

Unshackle the Middle Class - sethbannon
http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class/

======
rayiner
I'm not sure Scott has the causation/correlation right on this, but the trend
away from taking companies public is troubling. I don't think the regulation
in this area is helping: Sarbanes Oxley is pretty draconian in its regulatory
burden, and I view things like "sophisticated investor" requirements with deep
distrust. I think they're an overly paternalistic solution to a non-existant
problem, or one that should be non-existant if Social Security was maintained
as the proper safety net retirement system it was intended to be. Enron
wouldn't have been such a disaster if all of those people had a solid
retirement from Social Security.

But I think there is something deeper and more structural than merely
regulatory burden. Public companies suffer from the agency problem. When
ownership is diffuse, that problem is more acute, and managers' interests more
easily diverge from shareholders' interests. This is true regardless of the
regulatory structure. That is to say, it's a fundamental economic problem
rather than an artifact of whatever regulatory system is in place. One of the
benefits of taking companies public later, if at all, is that ownership stays
concentrated during a longer period and owners have much more concentrated
influence on management.

There is another economic phenomenon in place, which is this: the economy is
awash in capital and companies don't need public capital. When there are hedge
funds with billions to throw around, and private equity companies who can
engage in billion dollar transactions, why do companies need to turn to the
public markets? If there is some profit to be made investing in the next
Microsoft, and a private fund can swing the necessary size of investment, what
purpose is there to resort to the public markets? Is it ever more efficient or
more effective to supply a given amount of capital via the public markets
instead of via some private investment Overregulation doesn't help this
problem, but it's also ultimately an economic phenomenon. Concentration of
wealth (there are a lot of new foreign oil/resources billionaires these days)
means more private entities that can raise the kind of money that previously
one could only raise in the public markets. Moreover, fewer opportunities for
investment means that private funds can meet the underlying economy's need for
capital, making public funding less relevant. Changing the regulatory
structure isn't going to change that dynamic.

~~~
Domenic_S
> _one that should be non-existant if Social Security was maintained as the
> proper safety net retirement system it was intended to be. Enron wouldn 't
> have been such a disaster if all of those people had a solid retirement from
> Social Security._

Hmm, don't know what you mean by this. As it stands, the safety net is working
-- nobody who worked a significant portion of their lives is living on the
street for lack of funds.

What SS does _not_ give is a retirement of the same quality as a rich person's
retirement, which should make sense on the face of it. Those Enron folks _did_
have a Social Security retirement, what they lost was the more lavish
retirement they had planned for themselves (nb: I'm not using "lavish" in any
derogatory sense).

SS _was_ intended to be a _safety net_ , not a golden parachute, so elderly
people didn't die freezing and starving in the streets. By and large, it has
accomplished -- and continues to accomplish -- this mission.

~~~
sageikosa
> SS was intended to be a safety net, not a golden parachute, so elderly
> people didn't die freezing and starving in the streets. By and large, it has
> accomplished -- and continues to accomplish -- this mission.

Now if we can just broaden the population pyramid widely enough (and
lucratively enough) to support the great height of the future retirees, we can
kick that can so far down the road even we 40-somethings won't have to worry
about the scheme's stability.

------
swamp40
There is no more "middle class". Trust me, I grew up there, and it is gone,
gone gone.

It has nothing to do with the fact that they can't/couldn't buy into stocks
while the getting was good - and crowdfunding is nothing more or less than a
new type of lotto ticket for them.

The sophisticated investors have been putting one over on the new,
unsophisticated money for a _long_ time. It has always been that way, and
always will be. Still not responsible for the demise of the middle class.

$18,000 a year health insurance for a family of four, homes that cost 10x your
annual wage, companies that toss 40+ year olds with 20 years loyalty into the
profit volcano, student loans of $150K+ that can't be discharged with
bankruptcy and suck you down till the day you die, nursing homes that burn
$4K/month for 20 years or until you run out of assets...THAT's what killed the
middle class.

~~~
Domenic_S
The middle class forsook classic middle-class values (free time, time with
family, a small home in the 'burbs, seeing raising kids as something worth
your time, etc) to play the money game with the rich folk, and surprise
surprise, they're getting outplayed.

The only winning move is not to play.

~~~
intended
Thats very revisionist.

Lets take an average middle class person pre boom:

You are urged to take out a mortgage against your property because "House
prices have only gone up!".

Your banks are giving you great rates, "you'd be an _idiot_ to not take them.
We're giving it out to people with No Income, No Job or Assets! We made the
cover of Time with the way prices are going up!"

Everything is rosy, and you would be remiss and getting behind if you didn't
take care of your future.

This is what people faced.

