
Silicon Valley's $585B Problem - apsec112
http://fortune.com/silicon-valley-tech-ipo-market/
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chollida1
I'll take a bit more controversial side. I don't believe Sarbanes Oxley has
anything to do with companies not going public. Its a crutch that week
companies rely on..

I probably get ot speak with more CEO/CFO's than most people here and I've
never once heard SarBox brought up as any sort of issue.

What Sarbox will do is force companies to be a bit more mature with their own
internal financial controls, ie they can't run their company using quickbooks
anymore.

From my perspective the biggest issues that companies who go public have are
two fold:

1) They've come from the VC model where growth is held above all other things.
Once you go public, growth is expected but its also expected to take a back
seat to generating profits. This can be a very tough transition for some
companies as it means quite often the things you were doing to please your VC
are no longer the things you should be doing when you are public.

2) You can now be shorted. When you are private, its like the market for
sports free agents. it only takes one VC/team to pay a company/player.

There is now check and balance in terms of being able to short the company.
Which means there is no real downward pressure that allows companies to find
their equilibrium price.

Unfortunately this means that many companies whoi go public find out later on
that they were the sheltered child who was good at sports in their own small
town, but when they got to the big city, they and their parents(VC's)
overvalued their own abilities.

3) Most companies who go public don't know how to guide or handle wall street.
You might get offended by this, "who is wall street to say what I can or
can''t do with my company", but they are the owners of your company.

Consider this scenario. Your friend raises a great Series A valuation, say $25
million. He then comes to you to complain that his VC's are pushing back on
him for wanting to pay himself a $1,000,000 salary and the company buying a
share of a private jet, and who are the VC's to say how the company should
spend its money.

You'd probably look at your friend with disbelief. Wall street is the same,
once you go public they are the owners of the company and you need to know how
to keep them happy. The best thing Twitter has done since going public was to
hire Anthony Noto as their CFO
([https://en.wikipedia.org/wiki/Anthony_Noto](https://en.wikipedia.org/wiki/Anthony_Noto)).

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pdq
Per #1, you are correct in theory. However I can counter with Amazon and
Tesla, which have been increasing revenue rapidly but making losses for years.
And their stocks are near all time highs. So I would say Wall Street prefers
profits, but as long as you can keep increasing revenue, your stock will
continue to go up regardless.

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potatolicious
I'd argue there's a big difference between companies with positive gross
margins and companies with negative gross margins, though both may be making
losses in total.

Amazon most certainly has positive gross margins - and instead chooses to
reinvest profits aggressively. Tesla is less certain, but I think a far cry
from some of the unicorns that continue to run on deeply negative gross
margins with the expectation that scale/future tech/vague fantasies will save
them.

On the other hand many unicorns don't currently have business models where
they are selling dollars for more-than-a-dollar.

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csense
There are two issues that are causing this:

(1) Sarbanes-Oxley has made life harder for public companies, so companies are
waiting longer, getting bigger, and giving more of their returns to pre-IPO
investors.

(2) QE means there's a lot of money trying to chase returns, leading to asset
bubbles and volatility as investors bid against each other.

~~~
jeanduluoz
Absolutely agreed on (2). However, to follow that up, that should be leading
to bubbles in both private and public equities (which it has). Ultimately, QE
does nothing to stimulate the economy, only artificially pumping assets we use
as metrics for the economy. Ultimately information will be passed through
prices as institutional traders start to agree that fundamental values are
lower, and more QE will start to actually damage equities, rather than pumping
them as we've seen.

So cheaper credit affects private and public equities equally. But that's not
what we're seeing here - public equities are at lower valuations than private.
I believe that is because PE is substantially less sophisticated relative to
public markets. There is no way to short assets, holding periods are 3-7
years, and the method of transaction is cumbersome and antiquated. Compared to
public markets, PE has more information asymmetry, less efficiency, lower
liquidity, fewer participants, and no easy way of ratcheting down valuations
until the next sale.

So QE has pumped up PE even more than public equities, and we see that as
privately valued firms struggle after going public.

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tostitos1979
I am genuinely worried if assets such as real-estate will deflate once we get
to normal interest rates (which I suppose will happen around the time I die).
As someone who is house poor, I can see an asset that is bubbilicious but I
feel I have no choice but accept the distortion of the market.

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Kinnard
I'm beginning to think the "bubble" has more to do with financial news needing
something to report on and get people's attention than the broad performance
of the industry.

In that case, it's the "Ad Bubble" not another tech bubble.

~~~
rm_-rf_slash
Spot on.

Unlike the 90s, a lot of startups today are actually making things and making
money hand-over-fist, it's insane. Too bad for the press they're obscure
business models and located in places like Lansing MI and you've never heard
of them, but there is tons of money to be made.

On the other hand, social networks, big data, and now neural networks are The
Big Thing, so everyone relentlessly reports on them, throws money at them like
the hottest stripper in Vegas, and gets resoundly disappointed when they don't
live up to people's astronomical expectations.

Besides, if people generally only spend $X a year on stuff they see advertised
or sold online, how much money is going to be sunk into online advertising,
big data, and all that other junk until you're basically getting one dollar
earned for every dollar spent?

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dismal2
the question is how much of the other stuff being built is built on top of the
ad money pyramid. would cloud computing have grown as much without tons of
apps and sites springing up that then try to acquire users via the main
adverting channels? how many saas businesses are there catering to these types
of cos that are basically unsustainable, but got funding which they primarily
used in user acquisition efforts?

~~~
rm_-rf_slash
Yeah that's a scary thought. You get a bunch of businesses that are flush with
VC money and that opens opportunities for other companies that rely on their
services or networks (granted that usually means google <thing> or AWS but
that doesn't make their arbitrary removal of services any less capricious),
and suddenly the pyramid wobbles like a house of cards.

Then again I'm naturally averse to invest in anything that doesn't have a
profit motive front and center.

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sna1l
“Part of the main reason for going public was to continue to establish Lending
Club’s brand and credibility,” he says.

I feel like this doesn't apply to most companies nowadays. I think Lending
Club is in a special place because they deal with financials, which requires
an increased level of trust. A lot of companies like Uber, Airbnb, and smaller
startups like Wealthfront, Betterment, etc are able to generate pretty solid
brand recognition and trust without going public.

Also, this article really makes it seem like the only reason companies aren't
going public is because they aren't ready and that none of them are making any
money. I feel like that is a vast overgeneralization. The ones that are making
money, or are successful are still going to be able to raise money privately.
I know everyone here thinks the sky is falling down and funding is drying up,
but I don't think that is the case for GOOD companies. Sure your uber for X
might not get funding anymore, but solid companies I imagine are still able to
raise new rounds reasonably easily. Why would you want to go public when you
can raise adequate sums of money through private financing?

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kalu
I enjoyed this article. Interesting detail, compelling story line, easy to
digest.

Unfortunately, the thesis is deeply flawed--that most stocks plummet after IPO
does not a broken system make.

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yalogin
So are these IPOs LC, GPRO AND LNKD ever going to recover?

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vasilipupkin
yes, if they start making money. their PE ratios are still on the high side

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gaur
Inserting stock ticker garbage into articles is really obnoxious.

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pdq
Note: this article is from February 1, 2016

