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Silicon Valley Venture Capitalists Prepare for an I.P.O. Wave (nytimes.com)
144 points by raleighm 11 months ago | hide | past | web | favorite | 158 comments

Cashing out before the crash while the markets will still support IPO's

The big question - how much will they get for the vaporco known as uber?

Let’s say the company you work for goes public and your stock is suddenly worth $1,000,000 (as an example). A wise investor, you normally put all of your other savings into broad market index funds. Now, do you sell your company’s stock that was given to you and took you four years to vest into, or do you hold on to it and hope the valuation keeps rising? (This is a rhetorical question btw)

If you had $1MM in cash, how much of it would you use to buy the company's stock?

This exactly.

I work at Google and it astonishes me how surprised people are when I tell them I use autosale, the company program where your stocks are sold immediately as they vest.

They always ask "Don't you think Google stock is going to go up?" And I always reply that yes I do think it will go up but

1) that's not the right question to ask, you should ask whether it will go up more/less than anything else you could invest in with that money

2) My future compensation, both in terms of stock and salary, is already heavily tied to Google's future performance, so I have even more incentive to diversify compared with someone who doesn't work there.

I had a friend lose almost everything in the dotcom crash by being solely invested in his employer.

His advice exactly mirrored yours

I think it's very poor idea to own stock in your employer. This famously is highlighted by Enron encouraging it's employers to invest their retirement account disproportionately in enron stock. The employees that did lost their job and their retirement account at the same time. [0]

It's probably a less bad idea to own stock in a company you control on a managerial level (C level or on the board).

[0] https://www.nytimes.com/2001/11/22/business/employees-retire...

Even for CEOs and board members diversification is a good idea. They are just limited in how much they can diversify because it looks bad if they sell too much of their stock.

Honestly, it depends. Generally you want to divest, but you would have been an idiot to divest Facebook stock, for example.

If you believe it's a great investment (which you might -- given you work there!) then keep the money in. You might understand the business better than other investors that are not working in the company because you have a better view of the market and/or the stuff that is being worked on. If not, sell and reinvest in a different asset.

#2 is the dominant point. One of the subtle points on diversification is that it's ok to take less returns if they are uncorrelated to your other investments - you want things that go up when your main investments go down. Even if you're 90% sure that Google will beat the market, you want protection for the 10% case. (And yes - your human capital will take the upside when Google continues to do well)

This is not investment advice - but the other personal finance protip I've learned is - don't put a high percentage of your high net worth in the success of your immediate work. This is why you see SV-elite raising rounds (Levchin - Affirm, Moskovitz - Asana, Williams - Medium, etc) and not just using their own capital. It feels very counterintuitive if you're a founder, because you likely made a large portion of your net worth due to investing in your own merits.

This reminds me of the number one rule I hear from old-money types: never touch the capital.

It's not like you're taking much career risk by working at google, so you don't really need to diversify it away. It's much more important for smaller companies.

The problem isn't how risky your career at Google is, it's about the correlation of that risk with the risk of your investments. The most likely risk of working at Google is if you lose your job. Well losing your job is highly correlated with whether Google lays loads of people off. Which is highly correlated with the share price collapsing. Which is highly correlated with the tech sector crashing.

So most likely scenario for that risk to materialize involves: Google runs into trouble so needs to lay people off. So at that point, you've lost your job, and all your investments in Google are down for the same reason you lost your job, and because Google is such a large company it's layoffs mean a flood of talent into the labor pool so your future job prospects are effected.

So your safety net of savings becomes far less valuable at exactly the time you use it most.

It almost doesn't matter how safe you think Google is - because by working there you're already massively more invested in it than almost any investor would be.

That's sort of my point. It pretty much takes the entire tech sector collapsing for you to lose your job and (the value of your) shares. Something to think about, but not even close to the same league as working for a ~200 person startup or putting money in the investment banking institution you work for.

I'll also admit there's no reason I know of to keep your money in google stock if you work there, but that goes with point #1, not point #2.

The entire tech sector doesn't have to collapse for Google stock to go down and for Google to need to lay people off. Google could easily become the next IBM and fail to keep up with rest of the industry or even worse it might become the next Enron and be completely destroyed by bad leadership. Both IBM and Enron were extremely successful companies in their day.

Are we suddenly living in some alternate universe where former Google engineers have any trouble finding a new job? They are after all top 1% (of the top 1% :) of the talent pool. So what you say might make sense for smaller/less respected companies, but certainly not for FAANG.