Do note - the Middle class isn't the one responsible for manipulating the
banking system or creating exotics to over leverage a housing bubble.

Nor are they the ones who are meant to be the educated sophisticated
investors.

Further the root of the issue, the housing bubble, required banks to actively
sell their products, all the while telling average people that its all turning
out great!

In essence: the Banks were derelict in their duty to be wary of leverage, and
abused the information asymmetry they enjoyed to convince customers to "Just
get a mortgage! You can get that new kitchen you always wanted".

I'd say the middle class got played.

~~~
Domenic_S
Obviously they did, that was my point. The middle class was (and continues to
be) manipulated. Instead of one-income households being typical, two-income
households are typical, and guess what happened to housing prices as that
started to happen?

------
HistoryInAction
Hmm, that used to be my theory, but the data doesn't seem to support it. The
rise in M&A as exit over IPO is the key metric I tracked in researching this.
The inflection point seems to be around two years earlier than the 2002
passage of SarbOx, c. 2000: [http://www.xconomy.com/national/2008/07/01/whos-
afraid-of-an...](http://www.xconomy.com/national/2008/07/01/whos-afraid-of-an-
ipo-everybody-at-the-moment/) and [http://smallbiztrends.com/2010/05/trends-
in-exits-from-vc-ba...](http://smallbiztrends.com/2010/05/trends-in-exits-
from-vc-backed-investments.html)

That said, the modern startup path does seem to structurally delay IPO, which
in the short term has resulted in 20-50% shaves of post-IPO public investors
and long term difficulties in adding value of the sort Garry mentions. Just
the causality basis isn't clearly SarbOx.

My current theory is the tilting of the king vs. cash towards king, as
epitomized by Zuck. It's possible that the market had started driving
companies towards private control to emphasize long-term growth over short-
term, quarterly stock performance, which drove the Enron-era scandals. The
collapse of the tech bubble might have had an impact, too. I concur with Bilal
that private audits are a more likely causal link than SarbOx, though that
could be our mutual gov't experience talking.

The JOBS Act created the IPO on-ramp (5 year SarbOx tapered exemption to
reduce costs of public compliance), as well as 10x expanding the Reg A ($5M →
$50M mini-offering cap) exemption to make it easier for startups to blend over
into public exposure. However, these non-standard pathways are little known to
both the investors that traditionally take early board seats and certainly
early-stage founders. It's also unclear how much of JOBS has even been
implemented due to continuing backlogs from political obstruction of Dodd-
Frank at the regulatory level.

------
asanwal
The post on A16Z can be characterized as "talking one's own book" [1]

While convenient to cherry-pick MSFT as an example, there was also countless
wealth lost in the dot com explosion (Webvan, eToys, Pets.com, etc)

Yes going public today is harder and that means companies generally have to
have a better answer to "how will you make money (profitably)" than they once
did. And that is probably a good thing.

It's also surprising that venture capitalists who have on the whole been
unable to beat the S&P500 think that the layperson investing in tech companies
would fare so well.

[1] [http://invest.yourdictionary.com/talking-one-s-
book](http://invest.yourdictionary.com/talking-one-s-book)

~~~
pmarca
Actually there's a good case to be made that Scott is talking against our own
book. We have entirely private money locked up for 13+ years, we benefit from
longer private holding periods. Whether that's good for the industry or the
country are separate questions.

~~~
absherwin
You can fix this without government intervention: Launch an a16z ETF. It could
help you as well because you could secure more favorable terms if you so
desired to offset the additional work.

This may yield higher returns to investors than they could otherwise receive
but, if so, it's only because they underestimate you. If the return on funds
invested with you is expected to be higher, the ETF's price will increase
until the perceived risk-adjusted return is equal to that in the market. What
causes the types of entities who receive above average returns through
nontraditional vehicles to achieve them is some combination of the the higher
cost of raising that money, more limited availability and social convention.

~~~
rscale
I was just thinking that this article could serve as the opening shot in an
effort to create venture vehicles for retail investors.

------
jakarta
Why would it be a good thing for the Middle Class to participate in IPOs which
are typically skewed against them? The IPO process is one in which you're
usually buying into a company whose price has been bid up considerably (these
are "Growth" stocks).

I think it's been proven that investors aren't adequately compensated for
taking on "growth" risk. The risk premia attached to "growth" doesn't
outperform passively owning the index over long periods of time.

Seems like all A16Z is trying to do is juice the IPO market for more liquidity
(from dumb money middle class investors) so that they can have an easier time
exiting when they're ready.

------
yummyfajitas
Eliminating decimalization is basically just a way to increase the profits of
market makers at the expense of retail and other long term investors. Minimum
increments are just a minimum wage law for high frequency traders.

