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For me, this whole WeWork fiasco has shown just how valuable the SEC and the S-1 filing process is. Let's be clear -- Neumann was fired because any investor who read the S-1 was mortified and wouldn't touch the company with a 10 foot pole. If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors -- perhaps this will lead to some reform in the private market and more transparency, but either way I'm glad that the SEC provides such a breath of fresh air when evaluating companies with large valuations.

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I think it also shows the stunning level of mass delusion in the SV VC space.

To this day I don't know whether the people who throw around and parrot the valuations actually mean it.

I mean, take the price of a small portion of an asset that is illiquid and in short supply, and assume the same price would apply for valuing the whole?

This sort of crap wouldn't fly amongst kids in kindergarten, so I'm astounded that it is being perpetuated on this scale.

I really feel like a massive reality distortion field has been pulled over our eyes by the inflow of easy money.

I don't know, it feels like deja vu. The same mistakes were done in the early 2000s, then 2008. Except we all think that back then people were idiots to not see it.

Anecdotally, no one in SV ever believed in WeWork except Softbank. I couldn't find anyone to take the Bull case on WeWork, whereas at least some people could argue Uber had a real business model that depended on self driving cars.

WeWork, and Theranos before it, are not really the norm in SV. But SV and the tech ecosystem in general has a culture of "money talks," so when Softbank and Kissinger start backing these ridiculous companies, people think "well, good for them?" and move on. Skepticism towards WeWork's model has been the conventional position since Day 1, but no one is going to argue about the validity of Masa Son's dollars.

Softbank didn’t start investing in WeWork until others had gotten it to a $16B valuation 3-4 years ago. A lot of the investors weren’t SV but some were in its history.

> others had gotten it to a $16B valuation

Which just shows how much "valuation" is bullshit. I would've thought that was clear ever since 37Signals were (sarcastically) valued at $100B in 2009:

https://signalvnoise.com/posts/1941-press-release-37signals-...

(They repeated the joke at least in 2011 and 2015. Maybe 2009 wasn't the first time either)

Yeah for sure. I think we are on the same page. I was specifically pointing out the OP seemingly putting SV at odds with WeWork implying WeWork is ridiculous with ego, money, et al, and not SV.

Two possibilities: 1) Jamie Dimon and Softbank/Saudi Arabia are the only idiots here, and everybody else just chipped in relatively small amounts; neither could be considered classically "SV VC". 2) Similar to many people deciding to all buy the same stock at the same time, bidding it up far beyond it's real value but hoping to sell before everyone else realizes it, the VC money was thinking that the sheer size of their investment would make everyone else get on board, allowing them to cash out. A sort of "pump and dump" before it technically went public, such that it is (perhaps) not illegal, except that they did it too late in the cycle so people spotted a bad deal before buying.

Sorry I should've been more specific. I didn't mean this valuation specifically. We is really looney bin category. I mean the industry as a whole.

Oh, well in that case, it's a combination of: 1) lying, and... 2) there are no better numbers available for an early stage company. You can't go by profitability or revenue early on, because there's a lot you need to do before you get your first customer, and some of that continues to pay off. So, in the absence of reliable measures of value (a long history), they make do with the least bad method available (how much did somebody guess it would be worth).

I think also, if you have to find a place to park billions or tens of billions of dollars, it's easy to convince yourself that the $10million company you're looking at is worth a billion, or the $1billion company you're looking at is worth ten billion. The alternative is to go back to your own investors and say, "sorry, there's not enough good ideas out there to invest in, here's your money back". It's got to be hard to convince yourself that's the least bad option.

To be fair public company valuations are not that different. Sure, the price discovery is more efficient, but still if you were to sell any significant part of the stock it would lower the value of the company.

https://twitter.com/dhh/status/672050463395741696

> CHICAGO — December 1, 2015–Basecamp is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.

> In order to increase the value of the company, Basecamp has decided to stop generating revenue.

Why do private investors need protection? Why can't they be held responsible for the foolishness of their actions?

> Why can't they be held responsible for the foolishness of their actions?

Because it's politically difficult. Sometimes, infeasible. The public often pays for defrauded grandmas' mistakes.

There are also positive externalities to stable business environments. Diligence costs money. Putting some of that cost on the issuer, once, is more efficient than each investor incurring it. Consistent rules around fraud and disclosure thus prompt new capital formation.

The best examples of the need for this protection are the cesspools that are ICOs.

But she can buy lottery tickets without understanding that her odds of a profit are worse than jumping on an ICO? Seems hypocritical to me.

I'm no expert about legal matters. I'd appreciate if someone else can chime in here. But I found this with a brief search:

"To be an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year."