You could have said the same thing about IBM or Enron at some point. Things can change.

I'm sure people an Enron and Lehman Brothers thought the same. Even if it's a one in a billion chance, you should be protected for that.

Spot on re: 2. That might even extend to reducing exposure not just to Google, but to the entire asset class. If you're a Boglehead, one could simply reduce exposure to large growth stocks and increase exposure to small/large value stocks. That way, you reduce the correlation risk of losing your job and having your portfolio tank at the same time.

Regarding your second point, I always think of all those employees at Enron, many with stock-heavy compensation plans and even 401k funds heavily focused on Enron stock.

When the jig was up, not only were they out of a job, but all those investments evaporated.

If you feel your company will do better than an average company based on knowing the employees and strongly believing in its roadmap, culture and ability to innovate, it isn’t irrational to accumulate stock in it.

It's irrational to believe that you're more likely to be correct in that assessment than any other person who makes a bet on a specific stock.

No, it is not. This is one of the few times you are actually allowed to trade based on insider information.

If you are capable of correctly estimating that, you are likely better off running a hedge fund than working at Google.

Not really. Employees can have much more information and market insight than an external analyst, especially in tech.

Yes, but what you need to be able to predict is how the market is going to value your stock in $N years. Knowing that you have cool tech coming down the line, or that your colleagues are way smarter than your competitors', etc, might give you inside that analysts lack, but it rarely qualifies you to predict how the stock is going to perform - particularly in a large enough company where the pieces you see are small picture relative to the overall performance of the company.

It's also easy to get blinkered, and deceive yourself into thinking that the company will be successful despite the warning signs that those outside the company might see.

I worked at a bank during the GFC. And it was easy to believe (perhaps correctly, but that's irrelevant) that we weren't really in that much trouble. We were solvent, we were diversified, we weren't exposed to sub-prime, etc. But the market took a beating to us. And it didn't feel like that was justified. But that simply didn't matter. The stock was in free fall, and even if we were right and the market was "wrong", the market is always right because that's what sets the value. If you could afford to take a long term view, then the price recovered, and it wasn't the end of the world (though there were definitely better performing investment options). But I had colleagues who were leveraged against company stock and were getting margin calls every second day.

Which brings me to my second reason for hating to hold stock in my employer - those colleagues couldn't sell their stock due to insider trading rules. They had to find the money for the margin call, because the fact that they had "much more information and market insight" (as you put it) actually meant they weren't allowed to sell. Holding (public) stock in your employer is a big risk because even if you see the price crumbling, you may not be able to get out, and you just have to take the hit.

Note that not all stock compensation is the same. It sounds like you’re talking about restricted stock units, but with (say) ESPP, immediate sales can have less-than-optimal tax implications.

Is there a relative tax advantage to waiting to sell ESPP shares? AFAIK, an ESPP discount counts as earned income in the same year, and LTCG tax advantages would only apply to growth, which would be the case for holding any other stock over that period.

If you sell ESPP without waiting a year, that’s a disqualifying disposition. The difference between purchase price and sale price is taxed as ordinary income. If you hold it for a year after the sale (and 2 years after the grant), that’s a qualifying disposition, and you pay the lower of the discount or the profit from the sale price as ordinary income and the rest of the gains as LTCG.

If the stock is generally not going down and your company does the typical “you pay the lower of the first and last day price of the offering period” thing (a look-back provision), holding the stock is the only way to get preferential tax treatment on that part of the benefit. Of course this isn’t a sure thing; you do risk the stock going down before you finally sell.

I like to keep various employee stock grants for about a year, mostly so I feel like I have "skin in the game."

In general, though, my employee stock is usually not much. If I had a huge windfall of stock, I'd probably consult a financial planner and sell much sooner.

Would you not want to sell stock you have held for some time to take advantage of lower capital gains - or do the US tax authorities assume you are selling older stock first?

RSUs are taxed as income when both vested and released (generally simultaneous). From then forward, gains are capital gains from a basis of the value that was taxed as income.

With respect to lot identification (what shares did you actually sell for tax purposes), within an account, most brokers will let you elect specific lots or FIFO and I believe the IRS allows you to elect average basis. (There’s no particular advantage to making that election, IMO, so I never looked into it but vaguely recall that being the case.)

Across accounts, except for wash sale treatment, the IRS does not assume that when you sold in account B that you were selling shares acquired in account A.

