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"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reve

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is going public at a modest valuation. But if the company stays private, the employees are forced to go double or nothing. Either the company continues to grow, and there is a Google or Facebook like outcome with hundreds of employees getting rich. Or the company goes sideways and the stock ends up diluted to nothing. Furthermore the general public would have shared in the growth in the 1980's, but now most of the value has accrued by the time the company goes public. So for the few that make it, all the wins go to the founders and VC's, rather than having the general public get in early.

dcurtis 11y ago
In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.
- chollida1 11y ago
  > In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached. Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"
npkarnik 11y ago
Many highly valued tech companies do secondary offerings to allow average employees to get some liquidity. Sure, the general public may not "get in early" but M&A is far less risky for both VCs and general investors. If mostly "sure things" make it to IPO, it's far less likely for the general public to be exposed to the meltdowns that made the headlines circa 2000-2001. The flipside is that until the startups IPO, the VCs and founders are exposed to most of the risk.
- thorfish 11y ago
  Yeah, but as I understand it, employees can usually only sell about 20% or so in secondary offerings. Six months after the IPO, they can liquidate 100%.
  - foobarqux 11y ago
    They also don't get a real market price for their shares.
  - nathantotten 11y ago
    Good point. I wonder what the numbers are on how this affects the returns for employees.
  - mahyarm 11y ago
    Usually it's more like %10 of vested earnings, which ends up being something like %2.5-%5 of their stock.
pkaye 11y ago
I see it as the cost of forming a startup is much lower now so they can stay private longer. Combined with VC companies and angel investors flush with money, they are keeping the companies private longer to capture more of the gains. Then there are established companies who want to stay relevant who throw money at startups with no profit in sight but cool technologies. My guess is that in the end, problems will come when the established companies slow down in acquisitions and the VC companies and angel investors get tired of startups which can't show profit.
- thorfish 11y ago
  I see it as the cost of forming a startup is much lower now so they can stay private longer. I don't think that is true. Sales and marketing is still very expensive. SaaS needs a lot more cash investment than traditional software, since you are only making the money back gradually. Many of these unicorn software companies are raising a half dozen rounds. Also, the easier it becomes to write software the for the internet, the more a startup has to do. Yahoo! could get to a breakout stage just by having an HTML page full of links. That's not going to cut it these days. So I'm not sure overall if starting a company is much cheaper, even at the early stage.
  - pkaye 11y ago
    I don't agree. Lots of startups don't have sales and marketing in the early stages. The grow through word of mouth or iterate/pivot to find something that becomes a hit. Somebody like Yahoo would need to buy and maintain a lot of servers to scale up but now with cloud computing, you can grow quite a bit with Amazon AWS until you implement your own infrastructure.
    - spotman 11y ago
      would love to hear examples of successful startups that did not do any marketing. especially ones that are tech/Internet startups. also - while AWS can make infrastructure convenient to scale up, rarely is it cheaper. It certainly can feel cheaper in the beginning as its pay-as-you-go, but averaged out over N years it's not. AWS also has reserved pricing to aid with this, but most startups are not in a position to commit to either real hardware or 3 year contracts up front.
ChuckMcM 11y ago
And the more interesting follow up, which I really hadn't thought about, was that the value is being returned privately. That explains for me why hedge funds are investing in private companies. If these companies then develop a process of 50 / 50, where if you're in at Stage X then at Stage Y you can sell 50% of your holdings and buy in at your pro-rata share. Then you can invest, get returns, and never have the company go public (caveat the number of investors rule).
- sytelus 11y ago
  But is that the right strategy? Going public sure forces you to reveal lot of things you rather not and bring in expensive SAP and KPMG guys to do SO. But considering so much "free" money flows in during IPO, wouldn't it be good strategy to go public if you can?
glaugh 11y ago
I think there's a lot of truth to that, but the one thing it leaves out of the analysis is the opportunity to exit via acquisition. I don't have a sense of what proportion of companies that might previously have had an IPO would in recent times get acquired instead. I'd be surprised if it fully made up for the effect you describe. But I also imagine acquisition is more possible now than in the past since you now have a lot more big tech incumbents with cash to buy other companies with (e.g., who would have bought Instagram in 2000?).
nostromo 11y ago
It's another case of the cure (Sarbanes-Oxley) being worse than the disease (another Enron).
- Moshe_Silnorin 11y ago
  >Sarbanes-Oxley We'll never be rid of it. Like copyright law, It's crystallized into a self-perpetuating incentive structure. Everyone knows it's stupid, no individual has much incentive to try and change things. The ability to restore to a previous state is essential in the design of institutions, one lacking in our current governments. This is a very hard problem, but I'm hopeful prediction markets may be able to help with this in future governmental structures.
  - javert 11y ago
