
Silicon Valley’s ‘unicorns’ have regulators worried - tosseraccount
https://www.washingtonpost.com/news/the-switch/wp/2016/04/01/why-silicon-valleys-unicorns-have-regulators-worried/
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fiatmoney
Regulator with power for regulating public companies warns of the grave danger
in companies not being public. They could be escaping their benevolent
oversight!

~~~
trevyn
Bahaha yes.

"White echoed the concerns of some industry insiders that these tech start-ups
are missing out on the market discipline public companies receive by being
accountable to the whims of public shareholder."

Really? Being accountable to _whims_ is a good thing?!!

~~~
x5n1
It puts the fear of the markets and investors in the mind of the CEO and makes
him or her work like a dog. As it should. There is definitely something to
that. Don't meet analyst expectations and get burned. Yes that keeps you
performing rather than doing your thing. At least in the short term it does
some thing. In the long run we don't know how it rolls.

~~~
WalterSear
We know how it rolls in the long run. Terribly - for everyone but the
shareholders.

~~~
x5n1
And that's the only one who matters. The owner of the capital. At least that's
how our system is set up.

~~~
WalterSear
No, that's not how our system is set up. It's how our >marketplace< is set up.

------
paulsutter
Mark Cuban points out that the SEC should be issuing clear guidelines instead
of vague threats[1].

>Cuban argued the SEC should make clear rules so private companies and
investors know where they stand with regulators ... "The one thing that could
make the whole thing go backwards instead of forward is uncertainty," he said.

[1] [http://www.cnbc.com/2016/04/01/mark-cuban-heres-the-
problem-...](http://www.cnbc.com/2016/04/01/mark-cuban-heres-the-problem-with-
regulators.html)

~~~
caseysoftware
But "clear guidelines" would mean that some would clearly be within the rules
while some would be clearly breaking them.

It's a much stronger negotiating position for regulators to use a vague "well,
we're not sure..." and leave themselves room to maneuver and potentially
punish _any_ of the 'unicorns' at any time.

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wrong_variable
> __these tech start-ups are missing out on the market discipline public
> companies receive by being accountable to the whims of public shareholder __

Wow, you mean the type of accountability faced by GM, Ford, Exxon Mobile . . .

how can this man say that with a straight face ?

~~~
saryant
Enron's accounting fraud was only discovered because they're a public company
and forced to disclose those records. Once someone _actually looked_ at what
Enron was up to, the shorts took over and hammered them until they folded.
Only then did regulators actually take a look.

By being a public company, Enron couldn't hide its fraud. I have concerns
about the lack of similar checks on unicorns.

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koolba
Haha. This reminds me of the Simpsons where Homer takes Mr. Burns's boat out
to international waters (to circumvent local drinking laws) and the coast
guard tells them to come back so they can be under their jurisdiction.

    
    
        Bart: [through a bullhorn] Hey, Coast Guard!  Try to stop us now, you lousy Americans.
        Coast Guard: [through a loudspeaker] We can't hear you!  Come three hundred feet closer!
        Bart: Nice try.  You're not going to nail us.
        Coast Guard: But we just want to party.
        Bart: Oh, really?  Then play some rock music.
        [Man on cutter mimics the guitar riff from "China Grove"]
        Homer: [joins in] Come on, Bart!  The Coast Guard's covering the Doobs!

~~~
makomk
Isn't that the episode where they get hijacked by pirates and the coastguard
sit back and laugh at them? An interesting analogy, certainly.

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golemotron
This was a predictable effect of increased regulation of public companies,
(SOX) etc, and awareness that a founder can move more strategically without
being concerned with quarterlies and accountability to shared owners.

Politically it's unsustainable. If we see a half dozen more unicorns with
household names people will tie completely private ownership to concerns about
inequality: no way for the average person to buy a share and participate in
growth.

~~~
_yosefk
You could buy shares in GS or any other public company investing in private
companies and/or underwriting IPOs, so there's that. That said, the idea that
public capital markets are widely considered to be a way to increase
_equality_ , of all things, is stunning to me. I thought/think that people
supporting capital markets view them as a method for companies to raise
capital in exchange for a share of future profits, and that people opposing
capital markets view them as casinos, pyramid schemes, etc., and that the
point of extra regulation for public companies is to protect investors, while
the point of having less-regulated private companies is to lower the cost of
raising capital for those ventures that can make do with a small number of
rich investors.

Even if people widely consider the stock market to be an "equalizer", it
doesn't seem obvious that adding more early-stage small-cap stocks to the
market serves that purpose, because these companies are more likely to go
bust, with a small fraction of them capturing most of the growth, and an index
with a share in all those companies is not unlikely to underperform a large-
cap index. (Incidentally, this is related to the reason that widespread stock
ownership seems to me more likely to increase rather than decrease inequality
- the prices of these things have a high variance; taxing and redistributing
wealth and/or capital gains sounds like a surer path to equality, if that's
what you want.)

