...based on valuations determined by none other than Tiger Global. If you think those valuations are 100% objective, I have a bridge to sell you.
No one wants valuations to come down:
* VC firms don't want to write down their portfolios aggressively, because doing so will make raising the next fund much more difficult.
* Institutional LPs don't want VC firms to write down holdings either, because they themselves want to show good performance too.
* Portfolio companies never want to raise money at lower valuations than the last round's, suffering dilution, unless they absolutely have no better choice.
I think most people would find it chilling to discover how many things are "valued" principally by the owners or potentially compromised appraisers - and how often these values are accepted by banks and the government for material decisions (e.g., how much margin to extend). It's going to get wild when someone has to sell and actual offers start rolling in.
Reminds me of that scene in The Big Short where the price stayed constant and was not marked down, even though the world was collapsing around them. Heh.
This is normal, requiring an independent audit every time you want to do your books is just not practical. There is a certain amount of grift expected here, 10% or so either direction, it's not big deal. It is illegal though when you start reporting to the government on those valuations, and they get wind of you radically altering the valuations. Trump is in the middle of this fight right now, and he's not alone in getting in trouble for it.
Let's say you are company A and you want to get a loan against your property from Bank B. You bought it last year for $500M. Today you tell the bank it's worth 900B. The bank has every right to say.. uh, we need an independent audit from one of these firms before we will accept that much price appreciation and do business at that valuation.
All businesses can do that whenever they want. If they don't require an independent audit, they are taking on a bit more risk, because you are trusting the customer(company A here) to not lie to you.
But it's mostly not practical because independent audits can take a lot of time, and there are only so many auditors out there. Sure if there was more demand prices would go up and more auditors would enter the business, eventually, but it takes time to onboard.
I guess we disagree on why in this instance it's not already a better place.
I argue it's a great system right now. Companies can choose how much risk they want to take on based on how much trust and lies they are willing to try and sell or accept. At some point the truth will come out and you better hope you appropriately factored in your risk(s).
Without risk, there is no chance of reward, it's just how the system is. Other systems that try to remove the risk from the environment haven't had a very good track record so far.
I also don't agree with this. What you're saying is that we have a mechanism to prevent people from scamming each other, but you'd rather not implement it because you see yourself as more capable of profiting off the scam arbitrage. I think that's kind of sick. Companies aren't people, there's no natural expectation of privacy rights. As with software, a society where the books are open is more secure and more able to capitalize on that security.
When the asset changes hands, it is sold and the then current market price is known. For real estate, the market price is disclosed publicly. For other assets the price may or may not be disclosed, but it is known by both parties and probably by most people wanting to know that pay attention. This is what I meant by the truth will come out.
Let's say your parents, with whom you have a great relationship, are selling their house to downsize and you want to buy it. How tempted are you to get an independent house inspector to audit the house and make sure it's still standing and that you can trust your parents that the house is as the say it is? Essentially zero percent. Meanwhile there is your druggie cousin's dealer who has a house they are wanting to sell and you want to buy it. How tempted are you to get an audit done on THAT house? basically 100%?
We already DO implement the mechanism to avoid scamming people, TRUST. If you have it with someone, you are much more likely to not require an audit, the less you trust that person, the more likely you are to want an audit.
> What you're saying is that we have a mechanism to prevent people from scamming each other, but you'd rather not implement it because you see yourself as more capable of profiting off the scam arbitrage.
No, I'm talking about the basics of economics in our system. If you invest in US treasuries, they are very boring, guaranteed by the biggest government on the planet and very very safe. They also pay next to nothing in real(inflation adjusted) terms. If you invest in companies(aka stocks), then there is real economic risk, but the returns are ridiculously more than the boring, safe US treasuries. Same with your employment. You can go get a boring govt or academic job and be very safe @ work or you can go choose a very risky, but lucrative job that pays a lot. Everyone is free to choose their risk adjusted returns as they personally see fit for their levels of risk tolerance. The more risky will try to make it big and be the next Musk, Bezos, Gates, etc. The less risky will work at the local DMV or school.
> Companies aren't people, there's no natural expectation of privacy rights. As with software, a society where the books are open is more secure and more able to capitalize on that security.
I agree with this, but that's not related to this discussion at all. Personally I think companies should always have open books. That doesn't change that company X thinks the asset is worth $X and Company Y thinks the asset is worth $Y. They can either not do business or hire an independent auditor. Forcing an independent auditor into every asset valuation is just adding extra bureaucracy that isn't needed.
Oh, boy, here we go. Your word-wall-no-jutsu is strong. I shall respond to certain statements as I see fit, because bless you that's why.
>When the asset changes hands, it is sold and the then current market price is known.
Volume is down in many asset classes and the "distressed property" pricing is not being allowed to affect like appraisals in areas like commercil real estate. So, the truth actually isn't coming out, as a matter of practicality.
>We already DO implement the mechanism to avoid scamming people, TRUST.
This is a terrible mechanism absolutely ripe for corruption, which brings us to...
>You can go get a boring govt or academic job and be very safe @ work or you can go choose a very risky, but lucrative job that pays a lot.
Unless you leverage your public or bureaucratic position for personal gain, like trading securities on insider information or using your expertise to either gain a lucrative private position after reaitgning or gaining a public position where you can steer policy towards your interests. But that never happens in America.
>No, I'm talking about the basics of economics in our system.