    Yeah, but prediction markets are basically illegal, because---again---government regulation. Prediction markets are so vastly powerful, both as a financial tool (hedging) and an information tool, that people would be screaming bloody murder if we already had them and then they were taken away.
    - Moshe_Silnorin 11y ago
      I agree, the way American government is now, I don't think there is much hope for the legalization of prediction markets. But new governments are formed from time to time and there are quite a few nations in the world so hopefully someone else legalizes them.
      - javert 11y ago
        When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.
bane 11y ago
I'd also add that until the public validation of an IPO and some time trading on the markets, tech companies have just become investment "tokens" that hold arbitrary amounts of wealth as "valuations" that make no meaningful sense. M&A efforts are simply capturing this fanciful valuation and hoping they can sell this token off in some way for more to somebody else. It's like putting $1 in a sock and under your mattress, claim it's worth $1million and never letting up on that claim by trying to sell your "money sock 1.0" on the open market. You might even be able to get somebody to buy your "million dollar" sock and they'll go and claim to everybody that it's worth this ridiculous amount (or even more ridiculous they'll trade you their "million dollar" hat for your sock so you can both claim private market validation). Then if the hype lives long enough, they can then sell it for $1.2million to another private buyer, or tear it up and sell it off in threads for even more "buy a genuine thread from the million dollar sock! only $1,000!". It's almost completely divorced from reality.
- GuiA 11y ago
  Yes, but you can sell info about people who have worn the sock to advertisers.
  - bane 11y ago
    If you're not paying to wear the socks, you may be the product.
    - kenrikm 11y ago
      But the sock has revenues, even if it's a red sock that has no hope of turning black.
- pbreit 11y ago
  If you're able to sell a sock for $1m then, yes, it's worth $1m. But I strongly suspect that you could not. Which is why the analogy is flawed.
  - hueving 11y ago
will_brown 11y ago
The playing field in the private market should be leveled with the JOBS Act that will allow equity crowdfunding. Though I think the rules were supposed to be created a year after the law went into effect, and it's about 3 years later. While in theory such a system should bring a little democracy/meritocracy to these future unicorns of tech (no longer shall VC money/equity dictate winners) in practice I think we will see snake oil salesmen and big marketing firms ruin the trust for everyone.
- bsbechtel 11y ago
  Keep in mind that putting money into a company is only half the equation. Getting it back out is the other half. The JOBS Act is saying anyone can invest, but those small time investors will now face the same risks employees at start ups that don't IPO face right now - their stock is worth essentially nothing. This is also the same problem facing 2/3rds of our economy that are small businesses. They can't get access to financing for R&D because R&D doesn't produce immediate cash flow to service debt, and equity investors will never get their money out of a small business.
autokad 11y ago
thats very interesting, I never thought of it that way but yeah its kind of true. many companies now all the money is already made before the IPO
brc 11y ago
I would argue the point of Sarbox was to squish the IPO market. Not an unintended consequence at all. It was done with the bigger picture of restoring retail confidence in the market. That could only be achieved by damping the oscillations. I agree it's been a bad thing. What is odd to me is that I exepcted IPO activity to take off in a different jurisdiction, like London or Toronot or somewhere. That hasn't happened really. Instead it's just a case of some companies getting picked off by bigger ones, a couple of big home runs, and the rest sputtering along making a but if money but soaking up investors time and patience.
Animats 11y ago
"It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley." No, it's a consequence of low interest rates. "Private equity" is mostly borrowed money. Think "leveraged buyout", not "all-cash deal". Here's a list of the top 10 private equity lenders for 2011.[1] #1 is Bank of America. Back in 2000, 1-year Treasury bills were paying around 5.11%. Today they're around 0.26%. Debt financing looks much more attractive with today's low, low rates. [1] https://www.preqin.com/blog/101/4683/top-10-pe-debt-financers-2011 https://www.preqin.com/blog/101/4683/top-10-pe-debt-financer...
- javajosh 11y ago
  So the rich borrow cheaply, invest the money, and profit?
  - azernik 11y ago
    Yyyyup. Which, by the way, is the entire point of the Fed reducing interest rates - to stimulate growth by encouraging increased spending (including investment) of cheaply-borrowed money.
  - blazespin 11y ago
    Those who dedicated their life to capital allocation, yes, they are allowed to borrow cheaply and profit. I thought about going into this in university, but there is something very soul draining about it. Too bad I discovered warren buffet later in life. More power to these folks. In fact, we shouldn't even be taxing them. We should just start taxing things like mansions, yachts, and super cars by 5x.
    - JDDunn9 11y ago
      There's no logical reason not to tax investors. They aren't unique butterflies that make the economy flourish. Investment is just one component of a functioning economy. So is education, saving, consumption, etc. Too much focus on one is not a good thing. This is one of the reasons we have so many investor bubbles. Also, the wealthy have no other options than to invest their money. What else would they do with it, put it under their mattress? The ROI is the only incentive they need. All this does is increase income inequality.

