The Great Public Market Reckoning
avc.com
avc.com
VCs: Quit whining about the public using their brains to avoid your fucking scams.
The idea of public markets was trusted investments and the ability to gain with early companies. Now those gains go to the early private investors, then they shine that turd after the growth is tapped to sucker the public market longs into giving them more runway. Usually once the growth is tapped out they now dump it on the public markets.
But the system still works a bit, public markets and SEC requirements expose fraud and overvaluations.
When the whole of America revolves around the public markets, and so many forces out there trying to break them like private equity shovel companies, naked short selling, short and distort via large hedge funds, planned volatility and more. I wonder when the public markets will break, because that is when America breaks as well. You'd think the SEC would step in more. They are a bit on short and distort [1] and did on naked short selling after the Great Recession (3 day after the Sept 15th cliff) [2]. All of those forces are back with a vengeance.
While this has been true for recent IPOs like Uber/Lyft/WeWork, there also has been many other IPOs where the companies have continued growing even after they IPO. Recent examples include Twilio, Hubspot, Docusign and Tableau.
So a bunch of these SV darlings crash and burn. To a first approximation, no one cares and it seems a useful lesson at the end of the day.
Nobody is being fraudulent here. Everyone knows Uber is burning cash and is highly unprofitable. If that appeals to you, go ahead and invest, if not, don't.
Sure, I'm not shedding a tear for Softbank. But I'm also not pissed at them for... subsidizing my Uber rides using Saudi wealth for the past few years.
This all reeks of people with shaky investments trying to contain and destroy bad news so they can dump the bag on the public.
[0]: https://www.nytimes.com/2019/09/10/style/oh-behave.html
And "the public" wields it as often as any private asset manager.
It's quite rational for VCs to extract maximum value for themselves and their clients, and similarly rational for IPO buyers to push back on proposed valuations.
The only ones that are actually dumb are index funds, and they are huge, but not enough of a force to make a bad company into an easy sell.
Ironically, the public would pay for them again
> If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company.
> If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.
> But we have not been doing it that way in the late-stage private markets for the last five years.
> I think we may start now that the public markets are showing us how.
This presents the situation as if the connection between gross margin and valuation is some new discovery - "Cool, we've learned something about how to price companies! - and not a basic fact of business that everyone has been screaming about for a decade, but that many VCs have simply been ignoring.
It is entirely possible that the author is fully aware of the trend and avoided involvement in overvalued companies in anticipation of this return to rational behavior.
I wonder why Spotify and Tidal don't have recording studios launching new music? Do they figure the library of existing music is so massive that they can't ever get ahead of it with original content? It can't be that existing music studios have been running so efficiently that they can't be successfully undercut by one or two companies who have a grip on most music listening behavior.
[1] https://www.statista.com/chart/13406/gross-margin-of-spotify...
I'm sure balkanisation will come to the music space eventually, as we've seen happen to Netflix and is in the process of happening to Steam (against the wishes of consumers, but publishers want their own subscription revenue streams), but given that space was unified with iTunes previously, there's more inertia with the one stop shop model.
I think the dynamics of selection are a bit different for Spotify vs Netflix, i.e. my personal assumption is that customers are more elastic to selection for music than tv.
You can consume a unit of music much faster than tv, and you repeat consumption of music more often than tv so things like playlists suffer more from absent music and albums than TV may do.
I think it is vaguely easier to train TV watchers that there will be some rotating backcatalogue than you can music listeners...
When you open Netflix, you just want to watch something interesting within some category. That opens the door to Netflix creating its own content and puts them in a much better negotiating position vis-a-vis Hollywood. They don't need to license everything.
No no no, I want Netflix to take the Spotify approach. I'm just not sure the media industry is willing to let that happen.
When I listen to music I usually want a large percentage of that music to be stuff I already know. Of course I like discovering new music but, at least for me, probably > 50% of the time, maybe 90% of the time I'm playing music I know.
