Silicon Valley's $585B Problem | Hacker News Reader

Silicon Valley's $585B Problem

fortune.com

67 pointsapsec11229 comments

I'll take a bit more controversial side. I don't believe Sarbanes Oxley has anything to do with companies not going public. Its a crutch that week companies rely on..

I probably get ot speak with more CEO/CFO's than most people here and I've never once heard SarBox brought up as any sort of issue.

What Sarbox will do is force companies to be a bit more mature with their own internal financial controls, ie they can't run their company using quickbooks anymore.

From my perspective the biggest issues that companies who go public have are two fold:

1) They've come from the VC model where growth is held above all other things. Once you go public, growth is expected but its also expected to take a back seat to generating profits. This can be a very tough transition for some companies as it means quite often the things you were doing to please your VC are no longer the things you should be doing when you are public.

2) You can now be shorted. When you are private, its like the market for sports free agents. it only takes one VC/team to pay a company/player.

There is now check and balance in terms of being able to short the company. Which means there is no real downward pressure that allows companies to find their equilibrium price.

Unfortunately this means that many companies whoi go public find out later on that they were the sheltered child who was good at sports in their own small town, but when they got to the big city, they and their parents(VC's) overvalued their own abilities.

3) Most companies who go public don't know how to guide or handle wall street. You might get offended by this, "who is wall street to say what I can or can''t do with my company", but they are the owners of your company.

Consider this scenario. Your friend raises a great Series A valuation, say $25 million. He then comes to you to complain that his VC's are pushing back on him for wanting to pay himself a $1,000,000 salary and the company buying a share of a private jet, and who are the VC's to say how the company should spend its money.

You'd probably look at your friend with disbelief. Wall street is the same, once you go public they are the owners of the company and you need to know how to keep them happy. The best thing Twitter has done since going public was to hire Anthony Noto as their CFO (https://en.wikipedia.org/wiki/Anthony_Noto).

Do you think that regulation by the SEC has any adverse impact on innovation in the IPO market? I remember reading that during the Google IPO, the SEC was often unhappy with the unusual circumstances and that the Google founders thought that the regulations, such as the quiet period, were outdated.

I am always frustrated by this 0 or 1 line of reasoning. "I don't believe Sarbanes Oxley has anything to do with companies not going public". So, you seriously believe that regulation that raised the cost of going public has contributed literally zero to the reduction in IPOs? I mean is it the only sole cause? No. But should it get zero weight? no

Ok, how about I rephrase this, I don't think there is a single company that would be successful as a public company that has chosen not to go public due to Sarbox.

What Sarbox did was to put into law what companies should have already been doing in terms of corporate governance and financial reporting.

The companies that consider thsi to be a burden were ones who are already doing either shady things with their accounting or who just weren't doing proper oversite to begin with, hence the small number of companies who where complaining about it when it first came out.

Should Sarbox regulations get zero weight wrt to stopping companies from going public?

Yes I believe its impact is so minuscule that you can give it zero weight.

what is the cost of Sarbanes-Oxley compliance to the company in dollars ?

the salaries of a good CFO and a few lawyers.

As an engineer at a company recently acquired by a public company, we had a decent amount of work to do to become compliant. Code review, deploy procedure, etc all needed to be documented and formalized. These weren't too difficult, but they definitely tied up engineering resources for a decent amount of time.

Yeah, my impression is that if you are a decently organized company it's a piece of cake. If you have mountains of technical debt, spaghetti code and no build processes, dozens of SaaS products, zero documentation, piecemeal authentication/security, etc... it can becomes quite onerous.

For us it was a lot of simple things. Change management was the biggest pain but in the end it was just an extra step in our build process.

Our canary process was a bit hands on (find a host, deploy to that host, tcpdump/check logs to validate the changes were correct and in effect). We stopped doing that. I can't decide if we are building better software without that as a crutch or if we are just not seeing production issues.

Anyway, it's stuff like that. Little shortcuts here and there. Nothing major, but it required behavioral change within the org.

I'd prefer the cost in humans. How much staff does it take to ensure compliance. That's helps you figure out what size the company has to be since you might have to hire a few people. For a 500 person company it's no big deal.

How big was Cruise when GM went to buy them? I think too small to have done an IPO and part of that is that they were too small to have hired the extra people for compliance.

It costs few million dollars a year just to be a public company, SOX compliance included.

There's an accounting cost, but it's the tip of the iceberg. The real costs add up when even entry level employees (like myself working for a Fortune 500 out of college) hit major roadblocks in developing simple solutions to simple problems because a lawyer or auditor shows up and throws a Sarbox fit.

Per #1, you are correct in theory. However I can counter with Amazon and Tesla, which have been increasing revenue rapidly but making losses for years. And their stocks are near all time highs. So I would say Wall Street prefers profits, but as long as you can keep increasing revenue, your stock will continue to go up regardless.

