
And then the music stopped  - scottshea
http://37signals.com/svn/posts/3221-and-then-the-music-stopped
======
ChuckMcM
"So between just these three, some $40 billion has been extracted from pension
funds and other last-sucker-in-line investors."

This is incorrect, David takes the change in market cap and then equates that
to losses in pension funds. But this does not represent the state of affairs
because when companies go public they don't put _all_ of their stock on the
market, rather they put a small percentage of the company on the market
(called 'the float') and it is those shares IPO investors get to buy. For
Groupon this was an notably small percentage of the company (which caused
short sellers to complain that there wasn't enough liquidity to short the
company).

So lets be generous and say it was 10% of the companies involved then you are
looking at a change in value that is 4 billion not 40 billion. Next pensions
invest in hedge funds just as much as they do companies, and those hedge funds
took a good chunk of that money because they are shorting these companies with
questionable valuations. They could be having a great time with the IPO
market.

So yes, there are investors who are holding GRPN, FB, or ZNGA who have lost
money but it isn't a travesty, and it isn't 2000 again, and it isn't
newsworthy. A pension fund might own a big position on Ford (NYSE:F) which
they bought at the beginning of the year for north of $12 share and its now
worth $9. Doesn't mean the 'music has stopped for Automakers'.

If you look at CalPERS [1] (one of the largest retirement funds at 236 B$) you
will see they diversify their holdings pretty well.

[1] [http://www.calpers.ca.gov/eip-docs/about/pubs/annual-
investm...](http://www.calpers.ca.gov/eip-docs/about/pubs/annual-investment-
report-2011.pdf)

~~~
achompas
There's the bigger issue of DHH picking up his sword and shield yet again and
hacking at a strawman with a big "VC" note pinned to the head.

We get it, DHH. Generating consistent revenue streams, buying nice offices,
and raving about VCs is the only righteous and pure road.

I mean, who is he rallying at this point? Any entrepreneur with half a brain
knows that taking VC money, growing explosively, and trying to IPO is a
perilous road. What are we gaining here, aside from more vitriol?

~~~
larrys
"other last-sucker-in-line investors bought into."

Not to mention saying things like the above.

You don't know that you are the "last-sucker-in-line" until the music stops.
As the saying goes you can't time the market until of course _after the fact_.

------
carsongross
I'm sure I'll burn karma, but let me say it again: there _are_ companies out
there generating real, long term value, but the HN news stream ignores most of
them.

A perfect example is Guidewire, the company I worked for previously, which is
up nearly double its IPO price and is rocking the earnings, which has been
voted the best place to work in Silicon Valley for two straight years, and
which has contributed a JVM language back to the community, but which is in an
unsexy industry (insurance, enterprise software.)

~~~
46Bit
Consumer Internet companies get far more attention than they deserve because
their business model involves using your time. There's a massive number of far
more interesting, profitable companies in tech that you rarely if ever hear
about.

~~~
maayank
So how do you go learning about those industries?

------
PaulHoule
I'd say Groupon and Zynga aren't in the same category is FB.

Zynga made it big on those "free" ringtones that would cost you $10 a month
for the rest of your life. Groupon is a ponzi scheme.

Both Zynga and Groupon did quick IPOs because they had to get an exit before
they fell apart. Many agents on Wall Street have aided and abetted this
(underwriting banks, anyone who bought that stock for you or who encouraged
you to buy it, etc.) It's stupid short-sighted thinking from the industry
because it harms investor trust (in short supply today) and will hurt future
IPOs.

Facebook is a real company that delightes customers. They only did an IPO
because they couldn't keep up being a private company the way they were.
(Blame regulation) The big weakness of Facebook is an ARPU that's south of $10
a year... It's believable they can get it up, but I' afraid being public means
investors will force them to be tactical rather than strategic which could
kill the goose that lays the golden eggs.

FB has some real problems, in particular a $10 /year ARPU

~~~
majani
I think you're confusing users with customers. In the ad business those are
two completely different things. FB may be delightful for users, but it's
pretty 'meh' for advertisers.

------
unreal37
Plenty of people were warning about Groupon and Zynga being unsustainable
businesses BEFORE they went IPO, and I have no sympathy for those that played
that risky game. It's disingenuous to be outraged about those two stocks being
below the IPO price when it was a common sentiment before they went IPO.

Facebook is actually a real business, making $1B/quarter in revenue. Maybe
they should have went IPO at $8 and allowed all those high net-worth investors
who could buy at the IPO price to double or triple their money. But why should
they do that?

I'm beginning to think that the stock market is not a place for individual
investors, with all the computer traders and momentum investors. But that's a
different point entirely.