Conversely with Netflix I always want somehting I have never seen. Less than 2% of the stuff I watch on Netflix (or any other similar service) is stuff I've viewed before, maybe even less. Off the top of my head the only thing I've ever viewed more than once on Netflix is Rick and Morty.
Looking at netflix, their move to original offerings has essentially transformed them into their own channel + some extra outside junk just to keep the line blurred.
To me, the endgame there is that netflix will cease to have any outside content eventually.
If spotify/tidal follows that path they become a label with their own streaming service. Maybe they don't want to go that route.
Also, I imagine the technology is getting to the point where it wouldn't be unreasonable for labels to start up their own streaming services. If spotify/tidal decides they're going to be their own label, and the current labels decide they're going to start up streaming services, spotify/tidal is at a disadvantage without the back catalogs.
Honestly, I'm amazed spotify is doing as well as they are considering apple, google, and amazon's offerings in the space.
Most labels that invested in Spotify cashed out and sold in the IPO. It was hugely lucrative! In retrospect it looks like the right choice but what does it all mean? [2]
There is no certainty about Spotify's performance in public markets.
Netflix's original content push was fundamentally vanity-driven. If you're going to permit hindsight and say "That was a good idea," House of Cards's lead actor was a well-known predator even then, just not yet disgraced. So the success of original content, which literally everyone at Netflix is incentivized to make you believe occurred due to the sheer brilliance of blowing $100 million on a TV show, is undoubtedly as much attributable to exquisitely good timing as anything else.
All the other comments don't really know what they're talking about.
[1] https://www.theguardian.com/business/2018/nov/24/taylor-swif...
End of the day it seems to be up to the artists. The numbers are in Spotify's favor - 75% of music revenues last year came from digital music, and of those paid subscriptions were the overwhelming contributor
http://www.riaa.com/wp-content/uploads/2019/02/RIAA-2018-Yea...
I wonder though how an artist that's signed with a Spotify label would get a different treatment than an independent just uploading their music to Spotify (et al.)
https://www.ascap.com/help/royalties-and-payment/payment/roy...
It seems like ASCAP and RIAA are the power players in the arena rather than BMG/Universal and all of them?
I suspect the chicken and egg problem is worse there - in order for it to be valuable it would have to be a Spotify exclusive, but that implies not being on Youtube and therefore not getting critical mass.
Also the production values / return calculation looks more predictable for Netflix, while for music the costs are lower and the variance much, much higher.
And for Netflix people tend to watch shows once, whereas music is more likely to be listened to repeatedly.
Then there's a risk that if they do that the labels retaliate by pulling content.
Well, that was the great claim for Netflix, wasn't it? That the availability of mass amounts of data would allow them to create shows attuned to viewer desires.
How has that worked out? Netflix has some good shows but also at least the usual percentage of stinkers and cookie cutter riffs on a popular concept.
See also targeted advertising and lots of other areas where data is pitched as a magic elixir.
Public corporate ownership makes a lot of sense to me.
(I was hoping this would spur interesting discussion)
If liability is unlimited, would you really hand over unlimited liability to managers without extremely close oversight? No. So shareholders would have to directly run the business. Worse, would the shareholders hand over unlimited liability to a voting process in which they might lose to other shareholders?
Conversely, it's both unfair and pointless to make the mere managers, who are staff and not contributors of capital, liable for the business operations.
There are exceptions to this but they tend to be small to medium low-capital businesses. Accountancy and law firms often operate as partnerships, for example.
No, the LLC is a primitive of operation on which the economy is built. It's not going anywhere. But if people start using it as an excuse to dump externalities on the public, there is going to be a policy response imposing some kind of "corporate social responsibility".
But none of that is relevant here. This is the good old fashioned over-investment by the over-wealthy in schemes they thought would pay back by monopolizing future profits.
> If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.
Why this bubble can not be popped in seemingly any other case, especially when criminal acts have been committed, is what GP is complaining about, and was the expected outcome by critics of limited corporations when they were introduced.
You're quite right in that corporate structures do disperse liabilities. It's there in the name - limited liability company. However there are well established standard mechanisms for balancing out that real and tangible benefit, which are taxation and regulation.