Let's say you're smart but poor. So, even after doing your research, you have to be richer to get richer? Again, seems hypocritical and feels like it does less to protect people.

Now, let's say the SEC develops a test for an accredited investor status. How is the SEC supposed to test that you can assess good business ideas/risk efficiently? Some of the smartest people took bets that seems insanely risky and were considered stupid. I don't think there's a test able to judge this.

As an aside: It would be cool if hacker news could let you attach a flair to your profile for an area of expertise, and then you could request input from people with a specific flair who are also commenting on a thread.

You sort of answered your own question. Yes, there are people who are smart but poor. But they are significantly outnumbered by those who are poor but don't have great financial/investment sense. Since there isn't really a good way to differentiate between the two, you have to choose between letting many people be scammed to enable the few to invest or prevent the few from investing to protect the majority.

In your argument, the sum of all wealth for the lower class is what's being optimized for here, which you claim is a good thing. We can prevent the most money loss by restricting movement of capital. I happen to disagree with this but's let's table that and look at an analogy.

Say you take that argument and apply it to education. Poor people are generally less educated. Does that mean we should optimize limited budgeting resources to only teach to the average denominator to maximize total knowledge among lower classes (increasing value among many, just as we did with your previous argument)? This means the needs of many outweigh the ability of a few to move up.

I don't think it makes sense to hold back a few ambitious people for the good of everyone, when those few are not adversely responsible for other people's losses.

> How is the SEC supposed to test that you can assess good business ideas/risk efficiently?

Diligence costs money. Legal diligence costs more money. Deep, expensive diligence is pretty much required for private market investing, setting a lower-bound threshold on transaction sizes.

Someone who can’t make that minimum size will thus either invest (a) more than they can lose or (b) based on insufficient diligence. The first leads to getting screwed and second leads to getting screwed.

Erm... okay, but grandma couldn't have invested in WeWork unless she was an accredited investor, and if she's an accredited investor, I'm not so sure we need to be feeling a lot of sympathy for her greed.

> grandma couldn't have invested in WeWork unless she was an accredited investor

Which is a protection around American private capital markets.

Our economy and financial systems are built on trust. Fraud makes it hard to have productive transactions. Fraud also has a massive detriment to society. It's not that private investors needs protection. It's that people who commit fraud needs to be punished.

It is the SEC's job to build trust and prevent fraud, which it looks like it's doing a great job.

It's not that private investors need protection, it's that legitimate businesses have to compete against their fountain of capital and that all of these companies employ a lot of people.

The model of driving every profitable company out of business by undercutting on price to a massive per unit loss, funded by venture capital, in an attempt to corner the market and have a pseudo-monopoly is bad for "the public" in the long run.

It's bad for "the public" in the short run also, because competitor companies are employers and they can't afford to compete in the short run.

Because the LPs who fund VCs aren't only using wealthy individual's money, people's pensions are in there too.

I generally agree with this, but:

1. Pensions are diversified for exactly this reason and VC isn't usually a large % of the fund.

2. This should be exerted through other pressures at that LP level: political, regulatory, etc...not at the GP level.

Markets are more effective when there is truth and transparency, that's why the S-1 was so effective and derailing WeWork's IPO. Private investors don't necessarily need protection but if I was a big player in the private market I'd definitely be an advocate for more transparency.

What if there’s no way to know what’s foolish and what isn’t? The protection we’re talking about here is equal access to information which is a necessary prerequisite for an efficient market.

A maximally-efficient market needs all the information. Equal access is probably less important.

equal access implies every participant has all known information, the key word here being 'known', so you're probably right, but it doesn't matter either way in the real world :)

People's pension can get dragged into this mess.

I have the impression this is what lead to the Great Depression. Lots of people were saying, well, banks are failing, they screwed up, let them fail. More recently we had bailouts because the people running things learned about the Great Depression in school.

What would it take to convince you that unregulated markets lead to fraud? Are events like 2008 and dotCom bubble unimpressive to you?

Don’t forget crypto currency. Massive* unregulated market that is probably 99% fraud.

*of course because it is completely unregulated we have no real way to determine if it is truly a “massive” market or just a relatively small amount of people painting the tape with wash trading....

Crypto is an experiment, and everyone knows that. The 2008 crisis happened to AAA rated securities.

I think part of the article's point is that private investors cannot be held responsible for their foolish because they cause "ripple effects" as externalities (eg: dismantling of a functioning taxi industry)

Because with the rise of 401k and lately low interest rates a lot of people were forced into the market who simply don’t have skill or time to learn these skills to make investments in an unregulated market.