dcurtis 11y ago

In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.

chollida1 11y ago
> In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached. Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"

npkarnik 11y ago

Many highly valued tech companies do secondary offerings to allow average employees to get some liquidity. Sure, the general public may not "get in early" but M&A is far less risky for both VCs and general investors. If mostly "sure things" make it to IPO, it's far less likely for the general public to be exposed to the meltdowns that made the headlines circa 2000-2001. The flipside is that until the startups IPO, the VCs and founders are exposed to most of the risk.

thorfish 11y ago
Yeah, but as I understand it, employees can usually only sell about 20% or so in secondary offerings. Six months after the IPO, they can liquidate 100%.
- foobarqux 11y ago
  They also don't get a real market price for their shares.
- nathantotten 11y ago
  Good point. I wonder what the numbers are on how this affects the returns for employees.
- mahyarm 11y ago
  Usually it's more like %10 of vested earnings, which ends up being something like %2.5-%5 of their stock.

pkaye 11y ago

I see it as the cost of forming a startup is much lower now so they can stay private longer. Combined with VC companies and angel investors flush with money, they are keeping the companies private longer to capture more of the gains. Then there are established companies who want to stay relevant who throw money at startups with no profit in sight but cool technologies. My guess is that in the end, problems will come when the established companies slow down in acquisitions and the VC companies and angel investors get tired of startups which can't show profit.

thorfish 11y ago
I see it as the cost of forming a startup is much lower now so they can stay private longer. I don't think that is true. Sales and marketing is still very expensive. SaaS needs a lot more cash investment than traditional software, since you are only making the money back gradually. Many of these unicorn software companies are raising a half dozen rounds. Also, the easier it becomes to write software the for the internet, the more a startup has to do. Yahoo! could get to a breakout stage just by having an HTML page full of links. That's not going to cut it these days. So I'm not sure overall if starting a company is much cheaper, even at the early stage.
- pkaye 11y ago
  I don't agree. Lots of startups don't have sales and marketing in the early stages. The grow through word of mouth or iterate/pivot to find something that becomes a hit. Somebody like Yahoo would need to buy and maintain a lot of servers to scale up but now with cloud computing, you can grow quite a bit with Amazon AWS until you implement your own infrastructure.
  - spotman 11y ago
    would love to hear examples of successful startups that did not do any marketing. especially ones that are tech/Internet startups. also - while AWS can make infrastructure convenient to scale up, rarely is it cheaper. It certainly can feel cheaper in the beginning as its pay-as-you-go, but averaged out over N years it's not. AWS also has reserved pricing to aid with this, but most startups are not in a position to commit to either real hardware or 3 year contracts up front.

ChuckMcM 11y ago

And the more interesting follow up, which I really hadn't thought about, was that the value is being returned privately. That explains for me why hedge funds are investing in private companies. If these companies then develop a process of 50 / 50, where if you're in at Stage X then at Stage Y you can sell 50% of your holdings and buy in at your pro-rata share. Then you can invest, get returns, and never have the company go public (caveat the number of investors rule).

sytelus 11y ago
But is that the right strategy? Going public sure forces you to reveal lot of things you rather not and bring in expensive SAP and KPMG guys to do SO. But considering so much "free" money flows in during IPO, wouldn't it be good strategy to go public if you can?

glaugh 11y ago

I think there's a lot of truth to that, but the one thing it leaves out of the analysis is the opportunity to exit via acquisition. I don't have a sense of what proportion of companies that might previously have had an IPO would in recent times get acquired instead. I'd be surprised if it fully made up for the effect you describe. But I also imagine acquisition is more possible now than in the past since you now have a lot more big tech incumbents with cash to buy other companies with (e.g., who would have bought Instagram in 2000?).

nostromo 11y ago

It's another case of the cure (Sarbanes-Oxley) being worse than the disease (another Enron).

