How the decimation of the IPO market has hurt the economy and worse(blogmaverick.com)
blogmaverick.com
How the decimation of the IPO market has hurt the economy and worse
http://blogmaverick.com/2016/02/04/the-pre-cognitive-anti-trust-violationhow-the-decimation-of-the-ipo-market-has-hurt-the-economy-and-worse/
24 comments
Is it really business sense or just being lucky to IPO in a huge bubble?
Did Broadcast.com really create value for the economy that the employees were rewarded for, or were they just on the lucky end of a huge unsustainable wealth transfer from retail investors to startup founders?
Did Broadcast.com really create value for the economy that the employees were rewarded for, or were they just on the lucky end of a huge unsustainable wealth transfer from retail investors to startup founders?
All you have to do for startup success is find an accidentally rich sucker willing to pay $10k per user.
Good on Cuban for selling to a giant fool, but I'm not sure recognizing a sucker and selling to him or her is really all that broadly translatable a skill. My guess is the problem is the too-small supply of over-wealthy suckers.
Good on Cuban for selling to a giant fool, but I'm not sure recognizing a sucker and selling to him or her is really all that broadly translatable a skill. My guess is the problem is the too-small supply of over-wealthy suckers.
Dude, he put radio on the Internet.
As an investor I am familiar with often-cited data that shows how small and mid cap stocks have traditionally outperformed large cap stocks over time. I wonder if this cherry picking of returns whereby the fastest growing small companies leapfrog the public capital markets completely and only go public once they've captured the majority of returns will impact this historical trend.
I think Cuban is spot on in his assessment. It's basically not worth it unless you can find a secondary market buyer. Feels like musical chairs. And whatever you can't sell, with preferred shares outstanding, makes it seem like all bets are off, unless you can IPO which at least gives you a chance.
Strangely, the word "revenue" is not mentioned in that blog post once. Does anyone know if Broadcast.com ever made a meaningful amount of money before Yahoo! acquired them for $5.7 billion(!)?
Regardless of revenue, they were purchased for "over $10,000 per".
I call horse shit.
I agree with this statement, though, "It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition."
Perhaps we're not building monopolies but huge diversified holding companies. My bet is on there actually being huge monopolistic effects of owning all the data.
I call horse shit.
I agree with this statement, though, "It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition."
Perhaps we're not building monopolies but huge diversified holding companies. My bet is on there actually being huge monopolistic effects of owning all the data.
I somehow missed the headbar, it wasn't until I got to these comments that I realized the author was Mark Cuban.
I thought he was spot-on even before I knew who he was.
I think one of the big problems is the Sarbanes-Oxley Act implemented after the fall of Enron due to accounting problems. We wanted to make sure that there were no IPO's defrauding the public, but the regulations went too far and made sure there were no (or very few) IPO's, period.
And the IPO's that do happen are much much bigger. This is bad because much of the wealth that's created by a new company is created during its growth phase. In the 1900's, you could have simply bought shares in the young Microsoft or the young Apple -- at least there was a chance for some of that wealth went to regular folks who invested in the stock market. In the 2000's, the young Google and the young Facebook were only accessible to the rich -- VC firms and accredited investors with the right connections.
This isn't just bad for regular investors, it's bad for companies too. A public market has a lot more counterparties and is more competitive -- so (in theory at least) a publicly traded company shouldn't have to give up as much equity to raise a fixed amount of cash (because rather than being limited to making offers to a few private investors, there's a continuous bidding war for the stock in which pretty much anyone can be a buyer).
I thought he was spot-on even before I knew who he was.
I think one of the big problems is the Sarbanes-Oxley Act implemented after the fall of Enron due to accounting problems. We wanted to make sure that there were no IPO's defrauding the public, but the regulations went too far and made sure there were no (or very few) IPO's, period.
And the IPO's that do happen are much much bigger. This is bad because much of the wealth that's created by a new company is created during its growth phase. In the 1900's, you could have simply bought shares in the young Microsoft or the young Apple -- at least there was a chance for some of that wealth went to regular folks who invested in the stock market. In the 2000's, the young Google and the young Facebook were only accessible to the rich -- VC firms and accredited investors with the right connections.
This isn't just bad for regular investors, it's bad for companies too. A public market has a lot more counterparties and is more competitive -- so (in theory at least) a publicly traded company shouldn't have to give up as much equity to raise a fixed amount of cash (because rather than being limited to making offers to a few private investors, there's a continuous bidding war for the stock in which pretty much anyone can be a buyer).
The reliance on the stock markets is mostly a phenomena of the English speaking countries. It is supported by aspects of law, some of which go back to English Common Law, and most of which were shaped by the evolution of that law during the 20th century, especially as the law related to debt, fraud, and financial transparency.
