
The End of the IPO as We Know It? - apsec112
https://marker.medium.com/the-end-of-the-ipo-as-we-know-it-85b7220d67b1
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Lazare
I would summarise this post as:

"Public markets didn't like a few bad Softbank backed IPOs. This clearly is
_not_ because only Masayoshi Son loves giant bonfires they can shovel cash
into, but instead means that public markets are just horribly broken, and
everything we think we know about finance, economics, and the market is
wrong."

After listing a bunch of loss-making stinkers (Uber, Lyft, Peloton, Pinterest,
Caspar) we get the line:

> How is it that the hottest growth companies have stumbled out of the gate?

If you have to ask the question of why public markets might not think a
company whose business strategy is _mailing people mattresses below cost_ is
worth a billion dollars, then really, you're not going to understand the
answer.

Also, note this:

> And B2B player Zoom, the videoconferencing software company, which had a
> juicy pop of 72% on its first day of trading, has seen its fortunes seesaw,
> falling from a high of $102 to roughly $88 at press time, even as the
> broader market, especially the tech sector, has been on a tear.

Zoom is one of the only _actual_ profitable companies discussed, but the
author tosses them into the list of disasters like WeWork. But let's unpack
that: They IPOed at $36 a share, and they're down to $88, and the lesson here
is "oh man, public markets hate startups"? ...like, really?

The entire article is just one long "wow, profitable companies are valuable, I
wonder what deeper lesson entirely unrelated to profitably we can draw from
this if we ignore the obvious answer".

> But as they watch the public drubbing suffered by the likes of Adam Neumann
> [...] founders are more apt to see themselves as mistreated and even
> harassed by various gatekeepers

If you are a founder, and the person you feel the closest kinship too is _Adam
Neumann_ , you probably don't deserve to be treated very well by the markets.
The issue is _you_.

What a infuriatingly obtuse article.

~~~
mikekchar
While I agree with you, I wouldn't be terribly unhappy if IPOs changed in the
future. I'm actually quite worried that, as you say, people are looking at a
company that is nearly 3x its IPO a year later and calling a flop. But I'm
even more worried that a company with a value of $1 billion (after a $100
million series D) 2 years before IPO can have a market cap of ~$10 billion one
year after an IPO -- and it's still seen as a failure by somebody. Because
that's a bloody miracle.

I'm not just worried about that, though. If we accept these numbers (which I
mostly got from Bloomberg and Wikipedia), we're saying that a $100 million
infusion of cash propelled the company to $10 billion market cap in only 3
years. And looking at the balance sheet: $330 million revenue in 2019. Net
income $7.58 million. Total assets: $355 million. Total liabilities: $202
million. Annual operating expenses: $51 million.

So I'm seeing a company with a $10 billion market cap, with earnings of $7
million a year, and about 2 years worth of operating expenses in assets after
liabilities are taken into consideration. So I'm wondering what fueled that
10x increase in 3 years. Because _on paper_ I don't think I'd be touching it
with a 10 foot pole at it's price. It seems like only its promise to be the
next Google or Amazon is what's keeping the price high.

So that's what worries me about IPOs. People are expecting massive multipliers
and even when they get them, some people are upset. But these massive IPOs
also seem to be super fragile (at least in principal -- I have no idea if Zoom
will be the next big thing or not). It doesn't seem like they are doing
anything near the business necessary to justify their market positions. So I
worry that someday the emperor will notice he has no clothes...

~~~
shrimpx
I never understand this line of reasoning. It amounts to lamenting that the
market is not predictable (accurately reflecting “real value”). If market
positions were merely a function of “how the business is doing” then who needs
a market? My point is a market has a huge amount of speculation in it.

~~~
mikekchar
That's not really what I'm saying. I'm saying that there is _too much_
speculation. The bets are too big. I don't care one lick if people lose their
shirts. The problem is that if we put a lot of money into ventures that have a
very low probability of success, then that money is not at all efficient. The
idea that you have to bet big to win big could very well guide us into
recession (or worse). It wouldn't be the first time it has happened ;-)

~~~
pas
How much is too much? There are many regulations protecting people from
investing accidentally too much. What's wrong with people with billions
putting it wherever they thing might potentially make some more?

~~~
jfengel
"Too much" is that there's literally only so much value out there to buy.
Publicly listed companies will earn $X over the next year or ten years. Buying
a stock buys you a piece of that. If so much money flows in that your share of
$X is worth less than some other investment, you're making a bad choice. The
flood of money implies that you can get rich by selling your piece of $X to
somebody else, but that's not real money. It's just a pyramid scheme that will
collapse.

There's always genuine uncertainty in the value of $X and even more
uncertainty about how it will be distributed, so there's room for real
speculation. But "too much" is reached where even a broad index fund would
perform poorly because the price is bid up by speculation rather than
investment.