I blogged about this last year:

[http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html](http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html)

[http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...](http://www.chrisstucchio.com/blog/2012/subpenny_rule_responses.html)

~~~
hudibras
Yeah, what a weird solution to his supposed problem.

If I saw a blog post titled "Unshackle the Middle Class," I would never in a
million years have guessed that one of the unshackling mechanisms was a return
to "IBM was up three-eighths, closing at sixty-seven and five-sixteenths."

------
tptacek
Most of the 96% of "investors" locked out of startup financing because of
accreditation rules would be very poorly served by startup investing.

Also regularly overlooked: the risks to startups of accepting funding from
underqualified investors. Equity is ownership. Ownership involves baggage. A
degree of trust and reputation protection undergirds both sides of startup
investing --- and we _still_ get occasional horror stories.

This is a situation that looks terrible in black-and-white numbers, but is
probably not as bad as it seems.

~~~
gjm11
> Most of the 96% of "investors" locked out of startup financing because of
> accreditation rules would be very poorly served by startup investing.

I basically agree, but will make the following observation anyway: the figure
that matters isn't what fraction of that 96% would be very poorly served, but
what fraction of _the ones who would invest in startups if they could_ would
be very poorly served.

Imagine a university that targets exceptionally smart students, and also is
only prepared to educate the very rich. (Or people whose surname begins with
the letter A. Or almost any other small group that isn't basically equivalent
to "very clever people".)

Then it will be true that (1) most of the people "locked out" by its rich-
people-only policy would be poorly served by studying there, but also that (2)
removing that policy would be a public benefit. (Assuming there weren't other
adverse effects, e.g. running out of money because they could no longer charge
such high fees.)

Going back to startup investing, it's at least plausible that most of the 96%
wouldn't choose to do it because of the high perceived risks, and that those
who would will be those who (1) are more risk-tolerant because they have more
money and/or (2) think they understand the market particularly well. Both of
these are probably correlated with being not so poorly served by startup
investing.

(They may well not be correlated _enough_ with that to make it a good idea,
which is why I basically agree with your point despite the quibbling. But the
quibble seems like a _generally important_ distinction whether or not it makes
a difference in this particular case.)

------
sthomps
I'm sure Scott is incredibly intelligent, and I have the utmost respect for
A16Z, but this is a moronic, self-serving, bubble-mentality post.

Firstly, you seriously think that the middle class is being eradicated due to
the fact that they can't invest in private market companies early enough? You
believe that most of the middle class has their investable cash at the ready,
but is being limited by IPO listings?

No one will argue that IPO times need to come down and we don't need
overvalued companies bloating up the stock market. But you are making the
presumption that the investable upside of private companies outweighs those
that are available in the public market. I'll take 10 shares of BRK any day
over some random Ponzi scheme tech startup, thx.

The average returns in the venture market underperform the S&P, which is not
constrained to purchase. And the S&P is not exactly everyone's first choice.
The issue is not access to private companies, it's access to 1) knowledge, 2)
investable cash and then 3) comparable opportunities.

If the issue is that getting access, both on the private and public side, to
liquidity sooner than we are currently seeing, I agree. But it has very little
to do with the middle class. The title is just linkbait.

~~~
muzz
Moreover, he believes that individual middle class investors will be able to
invest and compete for returns with venture professionals, whose returns as
you point out are not even as good as S&P 500 index funds.

------
bpatrianakos
This comes off as having been written in a bubble. What I hear is someone
arguing for their own self interest while using the Middle Class to gin up
support. Who wouldn't want to help the middle class? I'm sure the middle class
could be helped by more IPOs and less regulation to get more of them but I'm
also positive it'll help the wealthy even more.

How about this idea: lets start human trials of drugs earlier and require less
regulations before medications are released so we can help fight disease in
3rd world countries... And boost my Pfizer stock.

~~~
adventured
Pfizer benefits massively from a highly regulated, FDA controlled market, in
which only the big players can bribe their way through challenging approvals,
and only big players can afford the massive cost of creating new drugs +
bringing them to market fully.

Companies like Pfizer would be more likely to get toppled in a free market,
than not. As it is, their position is guaranteed by the FDA. They're a
government protected company, similar to Verizon or Boeing or Exxon. They roll
in the profits, and all they have to do is buy up smaller players that can't
hang around long enough to get approvals. The only threat to Pfizer right now
is massive European pharmas.

