Hacker News Reader

Comment by jbooth | Hacker News Reader

I have to agree on your last point regarding average investors. Hard to have sympathy for anyone who buys something at a certain price and loses money.

That being said, it seemed like there were several aspects of "pump and dump", rent-seeking (we can get FB, noone else can, so we charge a totally made-up premium), as well as "make a big transaction at an improper valuation in order to get the inside track with FB's CFO for big fees on other transactions later" to the deal. That's not really how markets are supposed to work..

Meanwhile, it's still damn near impossible to a get a business loan, I hear.

View on HN

It has always been damn near impossible to get a business loan. It was damn near impossible to get a line of credit, even for a business with steady cash flow and multiple years track record, in the mid-late 1990s†. Debt financing for IP-driven businesses whose only physical collateral depreciates at near the speed of sound sucks. Don't blame Goldman for that.

† Unless the companies I was at that tried were doing something wrong, but, before you whip out the snark, I wasn't the one running those companies.

My local pizza shop bought their oven with a business loan. They bought it from the bank, who had repoed it from another bankrupt pizza shop.

I can't tell if you're agreeing with me or not, but the differences between the "pizza shop" and "ISP" scenarios are pretty huge even before you get into the credit and business histories of the business owners. Sorry to be a pedant.

By the way, curious: how did you find this out? When your pizza place gets a new oven, do you just go ask them about how they financed it? Do you ask these kinds of questions of business owners in general? How do they respond?

I'm absolutely agreeing with you - I was giving an anecdote explaining why a bank might consider a business loan to purchase a durable good a low risk investment.

I don't ask questions like this of that many people, but I'm on friendly terms with my local pizza guy. I'm often his last client of the night. He didn't seem to mind telling me about running a pizza place, at least in broad generalities. On the occasions when I've asked small business owners about such things, they are usually happy to talk about it, provided they aren't busy and don't think I'm a salesman.

I have these kinds of conversations with small business owners all the time. Businesses I use on a regular basis or one-offs, doesn't seem to matter, they all seem to be willing to talk how how things are.

I'm not blaming Goldman specifically for that, but I am blaming the whole financial industry. They spend huge amounts of resources pursuing zero-sum games like this, or obfuscatory games like the mortgage thing and, it seems to me, they haven't gotten any better at actually routing money to where it creates value (their purported raison d'etre) since the 1980s. Instead we just see more and more sophisticated games.

I mean, I guess that's where the money is, so shame on us.

What specifically could Goldman do to reduce the risk to a bank of lending money to a small business that will be spent mostly on salaries and (in the balance) on equipment that will be worth 1/10th its purchase price if they need to call in collateral? Businesses are risky. That's why companies finance with equity.

I agree with you, a more public process for creating liquidity in stock would be great.

Unfortunately, while Sarbox may have prevented another Enron/Worldcom, it also prevented/delayed the Facebook IPO. (Interestingly, that's exactly what assorted limited government crackpots were worried about back when Sarbox was passed.)

Eh, putting it on sarbox reminds me of the attempts to blame the mortgage meltdown on Fannie Mae. Way, way too ideologically convenient. I mean, they just picked up 500 mil, I think they could find the resources to do a little extra accounting, even if you're contending that it's an unnecessary burden.

Everything that I can see (as an outsider) about FB's corporate DNA tells me what they want to stay private for as long as possible regardless of whether it costs them an extra 100k in accounting to go public. I mean, they just picked up 500 million. I bet they could scratch up the money to bring in Accenture and have them do a bunch of excel sheets once a year.

I don't really have any solutions, here, aside from some ill-conceived and emotionally satisfying proclamations of "destroy the IPO underwriting industry!". I'm just noticing that, if things are working the way the article says they are, it seems like Goldman's job in this case is all about creating exclusive deals and making insider connections, and very little of it is about evaluating Facebook's proper worth. Although maybe they think they're making a value investment. Who knows.

It's well known that Zuckerberg wants to keep secret much of the information that Sarbox (and various other rules affecting public companies) would require him to release.

I'm sure Facebook could afford several million/year on Sarbox compliance. But what is the benefit to them? As you said, connected insiders (such as Zuckerberg and Goldman's clients) are doing just fine with Facebook remaining private. So why bother with the hassle of Sarbox, potential minority shareholder lawsuits, and liquid markets that might go down more quickly than the current illiquid one?

Well, my contention was that sarbox is a tiny piece of the puzzle, just to make it clear. Closing a few loopholes and adding a few new costs didn't radically change the game to my mind, compared to the already-huge distinction between public and private. Although you know more about this stuff than I do.