~~~
pas
Buying a stock gets you expected earnings. Of course a lot of people bet that
real earnings will grow a lot. Why do we have to tell them that they are
making a bad bet?

> If so much money flows in that your share of $X is worth less than some
> other investment, you're making a bad choice.

Or not. Who knows. If it were that easy to know people wouldn't do this.
Stocks are fickle, but liquid and with almost no transaction price. Buying and
setting up a stop loss is easy. (Even if placing the limit order has a fee.)

It's not a pyramid scheme. At best you might call it a pump-and-dump. But
what's the problem with that? The people buying the share for its expected
spot price rise are not dumb. They are just rich fools, with bad timing,
because were they the first ones to buy and later sell, they would be very
rich fools.

Who cares how an index fund performs. If the price signal gets so bad people
will stop pumping money into the stock market. Just let them play their
idiotic games. It's just froth. Sloshing back and forth.

The underlying economy is solid, it grows at a steady pace (minus the
occasional recessions).

The problem is of course that the benefits of that real growth take an awful
long time to trickle down into meaningful changes due to ... sociopolitics.

~~~
jfengel
I think I may have appeared more anti-stock than I am. I'm an investor myself,
and was just trying to give my opinion on your question about "how much is too
much"?

My intention was to point out the limits. The stock market can only hold so
much money (for a given set of companies). Precisely how much, I can't say,
and of course it's constantly growing (both from existing company growth and
adding new companies.

In particular I can't say if we're beyond that point or not. I do think we're
getting close: the P/E ratio of the S&P 500 is over 23 at the moment. That
corresponds to getting 3% interest on an investment. That's a crude measure,
of course, but an indicator that new money coming into the market might be
better invested elsewhere.

~~~
pas
I haven't read it as anti-stock :)

In theory the market should/will optimize, maximizing opportunities, which in
turn basically turns everything into the same risk-weighted-yield-wise. (After
all, if there's enough information, depth, participants, liquidity, low
transaction costs, then people will go after whatever market niche they may
find.)

So, yes, there's a limit of how much money should be in stocks, but my
belief/theory is that the investing market is very good at figuring this out
(in the grand scheme of things).

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stopads
Everyone is getting tired of the bullshit industrial complex that so many
companies seem to tread in. If you have zero plans for profitability, zero
plans for sustainability, zero ideas for actually creating a new useful
product or service then you shouldn't be forcing a semi-fraudulent IPO through
the door that is s transparent cash grab for the stakeholders.

This is a good thing. The number doesn't always need to go up. Especially when
it's all bullshit.

~~~
gruglife
But that’s the great thing about the market, there still have to be buyers and
the public is getting wise about these “semi-fraudulent” IPOs (see WeWork).
This is exactly how the market is suppose to work.

~~~
Retric
Markets can’t really get smarter over time as they represent all investors.
From young teenagers to experienced institutional investors. You just get
cycles of people learning the same lessons over again, but that doesn’t last
long term just at best a few decades.

~~~
mantas
That's not how evolution works. The new generations learns aggregated
knowledge of previous generations really fast.

Babies don't have to invent their toys from scratch, huh?

~~~
rbrtl
That also isn't how evolution works...

You're conflating evolution with education. Education also varies from one
generation to the next as the educators learn from their own experience, or
are imposed upon by government in curricula and standardisation.