If you sell right when it vests there's a negligible capital gain (or loss). The value of the RSUs are taxed at regular income when they vest. Any difference between that value and the value when you sell them is a capital gain (or loss) and that is what's subject to capital gain taxes. i.e. if you sell once they vest the capital gain/loss is essentially zero (because the stock hasn't had time to move much)

e.g. if your RSUs are valued at $1000 when they vest and you sell it a few minutes later and the value is now $1005 you'll pay regular income taxes on $1000 and have a $5 capital gain (i.e. when you file your taxes the cost basis for the holding are $1000, not $0)

It is taxed as income regardless at the point of vesting.

I think the op was saying that you already owned the stock - that now becomes worth 1,000,000 and presumably would have paid income tax for the FY when you vested.

You surly don't pay income tax on the gain of already owned stock but CGT.

Back in the day 2000's I did own stock that was worth over 1,000,000 certainly wouldn't have had to have paid income tax if we had been bought out at point - but that was in the UK

This subthread is about selling at point of vesting. Unless you are a founder with a 86(b) election, when you vest it is income.

Where do you invest that money subsequently.

You're missing an important caveat in number 1, which is the tax implications. You've got to compare selling immediately and paying regular income tax vs selling in a year and paying long term capital gains tax.

If you can beat that difference regularly in the market then you're probably in the wrong industry...

When the stock units vest (or are exercised in the case of options), you are taxed on their current value at the regular income tax rates. What would be taxed at the long term capital gains rate are any gains that happen _after_ the stock is in your possession. The former component is likely the one that will dominate within the timespan of a year.

Not in the case of Incentive Stock Options. They are taken into account with AMT, but you do not pay regular income tax at the time of exercise. If you have ISOs, selling within a year is subject to regular income tax, but if you exercise and hold the shares for more than a year, you only pay cap gains tax. And if they have a low strike price relative to current value, the difference can be quite significant. I know this because I'm dealing with precisely this situation right now and trying to decide my best move. I'll probably hedge my bets and do some of each.

Right but the subject at hand here is rsu not iso.

Cap gains is only on the stock's growth in the year after it vests. It's possible the stock doubles or more in a year, but generally unlikely.

Also, this is functionally equivalent to auto-selling RSUs and immediately repurchasing shares with the proceeds, from a tax perspective. RSUs should literally be treated like cash bonuses for public company employees - you should only keep the number of shares you would buy out of your paycheck.

The real question is why a company like Google is still giving stock to employees. The whole thing is a con at the expense of ignorant shareholders who somehow think all this dilution is not coming out of their pocket.

As sibling points out, this is reported in the financials of the company so shareholders are informed.

The reasons companies (listed and otherwise) give stock rather than cash are: 1)cashflow - it allows them to compensate people without affecting the cash position of the business 2)tax - sometimes it's more tax-efficient for the company than cash compensation 3)incentivises retention - vesting keeps people on the treadmill, especially if you re-up people while they vest so they would always leave a lot on the table if they walk. This is standard practise at Wall St firms so it's not SV-specific. 4)incentivises long-term value creation - if people get granted at around the fair value of the company when they join, then when they (exercise and) sell, they receive a share in the value they helped to create. It very much more direct than other forms of compensation 5)flexible - it's very difficult in many cases to adjust people's cash comp downwards. On the other hand if you structure a big piece of their annual comp as a discretionary equity bonus you can flex that 6)clawback - unvested equity is easy to claw back in the case of employee malfeasance. Cash is pretty much impossible to get back short of a lawsuit and even then, good luck.

I totally get that people's long-term financial well-being is often too correlated to their employer's stock price, but it's really no mystery why firms do this. It's not at all an SV invention either, it's very similar to the template used for a long time by Wall St firms.

Yes I know this is not just a SV thing, but it is still a con. About the only rational reason for granting stock in a company the size of Google is for tax reasons, but there is not even a good case here. If you want to tie compensation to long term performance then do this, don't just grant stock that can be sold straight away.

The reason it is used by lots of companies is it is a very effective way of stealing the shareholders money without them squawking.

Stock based compensation is reported as an expense in income statements, so, you're wrong.

This is why I said ignorant shareholders.

To "ignorant" shareholders, there's no difference between stock and cash compensation.

In the long run this is true, but in the short run ignorant shareholders overlook the dilution and just focus on the reported cash profit.

I do say I find it interesting that people even think that if you are going to be paid $x in total compensation it is better to be paid $x-y cash and $y in stock. I guess this sort of magical thinking is why companies do it.

That's what I'm saying, the "reported cash profit" includes stock-based compensation as an expense exactly like regular salaries. You don't even have to know what dilution means.

