Slow Exits Are Fucking Up the Valley | Hacker News Reader

Slow Exits Are Fucking Up the Valley

zachholman.com

85 pointsRKoutnik31 comments

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I think this is part of a trend that is occurring everywhere, not just the Valley: the gradual phasing-out of the public corporation [0][1]

Companies in every sector, not just technology, are switching to private financing. And why wouldn't they? There's less regulation, and less having to answer to Wall Street and the occasional corporate raider. Since there's more wealth accumulating at the top it's easier than ever to find wealthy individuals to finance you without having to tap the markets.

I don't think this is a positive development for society, but under the current circumstances it's probably an unavoidable one.

[0]: http://appcgg.co.uk/siteContent/downloads/Causes%20and%20Con... [1]: https://www.bloomberg.com/view/articles/2015-06-24/where-hav...

If I own a huge amount of a successful company, getting that asset liquid makes a lot of sense. Aside from being to sell at any time, being public means more bidders = probably a better price.

I don't see it as a progression so much as two motivations in balance. Sarbox &c make being public less appealing for a company. So, when one force gets stronger, the equilibrium moves.

Most of the blame for this can be placed on Sarbox (https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act), and other regulations imposed by the SEC.

Believe me, if you're a founder, you want to exit as well. The problem is, the cost for being a public company has gone up dramatically, due to increased regulatory compliance costs.

We are talking about companies worth billions. They can't manage to exist in a more regulated environment?

Or is it that they don't want to, in which case the obvious question is why?

Why?

Sarbox 404 compliance costs hundreds of thousands per year on the low end and low millions in the typical case.

It adds basically nothing productive to a non-fraudulent company itself. (Maybe it makes you write down some policies and management controls and audit your compliance to them. Great. At what expense? At what RoI on that expense?)

"You're worth billions; you can afford to casually light a couple million on fire every year for an epic Sarbanes-Oxley auditor-led bonfire." That isn't obviously a good thing (or even a true statement) to me.

I don't know, I just consider a rather nasty move to hand your employees piles of options with no intention of ever going public and making them worth something.

Selling to an existing public company makes the shares liquid just as well, without incurring (much) more Sarbox waste. Look at AppDynamics, Oculus, Supercell, Dollar Shave, and many others.

So if (nominally) billion dollar companies can't afford to go public (or it's not worth it), who can?

Another perspective is that there's a kind of members club investor thing going on, and the "actual market" (with their insistence on trivialities like profit and loss and audit of metrics) is an inconvenience to private games of high stakes poker that allow cap to be conjured out of powerpoint and closed door meetings. i.e, bulls%$t.

Personally I think AMZN proves that the market can evaluate growth focused companies that don't make money (compared to cap) just fine.

I see a lot more private exits happening and likely to happen in the future. (Meaning sell to an acquirer who is already public themselves, generally.)

This amortizes the Sarbox waste across a larger base.

Your citing of Amazon (with a market cap of over $400BB) fits nicely into this model. They have done acquisitions and are amortizing their waste over that much larger base. Someone trying to go out standalone at $1BB market cap (which used to be viable) isn't necessarily viable just because $400BB is (more than) viable.

Oh please. Do you know how many public companies there are? Some of them very small. Uber hands millions directly to consumers every week just to buy market share but they can't afford compliance?

The reason they aren't going public is because they don't need to raise capital right now, and they know their financials suck and would get ripped apart in an IPO. They think "wall St doesn't get us!" They're waiting for their numbers to improve but it's not going to happen and meanwhile their valuations go up to unviable levels for the public market.

Honestly, why would you as a founder of Uber/AirBnB/other big startup want to exit? You are probably already very rich. All your employees are staying put. If you need capital there's plenty to go around. No need to listen to Wall St. telling you what to do with your company. If anything it seems that going public is a necessary nuisance for many of these startups.

That analysis makes sense, if you leave out the VCs. They would also like a return on their investment, and if they thought going public would be profitable, you can be sure it would have already happened.

If you're being paid $900k/year, why would it matter if you could sell your $500MM asset? I mean, I lead a simple life, so _I_ wouldn't care. But some people _do_ want that, and I see the appeal.

Ah, here's the expected comment blaming government regulation!

Obviously it couldn't have anything to do with ridiculous valuations that the companies couldn't possibly live up to on the public markets. It must be that pesky regulation. Someone should disrupt it!

(even your Wikipedia link says that the claims of correlation between Sarbanes-Oxley and reduced IPOs is questionable; maybe you should edit it?)

Blaming Sarbox is a complete red herring. The reason we see less IPOs is because the unicorns are overvalued compared to revenues.

How about, the Valley is fucked up and is revealing so by slow exists?

That implies an inversion of cause and effect - that the inability to exit is doing damage, and that companies want to go public but are unable.

That's a different argument entirely, and doesn't feel reflective of the current fundraising climate, which other comments to the OP discuss in depth.

so this article is not about the roads? /s

VCs aren't playing with their own money. They're playing with funds from many investors. The exits (and writedowns, etc) are controlled upstream of the VC. Right now VC funds are a hedge and the investors don't need a payoff. At some point those investors need action and will require their VC folks to remove them from those investments (see dotcom bust). This isn't unusual and has nothing to do with what Zach mentions in his article.

>"Right now VC funds are a hedge and the investors don't need a payoff"

What are they a hedge against?

> number of people from GitHub who are in a financial position to become true angels.

How much money does one need to make to become a "true angel"?

To be an SEC accredited investor, you have to be making 200-300k in the last two years, or a net worth of > $1M.

I initially wrote that as "angel", but then changed it to "true angel" to distinguish those who might make a small investment once or twice to friends or family from those who can handle their investments a little more seriously. Or, put another way: as a founder, I feel less bad taking their money because it's not a major component of their net worth (at that point they shouldn't be investing in the first place, but yeah).

What are the conditions for angel investments? I remember reading that some Sun guy saw a Google demo and immediately cut them a check for 100k. Does anybody know what the conditions were?

"some Sun guy" being founder Andy Bechtolsheim, who was already a hundred-millionaire at the time.

I wonder how big his share of the company was. I suppose he didn't do it out of sheer goodness.

Of Google? Apparently enough to make O($billion).

(I knew Andy back when he was a grad student designing SUN-1 (Stanford University Network) boards, pre-Sun, etc., when we were sharing his design for the Imagen image processor (TeX project spin-off.) An extraordinary fellow even back then.)

Yes, of Google. Let's say you have the super bright idea and somebody like him gives you 100k what percentage does he want?

Quick back of the envelope: let's define angel as someone who can write 10, $25k checks a year. Let's say they have a yearly lifestyle expense of $250k, so they need to make $500k/year off their wealth. Then, assume they make between 4-8%/year on their investments. so that's $6-12M in the bank.

I usually just multiply the yearly income stream by 20 rather than futzing with rate-of-return calculations. It's way easier for napkin math and gives about the same answer ($10M in this case).

Agreed, I was just showing my work.

I work at a venture-backed company, started by people who already have enough money of their own. VCs don't make up enough share of the board to force them to do anything. Given that the founders already have money, what is their incentive to exit?

And if I don't like it as an employee, sure, I could take a job somewhere else. Somewhere else that also likely has its own reasons for taking as long as possible to go public.

What if the way it used to be was the anomaly, and now is normal?

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