
Tech Startups Choose to Stay Private in I.P.O. Standoff - chollida1
http://www.nytimes.com/2016/04/02/business/dealbook/tech-start-ups-choose-to-stay-private-in-ipo-standoff.html?_r=0
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tryitnow
A lot of folks are saying that companies don't have to raise money in the
public markets. Yes, that's true, but...

I'm skeptical. Simply put, the liquidity that comes with the public markets is
a huge advantage - IF your company has its financial act together, otherwise,
the scrutiny offsets the liquidity advantage.

The history of financial markets is littered with examples where secrecy leads
to wild overvaluations at best and fraud at worst.

Instead of hypothesizing that we've entered a magical golden era where private
markets provide all the financing but never require exits, it makes more sense
to assume there is an epic amount of confusion, misguided expectations, and in
some cases outright fraud. Every single financial cycle in history has
witnessed these behaviors. Every. Single. One. Today's Silicon Valley is no
different.

In short, for all these great companies out there... How do you really know
how they're doing financially? Do they even know how they're doing? Where's
the evidence? Without audited books in compliance with GAAP, who can tell?

~~~
joshjkim
I agree - put another way, bad-but-hyped companies are hiding in the private
markets, because they can maintain a high-valuation with a strong PPT and
unaudited financials vs. going public getting punished by the market for weak
(maybe terrible) GAAP financials.

but, like you said - we just don't know, and it appears they don't want us to
know. and that makes me think: in general if someone is keeping something from
the public, what are the chances its good vs. bad? I'd say it skews to the
latter =)

Sometimes, it's justifiable if the company really needs a private period to
invest deeply in something the public markets may not understand, but I'd say
mostly it's not - the ongoing markdowns by traditional investors is at least
one indicator.

~~~
mrgordon
I don't entirely disagree but I will point out one thing with the mutual fund
markdowns. If the fund's value declines as the public markets tank (e.g.
briefly at the start of the year) then the holdings in the fund need to be
marked down to compensate. If 5% of the fund is private company stock and the
fund as a whole went down 10% with the market, then you would expect the
private company stock to also get marked down ~10% to keep the accounting
straight. This doesn't necessarily indicate a problem with those companies as
the markets can and have bounced back and the private shares will likely
rebound with the markets in many cases. Now of course there are also the
Zenefits type companies mixed in that are just worth drastically less than
previously estimated.

~~~
chollida1
> If the fund's value declines as the public markets tank (e.g. briefly at the
> start of the year) then the holdings in the fund need to be marked down to
> compensate. If 5% of the fund is private company stock and the fund as a
> whole went down 10% with the market, then you would expect the private
> company stock to also get marked down ~10% to keep the accounting straight.

Umm, no that's not any where close to how fund accounting works.

Each position is valued independently and then summed up to give the value of
hte fund. If the fund accountant can make the case that the private positions
are worth more now than they were a month ago then they go up regardless of
what the NAV of the fund is.

Similarly if the fund believe that their private positions are worth less then
they get marked down, again independent of what the fund's worth.

I mean, by your logic if the fund holds a public stock that doubled in the
past month but the fund went down, then you'd have to mark down the public
stock, in this case I'm using a public stock as we know exactly what its
worth. Which is absolutely ridiculous.

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mrgordon
> I mean, by your logic if the fund holds a public stock that doubled in the
> past month but the fund went down, then you'd have to mark down the public
> stock, in this case I'm using a public stock as we know exactly what its
> worth.

This is not my logic at all and it makes no sense. Why would the fund need to
mark down public stock when the value of that stock is already explicitly
known?

The fund's NAV is, by definition, a summation of the values of its holdings.
The liquid holdings such as public stocks have clear values that are readily
available. Thus any other change in the NAV of the fund would come from its
illiquid investments, no?

I agree my comment wasn't exactly correct in that the NAV is a summation of
the liquid asset values and estimates of the illiquid asset values, not the
other way around as I perhaps implied. But what I mean is that the valuation
process for illiquid assets is difficult and imprecise and the valuation
committee will naturally tend to assume that the value of illiquid equities
generally move with the rest of the market in the absence of other new
information. It would take a strong conviction in your illiquid investments to
say that they maintained their value while nearly all of the liquid
investments lost 10%, 20%, etc.

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tim333
You've got to consider the VC fund managers incentives here. It's not in
general their money they are investing - they are getting a percentage on
other people's money. If their companies stay private at some silly
theoretical valuation they can go to investors and say look how clever we are,
everything's up, invest more. If they float a company and it drops in value by
50% like Groupon, Etsy, Box etc then they no longer have the genius track
record, the investors stop investing and they may cease to have a job.

There's a similar perverse incentive keeping the valuations up - there are a
lot of VCs out there but the few really good big startups have their pick of
who to get to invest so the other VCs get to fight over so so companies and if
one is investion at a 500m valuation then another that is being left out will
be tempted to offer to invest at a 1bn valuation to out bid them. After all
it's other people's money and they get a percentage on funds under management.
If they don't bid up and don't 'invest' then that's less funds.

I recently looked at some terms and conditions on being a 'limited partner'
which basically means an investor in a fund and they were taking something
like 20% in fees spread over a few years. It's probably a good deal less for
larger investments but even so any VC that can persuade investors to put $200m
into some company probably gets to pocket quite a few million regardless of
how iffy the investment may be.

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jpmattia
> _“I’m a little perplexed as to why this drought is continuing as it is,”
> said Jay R. Ritter_

As the old saying goes: Ain't nothing that price won't fix.

