
The Great Public Market Reckoning - twic
https://avc.com/2019/09/the-great-public-market-reckoning/
======
hodder
In reality, the public has just woken up to the fact that VCs were dumping
bags of shit on them at absurdly inflated valuations, and that many of these
bags of shit are destined for bankruptcy due to cash burn - they are commonly
outright frauds designed to siphon cash from the uneducated public investor
class to enrich VCs and founders. Fuck greedy VCs if they want to dump their
money into frauds and flip it onto the public. Fuck these criminals to hell. I
hope they go bankrupt if they don't figure out that that is the real shit
going on here.

VCs: Quit whining about the public using their brains to avoid your fucking
scams.

~~~
drawkbox
The rise of private equity siphoning off all gains before they dump it on the
public, is breaking the public markets and skimming from all investors.

The idea of public markets was trusted investments and the ability to gain
with early companies. Now those gains go to the early private investors, then
they shine that turd after the growth is tapped to sucker the public market
longs into giving them more runway. Usually once the growth is tapped out they
now dump it on the public markets.

But the system still works a bit, public markets and SEC requirements expose
fraud and overvaluations.

When the whole of America revolves around the public markets, and so many
forces out there trying to break them like private equity shovel companies,
naked short selling, short and distort via large hedge funds, planned
volatility and more. I wonder when the public markets will break, because that
is when America breaks as well. You'd think the SEC would step in more. They
are a bit on short and distort [1] and did on naked short selling after the
Great Recession (3 day after the Sept 15th cliff) [2]. All of those forces are
back with a vengeance.

[1] [https://www.sec.gov/news/press-
release/2018-190](https://www.sec.gov/news/press-release/2018-190)

[2]
[https://www.sec.gov/news/press/2008/2008-204.htm](https://www.sec.gov/news/press/2008/2008-204.htm)

~~~
AznHisoka
"Usually once the growth is tapped out they now dump it on the public
markets."

While this has been true for recent IPOs like Uber/Lyft/WeWork, there also has
been many other IPOs where the companies have continued growing even after
they IPO. Recent examples include Twilio, Hubspot, Docusign and Tableau.

------
twic
What gobsmacked me about this is the complete lack of introspection or
contrition.

> If the product is software and thus can produce software gross margins (75%
> or greater), then it should be valued as a software company.

> If the product is something else and cannot produce software gross margins
> then it needs to be valued like other similar businesses with similar
> margins, but maybe at some premium to recognize the leverage it can get
> through software.

> But we have not been doing it that way in the late-stage private markets for
> the last five years.

> I think we may start now that the public markets are showing us how.

This presents the situation as if the connection between gross margin and
valuation is some new discovery - "Cool, we've learned something about how to
price companies! - and not a basic fact of business that everyone has been
screaming about for a decade, but that many VCs have simply been ignoring.

~~~
bpt3
Do you feel like this specific VC should be held responsible for the
irrational behavior that has been taking place?

It is entirely possible that the author is fully aware of the trend and
avoided involvement in overvalued companies in anticipation of this return to
rational behavior.

------
bgilroy26
I was surprised that Spotify had such a low profit margin -- 26% -- and I
found an article[1] that explains that royalties are the biggest factor. They
go on to explain that Netflix's solution to the royalties squeeze has been to
launch original content.

I wonder why Spotify and Tidal don't have recording studios launching new
music? Do they figure the library of existing music is so massive that they
can't ever get ahead of it with original content? It can't be that existing
music studios have been running so efficiently that they can't be successfully
undercut by one or two companies who have a grip on most music listening
behavior.

[1] [https://www.statista.com/chart/13406/gross-margin-of-
spotify...](https://www.statista.com/chart/13406/gross-margin-of-spotify-and-
netflix/)

~~~
Macha
Once Spotify starts launching their own content, I'd expect the music studios
to react how TV studios reacted to Netflix originals - jumping ship to their
own services, draining Spotify's catalogue and USP.

I'm sure balkanisation will come to the music space eventually, as we've seen
happen to Netflix and is in the process of happening to Steam (against the
wishes of consumers, but publishers want their own subscription revenue
streams), but given that space was unified with iTunes previously, there's
more inertia with the one stop shop model.

~~~
yomly
I vaguely agree with you and to add to your point:

I think the dynamics of selection are a bit different for Spotify vs Netflix,
i.e. my personal assumption is that customers are more elastic to selection
for music than tv.

You can consume a unit of music much faster than tv, and you repeat
consumption of music more often than tv so things like playlists suffer more
from absent music and albums than TV may do.

I think it is vaguely easier to train TV watchers that there will be some
rotating backcatalogue than you can music listeners...

------
vinceguidry
Summary: Companies with software-like margins should be valued like software
companies, companies that sell something other than software should be valued
like traditional businesses. This hasn't been the case for the last five
years, these last few IPO flops have shown us the light.

------
netfl0
Corporate structures are designed to disperse liabilities in a tragedy of the
commons sort of way. Therefore, what is the moral rationale for a “private”
corporation, or for that matter any liability limiting instrument for private
parties.

Public corporate ownership makes a lot of sense to me.

(I was hoping this would spur interesting discussion)