Moshe_Silnorin 11y ago
>Sarbanes-Oxley We'll never be rid of it. Like copyright law, It's crystallized into a self-perpetuating incentive structure. Everyone knows it's stupid, no individual has much incentive to try and change things. The ability to restore to a previous state is essential in the design of institutions, one lacking in our current governments. This is a very hard problem, but I'm hopeful prediction markets may be able to help with this in future governmental structures.
- javert 11y ago
  Yeah, but prediction markets are basically illegal, because---again---government regulation. Prediction markets are so vastly powerful, both as a financial tool (hedging) and an information tool, that people would be screaming bloody murder if we already had them and then they were taken away.
  - Moshe_Silnorin 11y ago
    I agree, the way American government is now, I don't think there is much hope for the legalization of prediction markets. But new governments are formed from time to time and there are quite a few nations in the world so hopefully someone else legalizes them.
    - javert 11y ago
      When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

bane 11y ago

I'd also add that until the public validation of an IPO and some time trading on the markets, tech companies have just become investment "tokens" that hold arbitrary amounts of wealth as "valuations" that make no meaningful sense. M&A efforts are simply capturing this fanciful valuation and hoping they can sell this token off in some way for more to somebody else. It's like putting $1 in a sock and under your mattress, claim it's worth $1million and never letting up on that claim by trying to sell your "money sock 1.0" on the open market. You might even be able to get somebody to buy your "million dollar" sock and they'll go and claim to everybody that it's worth this ridiculous amount (or even more ridiculous they'll trade you their "million dollar" hat for your sock so you can both claim private market validation). Then if the hype lives long enough, they can then sell it for $1.2million to another private buyer, or tear it up and sell it off in threads for even more "buy a genuine thread from the million dollar sock! only $1,000!". It's almost completely divorced from reality.

GuiA 11y ago
Yes, but you can sell info about people who have worn the sock to advertisers.
- bane 11y ago
  If you're not paying to wear the socks, you may be the product.
  - kenrikm 11y ago
    But the sock has revenues, even if it's a red sock that has no hope of turning black.
pbreit 11y ago
If you're able to sell a sock for $1m then, yes, it's worth $1m. But I strongly suspect that you could not. Which is why the analogy is flawed.
- hueving 11y ago

will_brown 11y ago

The playing field in the private market should be leveled with the JOBS Act that will allow equity crowdfunding. Though I think the rules were supposed to be created a year after the law went into effect, and it's about 3 years later. While in theory such a system should bring a little democracy/meritocracy to these future unicorns of tech (no longer shall VC money/equity dictate winners) in practice I think we will see snake oil salesmen and big marketing firms ruin the trust for everyone.

bsbechtel 11y ago
Keep in mind that putting money into a company is only half the equation. Getting it back out is the other half. The JOBS Act is saying anyone can invest, but those small time investors will now face the same risks employees at start ups that don't IPO face right now - their stock is worth essentially nothing. This is also the same problem facing 2/3rds of our economy that are small businesses. They can't get access to financing for R&D because R&D doesn't produce immediate cash flow to service debt, and equity investors will never get their money out of a small business.

autokad 11y ago

thats very interesting, I never thought of it that way but yeah its kind of true. many companies now all the money is already made before the IPO

brc 11y ago

I would argue the point of Sarbox was to squish the IPO market. Not an unintended consequence at all. It was done with the bigger picture of restoring retail confidence in the market. That could only be achieved by damping the oscillations. I agree it's been a bad thing. What is odd to me is that I exepcted IPO activity to take off in a different jurisdiction, like London or Toronot or somewhere. That hasn't happened really. Instead it's just a case of some companies getting picked off by bigger ones, a couple of big home runs, and the rest sputtering along making a but if money but soaking up investors time and patience.

Animats 11y ago

"It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley." No, it's a consequence of low interest rates. "Private equity" is mostly borrowed money. Think "leveraged buyout", not "all-cash deal". Here's a list of the top 10 private equity lenders for 2011.[1] #1 is Bank of America. Back in 2000, 1-year Treasury bills were paying around 5.11%. Today they're around 0.26%. Debt financing looks much more attractive with today's low, low rates. [1] https://www.preqin.com/blog/101/4683/top-10-pe-debt-financers-2011 https://www.preqin.com/blog/101/4683/top-10-pe-debt-financer...

javajosh 11y ago
So the rich borrow cheaply, invest the money, and profit?
- azernik 11y ago
  Yyyyup. Which, by the way, is the entire point of the Fed reducing interest rates - to stimulate growth by encouraging increased spending (including investment) of cheaply-borrowed money.
- blazespin 11y ago
  Those who dedicated their life to capital allocation, yes, they are allowed to borrow cheaply and profit. I thought about going into this in university, but there is something very soul draining about it. Too bad I discovered warren buffet later in life. More power to these folks. In fact, we shouldn't even be taxing them. We should just start taxing things like mansions, yachts, and super cars by 5x.
  - JDDunn9 11y ago
    There's no logical reason not to tax investors. They aren't unique butterflies that make the economy flourish. Investment is just one component of a functioning economy. So is education, saving, consumption, etc. Too much focus on one is not a good thing. This is one of the reasons we have so many investor bubbles. Also, the wealthy have no other options than to invest their money. What else would they do with it, put it under their mattress? The ROI is the only incentive they need. All this does is increase income inequality.