Pfizer loves the system exactly the way it is.

~~~
bpatrianakos
Okay, it's obvious I don't know much about how pharma companies work but
that's not the point. Let me put it another way: Lets do something that
greatly benefits me, marginally benefits you, and wrap it up in good will and
fuzzy feelings so you'll buy it.

------
dude_abides
More accurately, Sarbox is keeping 96% of Americans away from some crazy
volatility -- they are missing out on MSFTesque price appreciation as well as
potential bankrupcy of countless new public companies.

~~~
hga
Erm, have you guys heard of things like index funds? There are plenty of ways
to play the game and not take too much risk from one company.

~~~
_delirium
Have delayed IPOs really moved the needle on index funds? Not a rhetorical
question; it's possible they have. The markets being indexed are so huge I'm
somewhat skeptical that companies IPOing later will make any difference in the
returns of a passive index investor, though. And that's even assuming that
earlier tech IPOs would outperform the rest of the market; they might make the
index funds perform _worse_ if that's not true!

~~~
pmarca
Number of US public companies in 1997: 8800. Number today: 4100. Total stock
market index fund return adjusted for inflation between 1997 and today: 0%.

~~~
cj
How do you figure 0%? S&P 500 has increased 124% since 1997, not adjusted for
inflation.

Google finance graph: [http://bit.ly/1d7JXnm](http://bit.ly/1d7JXnm)

~~~
_delirium
Total returns would actually be almost double that, since that graph doesn't
include dividends, which historically account for just under half of total
returns.

~~~
adventured
A 2% dividend wouldn't even remotely come close to doubling the 124%x S&P
return since 1997. It's a nice booster shot, nothing more.

------
saosebastiao
On a scale of 1 to 10 of importance to the middle class, buying early into
IPOs is about a 0. Try housing prices, health care costs, stagnant wages, an
unpredictably irrational criminal justice system, and the all-but-inevitable
revolution that comes when today's young realize that it is stupid for them to
pay 30% of their salaries to support the retirement of an entire generation of
selfish people who politically could never make hard decisions and passed the
buck onto their kids.

~~~
wildgift
I just looked at the IRS site. The total of social security and medicare taxes
paid is 15.3%. Half is paid by the employee as a deduction from their wages.
Half is paid as payroll tax by the employer. The self employed pay the full
15.3%.

Where do you get 30%?

~~~
saosebastiao
It goes to 22% in 20 years for just SS/Medicare. But don't forget Medicaid, of
which a significant portion goes to the elderly and is likely to increase, and
can also be funded by additional state taxes. Californians especially are f
__*ed. I 'm not throwing out a vetted number, but given all the evidence 30%
doesn't seem unrealistic.

------
rkeller
Yes, this is a great point, lack of investment opportunities is clearly what
is holding back the middle class, not stagnant wages since the mid 70s in the
face of dramatic cost of living increases.

The housing collapse was fun and all but it's 2013, we need to be finding new
ways to increase financial risk for the failing consumer base.

------
hkmurakami
4% seems like an awfully high fraction of the population that would
theoretically have access to the best startup investment opportunities. Even
if you are an accredited investor, you simply don't have access to many of the
best performing hedge funds. They are simply closed to you. They don't want
your money.

I imagine there would be something similar in venture investing as well. One
such example would be the lack of personal contacts which prevents us from
investing at the best opportunities. It's debatable whether secondary
exchanges have enough liquidity and trading volume to make investing in them
pragmatic for anything less than the top 0.5% of the population with respect
to net worth. Even then, the lack of due diligence would be frightening.

~~~
pmarca
That's right. The percentage of individuals who have access to top decile
hedge funds, PE funds, and VC funds (and in all three categories the top
decline generates almost all the returns) is infinitesimal.

In practice, the investor base of those funds is a very small number of high-
net-worth individuals and families, plus a set of long-lived private
institutions such as Ivy League universities, multi-generational foundations,
and the like. Sovereign wealth funds (national treasuries of countries like
Abu Dhabi, China, Singapore, and Hong Kong) are becoming a larger part of that
base now. (Not the US though, the US has no sovereign wealth fund.) Some big
pension funds invest heavily in private equity but not as much into venture
capital or hedge funds.