~~~
seibelj
If the failure of a business means personal financial (and perhaps criminal,
as history shows) ruin then very few people would start businesses. Limited
Liability for both the managers and shareholders is absolutely critical,
unless you want everything operated by the same people who run the DMV.

~~~
pjc50
Limited liability is what allows "managers" and "shareholders" to be separated
in the first place, and thereby allows the raising of huge amounts of capital.

If liability is unlimited, would you _really_ hand over unlimited liability to
managers without extremely close oversight? No. So shareholders would have to
directly run the business. Worse, would the shareholders hand over unlimited
liability to a voting process in which they might lose to other shareholders?

Conversely, it's both unfair and pointless to make the mere managers, who are
staff and not contributors of capital, liable for the business operations.

There are exceptions to this but they tend to be small to medium low-capital
businesses. Accountancy and law firms often operate as partnerships, for
example.

No, the LLC is a primitive of operation on which the economy is built. It's
not going anywhere. But if people start using it as an excuse to dump
externalities on the public, there is going to be a policy response imposing
some kind of "corporate social responsibility".

But none of that is relevant here. This is the good old fashioned over-
investment by the over-wealthy in schemes they thought would pay back by
monopolizing future profits.

> If the product is something else and cannot produce software gross margins
> then it needs to be valued like other similar businesses with similar
> margins, but maybe at some premium to recognize the leverage it can get
> through software.

~~~
gnopgnip
Most law firms will be limited liability partnerships these days, and will
have professional liability insurance.

------
WisNorCan
> And what we are seeing, for the most part, is that margins matter. Both
> gross margins and operating margins.

No kidding. Of course margin (and cash flow) matters. That is the very
definition of valuation. The tricky part is timing. Are current margins likely
to be the same as future margins?

There are some businesses that are investing heavily in their business to grow
new categories (e.g. AMZN) or build the network. In those cases, you won’t see
strong margin and cash flow early on.

Uber is a special case where they are losing money even at scale. Uber is a
great idea, but far overvalued by investors like SoftBank. It needs to drop
down below $10B. That will also mean laying off most of the employees and
raising prices.

WeWork is the same. They just got their faster.

~~~
southerndrift
Uber is preparing for a future with self-driving cars. If they are the network
to rent those cares, they will make back everything and more. The
manufacturers and even the self-driving software won't matter. All that
matters is being the app that summons the rides.

The network is not as defensible as facebook, but all the other players would
have to stick together to dethrone them.

~~~
vkou
What stops me from getting a billion dollars in investor money, developing an
Uber-clone app, buying a bunch of self-driving cars, and renting them out as
taxis in the top five metro areas in North America?

The network is not 'not quite as defensible as Facebook'. The network is not
defensible _at all_.

The Uber app adds no unique value to the user. The Uber logo on the cars adds
no unique value to the user. If the cars are off-the-shelf self-driving
vehicles, then there is no sane reason why anyone would care whether or not
they are riding in an Uber, or a Vkouber.

It's not like all the hooballaa about licensed and vetted and non-asshole
higher-quality drivers is at all relevant in a self-driving car world. The
_only_ thing you'll be competing on is price.

You know which industry operates this way? The airline industry. And do you
know what's the easiest way to have a small fortune? Start with a much larger
fortune and invest it into an airline.

~~~
southerndrift
Nothing is stopping you. But will you retain your market if you are not the
biggest network? You need deep enough pockets to get 50% of the market or Uber
will get its share back once you try to be profitable since they can leverage
their scale.

~~~
vkou
As an airline passenger, do I care whether or not Alaska, or American has the
biggest network?

I want to get from point A to point B, as cheaply as possible. If the Alaska
flight is the cheapest, I'll take it. If the American flight is the cheapest,
I'll take that.

I have no brand loyalty for airlines. I have no brand loyalty for taxi
companies. Why should I have brand loyalty for taxi-in-an app?

How can Uber leverage their scale? Are you saying they are going to price-dump
to push me out of a regional market? Isn't that illegal, and something that
our esteemed President complains about on a regular basis?

I'm not sure 'Become so big, and engage in blatantly anti-consumer monopoly
behaviour to the point that you are practically begging to be put on an anti-
trust trial' is a great moat to have.

~~~
southerndrift
The airline argument is quite convincing.

How about the frequency and the fair price? It's worthwhile to compare airline
rates. It's more difficult for in-app uber purchases that are more frequent
for less money. Will people compare rates? Especially if rates are not cheaper
elsewhere? The biggest network will have the best cost structure.

Uber can keep other companies alive by slightly rising their prices. So no
monopoly problem but nobody who has the money to innovate. Then they have the
money for the most advanced technology and by adjusting their prices they
decide how big their market share is.

~~~
vkou
> How about the frequency and the fair price?

The case looks even worse for Uber, than it does for Alaskan in that case.

The capital costs and logistics of getting more airplanes, more (highly
limited!) slots at airport terminals, working this out for point-to-point
connections, getting all your staff moving from flight to flight efficiently,
are horrific.

The capital costs and logistics of scaling up a self-driving taxi network, in
comparison, are peanuts.

> It's more difficult for in-app uber purchases that are more frequent for
> less money.

It's a simple as checking the ride price in two apps.

> The biggest network will have the best cost structure.

No, the network with the lowest profit margins will have the best cost
structure.

Uber will either be a defensible business, or a profitable, but entirely
indefensible one.

~~~
southerndrift
The limit of the airline metaphor is that uber doesn't have to own the fleet.
The fight is in subsidizing rides, like with lift. Then comes softbank and
they pick the winner because they have the deepest pockets. Who would go up
against those pockets but a bigger player? And then, uber can offer them
shares and the fight is over and uber keeps on winning.

Regarding the price checkking: it's one thing to compare ride prices if you
fly once a month but it is something else if you buy a ride 5 times a day.
Like businesses buying flights from one supplier, consumers will buy rides
from one app.

Uber will be profitable once nobody is willing to burn more money. That day
will come sooner than later.

Uber has thought this through because their name is not lift, but uber.

------
turk73
IPOs these days are more about "finding new and/or ultimate bagholders" than
anything else. Up yours GoPro.