~~~
golemotron
> That said, the idea that public capital markets are widely considered to be
> a way to increase equality, of all things, is stunning to me.

Never underestimate the power of spin. Private just has to look worse than
public on equality, and it does. I wouldn't be surprised to see an article
about this in the next few weeks as journalists compete for eyeballs.

~~~
_yosefk
I've already seen such an article, but I still can't imagine hordes of
protesters fighting for the privilege to invest in unicorns, especially now
that much of the bubble has popped.

------
Animats
Some, probably most, "unicorns" aren't really private. They have shares held
by "qualified investors", which can include mutual funds. Fidelity and T. Rowe
Price funds own sizable chunks of Uber and Space-X. Fidelity Contrafund owns
Uber stock, and anybody can buy shares in Fidelity Contrafund. So, in a sense,
ownership in the company is already publicly traded. The SEC allows a mutual
fund to put up to 15% of its capital in illiquid securities such as Uber. This
was intended as an exception to provide capital to small companies, not a way
for a company with a $60 billion market cap to avoid disclosure.

That's what concerns the SEC. When a "private" company gets big enough to be a
significant part of mutual fund portfolios, should it have to start reporting
as a public company?

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samcodes
Be at the whims of activist shareholders who demand short-term profits over
long-term strategy, and in exchange you get "discipline and oversight." Oooh
where do I sign up?

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ihsw
These unicorns are in a unique position to tell the _shareholders_ \-- whom
are, let's face it, increasingly acting like a cartel across wide swathes of
the economy because there are fewer and fewer of them each fiscal year -- to
tell them to _fuck off_.

And that scares the regulators because they're paid to keep "everybody in the
fold" by extolling the virtues of being publicly owned.

Here's a useful tidbit: the mysterious market forces -- the "shareholders" as
they're known -- are actually a small group of individuals or groups that pull
the levers of the economy. The _regulators_ rely on these lever-pullers to
play ball when need be.

Frankly I think these unicorns are right to fear buying into the US economy by
going public, the overt assertions of power by the US government are
definitely something to avoid.

~~~
littletimmy
Surely you're joking? The "shareholders" OWN the companies in question. Of
course it is their right to demand whatever they want from the company - they
own the thing. No company can tell its shareholders to fuck off, because it is
subservient to them.

~~~
Throwaway23412
This depends on the structure of control in the companies. Anyone familiar
with Facebook and Google knows that Zuckerberg pulled some fantastic
manipulation of board seats and Brin and Page created a new class of voting
shares that are 10x more powerful than regular shares. In such set-ups, the
co-founders have permanent control of their companies without having to hold
too many shares.

I imagine that many of the co-founders of the "unicorns" were smart enough to
replicate Zuckerberg and Brin/Page and are subservient to no one.

------
erikpukinskis
Why would I want to sell a company that I enjoy running to a bunch of people
who want to turn it into cash?

Public markets seem to be for people who want to take on some debt or are
tired of being responsible for the future of their business.

~~~
djcapelis
Isn't that true for all forms of investment? Including VC?

~~~
erikpukinskis
To some extent, yes. But if the company is private, a minority shareholder can
only sue a majority holder under the terms of the sale. In a public company
they can sue under the terms of the SEC. If the company is private, the
majority shareholder can act against financial interests if they like.

Public companies are trying to box out specific areas where they might legally
do that: C-corps, mission-based exemptions during public sale, etc

But—and this is full on opinion now—I suspect when the chips are down, the
courts will rule that Google can't just burn a pile of value because "we like
Science" or somesuch thing. They'll get away with it as long as the pile of
money is growing. And hopefully that's "forever". But maybe forever isn't as
long as we think it is. The world is changing. Snapchat cometh.

~~~
Animats
_I suspect when the chips are down, the courts will rule that Google can 't
just burn a pile of value because "we like Science" or some such thing._

That's when stockholders file lawsuits alleging violation of director
fiduciary responsibility. This can happen with a startup if the management
proposes a funding round that's a significant lose for existing shareholders.
The directors have the obligation to act in the best interest of the
stockholders, not the management.