Most developed countries take a different approach. In both Germany and France, and also in Japan, it is common for businesses to rely on close relationships with banks to get the financing they need.
Because of all this, I object to the tone of this paragraph, which makes it sound as if there is no way forward for business, except for the stock market:
"Why take it public ? Because the stock market was a source of cash that could help you grow. It was a marketing and validation opportunity that told customers and prospects you had arrived. It was a liquidity opportunity that while not guaranteed, if you could continue to grow the company over the long haul, would value your company at a multiple of earnings and allow me, my investors (many who were close friends) and my employees to increase our net-worth and cash holdings."
There is an alternate way to interpret the changes of law and finance during the last 25 years: that the USA is converging toward a model that has similarities to that used in other developed countries. There is nothing wrong with this trend. There may a lot of positives to this trend. Merely focusing on the end of the old system by no means proves that the new system is bad.
Most developed countries take a different approach. In both Germany and France, and also in Japan, it is common for businesses to rely on close relationships with banks to get the financing they need.
Because of all this, I object to the tone of this paragraph, which makes it sound as if there is no way forward for business, except for the stock market:
"Why take it public ? Because the stock market was a source of cash that could help you grow. It was a marketing and validation opportunity that told customers and prospects you had arrived. It was a liquidity opportunity that while not guaranteed, if you could continue to grow the company over the long haul, would value your company at a multiple of earnings and allow me, my investors (many who were close friends) and my employees to increase our net-worth and cash holdings."
There is an alternate way to interpret the changes of law and finance during the last 25 years: that the USA is converging toward a model that has similarities to that used in other developed countries. There is nothing wrong with this trend. There may a lot of positives to this trend. Merely focusing on the end of the old system by no means proves that the new system is bad.
> The reliance on the stock markets is mostly a phenomena of the English speaking countries
That should be corrected to say: the massive benefit of stock markets was mostly first realized in English speaking countries, and then was increasingly adopted by everyone else (recently Myanmar) because it was so blatantly beneficial.
That weakness on the part of France (probably the most stagnate major economy of the last 50 years), Japan (25 years of backward progress) and Germany (no growth in eight years) has resulted in immense stagnation when it comes to entrepreneurial business activity and innovation. It's why so much of the German, French and Japanese economies are dominated by old family controlled businesses, that pass down their ownership through the generations instead of giving their wealth to charity, while the opposite is overwhelmingly true of America. Very few of the biggest companies in the US are extremely old, and very few are still controlled by stagnate clans (Walmart for example is merely 53 years old). The US approach has resulted in far greater turn-over among the giant companies. Amazon.com exists courtesy of the IPO and very receptive public market, which funded Amazon's build-out and has enabled them to begin destroying Walmart.
It's why those nations are so behind the US when it comes to venture capital and technology companies (which need to move especially fast). Slow moving, risk averse banks are a terrible choice compared to a properly functioning IPO market (the sort that the US had prior to recent regulations).
That should be corrected to say: the massive benefit of stock markets was mostly first realized in English speaking countries, and then was increasingly adopted by everyone else (recently Myanmar) because it was so blatantly beneficial.
That weakness on the part of France (probably the most stagnate major economy of the last 50 years), Japan (25 years of backward progress) and Germany (no growth in eight years) has resulted in immense stagnation when it comes to entrepreneurial business activity and innovation. It's why so much of the German, French and Japanese economies are dominated by old family controlled businesses, that pass down their ownership through the generations instead of giving their wealth to charity, while the opposite is overwhelmingly true of America. Very few of the biggest companies in the US are extremely old, and very few are still controlled by stagnate clans (Walmart for example is merely 53 years old). The US approach has resulted in far greater turn-over among the giant companies. Amazon.com exists courtesy of the IPO and very receptive public market, which funded Amazon's build-out and has enabled them to begin destroying Walmart.
It's why those nations are so behind the US when it comes to venture capital and technology companies (which need to move especially fast). Slow moving, risk averse banks are a terrible choice compared to a properly functioning IPO market (the sort that the US had prior to recent regulations).
> The reliance on the stock markets is mostly a phenomena of the English speaking countries
I know more about how it works in the US than in other English-speaking countries.
That listed US non-financial corporations attain capital via stock issuances, initial or subsequent, is a kind of mythology. From a century back until now, less than 5% of US non-financial corporate capital expenditures are from capital raised by stock issuances.
If you look at the numbers, it mostly works in the US in the same manner as Germany, France, Japan etc. To raise capital, corporations reinvest profits, they go to the banks, they sell bonds. The idea that stock exchanges are heavily involved with companies raising capital is a widespread one, but that has more to do with the aptitude of stock exchange PR departments than reality.