~~~
justindz
Your last line is interesting and seems like a useful line of discussion to
come out of this otherwise PR-laden exercise. Is there somewhere that you
could elaborate on the evidence and suggest alternatives? You'd have at least
one reader.

~~~
rm999
I guess I'll start with a rebuttal. The stock market is a great place to
invest if you understand a couple things:

* The market is high risk, people have lost half their life savings in it. You should know how to balance that risk with your needs. With risk comes high reward, the stock market tends to average much higher returns than lower risk investments.

* You will never know as much about individual companies as institutional investors and hedge fund analysts. These guys have the CEO's cell phone number and invest billions of dollars. But their analysis is priced into the current value of stocks; consider this a free service they are providing you.

My advice is to invest only your savings you won't need for at least 20 years.
Invest in funds that average your risk across many companies (e.g. s&p 500
index funds) and avoid funds with high fees.

The stock market is an opportunity to own a small part of a large chunk of the
economy. It's economically liberating to people who are willing to educate
themselves on it, and a dangerous trap to those who don't. The fact that in 30
seconds I can spend 50 dollars and own a small part of the 500 largest
companies in the USA is a modern marvel.

~~~
unreal37
I recommend the book "Dark Pools" by Scott Patterson[1]. It is an account of
how traders beat each other by microseconds to get an order in, and can find
and exploit every possible way they can in order to get an advantage.

There is (perhaps) no way a human can compete in the stock market any more.
This is the age of AI, where computers are pushing around billions of dollars
in an automated fashion. Taking every arbitrage advantage in milliseconds, and
are even able to find under- and over-valued stocks in the blink of an eye.

[1][http://www.amazon.ca/Dark-Pools-High-Speed-Traders-
Financial...](http://www.amazon.ca/Dark-Pools-High-Speed-Traders-
Financial/dp/0307887170)

~~~
rm999
There's a big difference between trading and investing. All laypeople should
be investing in the market, but you are talking about trading taken to an
extreme. A computer trader may get in and grab 1000 shares, then resell it
right away for 10 cents more. He can do that 100,000 times a day and make a
good living. But an average investor buys 1000 shares and holds them for 5
years. He's losing maybe a few dollars over his lifetime to these guys.

These high speed investors aren't drastically modifying the value of the
market. If they were they would be creating arbitrage situations that would be
closed right away.

~~~
Nelson69
You're right, it's trading vs. investing. Didn't take a genius to buy Google
or Apple 5 years ago, no highspeed tricks or anything and you've made a tidy
chunk of profit.

Whether or not they're drastically modifying the value of the market is really
hard to say, I don't think we know that fully. Honestly, I don't think we
understand it that well yet. You can make some fairly reasonable assumptions
that it doesn't cost the typical investor that much over his investing life
though. I think part of those assumptions are that the high speed traders are
simply trying to move faster when they acquire knowledge though, to me, that
seems kind of elementary for the guys that invented all these exotic synthetic
derivatives and ways to mask risk and shift it around... You couldn't tell me
that they aren't trying to think up other uses for those technologies if they
exist; like maybe you can measure what counter parties are doing with high
performance timing and get some insight.

Fundamentally, are they leaving that few dollars on the table or are they
picking them up? It may only be a few dollars but it's a big difference
between paying it and taking it.

------
wtvanhest
This is a typical anti-finance rant, with no substence. The only thing that
would have made it worse would be a blantently political statement any of the
parties.

 _So between just these three, some $40 billion has been extracted from
pension funds and other last-sucker-in-line investors. While, in the process,
soured many on the idea of the public markets and enriched investment bankers
hawking the toxic stocks. Hey, at least someone got out while the going was
good._

Net out what VCs got which also goes to pension funds before calculating the
$40B. Don't mention investment bankers while not also mentioning founders who
sold shares and took a far greater percentage of the IPO cash.

~~~
batista
> _This is a typical anti-finance rant, with no substence. The only thing that
> would have made it worse would be a blantently political statement any of
> the parties._

Because finance in itself is something like nature, and not at all political
and ideological, right?

~~~
wtvanhest
_Because finance in itself is something like nature, and not at all political
and ideological, right?_

The math in his post is clearly, scientifically wrong and represents a typical
rant from an uninformed observer. It would be the equivalent of workers
blaming computer scientists (hackers) for eliminating all of their jobs that
were based around making phone books.

It is an anti-finance rant, with no substence.