Right, scams. Profit is taken off the arbitrage of information asymmetry that, in a better system, would not exist (at least so egregiously). Your "trust" is lipstick-pigging the inherent scamminess of free enterprise as it exists in our society.
>I agree with this, but that's not related to this discussion at all.
It's actually the central issue. People are making poor decisions based on their poor access to information. Consensus is deterministic when the information under consideration is equal. What I'll give is that, practically-speaking, that equality is impossible, but it's much easier to approach when one party isn't allowed to hide a massive component of their valuation.
Again, I've yet to see you explain how this auditing process would be more expensive to society than arbitrage-bred profits that are then gambled away in bad market bets and economic crises. What you're running up against is the fact that capital accrual is more expensive to society than distribution to pay for basic goods and services. Hoarding money is more expensive than just using it. Sorry.
So if I understand your position, you want information to always be free in every transaction, so when you go to the store to buy a pack of gum, you can look up the entire supply chain, figure out the entire cost for that gum and come to a reasonable price between the buyer and seller?
We would have independent auditors that verify the supply chain information is accurate, adding lots of extra cost for these auditors. How are they paid?
How do we keep the auditors honest? What if they are incentivized in some way to not be completely truthful in their auditing?
How many people do you think will be willing to do that?
I'd bet the amount of people willing to do that is effectively zero. Especially over a pack of gum.
>So if I understand your position, you want information to always be free in every transaction, so when you go to the store to buy a pack of gum, you can look up the entire supply chain, figure out the entire cost for that gum and come to a reasonable price between the buyer and seller?
You bet your sweet patootie I do. It would go a long way towards curbing human rights abuses, too. But you're engaging in a bit of a slippery-slope fallacy, because we were talking about large property and business sales, not gum.
As to how to implement this regime, I'd love to put the big brains that are currently relegated to glorified ad sales, Ponzi scheme engineering, and bigot-corrections (that would be tech, finance, and social justice advocacy, respectively) on it.
You know that you can do this now, presuming the companies involved are public companies?
It's not 100% but for the enterprising sort you can figure it out.
This is basically what investors do all day, track down and dig into companies and how they make their money. Then they apply future growth compared to current value and decide if they want to buy in on the future of the company or not.
If they are not public companies, then you have to have a plausible excuse for the private company to share that information with you. Investor as the job title usually gets the job done, provided they want more money invested.
We have reached a point in our industry where it is a race to the bottom for tech startups. Cloud computing, language frameworks, and other SAAS offerings have resulted in the vast majority of "startups" these days just being a group of people putting legos together, packaging it up, and raising money as "the next best 'x'" when a,b,c,d,e,f,g already exists.
It is no longer going to be feasible for a Stanford/Harvard college drop-out to be able to bolt together 15 different SAAS offerings into a package and tell investors THIS will change the world.
How many lego-brick-assembly startups actually had large exits before they transitioned into something more sophisticated? Seems like a bunch of those types raised big and then basically became zombies slowly burn their cash pile, but every savvy potential acquirer recognized they could roll their own for much less than their desired acquisition price.
And those that didn't matured/pivoted/whatever into something that could not simply be written off as lego-bricking solutions.
2021 was a height of "more money on the market than productive things to do with it". Startups are expected to operate in 2-year fundraising cycles - VCs used to push you to increase burn rate if you had a longer runway.... So right now startups that raised at the top of 2021 are facing potential fundraising now. The equivalent company would have 2-3x lower valuation in 2023 compared to 2021 - based on my discussions with other founders, what board members say, etc.
The dirty (open?) secret is that most software tech VCs are absolutely awful at their jobs. Just completely useless except as glorified rolodexes. It’s not like biotech where they’re forced to face their ignorance head on, software allows them to coast on weapons grade bullshit until the chickens come to roost (conveniently after the second fund has been raised). Even the big guys who have the clout to be consistently at the front of the line for the best deals like Sequoia are just fools with more money who invest in absolute disasters like SBF without a shred of due diligence. If biotech investors were this dumb we’d still be shooting up snake oil at the dentist’s office.
The tide coming out with interest rates will hopefully reshuffle the industry.
> Theranos enters the chat and would like to have a word.
Theranos is the perfect case in point: no biotech VC invested in Theranos. Not a single one. They avoided it like the plague because anyone who did any due diligence knew that using blood from a finger prick for accurate diagnostics was a physical impossibility.
The list of Theranos investors is all "dumb money" like Rupert Murdoch, Betsy DeVos (that Betsy DeVos), Larry Ellison, Robert Kraft, and the Walton family among others.
2000 or so would like a word with you. "Tech" hasn't really melted down even if there have been layoffs, it's harder to find new positions, and a lot of crappy startups have shutdown. Dot-bomb was an absolute nuclear winter by comparison. (May still happen of course but probably not.)
Meltdown is certainly an overstatement (at this point). Not that that is much consolation to people who have lost their jobs and are having trouble finding a new one or those whose RSUs are worth a whole lot less than they were.
Well this site is about tech and things aren't going so well for many new tech ventures lately, as seen in this other article which made frontpage today too:
"Startups weather a dismal year – 543 have declared bankruptcy or shut down":
No one wants valuations to come down:
* VC firms don't want to write down their portfolios aggressively, because doing so will make raising the next fund much more difficult.
* Institutional LPs don't want VC firms to write down holdings either, because they themselves want to show good performance too.
* Portfolio companies never want to raise money at lower valuations than the last round's, suffering dilution, unless they absolutely have no better choice.