

Ask YC: Is an IPO Alternative Needed? - steveplace

I've seen this idea going around for the past six months and I was curious about the feasibility/need for it. Currently there are barriers for companies to reach IPO (Sarbox, etc.) which in turn makes it much more difficult for a clean exit for early-stage investors.<p>So what has been suggested is to create a secondary market (see here: http://www.avc.com/a_vc/2008/08/a-secondary-mar.html) to help fill the widening gap between startup and IPO. This would in turn create some liquidity that would lead to less risk for founders and early investors.<p>Clearly there are some legal risks in actually creating a market. The only people that could participate would be accredited investors, and there would be some muddling with the SEC and possibly the CTFC.<p>I'm asking YC because the discussion doesn't seem to hit this demographic. What do you think?
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markessien
Investing money based off a future IPO is speculatory and is not good for the
economy.

Let me give an example - a lot of hollywood films are banked by people who
want to get a good return on their investment. If you are an investor and you
want to make money on your hollywood film, what you need to do is analyse the
market, find out what the biggest consumer market likes, take a look at past
hit films and create a derivate of that. If this type of movie factory turns
out mediocre films with profits in the 10-20 million range, then just churn
out a large number of them, and you'll make your money.

This type of speculatory investment means that the money tends goes in well
known technologies that offer a clear path to returns. The investors are going
to minimize risk as much as possible by avoiding experiment - and in my
opinion, we are at the moment when we should experiment the most.

A web app does not need investment, it has a clear path towards profitability
and costs can be kept very low. A robot building studio however, needs
investment. A shoe discounter needs investment.

When an IPO is the goal of a company, it changes the very nature of the
company - and it changes it for the worse. The company has to baloon its chest
out and thump on how good its doing, and to do that, it cannot afford to be
seen to fail in anything.

IPOs should become more difficult if anything, in my opinion.

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thinkcomp
No. What's needed (at least around here in Palo Alto) is companies that
actually make profits!

Also, Sarbanes-Oxley is not the reason companies aren't going public right
now...

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mtkd
The cost of listing and compliance is a consideration - listing can add $1m+
to your yearly costs.

It's a big reason many companies are considering de-listing at the moment -
with no liquidity in the market there are few reasons to stay on right now.

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mattmaroon
Yes. Lack of exit options discourages VC investment. I dont know if it's
"needed" but it would be a good thing.

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mtkd
The IPO market should come back pretty strong, possibly as early as later this
year - especially if interest rates remain low. With low savings rates there
will be a lot of cash people will be looking to invest and traditionally
people like to get a bit of it in to higher risk vehicles like start-ups.

Right now the issue is liquidity, all the funds have been sh---ing bricks for
the last few months - this chaos and panic needs to subside, then there needs
to be a few months stability, then there will be a trickle of new investors,
then will come a mad dash as people don't want to miss the next bubble.

One thing to consider at the moment is getting exposure to overseas funding -
look at setting up a joint operation in another country e.g. if you are
America look at Europe or Asia - having a joint operation will give you 2
places to seek funding and, if you are making any revenue, revenue in
different currencies - this way you hedge against your country being sluggish
coming out of the recession.

So my advice for starting up now is #think Multilingual#

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vaksel
companies can already sell part of their stake. i.e. craigslist has 25% owned
by eBay, and its a private company

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blackguardx
I didn't think that craigslist sold part of their company to ebay. I thought
it was a disgruntled employee that sold his private shares.

Craigslist doesn't like being part-owned by ebay. After all ebay sued
craigslist for diluting its ownership by granting more shares to new
employees.

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Retric
How are you going to deal with scams?

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steveplace
That's one of the legal hurdles. Theoretically, being an accredited investor
means that you have a lower probability of falling for a scam. Bernie Madoff
sort of proves that wrong.

There would have to be some form of financial transparency, but much more
simpler than what the current standards are for public offerings.

Also, scams do exist in the public markets. Throw a dart at any stock under 2
bucks and odds are you've found one.