The result is that the vast majority of retirement savings for normal
Americans -- whether managed by individuals or institutions -- can't access
compelling private market opportunities.

~~~
7Figures2Commas
1\. The list of top performing funds is _not_ static.

2\. The number of individuals and institutions invested in these funds who
actually understand the instruments these funds invest in (particularly in the
hedge fund world) is infinitesimally smaller. In other words, they couldn't
give you an _educated_ explanation as to why they invested, they simply got
lucky.

3\. Access doesn't guarantee returns. Sending your money to John Paulson in
2008 was very rewarding; if you invested in his PFR Gold Funds, you're down
more than 50% in 2013 alone. It is almost impossible to predict top
performers, particularly given point 2 above, and even if you do invest in a
top performing fund, at best your investment is likely to constitute a modest
portion of the total funds you have invested.

4\. Success is a double-edged sword for fund managers: it's possible to raise
a lot more capital (management fees, yay!) and launch new funds with ease, but
finding investment opportunities that can deliver meaningful results becomes
increasingly difficult as the size of the positions you need to establish
grows. In other words, by the time you're investing in a fund manager because
of past performance, there's a good chance you've already missed the big
gains.

5\. If you go back decades, particularly before 2008, hedge funds on the whole
provided significantly better returns than buying a major index. But in the
past several years, the S&P 500 has outperformed a number of indexes that
track hedge fund performance. When you consider fees, most hedge fund
investors have overpaid for underperformance the past several years.

6\. A number of investment banks are exploring the launch of retail investor-
friendly hedge funds with modest minimums (four-figures low in some cases),
and Goldman has already launched its own. This is seen as a growth market for
the investment banks so you can expect a lot of action in this space in the
coming years.

Compelling market opportunities, private and public, _do_ exist and the number
of financial products promising average Americans access to them has grown
considerably over the past decade. If I want a leveraged investment in
publicly-traded mortgage REITs, for instance, UBS has an exchange traded note
I can buy tomorrow. If I want to invest in investment-grade bonds denominated
in renminbi, there's an ETF for that. And so on and so forth.

The number of sophisticated (and sometimes incomprehensible) financial
products available to everyone will continue to grow but that doesn't really
matter: the number of individuals who will be invested in the right products
at the right time, and keep their gains over the long haul, will _always_ be
small. Put simply, access has very little to do with actually being able to
exploit compelling market opportunities.

------
runawaybottle
I think the systematic deindustrialization of America for the past 30-40
years, along with massive upward wealth accumalation (understatement) and
corporate infiltration of government, and worldwide governments for that
matter (globalosscilation I believe it's called), is what "shackled" the
middle class. And by shackled, I mean face fucked.

I'm going to have to respectfully disagree with the OP, and suggest that, no,
I don't think getting in on a few tech IPOs would have solved much.

------
vbuterin
Okay, I normally view arguments that regulation is hurting the middle class
very favorably, but these arguments are very sketchy for a number of reasons:

1\. Decimalization. The argument that the author is making is essentially that
"market makers are only interested in working at spreads higher than $0.01,
the minimum spread got reduced to $0.01, so market makets are not interested
and we have no market makers anymore." Let me restate that in non-financial
terms: apple farmers are only willing to sell apples for at least $10, before
the government and/or the farmer's market operator mandated that apples be
sold for at least $15, now the minimum price was reduced to $5, so we don't
have apples anymore. The fallacy is obvious: if there's no supply at $5, then
the price of apples will just go back up to $10 or $12 or $15 until there's an
equilibrium again. Same with market making and spreads; if no market makers
participate with spreads of $0.01, spreads will go up to $0.05, or $0.10, or
maybe even $0.23 and we'll end up with a better situation than we had before.

2\. Investment and public/private companies: here, the argument seems to be
that investing in an early seed round is basically a lottery, investing in
public companies is too late, so the middle class should invest in mid-cap
firms. That seems oddly specific - the one kind of investment that government
won't let us make is exactly the kind of investment that will finally make the
middle class prosperous again. The coincidence doesn't invalidate the
argument, but it does make it somewhat suspicious.

3\. The focus on IPOs as a route to wealth creation assumes that money is
generally spread out among the masses. This is increasingly false; the poorest
25% of Americans have less than zero net worth - that is to say, they
literally have less to invest than a starving Ethiopian. Deregulation should
focus more heavily on the processes of actually creating wealth rather than
investing it even if it is ultimately welcome in both.

And the fact that the article does not even mention SOX is just weird...

------
gsibble
While I'm not a fan of Sarbox, I don't think we can simply say that it's going
to single-handedly create this two-tiered system. It's not like every private
company that would have had access to public capital much earlier would have
grown 500x. Microsoft and Facebook are the outliers, not the norm. Not to
mention that Sarbox has nothing to do with what defines "accredited". Congress
can and has changed that definition at will, including raising the limits
necessary under the Obama administration due to Dodd Frank.

That said, Sarbox has had so many unintended consequences and resulted in so
much destroyed value that I do believe it should be curtailed in one fashion
or another.

~~~
hga
But you know why they had to use a company like Facebook to make their
example? Post-SarBox, which I think was more like the final nails in the
coffin vs. "single-handedly", only wild successes like it are able to do IPOs.