As opposed to the use of multiple share classes with different voting rights?

Well yes another con of the shareholders. Why shareholders invest in companies doing this sort of stuff is beyond me. It is not as though they are they actual owners of the business or anything.

I agree with you there (one reason I sell all my goog)

No its part of the employees comp - you seem to have a very 19th century Dickensian view of employees.

Not at all. I just think the employees should be paid in cash and not in shares as a way to hide the total compensation cost.

Ah so we should just tug our caps and be good little peasants and get above ourselves and say "thankee kindly master Frodo after saving the world ill just get right back to cutting the grass at bag end"

If you work at Google and you are paid in cash you can buy as much or as little of Google stock as you want. There is no rational reason (other than to fool ignorant shareholders) to pay part of your total compensation in company stock.

Tax efficacy and a much better gearing also owning shares in your employer is a good thing both for the company and socially.

This is absolutely the right way to think about this. However if you have options the situation is different. There may also be tax considerations.

Another variable is whether your personal effort materially affects the outcome for the company. If you think your work will dramatically increase the value of the company you may want to own more stock ... presumably though if this is the case it's already reflected in your compensation (and maybe part of that is stocks/options as well).

The way I tend to think about this is that if you're working for the company you're already invested in it to some degree so from a diversification perspective I'd tend to want to own less stock of the company I work for.

> Another variable is whether your personal effort materially affects the outcome for the company.

Well no, the question supposes you work for the company in either case. If you held $1M in cash, would you invest it all in the company you work for because maybe you can affect the outcome? If not then probably you shouldn't hold onto $1M in equity... if you're perfectly rational that is.

There is one reason that it might behoove you to keep everything invested in the company you work for.

It may be that you have insider information that no one else knows.

Technically if you buy the stock based on insider information you're breaking the law. If you get stock and don't sell it I don't see how that can be considered insider trading...

Yes, which is why I said "keep" the stock. If you're buying and selling based on insider info, you could be in trouble (thought unlikely as an employee that isn't an executive).

But no one could be prosecuted for just not selling stock they receive as compensation.

That's fine. The question is not "are there good reasons to invest in your employer." It's "are you rational enough to treat $1M equity and $1M cash the same."

Also, it is uncontroversially a bad idea to invest "everything" you have in one company.

And then take that answer and invest even less given that, as an employee, you are already exposed to downside risk.

I think it's really dumb to buy your employer's stock on the open market. (Not including whatever stock plan you already heave,) You're already exposed to risk from loosing your job.


It’s not all or nothing. Selling 25% probably makes sense. Selling 100% probably doesn’t. The right balance depends on what % of your total net worth that $1M represents.

I also think it highly depends on your answer to “how excited are you about the company’s roadmap for the next few years?” and “do you feel like you / the company have more to do on the topic?”

Yes exactly. For somebody really looking to optimize, research Kelly criterion.

I had a friend who chose the latter during the dotcom boom, and he lost everything when the market crashed. When the company we were working for got acquired, he couldn't believe he was getting a second chance and kept telling me to cash out so I didn't end up like him.

If you really believe that the company's stock price will do well in the future, go ahead and keep some shares. But I would still put a significant percentage in safer investments.

An age-old question. If you look at Larry Ellison or Bill Gates, they would not be where their are without holding a whole lot of stock when the could have sold. Personally, in the case of your first liquidity event, it is a great time to take enough off the table to never have to worry about money again. Beyond that, it is a matter of risk tolerance and what you find entertaining.

Here are the wise words from the CEO of the first start-up that I worked at, which went public (but I was too junior to make much money): "Remember, at an IPO, the people that know the company best think that it is a very good time to be selling stock."

Quite often, someone in this situation is going to also have more shares vesting over time. Even if you sell all you can on day 1, you will likely participate in future gains.

The short version is: retain a competent wealth manager to advise you.

EDIT: not all wealth managers are scam artists. If you suddenly earn lots of money and don't know what to do with it, find a professional paid by the hour to advise you. Do not listen to the people telling you that anyone charging you for advice is automatically a scammer. Also don't listen to people telling you that it's "not that hard" without any context on your experience and understanding of finance. They have nothing to lose by looking smart and confident on the internet while discussing your money.

It depends on your overall net worth. If the stock represents the majority of your net worth, you might want to diversify across different types of assets - your newly introduced tech stock being on the high-risk end of that spectrum. If on the other hand you have "enough" of your savings in lower-risk assets, then it can make sense to keep all your stock.