I'm certainly not saying that FB is under any obligation to go public if they don't want to. Just that in this particular case, Goldman is primarily trading on them not being public rather than trading on their value. I mean, good for them for exploiting a bug, I guess, but this is why I think the financial industry are, in the large, a bunch of charlatans :)

Besides trying to pivot to a big-government/little-government argument, what specifically is your objection to Chris' comments? It seems pretty plain on its face that SOX materially increases the cost of going public; not simply because of what compliance requires you to disclose, but because of how it directly increases outside accounting costs.

If you want transparency from companies, you have to see them go public. It is not reasonable to demand public-company transparency from a private company. The word "private" means something. If the markets worked today like they did in 1996, do you seriously believe Facebook would be a private company? Why or why not?

I wasn't pivoting, I was pointing out a fallacy.

Fannie Mae and Sarbox are tiny, tiny pieces of their respective puzzles. Blowing them up because it's ideologically satisfying is thinking with your amygdala.

(BTW, the "big government / little government" argument exists entirely in the heads of the ideologically pure. The rest of us are more concerned with the "works / doesn't work" argument, on a case by case basis.)

I'm a near-statist liberal, so I'm pretty sure it doesn't just exist in the heads of comic book caricatures. I take your point about making scapegoats of things like SOX, but "unintended consequences" is part of the core narrative of regulation, even minor regulations (SOX isn't minor), and you're really not answering my question with this comment.

Do you think more companies should go public?

If not, do you think private companies should be forced to be more transparent? Why?

If so, do you not believe that it's become more expensive to be a public company in 2010 than it was in 1995?

I've stated my opinion several times now, and unfortunately it doesn't fit into those questions:

Sarbox's additional costs are a very small part of the equation compared to the fundamental difference between public/private, not to mention all of the costs that existed prior to Sarbox. If you're making the decision to go public or stay private, Sarbox is very unlikely to be a deciding factor. Hence, bringing it up is something of a red herring IMO.

EDIT: In response to below, I haven't read Sarbox, but I'm pretty sure it has no provisions regarding building a new HBase messaging system or online user privacy.

You continue to focus on the cost of Sarbox, but what if the real objection is that increased regulatory requirements would slow down a company that famously has a core value of moving very fast?

Respectfully, I'm pretty sure you need to read up on SOX before you talk so stridently about it. SOX most definitely does increase the costs of going public to a point where it changes the types of companies that do go public. In the '90s, companies went public with little or no revenue. In the 2000s, you can't get anyone to underwrite you until you pass a fairly high 8-figures revenue threshold.

But that's a decision on the part of the person doing the underwriting, right? You're describing psychological factors that have nothing to do with the cost of doing the underwriting.

Are you saying SOX tripled the cost? 10X?

If not for SOX, are you suggesting that pets.com would have a successful IPO today?

Yes, if it wasn't for SOX, I think a lot of companies no more sound than PETS.COM would have gone public. They'd have lots of users, moderate and consistent revenue, but no real prospects.

"8-figure revenue"

Which Facebook has. So why arent they public? Obviously not the monetary cost of SOX. It could be one of the toher parts of SOX (such as the regulations on public company execs) but I find it hard to believe the cost of the accounting department is the reason Facebook isn't public. There are thousands of companies smaller than Facebook being traded every day and they're not going backrupt because of the accounting costs.

Even without SOX, there were a lot of reasons to remain private. On the margins some companies remain private because of SOX costs. (If SOX is preventing useless companies with 0 revenue from going public I see that as a feature and not a bug). But on the scale of Facebook, the costs are not important. So there are other reasons driving this, not SOX.

You're right; Facebook easily can go public. I think the subtext is, had SOX not happened, it's very likely they would already have gone public.

What I'm suggesting happened was, SOX took the IPO mechanism, which was a common and easy path to liquidity for VC, and made it a much bigger deal --- not just because of the regulatory burden that it imposes, but also because it washed out many hundreds of companies that might have gone public instead of taking a C round.

Being one of a small number of standard bearers for tech's return to the public markets is a different thing than being one of the best of hundreds of tech companies at varying stages of growth on the market.

"Sarbox ... also prevented/delayed the Facebook IPO"

Could you elaborate? (I'm genuinely curious)

Sarbox adds additional accounting procedures, with the goal of preventing another Enron or Worldcom, where lax accounting procedures meant that they were telling their investors "everything is fine!" one day and "we're bankrupt, your stock is worthless", the next.

The contention is that these additional procedures disincenvitize companies from going public. My counter-contention is that they're a very small drop in the bucket compared to the pre-existing incentives and disincentives.

> My counter-contention is that they're a very small drop in the bucket compared to the pre-existing incentives and disincentives.

And Facebook isn't exactly "at the margin" either, where that drop in the bucket might make a difference.

Reply on news.ycombinator.com