I know more about how it works in the US than in other English-speaking countries.
That listed US non-financial corporations attain capital via stock issuances, initial or subsequent, is a kind of mythology. From a century back until now, less than 5% of US non-financial corporate capital expenditures are from capital raised by stock issuances.
If you look at the numbers, it mostly works in the US in the same manner as Germany, France, Japan etc. To raise capital, corporations reinvest profits, they go to the banks, they sell bonds. The idea that stock exchanges are heavily involved with companies raising capital is a widespread one, but that has more to do with the aptitude of stock exchange PR departments than reality.
You can't go to a bank for advertising money or to write code. wanna buy a building got 20%-40% down and a revenue stream for the last 2 years to pay for no problem. equipment maybe.
I would say part of this can be chalked up to a cultural difference. Germans and Japanese are risk-averse (as a generalization) and don't like risky entrepreneurial ventures. You want to take a nice business plan to a bank for debt financing, instead. Think of all the big public German companies like SAP, Bayer, Siemens: they're all in boring, bog-standard industries.
In contrast, other cultures with a greater threshold for risk have more of an appetite for the stock market. This goes hand-in-hand with innovation/startup culture.
In contrast, other cultures with a greater threshold for risk have more of an appetite for the stock market. This goes hand-in-hand with innovation/startup culture.
> and also in Japan, it is common for businesses to rely on close relationships with banks to get the financing they need.
This works if you're a megacorp (or maybe an "established" company). Japanese banks are really stingy when it comes to making loans* and it might be neigh impossible if you're a tech startup. Actually, even opening a business bank account might be tricky.
* Apparently that's why government is threatening them with negative interest rates (more than threatening: they're here and without limits on how negative is the latest comment!); i.e lend the money to someone or pay!
This works if you're a megacorp (or maybe an "established" company). Japanese banks are really stingy when it comes to making loans* and it might be neigh impossible if you're a tech startup. Actually, even opening a business bank account might be tricky.
* Apparently that's why government is threatening them with negative interest rates (more than threatening: they're here and without limits on how negative is the latest comment!); i.e lend the money to someone or pay!
I'm not sure I agree with his "dead money" assessment... if its parked in a bank it is still providing money to the bank, which can be doled out in loans.
There's this notion going around that money is stored in some "rich person warehouse" never to be seen again when it isn't invested in a clean tech / end income equality social venture
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It only seems bad to those in business of pushing out IPOs. To everyone else, it appears as a market correction.
This is like saying that the decimation of the housing bubble has hurt the economy and worse. Broadcast.com is the classic example of a completely worthless business flipped to a clueless buyer.
if a founder was recruiting you as an employee, and told you their strategy was to shoot for an IPO instead of shooting for an acquisition
would that have any tangible value to you as a prospective employee?
would that have any tangible value to you as a prospective employee?
Can private companies not offer dividends to their stock holders?
Of course they can. This has nowhere near the wealth spreading effects of an IPO though. First of all, most employees do not own shares but rather options. Option-holders do not receive dividends. You must exercise options to become a shareholder and most rank and file people cannot do this without selling the stock at the same time because it requires them to put cash in. The kind of middle class folks Mr. Cuban wants to enrich do not typically have thousands to invest in their employer.
I did this once prior to an acquisition of a company I worked for and lost the money. It's pretty much a stupid move unless you are already wealthy and a founder or controlling exec with better insight and control over the outcome.
Also, when an employee exercises options and then sells the resulting share in a public company, they receive a multiple of earnings. Earnings != dividends but suppose all the earnings in a period were paid out as a dividend (they wont be of course) -- the shareholder will get only that amount whereas if they sell the share, they will receive a multiple often 10-15x or more of earnings. Most people benefit more from an exciting lump sum payout than an unpredictable drip at a time.
I did this once prior to an acquisition of a company I worked for and lost the money. It's pretty much a stupid move unless you are already wealthy and a founder or controlling exec with better insight and control over the outcome.
Also, when an employee exercises options and then sells the resulting share in a public company, they receive a multiple of earnings. Earnings != dividends but suppose all the earnings in a period were paid out as a dividend (they wont be of course) -- the shareholder will get only that amount whereas if they sell the share, they will receive a multiple often 10-15x or more of earnings. Most people benefit more from an exciting lump sum payout than an unpredictable drip at a time.
Can you elaborate? How might this resolve the issues mentioned in the article?
300 of 330 employees becoming millionaires within a year of IPO. With the amount of dilution most startups go through after the multiple rounds, this is an unimaginable outcome nowadays.