> The short version is: retain a competent wealth manager to advise you.

This is not good advice. "Wealth managers" are totally useless and exist just to charge you fees and create complexity. I really like mgummelt's comment above; it doesn't have to be more complicated than that!

The recommendation is typically to use a "fee only" financial planner, who actually charges by the hour for advice instead of taking commissions on the products they sell you.

And how will you verify that they are not taking commissions on the side in addition to your fees?

Depends on your threat model. If you're concerned about the inherent well-known conflict of interest in the industry, it's probably sufficient to ask (a key word is fiduciary - are they a fiduciary or not?). The general pattern for commissioned financial advisors isn't optimal for you as a client, but it isn't fraudulent. There's also an organization called NAPFA [0] that registers fee-only advisors.

If you're worried about a malevolent actor who's willing to commit fraud and openly lie, well, how do you deal with trust for any other kind of professional? Reputation, credentials, reviews, referrals, word-of-mouth, etc.

You can also seek advice from someone independent of handing them your money to invest. You can ask an advisor to tell you what you ought to be doing with a self-directed brokerage account at another firm. I guess it's not impossible that there could be an elaborate scheme to collect commissions even across institutions, but again, you need some sort of trust for the whole project to make any sense.

[0] https://www.napfa.org


Exactly. From personal experience, "wealth managers" are a scam. They're just below the scam scale from mortgage brokers and real estate agents.

You're thinking of people who charge you a management fee and try to "beat the market". I'm talking about people who charge you by the hour to explain to you how to manage your money. Maybe "financial advisor" is a better term?

Either way qualifying any form of professional counsel as "a scam" seems a bit excessive, and also bad avice.

"By their fruits you'll know them". One has to be careful, because there is a lot of professional-looking scam artistry going in this space.

Also, you mention the term "financial advisor". I urge people to remember that there are different kinds of those, including those who know shit and care even less, and all they want is to sign you up to some financial MLM scheme. Source: I know some of the latter kind personally.

Yes, you have to watch out for unprofessional and dishonest people when selecting a service provider. That's very different than saying all providers of financial advice are automatically dishonest by virtue of their profession.

Not sure a wise investor would 100% use "index" funds especially one with such a large > 1M portfolio.

At that level you would need to look at diversification both on a geographical and sector level.

In the UK I would of course sell enough to use up my CGT allowance - you can also move up to 20k£ into an ISA to put the shares beyond tax for CGT and Dividend Tax

Index funds are already diversified. When you invest in one, you are betting that the entire economy or a sector of the economy, depending on the index fund, will increase in value.

Yes but take Enron for example or any other value trap an index fund must buy those.

And the Massive buying of indexes bids up the price of shares like FANG's beyond the shares real value.

On average, one company in the portfolio going bankrupt isn't going to make much of a difference assuming the portfolio is large enough. Most index funds have a large enough portfolio.

Not really a binary question. So it might be better to think about it as what mix of stocks(including the one I work for) should I own with my portfolio? Especially since my job is tied in with XYZ company. Anything less than 50% in the broad market would be very risky. In fact you might want to think about aghast some % bonds.

Will this result in appreciably more money flowing into the rest of the ecosystem from the people that are enriched turning into Angel investors? Or does that only happen with the massive IPOs like Microsoft, Google, et al?

There are some good and some not so good among these companies. Uber is a taxi company with an app. Cars still cost the same as before to run, drivers still cost the same as before, all costs are the same as before. So once the subsidization by VCs stops, Uber rides will be as expensive as any other ride. Self-driving cars will not save Uber either. There is no network effect with self-driving cars, and once the technology is ready it will be commoditized, and Uber will have no advantage.

As a rider, it's great to use it while you can, but there is no actual business there.

Airbnb on the there hand has all the advantages people like to see in a business.

Re: "all costs are the same as before"

If you mean the same as running a Taxi, you're ignoring the higher prices caused by the artificial scarcity imposed by the medallion system, and ignoring the cost / fee for of the medallion itself. Uber could absolutely return some of that to the user in the form of lower prices than traditional taxis; and keep some for itself, of course.

Uber also has some efficiencies - its ability to pair customers and drivers makes robust taxi markets in a lot of places that wouldn't otherwise have them. (I honestly don't even know if my city has a traditional taxi company, but it definitely has Uber and Lyft)

I'd be surprised if it doesn't. I know someone who lived in West Virginia for a while. Before she got a car, she had to call a taxi to get to and from the grocery store.

