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And then the music stopped (37signals.com)
108 points by scottshea on July 30, 2012 | hide | past | favorite | 64 comments



"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...


Critical thinking (especially in regards to finance) isn't what got 37s's blog to a high level of readership. It's more about regurgitating the same ideology over and over.


Not only that, but when you look at peak prices, you have to take into account the volume traded at that price. Theoretically, for stock X, you could have a single trade for 1 share at $100, while the pension funds bought in mostly at $45. If X trades at $35 now, $65 off its high, you can't conclude that pension funds have lost $65 per share across all of their shares.


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?


"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.


>"it isn't newsworthy"

While you are correct on the clarification of market value, I don't see how anyone can claim that these companies having their share prices slashed in half within a year of their IPOs isn't newsworthy.


Trust me it isn't newsworthy. Granted two of them made it into the top 5 but hey those folks who bought BRHM, they are feeling some real hurt now.

[1] http://www.nasdaq.com/markets/ipos/performance.aspx


>"Trust me it isn't newsworthy"

I didn't realize you decided what is and isn't newsworthy. A tad arrogant, no? I prefer the market method: if it makes the news, it's newsworthy.

Outside of Michael Kors, I don't know a single company on that list. Meanwhile, Zynga and even moreso Groupon are what you might call "famous". The fact that they both appear on the list of worst performing IPOs is newsworthy. But I'm no authority.


Ok, I will assume you're not trolling here, you wrote this in the antecedent:

"I don't see how anyone can claim that these companies having their share prices slashed in half within a year of their IPOs isn't newsworthy."

I responded with a link to the NASDAQ's performance website, which if you look through it will see that there are a lot of companies who lose over half their value within a year of their IPOs. In fact, a number of studies have shown that it is typical for a company to lose value post IPO during its first year.

On that basis, and on the basis that reporting on typical behavior is not 'news', I make the claim that simply losing half their value post IPO is not, by definition, newsworthy.


Not trolling at all.

GRPN and ZNGA are not just some obscure companies; they're incredibly well known, well hyped, and used daily by millions of people.

Yes, IPOs flare out all the time. But the NASDAQ is huge. You can't honestly compare these two companies with a tiny, speculative penny stock. Groupon and Zynga went public with multi-billion dollar valuations. These are massive companies. I know people who lost money on them. You'd be hard pressed to find anyone who has even heard of these others, let alone actually invested in them.

That's why it's news-worthy. That's my point.

Edit:

>"which if you look through it will see that there are a lot of companies who lose over half their value within a year of their IPOs."

Indeed. I'm actually shocked that both Zynga and Groupon made the top five. When you look at who they were anti-competing with, that's insane.


GKNT (The artist formerly known as LNUX, a.k.a VA Linux) makes Zynga & Groupon look like amateurs:

http://finance.yahoo.com/q/ta?s=GKNT+Basic+Tech.+Analysis...


Hey, they're still in business! There are more than a few businesses that went public in 2000 that weren't so lucky.

Pretty epic chart, though.


...and it isn't 2000 again, and it isn't newsworthy.

Well to the extent that a great many people seem to believe that this current boom is nothing like the dot-com era boom, perhaps it is.


GRPN, FB, or ZNGA

Yuri Millner.


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.)


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.


So how do you go learning about those industries?


"Consumer Internet companies get far more attention than they deserve"

There is an agenda on HN just like there is an agenda on avc.com by Fred Wilson, or for that matter Techcrunch, or the NY Times.

Which is fine. It's their sandbox and they can run it any way they want. It doesn't cost anything to read so therefore as the much overused at this point saying goes "we are the product". (There are of course other things mixed in there of course but the bias is apparent. I'm not seeing anyone else able to post "help wanted" on HN but YC companies.)


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


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.


Facebook didn't have to sell stock to comply with regulations. They only had to file paperwork. They IPOd to get the benefits of the IPO ($$$), since they already were facing the bulk of the paperwork requirements.


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.