------
dredmorbius
An article whose logic I'm not particularly enamored of, but whose underlying
import probably matters, as magixman noted
(<http://news.ycombinator.com/item?id=4312648>)

IPO valuations, and post-IPO stock performance, have a lot to do with funding
rounds for startups. This affects not just startups, but the overall
employment and economic climate, especially in startup-heavy locations such as
the SF Bay Area.

Given that much of the counter-cyclical economic activity in the Bay Area is a
consequence of startup-related companies, I'd expect a fairly broad overall
cooling, at best, from the Groupon / Zynga / Pandora / Facebook, et al,
experiences.

David (no last name)'s financial logic is flawed. His concerns aren't.

------
crazygringo
> _some $40 billion has been extracted from pension funds and other last-
> sucker-in-line investors_

Correct me if I'm wrong, but that would only be true if everyone in all the
companies had sold all their shares.

I don't know what percentage of shares in Facebook, Zynga and Groupon became
publicly availably post-IPO, but does Zuckerberg's continued stake in Facebook
make him a "last-sucker-in-line" as well? I doubt it.

~~~
netcan
I don't think you'd really consider Zuckerberg an investor at all. Employees &
founders in particular are really a different class.

Anyway, you can't be last in line if you're first in. Most of the pre-IPO
investors made profits. Most of those that have cashed in those profits,
cashed out by selling their shares to post IPO investors.

~~~
crazygringo
Sure, I'm just saying the article seemed a little hyperbolic. That the true
figure is surely less than $40 billion, and that it's not like this is some
shell game where all the smart people involved already cashed out.

------
flyosity
Did anyone here actually purchase shares of Facebook, Groupon or Zynga? I
never read one positive thing saying that their share prices would go up, it
was always the opposite. I just assumed people who took a bath on those stocks
were less tech-savvy investors trying to be "hip" with fresh IPO stock.

~~~
veyron
That's you. Lots of people pumped Facebook and got in expecting an IPO pop.
For example, even the bearish analysts believed in the pop:
<http://www.youtube.com/watch?v=H9Twxv1V50s>

Short conversation on the matter: <http://cl.ly/image/0K2D072E1T0w182K0L0o>

------
plehoux
Those "pension funds and other last-sucker-in-line investors" are to blame for
not doing good diligence.

FB, Zinga, etc. cannot be accused of not leaving money on the table.

Updated: The OP did not accuse anyone, it's just my feeling toward those IPO.
Big funds, with high management fees are to blame!

~~~
magixman
Agreed and there is plenty of blame to go around and anyone who buys an IPO
has to assume a certain risk. Unfortunately for us the fact remains that when
the top of the eco-system starts to look shaky it can have reverberations all
the way down the line. We should not under-estimate the impact of this.

------
jiggy2011
Not sure what the lesson is here, other than "shares sometimes drop in value".

I think most people understand that shares in tech startup IPOs are a fairly
high risk business.

~~~
grey-area
The intended lesson is restated at the end, in case you missed it:

 _Or we could...start valuing stocks based on fundamentals._

Valuing stocks on putative future profits based on users, or on comparative
values based on other inflated stocks, or based on the price someone paid for
some fraction of their shares last week, is not really a solid way to try to
calculate value for investors. It's a difficult problem and no-one can claim
to have a definitive solution, but the methods used to value Instagram,
FaceBook, Groupon, etc do not stand up to a lot of scrutiny.

Of course you could argue that it's too soon after an IPO to judge the
possible profits of FaceBook (for example) and the right price for them, but
given the current valuation of FaceBook ($44B?) and their current revenue and
profits vs users, I'd say they have farther to fall, esp. when employees start
to sell shares soon.

~~~
jiggy2011
I guess with some of these startups though the ground is so untrodden that's
it would be impossible to come up with a way to value them other thinking
about things like future monetisation of users.