Public corporate ownership is all very well, I'm not in principle against it in certain areas. However what I suspect you are advocating is enforced public ownership, i.e. the prohibition of private companies and socialisation of the entire economy. That hits two big problems.
The first problem is purely practical really - it doesn't work. It's been tried over and over again, and is a recipe for disaster. Now I'm not saying all public companies will fail, not at all it can work fine for some activities particularly utilities and social services. I'm saying that resorting to public ownership across whole economies fails. Every time.
The second issue should really be the first in terms of priorities really. Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple. Capitalism is just the exercise of individual freedoms and rights of ownership over property and capital, and free association with others. That's it. That's all it is. You don't even really need limited liability, although I think that is a reasonable and well proven enhancement when balanced by appropriate regulation in the public interest.
I assume you're not against the publicly traded stock market, just clarifying since others may interpret this as such.
> However what I suspect you are advocating is enforced public ownership.
This is not the conclusion I come to, I do not believe my original post suggests this.
> Forcing universal public ownership and prohibiting private enterprise is oppression, pure and simple.
This was not my viewpoint. I am imagining quite the opposite. If the liability is dispersed, so should ownership. If the ownership is private, the liability should be private. I believe both are critically necessary. These feels like a conservative(dictionary version) viewpoint.
The term public ownership generally means owned by the government, it’s public in the sense that it’s therefore owned by the people. See the Wikipedia article on public property.
Dispersed private ownership is new to me. Huw would that work, mandatory dispersal of shares to all citizens? What happens for new citizens? How do citizens take advantage of their rights, just like any shareholder? What if the vast majority simply sell their shares? I’m not clear how this would all work.
I also don’t see how this brings corporate behaviour under control, without taxes and regulation which we can do anyway.
That could work as long as the shares don't come with rights of information (financial disclosures) or control (board seats) - if they did no startup would ever be able to do anything, and if they did manage to do something their competitors could buy up 1 share and get full access to their books. It opens another can of worms though: if the shares don't come with any rights of information or control, there is a strong incentive and ability for insiders to take actions that cheat the public out of their shareholder rights. For example, they could claim that they "lost" the shareholder certificates and have no record of you as a shareholder (as in the recent Mary Poppins sequel), or they could issue new shares to dilute your ownership down to nothing (as in the Facebook movie), or they could take your money and not deliver a working product (as in Theranos), or they could take your money and then spend it on overpriced leases of buildings owned by the founder (as in WeWork). The reason we have accredited investor provisions is that presumably anyone with a million in liquid assets has the ability to hire lawyers to enforce their rights, and the sense to be aware of these scams and carefully document everything.
Interestingly, the selling point of blockchains & ICOs was that you could delegate the enforcement of rights to a computer and not need a lawyer to ensure you don't get screwed. It only really worked for the first two cases, though, and the SEC shut it down pretty quickly because the latter cases (like taking your money and running off to the Cayman Islands) became a real problem.
Second, property itself is oppression, since it is the artificial exclusion of people from resources, and thus allowing it is more of a tradeoff, not some fundamental right. I would say that personal property (property you actively and personally use) could be a legitimate natural right, but that is directly at odds with the more artificial and modern private property (enclosure of everything guaranteed perpetually by the state) as it excludes rent.
On your "point zero", maybe the most interesting one... you point out that regulation can help mitigate the problems of private ownership. I would go one further and say this points out a false binary... every corporation I'd somewhere between fully public and fully private, because the more regulation you add the more public it becomes. I am wondering how you reconcile a the freedom narrative with the fact that regulation is partial forms of oppression? Personally, I've dropped that concept long ago, and am more interested in finding the most democratic (ie public) we can go along that scale while still providing just enough minimal flexibility and rewards to those operating it to maintain as many of the benefits of unfettered capitalism as possible.
The question of private property is an interesting one. Sorry but I hoped to come back and write more but I’m out of time to address it at the moment.
