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I'm not sure public markets are a unique way of getting "real" prices. Private-equity sales are a real market with real money; if Google buys a company for $50m, that's an actual market transaction that valued the company at $50m. Is the idea that public markets provide better price discovery than private sales do? If so, is there empirical evidence that publicly traded companies really are more accurately valued than privately held companies are? (Genuine question; it's possible there is such evidence, but I haven't found a good article on the subject.)

It's a fair hypothesis to me: the public market has a larger amount of people, so more information; it also has mechanisms such as securities that benefit highly and rapidly information bearers.

But the idea that private investors' valuation is not "real" somehow sounds silly to me. The companies are still getting sold. The companies/investors that buy them have real value and expect to generate enough revenue from the acquisitions amounting at least to the acquired value.

The question then (and I think is a good one), is why private investment is getting more prevalent if public markets have more efficient valuation mechanisms. I think the answer is that private investors are more willing to 'kickstart' so to speak the early stages of startups, and from then have grown to dominate the investment market to their great benefit.

Public markets investors typically have far less information about companies than do private investors. For most technology companies, the probability of success / profit is driven more by specific company factors rather than larger industry and macro trends. Most public tech companies are understandably worried about disclosing detailed sales metrics / technology roadmap to all investors for competitive reasons; however, as part of any PE / VC backed investment process, private investors are typically given access to all of this detailed information.

Ah yes so private investors have more specific information while public market investors focus on overall market trends. But is there no way to public investors to get a glimpse of the internals of the companies without disclosure of competitive information? Maybe through some kind of report by a consultancy under NDA, or a small group of investors under NDA giving an investment report?

Under the SEC's Reg FD, public companies are required to disclose all material information to all investors at the same time. So, what you propose is not really workable under the current regulatory regime. Sometimes public companies will give extra disclosure to help investors (e.g., product line revenue, numbers of employees within each function, etc.), but often that information is not enough to truly diligence an investment thesis.

As a result, there is a slight information asymmetry penalty in the valuation; however, this penalty is dwarfed by the liquidity premium you get as a public company.

In private sales people take big chunks and have incentives to investigate the companies deeply - much of the public market is about small chunks where people don't do as deep investigations, because it would cost them more than the potential benefit. Of course in the public market there would also be some big chunks buyers that would do those deep investigations - but it is not guaranteed how big influence they would have on the price.

> Is the idea that public markets provide better price discovery than private sales do?

I think that public companies can reveal true market value quicker than private investments.

For example, VCs invest in company xyz at a valuation of $100m, they don't actually know if that valuation is "real" until the company sells. Until then, it's made up numbers. That gap between investment and sell date might be 5-10 years and until then then there's no market proving of that valuation. We've seen it time and time again that private companies can exist with no revenue or at least no profit for years or until their private fund runs dry, but can still claim a "valuation" in huge numbers, even while the market provable "value" of the company is $0.

Public stock markets tend to suss out valuation much quicker, a company might be "valued" on the market with a market cap of $100m, but miss a couple quarters or some big sales and stock holders will dump and run and the market cap can drop quickly over even a matter of days or weeks. Public investors eventually start to want the fundamentals of their companies to be good even if they start as fantasies. Reportable revenue, eventual profit (or continued revenue growth that's quickly convertible to profit in the even of market saturation)...eventually these things all have to exist, and I'd wager that an analysis of stock market prices on a company over the long run has a strong correlation to these fundamentals. I can't go and buy 1 share of Tesla at $500 and suddenly claim the company is "valued" at $60b.

But you can do that with private companies because of the information asymmetry available to private companies. There's all kinds of wonderful ways to game "valuation", but that's fundamentally different than market "value".

There's an idea that publicly traded, but unprofitable, fast-growth companies, like Tesla, with big inflated stock prices are the same as overvalued privately funded companies, but there's some fundamental differences in those valuations. If Tesla's revenue growth curve turned downwards next quarter or two, their stock price would plummet and their valuation/marketcap would arithmetic its way downward as a consequence. But a private company's "valuation" would stay the same until the next funding round/corporate sales activity, a lag time that could be years away. Thus a private valuation is more likely to be divorced from any business fundamentals than a public one, and that's simply because private company valuations are more closely tied to investor activity not business activity.

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