"the stock market is not a place for individual investors"

It's very difficult to make money in stocks unless there is something you know that most others don't know about the company or it's prospects.

So if you know about security and know of a security company going public and something about the people at the company and the business prospects (not talking insider just a higher degree of understanding or knowledge) you might be able to do ok.

However I've found that even in things you know about it's hard to make it all work because you really don't know the behind the scenes things happening at the particular company you are investing in (which would be insider information). I'm reminded about this anytime I think about investing in Verisign which I know much of from the industry and the fact that I've been dealing with them for so many years and I haven't ever been that right in predicting where the stock is going to go based upon the way I see things since that is not the same as the way the market sees things. That said I probably have a better time and stand a better chance then someone who knows less than I do. I don't invest in stocks. It's gambling. Business is a gamble as well but at least you can control many things and improve your odds.


>It's very difficult to make money in stocks unless there is something you know that most others don't know about the company or it's prospects.

Look at a chart of Amazon or Apple over the past 4 years and tell me that you'd need some sort of special expertise to see value in these companies.


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.


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.


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...


That book, and your comment, conflate two different concepts: trading and investing.

It's possible to invest in the stock market with very little trading. The GP's comment spells out the best strategy--use index funds to spread risk and reduce expense, and invest for long time horizons. This is still a great strategy.

It's also possible to try to turn a short-term profit by trading individual stocks--often called day-trading because you clear your positions within the time period of days. High-frequency trading has greatly reduced price spreads, which makes it harder for the average guy in his underwear to compete. This is not investing though--more like gambling.

For more on how high-frequency trading really works, I recommend:

http://news.ycombinator.com/item?id=3852341


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.


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.


Thanks for the encouragement. If I decide to post something, I'll let you know. :)


The problem is that individuals invest in funds whose managers chase these fads -- or who invest in broad market indexes. It's hard to find a "no hype" fund to invest in, especially when individuals have their hands tied by employer/government plans that don't offer owner-directed investments. (These 401-K and other non-defined-benefit schemes always seemed a scam to me -- in order to enjoy the tax benefits of saving for retirement, I have to invest only in the funds whose manager bought the fanciest lunch for my HR director?)


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.


>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?


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.


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.


> 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.


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.


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.


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.


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


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!


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.


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.


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

That's not clear ...

Forget about the multitude of analysts who were way off the mark (Lou Kerner, for example, called for $200B Facebook) for a moment. Representative Fattah, congressman from PA, did an interview with CNBC and clearly didn't recognize the risks of Facebook.

http://video.cnbc.com/gallery/?video=3000090703&play=1


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.


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?


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.


Who is "we?" The market can stay irrational for longer than you can stay solvent.


The we could... quote was from the article and refers to the dear readers without presuming to know what they think - it's an exhortation.

Stock markets behave mostly irrationally in the short term (see Random Walk Down Wall Street), but that doesn't mean you shouldn't attempt to ignore the irrationality and get a little closer to the objective truth - in this case by valuing companies based on what they earn and could earn, not what someone else paid for them or might pay for them.

Depends what you're after I guess - if you are trying to make lots of money in a few days/weeks/years with borrowed money, you'd absolutely have to attempt to predict the irrationality of the market or go bust. On a long time scale with money which is not borrowed/required, you can afford to take a longer view based on profits.


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

[2] 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

* edited for formatting


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.


Linkedin is trading at 698 times earnings. I'm siding with DHH in the long run on that one.


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.


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


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.


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 ..


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.


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...


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.


>"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.


> 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.

Really, it's not that hard? Do you have a track record to point to?

It's been my experience that most people who say "it's easy" are those who look back and say, yea of course I knew the tech bubble would burst at exactly that point, etc, etc.

There is a saying, right but early is wrong, right but late is wrong. Sadly, it's often not enough to just be right, you either run out of money or nerves, often both:)


the best investment in the world right now is AAPL

No, the best investment in the world last year was AAPL. We won't know what the best investment in the world right now is until next year.


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




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