On the balance between private ownership versus public responsibility you’re quite right. It’s not a matter of absolutes. Its important to recognise that every right incurs an obligation on others to recognise, protect and provision the conditions to exercise it. I don’t think there’s anything absolute about rights. They are a vital, indispensable concept, but they are hard work and all the more valuable and worthy of respect because of it, both by those granting them and those exercising them.
I’ve already addressed the question of how to reconcile corporatism with regulation. Corporations are limited liability bodies, which confers on them significant legal and financial benefits. I think taxation and regulation are a reasonable and fair quid pro quo. To expand on that, corporations, individuals and companies in general also benefit from the protection and services of government and society. That includes things like access to an educated work force, protection by the legal system, etc, etc. All of those things create an obligation that can be reasonably discharged through paying taxes and following regulations in the service of the public good.
Of course they can always exercise the ultimate freedom - to leave and go elsewhere. From time to time some do.
No kidding. Of course margin (and cash flow) matters. That is the very definition of valuation. The tricky part is timing. Are current margins likely to be the same as future margins?
There are some businesses that are investing heavily in their business to grow new categories (e.g. AMZN) or build the network. In those cases, you won’t see strong margin and cash flow early on.
Uber is a special case where they are losing money even at scale. Uber is a great idea, but far overvalued by investors like SoftBank. It needs to drop down below $10B. That will also mean laying off most of the employees and raising prices.
WeWork is the same. They just got their faster.
The network is not as defensible as facebook, but all the other players would have to stick together to dethrone them.
The network is not 'not quite as defensible as Facebook'. The network is not defensible at all.
The Uber app adds no unique value to the user. The Uber logo on the cars adds no unique value to the user. If the cars are off-the-shelf self-driving vehicles, then there is no sane reason why anyone would care whether or not they are riding in an Uber, or a Vkouber.
It's not like all the hooballaa about licensed and vetted and non-asshole higher-quality drivers is at all relevant in a self-driving car world. The only thing you'll be competing on is price.
You know which industry operates this way? The airline industry. And do you know what's the easiest way to have a small fortune? Start with a much larger fortune and invest it into an airline.
I want to get from point A to point B, as cheaply as possible. If the Alaska flight is the cheapest, I'll take it. If the American flight is the cheapest, I'll take that.
I have no brand loyalty for airlines. I have no brand loyalty for taxi companies. Why should I have brand loyalty for taxi-in-an app?
How can Uber leverage their scale? Are you saying they are going to price-dump to push me out of a regional market? Isn't that illegal, and something that our esteemed President complains about on a regular basis?
I'm not sure 'Become so big, and engage in blatantly anti-consumer monopoly behaviour to the point that you are practically begging to be put on an anti-trust trial' is a great moat to have.
How about the frequency and the fair price? It's worthwhile to compare airline rates. It's more difficult for in-app uber purchases that are more frequent for less money. Will people compare rates? Especially if rates are not cheaper elsewhere? The biggest network will have the best cost structure.
Uber can keep other companies alive by slightly rising their prices. So no monopoly problem but nobody who has the money to innovate. Then they have the money for the most advanced technology and by adjusting their prices they decide how big their market share is.
The case looks even worse for Uber, than it does for Alaskan in that case.
The capital costs and logistics of getting more airplanes, more (highly limited!) slots at airport terminals, working this out for point-to-point connections, getting all your staff moving from flight to flight efficiently, are horrific.
The capital costs and logistics of scaling up a self-driving taxi network, in comparison, are peanuts.
> It's more difficult for in-app uber purchases that are more frequent for less money.
It's a simple as checking the ride price in two apps.
> The biggest network will have the best cost structure.
No, the network with the lowest profit margins will have the best cost structure.
Uber will either be a defensible business, or a profitable, but entirely indefensible one.
Regarding the price checkking: it's one thing to compare ride prices if you fly once a month but it is something else if you buy a ride 5 times a day. Like businesses buying flights from one supplier, consumers will buy rides from one app.
Uber will be profitable once nobody is willing to burn more money. That day will come sooner than later.
Uber has thought this through because their name is not lift, but uber.
Where it's different from those others is it's selling innovative software services to others.