Legal and regulatory changes in the late '50s created the ecosystem that had
IPOs as an ideal exit, and this had a fantastic half-century run ending with
SarBox. And since then people are chasing 140 characters instead of flying
cars, to paraphrase Peter Thiel. So much destroyed value I'm sure it has more
than a little to do with their being no end in sight for the Great Recession.

~~~
muzz
They had to pick an outlier as the example, because venture capital returns as
a whole are so low that they would contradict the point the author was trying
to make. As a whole, VC returns have not beaten simple index fund investing
(S&P 500, etc).

------
foobarbazqux
> Delayed IPOs = 96% of Americans don't have access to wealth creation of
> investing in the fastest growing companies

48% of Americans don't own stocks at all.

~~~
jellicle
And most of the the rest own an absurdly tiny amount, like a few hundred
dollars in a 401k plan.

A venture capitalist trying to get legal changes made by putting on a faux-
populist claim of "it's for the middle class" is vomit-inducing.

------
rdp2013
What the vast bulk of Americans need is increased Social Security benefits.
401k's are a huge failure, pensions are nearly gone as an option for most.
[http://www.newamerica.net/publications/policy/expanded_socia...](http://www.newamerica.net/publications/policy/expanded_social_security)

------
nugget
I would say that about 96% of investors "buy high, sell low" because they
can't stomach real volatility. How many mom and pop investors dumped their
equity funds in the deepest depths of the recession? It's sad to think about.
Much more important than access to a hot IPO is having enough capital, and
enough knowledge, and perhaps enough reassurance, to hang in through the ups
and downs. If you can give people that and a few broad-based, low ER index
funds then they will do just fine.

~~~
steveklabnik
"The market can stay illogical longer than you can remain solvent."

------
pjmorris
It isn't overpriced housing, healthcare or the lack of jobs, but
decimalization that's holding the middle class back? No wonder people think
the elites are out of touch.

~~~
muzz
It's almost as if you are repeating what the middle class considers to be its
economic woes. Clearly, they cannot articulate their own economic woes-- it
requires a multi-millionaire venture capitalist to tell us what is holding the
middle class in shackles...

------
bmahmood
While not a whole solution, there were aspects of the 2012 JOBS Act that
sought to relieve some of the provisions of SOX on small-cap companies.

[http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...](http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups_Act#Provisions_of_the_bill)

Part of why there are fewer small-cap IPOs since 2000 has been due to the
required external audits on companies - on average costing $2M. This had
forced many companies to delay their IPO until they had the revenue to afford
the audits, at which point often they no longer needed an IPO (due to folding,
or selling).

The JOBS Act offered a series of exemptions for small-cap companies to be
exempt from such audits, though I'm not sure what stage of implementation the
SEC has taken it.

------
dangoldin
I took a quick look at tech companies that went public in the 80s up to today
(1) and it's not as simple as Scott makes it out to be. The annualized returns
are comparable now to what they were in the "glory days" due to companies like
Tesla and Netflix but the massive long term returns are going to be
harder/impossible to achieve.

Sure we may not have the chance for another Microsoft going public but there's
still opportunity, it just takes a bit more effort and moving money around
more frequently.

1\. The post itself is not 100% relevant but the table of returns is worth
taking a look at: [http://dangoldin.com/2013/05/24/investing-in-tech-
stocks/](http://dangoldin.com/2013/05/24/investing-in-tech-stocks/)

------
salimmadjd
Becoming more cynical, I'm convinced most laws are vetted by the powerful to
ensure their interests are preserved.

Why should we think Sarbox is any different?

~~~
pmarca
Supporting that, big established companies have gigantic legal, financial, and
regulatory staffs already in place to deal with new regulations like Sarbox.

New companies do not.

------
davidf18
The author is ignoring the cost side of the equation. Higher education (even
public), housing, and health care, have all significantly outpaced wages.
Public Universities have increased in price as states have basically stopped
funding them. Housing has increased because of artificial scarcity through
restrictive zoning regulations which prices the middle class out of markets.
Today's NYTimes describes of the last apartment listed for less than $600K in
Manhattan's West Village (a total of 408 sq feet for $595K).
[http://www.nytimes.com/2013/07/09/nyregion/amid-housing-
scar...](http://www.nytimes.com/2013/07/09/nyregion/amid-housing-scarcity-
many-buyers-are-going-home-empty-handed.html?pagewanted=all)

The dramatic rise in housing was through politics that restrict construction
that benefits existing landlords over the middle class.

Housing and public higher education costs can both be addressed by electing
public officials that are concerned about living standards for the middle
class by simply restoring state funding of higher education and deregulating
restrictive zoning laws.

------
dustingetz
If sarbox did indeed cause delayed IPOs to the extent described here, author
didn't even try to make a case for it, he just said it is so.