(To be fair, this was the eastern panhandle, which has the capital and the tourist attractions.)

If you're going to count that, you'll also have to figure out the costs for negative externalities like congestion, pollution, accidents, social services for drivers (health care, retirement, food stamps, etc), bankruptcies, and regulation.

The medallion system had its issues, but there were reasons it existed. City after city decided it didn't want infinite unregulated taxis in circulation.

I disagree. Uber facilitates the process of becoming a driver, therefore there will be a larger supply of drivers. I believe the price of a fare will decrease due to the increased competition.

Also facilitates becoming a rider through ease of use/payment. And more riders, more revenue even with the same margins.

The app is much smoother than the 2011-era cab experience — call a phone dispatcher, hope a cab shows up eventually. (Of course, Lyft provides exactly the same experience for consumers and even taxi companies are attempting to provide an app nowadays.)

Has Uber stopped operating at a massive loss, subsidizing every ride with VC cash? Fares are already artificially and unsustainably depressed, and without Lvl 5 automation (clearly not incoming soon) the fares eventually have to rise. Those fares will rise even more as driver backlash against how little they’re paid increases with time.

Amortization over say 20 fairs per day * 20 days a month * 12 months a year, reducing the cost by 1 cent per ride per ~50$ dollars in cost savings. Suggests it's just not a meaningful savings.

Where are you getting the 1 cent reduction quantity? My only point was that a greater supply of drivers could yield a lower price, but I never asserted to what degree the price would decrease.

Increasing costs to add a driver does not prevent company's from adding new drivers it just makes that more expensive. Thus, you need to consider it as another form of cost savings not a difference in the number of drivers.

A company that pays 50$ less to get an employee can reduce fairs on the order of 1 cent or make an extra 1 cent per ride. It's possible Uber might add a few cents per ride this way, but it's not particularly significant even assuming the average driver does not last that long.

Having ridden in thousands of cabs, and hundreds of Ubers, calling Uber a “taxi company with an app” is like calling an airplane a car with a crossbeam.

You must have some pretty poor apps - my local one doesn't even need an app.

In the UK when I call my normal cab company it knows where my phone is and asks you to press 1 to book a cab to my location - I then get a SMS confirming the booking another when the cab is dispatched and one when it arrives

I have never used an app to call a taxi. I used taxis for decades, and when Uber came out it was such a night and day difference that I have taken exactly one taxi in the last five years, when my phone battery was dead.

My impression is that Uber is making money of the rides.

It loses money on all its other research and investment schemes.

I don't know if there are any actual facts out?

No, "Uber passengers paid only 41% of the cost of their trips for the fiscal year ended in September 2015." Prices have not changed much since then, so they are a long way from break even.


That's assuming the only reason they paid that much of those trips was because of price. That's not true of how Uber operates.

They do a lot of things like driver incentives (for being logged on a certain amount of time etc, or for signing up in the first place - a lot of this is during market setup for a given city), complete discounted rides based on new signups for riders, etc. You can assume as their penetration into the market saturates for both drivers and riders that both of these costs will diminish.

A lot of people on Hacker News being US based also ignore the fact that Uber is highly international. I use it almost everywhere I travel for work, I think Malta was one of the few places they weren't. Lyft and similar competitors are mostly either US-specific or even city-specific. There is a lot of different economies in other regions to look at.

Prices haven’t changed much in the US but Uber has divested some of its most expensive investments around the world (China, Russia, APAC).

thats 3.5 year old data (data started in FY Sept 2014) in a hugely changing and dynamic market, so basically not useful.

I work at Uber. We have publicly released financial statements each quarter. For q4 last year, our rides business was contribution margin positive (aka, it makes money). What loses money for us is R + D, and growth in new products (freight, eats, etc)

I notice you don't actually provide actual data to make a point. Which destroys your argument.

41% is such a ludicrously large way from 110% you need some real data to back it up. Further pretending the start date is means the data is a full year older is silly. At best you can have 2 more years of fiscal data.

I just don't get where the money goes if that's true.

If I pay $10 for a ride, $7 goes to the driver, which covers all the cost for the car, gas, his wage etc.

$3 goes to Uber. What marginal costs do the have for my ride that are anywhere close to that?

16,000 employees. Salaries, benefits.

Global facilities and infrastructure.

Numerous exploratory business ventures, like Uber Eats.

What you're saying is that you've never built a $10 billion sales, global corporation before. Which is very understandable, few have.

> Numerous exploratory business ventures

This is my original point!