I'd argue there's a big difference between companies with positive gross margins and companies with negative gross margins, though both may be making losses in total.

Amazon most certainly has positive gross margins - and instead chooses to reinvest profits aggressively. Tesla is less certain, but I think a far cry from some of the unicorns that continue to run on deeply negative gross margins with the expectation that scale/future tech/vague fantasies will save them.

On the other hand many unicorns don't currently have business models where they are selling dollars for more-than-a-dollar.

Your points are only valid if the founder of the company are making the decisions. VC Investors don't care about those points, and by the time companies tend to go public these days, the VCs are the ones making liquidity decisions and they don't give two shits what the founders have to say about it.

many companies whoi go public find out later on that they were the sheltered child who was good at sports in their own small town, but when they got to the big city, they and their parents(VC's) overvalued their own abilities.

/// so true

There are two issues that are causing this:

(1) Sarbanes-Oxley has made life harder for public companies, so companies are waiting longer, getting bigger, and giving more of their returns to pre-IPO investors.

(2) QE means there's a lot of money trying to chase returns, leading to asset bubbles and volatility as investors bid against each other.

Absolutely agreed on (2). However, to follow that up, that should be leading to bubbles in both private and public equities (which it has). Ultimately, QE does nothing to stimulate the economy, only artificially pumping assets we use as metrics for the economy. Ultimately information will be passed through prices as institutional traders start to agree that fundamental values are lower, and more QE will start to actually damage equities, rather than pumping them as we've seen.

So cheaper credit affects private and public equities equally. But that's not what we're seeing here - public equities are at lower valuations than private. I believe that is because PE is substantially less sophisticated relative to public markets. There is no way to short assets, holding periods are 3-7 years, and the method of transaction is cumbersome and antiquated. Compared to public markets, PE has more information asymmetry, less efficiency, lower liquidity, fewer participants, and no easy way of ratcheting down valuations until the next sale.

So QE has pumped up PE even more than public equities, and we see that as privately valued firms struggle after going public.

I am genuinely worried if assets such as real-estate will deflate once we get to normal interest rates (which I suppose will happen around the time I die). As someone who is house poor, I can see an asset that is bubbilicious but I feel I have no choice but accept the distortion of the market.

I'm beginning to think the "bubble" has more to do with financial news needing something to report on and get people's attention than the broad performance of the industry.

In that case, it's the "Ad Bubble" not another tech bubble.

Spot on.

Unlike the 90s, a lot of startups today are actually making things and making money hand-over-fist, it's insane. Too bad for the press they're obscure business models and located in places like Lansing MI and you've never heard of them, but there is tons of money to be made.

On the other hand, social networks, big data, and now neural networks are The Big Thing, so everyone relentlessly reports on them, throws money at them like the hottest stripper in Vegas, and gets resoundly disappointed when they don't live up to people's astronomical expectations.

Besides, if people generally only spend $X a year on stuff they see advertised or sold online, how much money is going to be sunk into online advertising, big data, and all that other junk until you're basically getting one dollar earned for every dollar spent?

the question is how much of the other stuff being built is built on top of the ad money pyramid. would cloud computing have grown as much without tons of apps and sites springing up that then try to acquire users via the main adverting channels? how many saas businesses are there catering to these types of cos that are basically unsustainable, but got funding which they primarily used in user acquisition efforts?

Yeah that's a scary thought. You get a bunch of businesses that are flush with VC money and that opens opportunities for other companies that rely on their services or networks (granted that usually means google <thing> or AWS but that doesn't make their arbitrary removal of services any less capricious), and suddenly the pyramid wobbles like a house of cards.

Then again I'm naturally averse to invest in anything that doesn't have a profit motive front and center.

“Part of the main reason for going public was to continue to establish Lending Club’s brand and credibility,” he says.

I feel like this doesn't apply to most companies nowadays. I think Lending Club is in a special place because they deal with financials, which requires an increased level of trust. A lot of companies like Uber, Airbnb, and smaller startups like Wealthfront, Betterment, etc are able to generate pretty solid brand recognition and trust without going public.

Also, this article really makes it seem like the only reason companies aren't going public is because they aren't ready and that none of them are making any money. I feel like that is a vast overgeneralization. The ones that are making money, or are successful are still going to be able to raise money privately. I know everyone here thinks the sky is falling down and funding is drying up, but I don't think that is the case for GOOD companies. Sure your uber for X might not get funding anymore, but solid companies I imagine are still able to raise new rounds reasonably easily. Why would you want to go public when you can raise adequate sums of money through private financing?

I enjoyed this article. Interesting detail, compelling story line, easy to digest.

Unfortunately, the thesis is deeply flawed--that most stocks plummet after IPO does not a broken system make.

So are these IPOs LC, GPRO AND LNKD ever going to recover?

yes, if they start making money. their PE ratios are still on the high side

Inserting stock ticker garbage into articles is really obnoxious.

Note: this article is from February 1, 2016

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