~~~
hga
Nobody I know denies that the US IPO market almost entirely shut down after
SarBox. Correlation does not imply causation, and I personally think it was
only the last set of nails in this coffin, but from that time sequence and a
lot of anecdotal data of people saying SarBox is why they aren't going public
has resulted in it being the commonly accepted reason.

~~~
muzz
The data denies it. Number of IPOs fell 90% in the two years preceeding
SarBox, and increased afterwards:

[http://www.xconomy.com/wordpress/wp-
content/images/2008/06/i...](http://www.xconomy.com/wordpress/wp-
content/images/2008/06/ipo_chart_issues_per_year.jpg)

~~~
hga
You don't entertain the possibility that the dot.bomb crash and 9/11 had
anything to do with that initial fall? Do you note that the number of IPOs
failed to recover in the period before the Great Recession?

This is one of the reasons I say it wasn't only SarBox, but that SarBox "was
only the last set of nails in this coffin".

~~~
muzz
That was not your claim. Your claim was: "Nobody I know denies that the US IPO
market almost entirely shut down after SarBox", which is simply contradicted
by the data

------
muzz
The return of pre-IPO venture invest industry trails the performance of the
post-IPO returns of the Dow, Nasdaq, and S&P 500 (not to mention that those
are highly liquid, regulated, have more disclosure, are more accessible, etc):

[http://www.avc.com/a_vc/2013/02/venture-capital-
returns.html](http://www.avc.com/a_vc/2013/02/venture-capital-returns.html)

Not sure why the author believes that somehow individual middle-class
investors will be able to compete with venture professionals who do this for a
living and still cannot beat simple stock market index funds.

------
2pasc
I think the issue described here is real. Truth is, today IPOed tech stocks
tend to go public much later than previously in their life for many reasons.
Look at PayPal. They went public with a $20M revenue run rate, growing 50% Q
over Quarter. Today, private investors with $50-$250M rounds and secondary
offerings where founders/early employees take money off the table completely
wiped out the opportunity for consumer investor to make money out of tech IPO
Companies. Funny enough to see that A16Z (or KPCB) are some of these late
stage funds (even though they are stage agnostic, they also invest late stage)

------
joshuaellinger
How about some more progressive taxation and some real regulation of the
banks?

~~~
contingencies
I can't believe you were downvoted.

~~~
noarchy
I can. The people who tend to read this site are not generally going to be
from lower income brackets, so a more "progressive" tax just means more
picking of their pockets.

Regarding the banks, that's a real uphill fight. I don't know if there is a
more protected, favoured sector. I'd be happy if the mentality that led to the
bailouts were to end. That would be a great start.

~~~
contingencies
Sure, relative wealth and selfishness do probably correlate. However, you
would hope that intelligence would trump that...

~~~
noarchy
Intelligence probably led to a lot of that wealth being created, as well as
the desire to protect it from those who have no legitimate claim over it.
There is indeed selfishness at work here. There is the selfishness of those
who don't want their wealth to be confiscated. There is also the selfishness
of those who want to take the wealth of others.

------
muzz
> Arguably the most significant among the changes was the 2001 move to
> decimalization

Wow, the claim that the ability to trade stocks in dollars and cents, as
opposed to dollars and fractions, is one of the most significant factors in
creating a "hostile environment" for IPOs, because then the minimum potential
profit is 1 penny. Essentially re-iterating that stocks are merely trading
vehicles, and that underlying value isn't responsible for movement in stock
price but rather the mechanics of trading.

------
kenster07
Before I can read this article, I think someone should explain the assumption
that the middle class is "shackled" in the first place.

~~~
muzz
Certainly the middle class isn't being shackled by paying ordinary income tax
rates of as much as 39% while VCs pay much lower taxes (previously 15%) as
capital gains via the carried interest loophole.

Certainly that isn't an advantage worth mentioning at all when comparing the
struggles of the middle class to the opportunities available to VCs...

[http://en.wikipedia.org/wiki/Carried_interest](http://en.wikipedia.org/wiki/Carried_interest)

[http://www.avc.com/a_vc/2010/05/why-taxing-carried-
interest-...](http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-as-
ordinary-income-is-good-policy.html)

[http://www.npr.org/blogs/money/2012/01/19/145449117/carried-...](http://www.npr.org/blogs/money/2012/01/19/145449117/carried-
interest-why-mitt-romneys-tax-rate-is-15-percent)

------
aidenn0
The middle-class needs a positive savings rate before anything like the
article suggests can help.

------
jmspring
Minor point to an interesting discussion, happy to see pmarca joining in on
this (and learning a lot).