Self driving cars have massive network effects, just like any product dependent on machine learning. More users -> more data -> better product -> more users.

It's the same reason Google is invulnerable in web search.

Google isn't invulnerable in search because of a network effect, which is about your product becoming more valuable because you connect your users to your users (e.g., the Bell System or Facebook). Google is invulnerable in search because search has a very long tail, requiring massive investment to reach adequacy for most users. Google's advantage is economy of scale.

Self-driving cars definitely don't have a network effect. They also don't have the came kind of economy of scale as Google. A person who learns to drive in one, specific part of the US is able to drive, with minor additional learning, in any part of the US. Yes, there's some minimum size necessary to get the data for self-driving cars. But unlike with search, where the minimum size is generally "the whole web", the minimum size for self-driving cars is much smaller. That's why we're seeing many different companies work on it.

Network effects are not limited to products that connect users. A network effect is when more usage increases the value of the product [1]. More Google users means more click data, which means better search ranking.

But yes, Google also has scale economies.

[1] https://en.m.wikipedia.org/wiki/Network_effect

I don't think that qualifies, as network effects keep increasing with the size of the network. Click data's value tails off pretty rapidly once you nail the top few things that people click on, which is the great bulk of the usage.

It's actually exactly the opposite. Google's most valuable data is the long tail, which is substantial in search, since they have some data for rare searches, whereas Bing as none.

The network effect for google comes from it's relationships with users and advertizers. This is why Microsoft couldn't overtake them despite spending so much on bing.

More users -> more data -> better product -> more users


More users -> more labeled data -> better product -> more users

ML systems need lots of labeled data, not just lots of data. This is one of the primary why game playing AI's have had such great successes, tons of labeled data are relatively cheap. Great discourse on this and other related issues here:


Supervised learning requires labels. Unsupervised doesn't. Self driving cars use elements of both. This is why companies like Cruise and Tesla are rushing to get basic self driving cars out there. They need driving data.

Fair enough. I guess I'm in the camp that unsupervised learning is of limited utility.

You can get creative about labels. For instance, with known velocity of the car, predict where an object in view of the camera will be 5 frames in the future... This makes all data recorded by the camera effectively labeled, and is actually a useful thing to have.

Human input in normal cars with sensors provides supervision.

Things like uber pool & friends is something that is hard to do efficiently as a dude with a few weeks. While airbnb is a fancy ecommerce website ;).

"Airbnb is just a fancy ebay CRUD app for rooms, anybody can code that!"

So how do the "rest of us" profit from these IPOs?

Work for a bunch of startups for 1-4 year stints. Don't leave until you're at least 1/4 vested. Then if you don't think you're on a rocket ship, find another. This is a common career path among silicon valley folks. If you're not an engineer or talented executive, then make money another way and start angel investing and take a long time horizon.

Pick the right growth candidate, hold your nose at the valuations, buy and hold for a few years until the growth catches the fundamentals up. Or wait until (assuming) the market drops at some point and buy the growth at dramatically more reasonable valuations. I'd also say buy what you know; that is, if you have experience with a company and know that their products are particularly good, providing the company a likely advantage over time assuming they're well run. I don't know much about Zuora for example (so if I want to buy it, I'll spend a lot of time on research), but I plan to stalk DocuSign for a reasonable entry point as I know their products well and I like their position.

As it becomes more profitable for VCs to invest in startups, they invest more and in more startups. Now that there are more startups and they have more money, they need to hire more software engineers, and have more resources to do so. So software engineer salaries go up.

I don't think these IPOs are designed to make profits for the rest of us.

That depends on what you're buying.

Atlassian has tripled since the early days of its post IPO trading.

Shopify is up 5-6 fold in two years.

Square is up four fold in 2.x years.

Baozun is up seven fold in 2.x years.

I've thought for quite some time that rather than the broader overall market being allowed to participate in the possibility of crazy gains from technology startups, the rise of the VC financing model has resulted in the lion's share of gains (and losses) going to an elite group of well connected people, and once the easiest money is made, let the market have what's left over in a traditional IPO.

As you point out, there are still some examples of fantastic returns, but considering how the world has been transformed by startups, I don't recall reading very many stories of individual investors getting in early and making a killing, but I do recall reading plenty of stories of startups (that obviously needed significant funding along the way) growing into multi-billion dollar enterprises.

This is something you can believe only if you think the vast majority of startups are making these returns. The fact is the lions share of risk also goes to VCs.

If you gave an average investor the kind of deal flow that big name VCs have access to you’d fry their central nervous system.