~~~
ISL
Unless that gets priced into the private markets...

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joshjkim
admittedly 0 in the last quarter is unusual, but the trend is explainable, and
it's weird that the article acts like there's some sort of mystery here, when
the reasons for the trend seem pretty clear (and have been discussed at length
before..):

tech companies are not going public because

1\. They don't have to (they can raise just as much $$ in the private markets
with far less scrutiny) and

2\. Going public is a huge pain that most people want to avoid (reporting,
quarterly (read: short-term) goals, public scrutiny).

Also, a bunch of other reasons, but that seems like the two most well-known
factors that for some reason are not mentioned at all in the article..unless
I'm missing something.

The article hints that the market's poor reaction to recent IPOs is a major
factor, but I'd say it's less than the two I mentioned above, though I can't
quantify that here.

~~~
maaku
Also second market lets employees cash in their options instead so there isn't
internal demand for a liquidity event.

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at-fates-hands
It's interesting the article doesn't come right out and say this is the
correction the market indicators have been hinting at for a while. It's all
there in black and white:

 _“Volatility has bred more practical thinking, especially on the
shareholders’ side,” said Atish Davda, the chief executive of EquityZen, a
marketplace for pre-I.P.O. companies._

 _Only a third of the tech companies that went public last year are in the
green today, meaning that many initial offering investors are already feeling
some pain in their portfolios and are unwilling to take on new risk._

It's not that there's no companies who want to go public, it's the investors
who want to see solid revenue, more liquidity, and better business plans
before letting these companies risk their money.

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seibelj
If you are a founder and go out to raise money with the goal of becoming a
unicorn, whether for ego / PR / hiring purposes, you are an idiot. I think a
lot of companies wanted this label for no rational reason, and this is a
symptom of that craze.

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chollida1
> Now, for only the fourth time since data the early 90s, there have been no
> tech company I.P.O.s in a quarter.

> Since 1993, when the firm started collecting data, tech intial offerings
> have been absent from only three quarters: the third quarter of 2002, the
> first quarter of 2003 and the first quarter of 2009.

Having liquidation event language in mezzanine rounds of funding isn't that
new.

I'm now wondering how long it will be until we see language that penalizes a
company if it doesn't have a liquidation event in a certain time horizon in
its series A or B rounds of funding.

~~~
tryitnow
I think Spotify's recent funding (a loan!) penalizes it if it doesn't have a
liquidity event.

~~~
mrgordon
Yeah this is relatively common