It also comes up when a company has assets and is losing money, and the
stockholders want to liquidate and get some money out, while management wants
to burn all the cash out to the bitter end.

------
ibnaks
I'm not sure what's wrong with this. In the article the only issue I could
find was that when companies are subject to the whims of public investors they
get "market discipline" whatever that means.

If they are profitable (most aren't) I don't see why that discipline is
necessary.

------
darkclarity
If I ran a business (or invested in one) that was already successful and had a
promising future then I wouldn't make it public. I can understand Uber and
Airbnb staying private, less so for Snapchat.

------
Negative1
The whole situation is a bit confusing to me. A bunch of people have given a
disproportionate amount of money to a few companies and those companies now
have massive valuations. If the people giving them money shared the regulators
concern, it seems simple enough to just, well, stop giving them money. And yet
Slack gets $200 mil just a few days ago.

So what is happening exactly? Is there unrealistic optimism happening here or
are people being suckered out of their money. Is the government concerned
about the eventual pop and so is telling the very people who would benefit the
most to quit it? Seems like they should be telling the _investors_ to stop,
no?

~~~
nivertech
These are not real valuations. The more realistic valuations are for common
stock.

Most of those deals are really a debt disguised as an equity.

It just a way to give companies loans, which should be repaid via either
cashflow or future IPO.

When reading news headline just replace: "Uber raised another $1B round" with
"Uber took another $1B loan".

One of the unicorn CEOs said:

 _We need to be worth a billion dollars to be able to recruit new engineers.
So we decided that was our valuation._

If you are issuing options to employees based on valuations fabricated to
attract them, you are pretty clearly committing securities fraud.

[http://blogs.wsj.com/moneybeat/2016/04/01/sec-chief-warns-
si...](http://blogs.wsj.com/moneybeat/2016/04/01/sec-chief-warns-silicon-
valley-unicorns-about-the-horn-wagging-the-tail/)

------
tim333
The problem is:

"Public pension funds—the state-run investment pools responsible for the
retirement benefits of nearly 20 million Americans—have quietly been funding
the recent boom in venture capital."

Then when it eventually turns out the unicorns aren't worth all those billions
it will be your pension money burnt. At least when things float you get a
reasonable estimate of their actual value.

[http://www.bloomberg.com/news/articles/2014-09-23/are-
public...](http://www.bloomberg.com/news/articles/2014-09-23/are-public-
pensions-inflating-a-venture-capital-bubble)

------
mcamaj
The federal government wants Silicon Valley's largest private companies to go
public. The official reasoning is that this will allow these giant companies
to build better governance models, and become more transparent. But what's
wrong with private companies, and do they need to be public to have more
reporting requirements?

------
seibelj
Uhhh doesn't a VC need to close out their position eventually? And mark a
return on their fund? If you take VC money you can't be private forever, you
need to be acquired or go public.

~~~
djcapelis
Not entirely true, the other option is that other people buy the VCs out of
their stake in the private market. In sharply profitable companies, a company
could in theory buy itself back from its own investors without needing to be
either acquired (it acquires itself, essentially) or doing an IPO.

Of course, your company actually has to be making money to do this. Which for
most unicorns is something of a problem.

All investment is essentially debt. At some point either someone else chooses
to hold it at a value that is mutually agreed on, or the company buys itself
back.

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nxzero
Dear SEC, Reduce the costs and risks related to going and staying public -
you'll easily get your wish!

~~~
wavefunction
How would the SEC reduce "risks related to going and staying public?"

~~~
nxzero
For starters, make the rules for the first 365 days after the IPO the same as
being private; which would include limiting the first year of the IPO to
qualified investors.

~~~
avita1
Doesn't that defeat the purpose of an IPO? The P does stand for public after
all.

~~~
nxzero
Doing it this way would remove a lot of risk for the general public after he
365 days passes. Have a better idea?

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ilaksh
The real problem with these unicorn technopolies is they centralize too much
power and control over various aspects of our society. They take on pseudo-
governmental roles. Whether they are on the stock market or not is mostly a
concern for rich traders.

The solution is going to be moving away from proprietary platforms created by
technopolies to decentralized open platforms.

~~~
zavi
#Bernie2016 #420

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cynical_sheet
What natural right do these regulatory agencies (or group of thugs known as
government) have to regulate free people who choose to associate freely? What
they are doing is deeply immoral.

~~~
ubernostrum
What "natural right" do people have to free association?

(hint: the answer is none, because there is no such thing as a "natural
right")

~~~
coupdetaco
Natural rights are those rights given to you by god.