YC, for all it’s prestige, has only had one startup actually IPO, and only recently. Can an average investor survive this kind of torture? Never knowing if maybe one day all the money they put down will actually net some return? Knowing that they will have to continue investing or else hang all their hope on what they’ve invested in so far?

There’s plenty of sure money to be made buying post IPO, be content with that.

> YC, for all it’s prestige, has only had one startup actually IPO, and only recently.

That may be perfectly consistent with my point - VC's typically provide multiple large rounds of financing, something that formerly would have required going to the public markets, and this can delay IPO's until companies are heavyweights and most of the big gains are in the bag.

An IPO is not the only way for VCs to make money. When a company raises money there is often a chance for the earlier investors to sell their shares to new investors. At the time time of the IPO they have already made a lot of money.

There's only been one IPO, but there's been ~83 exits: http://yclist.com (Only select the "Show Exited" checkbox.)

Isn’t that just a long-winded way of saying that early investors, who take on more risk, earn superior returns?

As for the barriers to the general public investing in risky startups, that’s a feature not a bug. Look no further than dotcom 1.0 or the present day ICO market to understand why.

Not really, with initial and intermediate funding now being covered by deep pocketed VC's, the public no longer has the chance to invest in earlier stages of the development cycle.

Regardless of whether this is good or bad, it is different.

This isn't really true. If you actually wanted to and tried to put in early stage money, you could. Lots of startups raise their first few hundred K from "friends and family" type rounds and are usually readily looking for small investors to write small (25k or even less) checks.

I would bet within a couple degrees of separation within your network you can find someone raising money for a project you're at least somewhat interested in. There are also platforms like AngelList that are making it easier to fund deals with small money.

It's not true that it's different?

How might an individual know about and do some baseline reasonable due diligence on these opportunities as identically easily as he could with a publicly listed stock?

And why do VC's bother going through all the work, if the outcome is no different than if they'd simply have left things be as they were, with these companies getting funding from the public markets?

How many of those people get pushed out by later VC money because they want to clear up the cap table?


A rising tide lifts all boats.

You don't buy these companies to catch a temporary rising tide. Market timing is more often financial suicide, one of the worst mistakes amateur investors make.

You buy for the growth and long-term picture. If you believe in the growth potential, you buy in at an early opportunity.

ServiceNow's stock has gone up six fold in less than six years. Their revenue has climbed from $424m in 2013, to $1.93b in 2017. The last four quarters they've brought their burn rate down to meaningless while maintaining the growth, with immense gross profit margins that imply they'll likely become nicely profitable in the future.

That's a story not about rising tides, it's about the growth in the business and its future prospects.

Ask GE if rising tides lift all boats. Or AT&T, a functional, highly profitable business whose stock hasn't gone up in five years. Or Exxon, whose stock is down over five years. Or Procter & Gamble, which is still a thriving business, and whose stock also hasn't moved in five years. Those were all considered world-class blue chip stocks in the recent past.

ServiceNow doesn’t have a dividend, your other examples do. They are different types of investment, growth vs. value.

Let’s not forgot Apple’s rise, fall, and post 2000 rise again. If you were young in the 80s, bought Apple, and planned to save it for retirement you would be sitting on a nice chunk right about now.

In the 90s there was also a very good chance for ending up with 0.

Here is a pretty decent article about 90s companies [1]. Didn’t realize CompuServe was owned by H&R Block.


You're cherry-picking.

The same way you benefit from a successful startup. You don't.

Smells like a bubble....

something tells me all stars are aligning for a huge correction. real estate prices inflated beyond imaginable while wages bave been stagnant. almost a decade old tech companies not making any money valued in billions and an administration made up of moron wages war on issues that have no relation to the country. something tells me shit will collapse big time in Trump's last term and everything will be blamed on him and people who voted for him by the media and the elite. meanwhile the elite will have cashed in on all these ipos by having dumped overinflated stock of unicorns on middle class. 2020 will be a hell of a year

The only problem with the "something tells me" line of reasoning is that it's always being espoused by someone. Literally at any point you can find people who feel the way you do. Good news is that if you keep it up you'll eventually be right for a little while.

> Good news is that if you keep it up you'll eventually be right for a little while.

A broken clock...

good news is that is not something I keep up. Out of my 11 years ib reddit and however long here this is the first time I am saying out loud that there will be a correction in within a next year or two. to the broken clock guy, eat shit.

Do you mean term or year? 2020 will still be in Trump's first term.

Pay walled on mobile.

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