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Gonzih
Article provides really some terrible examples of IPOs that failed. All of
those companies were unable to deliver revenue even close to what were asummed
during private investement rounds. System is not broken and it punishes
disfunctiinal businesses pretty well.

~~~
kovek
You write that the system punishes the businesses. Does it also punish those
who were lying in their work towards the IPO?

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kludgekraft
Late stage VC and PE went after sky-high valuations, startups didn't see the
need to go IPO for much longer than the yesteryears. At some point, they run
out of money and IPO is their only option to raise afresh. VC/PE must correct
this by bringing their valuations inline with the IPO market and be just a
stepping stone and not the ultimate step in the fundraising market

~~~
bradleyjg
That rather depends on who's right and who's wrong, doesn't it? If late stage
VC and PE are by and large better at understanding the net present value of
all future cash flows than the public markets, the best way forward is for
them to find a way to provide liquidity for founders, employees, and earlier
stage investors other than going public. Lowing valuations instead would be
leaving money on the table for all those existing stakeholders.

~~~
kludgekraft
Completely agree. But I'm guessing today's late stage VC and PE still think of
IPO as the ultimate 'exit'. If the investors sign up to provide enough
liquidity or even providing partial exits to founders/employees, they'll have
provided the company enough leeway to turn profitable.

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Traster
Does anyone else find it quite funny that the article about the Renaissance
IPO Index is literally headlined:

>2019 IPO Market: Better Than the Headlines

and literally says:

> beyond these headline-grabbing disappointments, the IPO market had a mostly
> good year.

If you're going to write a boring cherry-picked article making the case the
sky is falling, here's a tip: Don't literally cite research that says "The
data says the sky isn't falling even though people are writing articles about
it"

Shouldn't we be talking about the opposite of this article. If IPOs are not
making great returns, shouldn't that indicate VCs are dying, not IPOs? Of
course it doesn't matter because IPOs are fine and so are VCs.

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throwGuardian
Not the end of the IPO - end of private cabals who shake hands and sermon a
10X P:E price on a comparable stock/product currently public at 1X P:E.
Despite the jowly greed of influential VCs et al. they cannot bend reality

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peter303
The majority of unicorn valuations are bogus- small slices purchased at
astronomical prices to make the valuation appear an order of magnitude higher.
A true stock offering, whether using conventional IPO banks, or creative
methods like Google did, obtains a more accurate valuation.

------
duxup
The lack of disclosure...or worse Spotify's argument makes me skeptical of
this alternative route.

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2J0
The primary buyers of newly issued stocks are precisely who have been forced
into buying artificially supply constrained private shares with in many
professional opinions made available to me under assurances of my probity,
unlawful restraint and restrictions and highly unnatural interpretations of
GAAP. I recently received a three word share report from a former limited
partner and it read "Out Of Expletives ". Okay six words or three plus one
acronym for "E&EO" ended the message.

Price increases are macro driven or trading and execution or business
distribution factor sensitive appreciation. There's no real economic growth. I
am presently held from advancing my own business because such a incredible
burden of anecdotal evidence that's my direct experience has accumulated until
I realised only this year that I am duty bound to account for and attempt to
report the findings however that may be possible, before committing to a major
investment. I owe my partners my experience and that's become a consideration
under my employment contract as my responsibility to so do. At least I am sure
I will not be imprudent if I do spend the necessary time in writing. Health
forced me into a prolonged period of sabbatical and I am changed by my
experiences. I genuinely fear for a complete paralysed economy and not even
paralysis is correct nomenclature because that word implies a otherwise viable
body capable of resuscitation. I think we killed capitalism as we thought we
knew it and we have all become parasitic unknowingly and blind to the ways we
so became. I suffered memory loss from a head trauma and actually had to
somehow reboot my system for thought about every aspect of my life. My
business was all consuming to my near death by self neglect and the upshot is
I regained or just gained a humanity I cannot believe but know was horribly
diminished if not lost over almost thirty years pursuing a ridiculous ambition
without any rest. I never noticed the time passing but I was matrix style
patched in to the business world and ignorant of everything else. Learning
about business and economic opportunities from scratch in much needed normal
conditions instead of catapulted from a exclusive education has confronted me
with a sense of total terror at the frailty of our economic civilisation. Even
more frightening and yet optimistic I discovered that the communities of
computing nerds actually are most attuned to global risks and dangers. Which
means that the most important knowledge is altogether compartmented separately
from political potential for action. This isn't non obvious of course but I
think it's a different level of separation from forty years ago and now the
majority of logical arguments are happening apart from mainstream media and
society. Because every science is become just "tech news" as if they saw the
world of science through a Slashdot filter

~~~
anonuser123456
Someone working on an HN chatbot?

~~~
runawaybottle
Lol. Posts of this length scream ‘adderral just kicked in’. At OP, I hope you
are doing okay, recovery can be tough. Plus, you are probably mostly on point,
work on that conciseness though.

