellent valuations. If they had kept the company private, they wouldn't have had nearly the return they had.
mikeryan 11y ago
At some point the investors need a way to get their money out. There's not a lot of incentive for the company outside of the pressure the board puts on.
Lukeas14 11y ago
For some companies, an IPO is more about their financial structuring than the dollar investment. Legally a private company can only have a maximum of 500 individual stock holders before they have to make public financial disclosures. This was part of the reason why Facebook decided to IPO even though it definitely didn't need the investment.
macspoofing 11y ago
>I'm curious given these kinds of deals, what the point of an IPO is anymore 1) More capital/money. 2) Pressure from existing investors who want to cash out.

by entee 11y ago

mathattack 11y ago

3 major reasons: 1 - After a certain point in time (based on # of shareholders) it becomes more onerous to be private, and you wind up with all the reporting responsibilities of being public. 2 - It's easier for a public company to engage on both sides of M&A. There's less quibbling about theoretical valuations since the company has a price. (When one private firm buys another with stock, there's 2 theoretical prices that need to be negotiated) 3 - For enterprise deals (not Snapchat) some customers prefer the stability of public ownership.

entee 11y ago
Cool, thanks! That said I wonder if 1 will always be that big an issue. What if you structure it so that you have a small number of large shareholders that represent larger groups? For example, in the case of stock options, a sort of labor union owns the stock, sits on the board and is responsible for distributing dividends to employees following a schedule of percentages. 2 is clearly troublesome, but perhaps more in the M than the A. If you acquire small companies, you may be able to do it in cash or again as some sort of contract entitling people to percentages of dividends. After all, that's kind of what a stock certificate used to be in practice, not just theory (yes oversimplification, but it seems people care far more about stock price than dividend these days). I wonder whether these issues will always be as troublesome. As these kinds of mega deals become more common, it seems quite possible that a sort of parallel private market could emerge. Anyway, thanks for the reasoning!
- mathattack 11y ago
  The trend is against all three of these, but it's a slow trend. On #1 - the issue is individual employees each have shares tied to their hire date. It's possible that someone could do some kind of financial engineering to make it look like 1, but this hasn't been done yet. This is the issue that forced Facebook to go public. On #2 - If it's a cash purchase, the problem is less an issue. It gets tricky when the acquirer is significantly away from a funding event. The values of many high tech firms can be +500% or -80% just 6 months after a prior event. This has a massive impact on share-based acquisitions. Less of an issue with more mature companies. All this said, it's fairly easy to see a world 20 years from now where there are much fewer public firms.
  - entee 11y ago
    My guess is for these things to change (if they ever do) there would have to be a crisis event. Maybe after the next crash employees will be more reticent to take pure stock and will go for an alternate arrangement. Maybe the structures built for those arrangements will allow contracts for acquisitions to be structured differently. It's going to be interesting to see how long this private valuation explosion will last and what the fallout will be after it pops.
    - mathattack 11y ago
      A fully private market isn't great either. There's a lot of value for the investment community in general to know what the daily value of a given stock is. If you try to get this transparency via off-market transactions, aren't you just recreating the public market?
      - entee 11y ago
        Oh totally. I think it would be a bad thing overall, but that doesn't mean it won't happen. If you have enough capital in a relatively small number of private entities, perhaps they will find it to their advantage to compromise a little on clarity, in exchange for more control or less regulation. Overall, I suspect a shadow market would be a bad thing, but it's hard to argue that for the moment there isn't something like a shadow market in silicon valley. I don't think it's a sustainable one, and it certainly is opaque (what's in those term sheets?), I'm just thinking of whether something similar could exist in a more permanent form.
kchoudhu 11y ago
I'm having a bit of a laugh here trying to imagine what an enterprise version of Snapchat might look like.
- mathattack 11y ago
  It could be very useful. People may be more willing to share opinions if they know it won't be kept on record forever.
  - entee 11y ago
    Possibly also illegal though from a document preservation perspective.

randomname2 11y ago

The private valuations are not really comparable to the public market caps, given the conditions these private investors get. Maybe I'm being cynical, but given the exuberance of public tech stocks, and the bubbliness of the tech market in general, some may be impatient to cash out. Also see: "greater fool theory"

dataker 11y ago

Probably makes sense from a founder's perspective, but investors eventually need an exit( long-term or not).

foobarqux 11y ago

IPOs are now less necessary for raising funds than they are for cashing out shareholders.

JonFish85 11y ago

The biggest thought that comes to mind is that these companies don't actually make money. If Snapchat was pulling in the $33bn in revenue that Mars Inc. pulls in, then I imagine they would be much more likely to keep it private. But these companies' valuation is based on the idea that they have a huge market, and MAYBE they'll make money someday. Generally I believe that when these social network companies go public, their price-to-earnings is insanely high, meaning that in order for investors to receive value, they'd have to either hold the stock for a very long time, or be confident that the revenue will ramp up quickly enough to start making money very soon. Ultimately, a VC has taken the risk that the company can be sold to "someone else", whether acquisition or IPO. That's when they see the company as having it's maximum value to them. They're not in the business of creating a sustainable business, they're in the business of taking something small and making it big. Once they get a valuation that they feel can maximize their investment (either IPO or acquisition), they're happy to lock in their money and move on. Take Zynga or King for example. They were revenue machines when they were close to IPO. But investors knew the money-train was coming to a close, so they sold out and locked in their massive gains. The companies were very lucrative for a short period of time, so that drove up their IPO price. But VCs needed to get out before the popular games took a dive, which they inevitably did, and the investors got out at excellent valuations. If they had kept the company private, they wouldn't have had nearly the return they had.

mikeryan 11y ago

At some point the investors need a way to get their money out. There's not a lot of incentive for the company outside of the pressure the board puts on.

Lukeas14 11y ago

For some companies, an IPO is more about their financial structuring than the dollar investment. Legally a private company can only have a maximum of 500 individual stock holders before they have to make public financial disclosures. This was part of the reason why Facebook decided to IPO even though it definitely didn't need the investment.

macspoofing 11y ago

>I'm curious given these kinds of deals, what the point of an IPO is anymore 1) More capital/money. 2) Pressure from existing investors who want to cash out.