I agree with his belief that total market funds tend to pick up newer IPOs
(where valid) sooner than those that, say, stick to the S&P 500.

------
rokhayakebe
Can someone explain this to me, please: _Because IPOs democratize wealth
creation and create jobs for the 99.9% of Americans who are unlikely to be the
next Zuckerberg_

~~~
_pmf_
> Can someone explain this to me, please: Because IPOs democratize wealth
> creation and create jobs for the 99.9% of Americans who are unlikely to be
> the next Zuckerberg

The author believes that Ponzi schemes are a way to generate lasting wealth,
and we are all stupid communists for not seeing this.

------
wildgift
Another way to get at the money is to raise taxes on the top 4%.

------
wavesounds
Why wouldn't companies just increase the price of their shares by a factor of
4 to counter the increase in tick size by 4? Thus keeping the percentage of
tick size to asset value the same ($1 stock with $0.0025 tick size = $4 stock
with $0.01 tick size).

------
adventured
"Thus, the public investors in Microsoft have had the opportunity to realize
$233.5 billion in market cap appreciation; the private investors had only a
$500 million head-start. From IPO, a single share of Microsoft stock has
appreciated close to 500x."

That's an ok point, but it ignores the extreme multiplier benefits from
participating in that first $500 million. That is to say, very few (likely
none) of the private investors would pay at a $500m valuation on a $500m IPO.

If you got in at $50m your return was upwards of 5,000 (4,680) fold vs. 500
fold at $500m. And of course this is all theoretical as Microsoft didn't take
meaningful outside money.

Scott tries to say that private investors _only_ had a $500m head start, and
compares that to the total $234b market cap. $500m vs $234b is not the
important stat line, rather it's the way the returns massively increase if you
got in with the private money early. It's the difference between being perhaps
being a billionaire versus having $25 or $50 million. Both are great outcomes,
but there's no sense in pretending the first $500m shares much in common with
the last $234 billion.

Point being: no, the private investors did not just have a tiny head start in
the grand scheme of things (ie compared to the market cap now), and that is
almost always the reality. They had an extremely massive head start over the
IPO money, no matter how you calculate it. Early money multipliers can almost
never be touched by public investors.

------
blahbl4hblah
Wow. "what the world needs now is lo...I mean more speculative investment..."

Give me a fucking break...

------
CleanedStar
Yes, a VC is looking to unshackle the middle class, thank you! Someone is
looking out for the US middle class, Scott Kupor, managing partner Andreessen
Horowitz apparently.

Barf. Who is dumb enough to swallow this? Sounds like an echo of Bill
O'Reilly's "I look out for the little guy".

You tend to hear this term "middle class" from on high a lot, as it means
absolutely nothing. What is the middle class in the middle of? Apparently
people with income of $200k or over, or assets of $1 million+ are not middle
class in his definition. Excluding worth of primary residence of course, which
he neglected to mention. I guess this means doctors are not middle class. They
must be in the upper class - a doctor is in the same class as Alice Walton,
who inherited $26 billion. What is the dividing line between the middle class
and the class under it? What class are janitors in, middle, lower? Class used
to mean ones relation to production, but that doesn't fit into the kind of
babble people like to put out.

To the big point of why this is nonsense. If you look at the Survey of
Consumer Finances done by the Federal Reserve, that 4% of Americans he speaks
of are the ones who hold the majority of stocks, the majority of bonds and
whatnot. Just look through one of these Federal Reserve papers and you'll see
that, other than primary residences, this top 4% own almost everything.
Outside of primary residences, the next 5% to 20% swallow up pretty much
everything the top 4% does not get. Which is not much, relatively. The bottom
80% have virtually no wealth outside of primary residences.

The idea that the median American will benefit from investing in VC is
ludicrous. The median American does not have the money to invest and benefit
from this. Stocks, dividends and profits are a weapon against the median
American. They are dependent on the stock owners, the small top minority,
getting the lion's share of the wealth created by the median American. If
American workers had strong unions and most of the created wealth in
corporations went to wages, not dividends, this would hurt the owners of
stocks. The weaker the median American is in this equation, the better the
stock does. The median American is all about wages, the crumbs of VC he might
pick up are almost nothing. He has no money to invest, so even if his shares
go up 20% a year, it amounts to very little.

Obviously, this is yet another thing to benefit the very wealthy. But to sell
it, people have to say it's for the middle class. Whereas the middle class,
whatever that means, is actually hurt when the wealth they create at companies
goes to profit and not wages. It is coming out of their pockets - they create
the wealth, then it goes out to heirs like Alice Walton in the form of
dividends. Or payments to limited partners from VC. And the like.