Without it's users, Facebook is worth very close to $0. With it's users? who
knows?

~~~
grey-area
_Without it's users, Facebook is worth very close to $0. With it's users? who
knows?_

Well, one way to look at that question is to ask how much revenue they make
per user (ARPU) and how much profit right now, and how much they could scale
that. Obviously these numbers can be manipulated, and are likely to be
optimistic if anything, but it's a better starting point than trying to work
out numbers based on what someone paid for 10% of shares, or what someone paid
for Instagram, or what they would make if they managed to charge their users a
subscription (unlikely in the extreme).

Given their business model (ad supported), the fickle nature of their users,
and their strong free competitors (Google, Twitter etc), I personally don't
think they are worth $44 per user (assuming 1B users). I think the ARPU is
around $1, that's not great, and not likely to grow hugely.

------
harold
Those "last-sucker-in-line-investors" could have also invested in LinkedIn [1]
and Zillow [2], both of which have done reasonably well after their IPO.

Easy to pick a company to use to reinforce a message (37 Signals would have
made a better case against non tech company GM [3], which had hype _and_
government assistance and is still on the way down)

[1]
[http://finance.yahoo.com/q/bc?s=LNKD+Basic+Chart&t=2y](http://finance.yahoo.com/q/bc?s=LNKD+Basic+Chart&t=2y)

[2]
[http://finance.yahoo.com/q/bc?s=Z+Basic+Chart&t=2y](http://finance.yahoo.com/q/bc?s=Z+Basic+Chart&t=2y)

[3]
[http://finance.yahoo.com/q/bc?s=GM+Basic+Chart&t=2y](http://finance.yahoo.com/q/bc?s=GM+Basic+Chart&t=2y)

* edited for formatting

~~~
regularfry
DHH has been pretty clear in the past what he thinks about LinkedIn - that
they're a disaster waiting to happen - and looking at the P/E he may well
think the same of Zillow. The saying about markets staying irrational longer
than you can stay solvent applies here.

------
FlyingSnake
Selective bias in action. LinkedIn also debuted and is far from a flop and its
too early to call demise of Facebook.

Sigh, SVN used to a blog about the small guy, the startup people and advice
from the trenches. Its sad to see it deteriorate into banal arguments without
any merit.

~~~
sadga
The blog is "Signal Vs Noise". There was never a promise that Signal would
win.

------
KaoruAoiShiho
Each of these are different / unique cases. Perhaps only Facebook actually
fits the 37 Signals narrative (that of a company overvalued because people
were too optimistic about potential). Zynga and Groupon both had great
revenues and from that perspective were deserving of their valuations. However
Zynga is losing customers because they didn't innovate in their space and
Groupon's financials were misleading in the first place.

~~~
juliendsv-mbm
Groupon was generating revenues, not profits. They also lied about their
revenue declaring their gross billings as their revenue, but they should have
declared their net revenue (the amount groupon keeps after paying the
merchant) before going IPO ..

------
ojbyrne
I'd love to see a 37 Signals IPO, just to shut DHH up.

Also KYAK, TRIP, PANW are all up from their IPO price. I'm sure there's
others.

------
robbiemitchell
If you have strong thoughts on this, consider contributing to this related
question on Quora as well: [http://www.quora.com/Venture-Capital/Why-do-
people-care-abou...](http://www.quora.com/Venture-Capital/Why-do-people-care-
about-valuations-of-other-companies)

------
nirvana
I'm tired of "Stocks are gambling" nonsense like this. Some companies are
valued on the fundamentals. In fact the best investment in the world right now
is AAPL, which trades generally between 12-14 times its trailing EPS. This
recent "miss" was a "bad earnings quarter" and even then it grew at %20 year
over year. (The lowest in the past 4 quarters by far).... but if Apple was a
company that only and always grew at %20 year over year, then "on the
fundamentals" Apple should be trading at 20 times EPS.

This makes Apple a screaming deal. There are other good stocks out there, and
if _you_ decide to trade on the fundamentals, you can make great returns. Its
not very difficult.

The thing is, part of the reasons it is so easy is that almost the whole world
has convinced themselves that its impossible and instead doesn't invest or
puts their money into index funds.

~~~
tatsuke95
> _"I'm tired of "Stocks are gambling" nonsense like this."_

Definitely in agreement with you here.

> _"Its not very difficult."_

I assume you have a portfolio that's been killing it. Would you mind posting
your results?

> _"but if Apple was a company that only and always grew at %20 year over
> year, then "on the fundamentals" Apple should be trading at 20 times EPS."_

The problem is predicting that a company the size of Apple will grow 20% y/y
forever. What fundamental reason do we have to believe that? We're sort of in
uncharted territory there. For all we know, Apple's decline starts next year.
_That's_ the difficulty of this.

> _"puts their money into index funds."_

There are sophisticated financiers who insist that index funds offer the best
value in investing. The world is filled with people who think it's "easy" to
get "great" returns in the stock market. The reality is that in an efficient
market there are no "great" returns, only average returns. Those returns are
based on a function of risk (so the expected returns are the same) and some
time value of money.

------
ktizo
So, if the music has stopped, is now a good time to sell chairs?