The vast majority of 401(k) funds are in large-cap mutual funds which don't invest in IPOs. Most 401(k) plans also offer some sort of money market or Treasury bond fund. It takes about 5 minutes and zero skill to learn that T-bonds are safe investments.

It’s not like treasuries or money market return acceptable returns for people’s retirement portfolio.

What is an "acceptable" return? No one has a right to achieve any particular return.

Treasuries and money markets basically return zero after inflation.

So, at least more than zero.

I never understood how anything can return more than zero after inflation "in the long run". If it did, then over time people with that asset would have all the wealth. But if they did, then they would buy things with it, raising prices of everything else.

You may want to peruse some of the econ stuff from mit ocw:

https://ocw.mit.edu/courses/economics/

Things don't return a lot over zero in the long run. Maybe 5-7% in the absolute best case for long term returns. Enough that even a million dollars generates maybe less than $40k of reliable income.

Most people need to expend so much of their income just to live that this mostly doesn't affect the average person.

But yes, the rich get richer. They don't always buy things proportionally more, some of it just sits there.

I never know if "the rich get richer" means the people on the tail of the distribution now will be farther out in the future, or if it means the people on the tail of the distribution in the future will be farther out than the people on the tail now.

That's actually a very good point. That's kinda why Housing will always return 0 (real return - not including all the costs, like property taxes, repairs, HOA, insurance, etc) in the long run. And if we're actually making progress on housing, it'll return negative returns.

Now as for other stuff, returns can be greater than 0 because there's more stuff to buy, later on, hence greater than what there is today. There are two components to long term returns above 0: population growth and productivity growth. In the past century we've done quite well on both fronts. Productivity has expanded at 2% per year and populations have increased by a massive 1.6% per year, add to that the 4% dividend and 3.5% for inflation and that gives you the 10% return on equities everyone is quoting.

but the future returns are expected to be much much lower. labor force size in the US is projected to grow 0.4% and per capita increase in productivity is now at about 1% for the last 20 years. and dividends are roughtly 1.8%. So, in the longer term, not including a contraction in PEs, we can see roughly 3% increase in equities on average/yearly

A return that lets you retire in this lifetime seems to be the minimally acceptable return.

Return by itself is meaningless. If you want to discuss retirement then you have to account for the other variables: consumer price inflation, risk, contribution levels, lifespan, etc. For individual workers the most practical suggestion is to save more instead of expecting high returns.

Most people don’t make enough money to save that much money so they can retire.

The number of new cars, new iphones, large houses, and other luxury purchases suggests otherwise.

that's not great logic.

https://www.washingtonpost.com/graphics/2017/national/senior...

Most 401ks are invsted in public companies, not private ones

The comment was about SEC and S-1. This is very relevant for 401k investors who were supposed to be the suckers to buy this crap.

Aren't all of them? I thought you could only invest in public companies that have PE funds.

401ks are rarely self directed investments though. You can pick fund types, but rarely, if ever, could you pick stocks. The 401k is heavily regulated.

And nobody is “forced into the market.”

You are basically forced into the market if you ever want to retire. Where else can the regular guy get decent returns? Real estate?

Oh, there is an alternative? As far as I'm aware every form of 'I don't want to work, but be paid as if I am' is tied to market return on capital.

Because fraud can be dressed up any number of ways, with no transparency it's impossible to know one way or another.

>If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors

I would go stock up on popcorn. We may see some very interesting lawsuits soon. Unless the Saudis get him, well, the Saudi way.

While you're right, I also wonder why anyone cares if a bunch of cash-rich, overconfident private equity funds get fleeced? They're more than capable of taking care of themselves.

"Counterfeit capitalism" in the era of cheap money is probably a net benefit to the average Joe because it subsidies his co-working space/taxi trips/meal deliveries/etc.

Unfortunately the opportunity cost of those bad investments might sting many in the long run. I'm not going for any trickle down style economics just that smart investment may help a smart company blow up and solve a generalized problem. They can profit but over time that improvement might spread to another industry or company and slowly make many other groups better off sort of like how investing in NASA led to advancements in technology we all use today.

I do think there should be greater checks for private capital but then again it is their money to throw around. I just lament the lost opportunity because a 50:1 unicorn was picked over a 5:1 more generalized solution, failed, and now although billions was put back into the economy no progress was made.

I’ll bet money he was “fired” for something much more banal, like using harder drugs than just the admitted marijuana. Still probably can credit the IPO process for bringing it to light, but I don’t think taking Neumann off the tiller of this company is going to make it any more attractive to investors.

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