Let's ride this bull
37signals.com
37signals.com
Matt Taibbi from Rolling Stones reports:
Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind passage of this law) attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
Is just wrong. You still need audited financials to be a public company (current, plus 2 years prior to IPO instead of 3). I believe what changed is some of the Sarbox rules related to rotating auditors, etc. See http://www.orrick.com/fileupload/4624.htm for one leading law firm's analysis of the JOBS act.
(I am not affiliated with the firm)
There is certainly room to relax some of the regulations put on small public co's by Sarbox. That's part of the reason companies are listing on foreign exchanges, and let's be honest, you dont' see "fraud running amuck" on the London Stock Exchange do you?
I like 37 Signals approach to building products and many of their business philosophies but they seem to have a need to relentlessly attack any other way of creating a company or doing business. Not quite sure why.
And for what it's worth, this NY Times article would seem to support the original Rolling Stone assertion:
"Under the JOBS bill, companies with up to $1 billion in annual revenue would be free to ignore — for their first five years as a public company — regulations that were put into place after the end of the dot-com bubble and the collapse of Enron. Among them are requirements to hire an independent outside auditor to attest to a company’s internal financial controls..." http://www.nytimes.com/2012/03/23/business/senate-passes-sta...
Your citation to the NY Times only governs "a company's internal financial controls" - not it's financials or independent accounting requirements (which is essentially audited financials).
My original criticism of the Rolling Stone assertion as reproduced by quote in the 37Signals blog post was and is that companies are exempt from independent accounting requirements. That's supported in the information I cited.
What the magazine was referring to is that auditors would no longer have to attest to a company's financial controls for financial reporting (mentioned in the Orrick PDF you intended to link http://www.orrick.com/fileupload/4619.pdf).
This means, for example, they would not bother to make sure revenue is being booked correctly, as explained here http://online.wsj.com/article/SB1000142405270230407200457732...
When Groupon recently had to restate (and slash) previously-reported revenue, this was due to weak internal controls, the same sorts of controls the JOBS act would exempt from being audited. http://online.wsj.com/article/SB1000142405270230402350457731...
So you really need an independent audit not just of the numbers but of the controls behind the numbers if your goal is to make sure investors get accurate financial information about a company.
Thus audits of financial controls are a key part of independent accounting.
The only change I'd make to Rolling Stone's original piece would be to revise to "exempt them from CERTAIN KEY independent accounting requirements for up to five years." But that's for clarity, not technical accuracy.
Taibbi is communicating an accurate idea - the JOBS act seriously weakens independent oversight of accounting for affected companies.
If you want to cash out early I would trying to sell your company early in the boom.
If you think you can grow vary quickly take some outside investment.
If you just want stability build up a little cash hoard so you can grow during the crash and pickup talent cheaply.
This is why I am interested in the timescales involved: how long will it last, and why will the bubble deflate? This input is highly desirable to make the correct decision.
From an investor standpoint, I think startups are where the smart money is, if you have enough cash to play the game. So, of course capital is going to gather there, and it's going to keep doing it as long as it's the best place to put a few million dollars if you want to make a few million more.
So how long will it last? I think it'll last a while -- until the consumer markets start to improve and other investment strategies become stable again, and there are enough Groupons to seriously hurt the perception of the startup investment strategy.
There's no sign so far of real improvement elsewhere, and right now only the crazy people are the ones saying that startups look like a bubble. So, I'm guessing this will go on for at least a year or two.
Purely from a business standpoint, if you can get access to any of this capital, and if you're willing to play the game and give up some amount of control over your business, then you'd be foolish not to take the money. If nothing else, it might give you a tremendous edge over your competitors.
However, there are no free rides. The capital could come with a big risk: that when the market finally corrects again, your business has been spending beyond its revenues for a couple of years and the adjustment is so painful that it kills your business.
I think this really comes down to how you think; if you think in terms of, "what do I want to be doing in three years", then you should probably take the money and get rich and have a good time, and if the business collapses afterward, who cares? But, if you think in terms of, "what do I want to be doing in thirty years", and if your business is important to you -- then maybe still take some money, but be more conservative about it and make sure you can survive once everybody decides that startups are a bad investment again.
But I really don't know what I'm talking about, and I bet a bunch of folks are about to turn up and tell me so. :-)
If you want to make money rite now (and lots of it) ride with the bubble. The answer depends on what your objectives were when you started your business.
It's true that more companies are being created and seed valuations are going up. But the selection process still occurs at the series A stage and crappy companies usually still can't pass that hurdle.
As for the JOBS act: if I'm not mistaken investment is capped at (the lowest of) $10K or 10% of the annual salary. I believe you even have to go through a course before you can invest though the JOBS act. Conversely, in the stock market you can invest as much as you want, without any training, and lose everything overnight.
The fact is that economy fluctuates. Whenever there's an upswing people scream bubble. It's a result of the traumatic effect of previous bubbles. But the irony is that real bubbles sneak on you. Hardly anyone sees them coming. So keep screaming bubble, it makes me feel safe.
I think there is a bubble and I can accept the rest of your viewpoint, but this part is not true. Most people who have a well developed understanding of an industry and basic financial sense easily recognize bubbles and have always done so in the past. The people who it sneaks up on are those who listen to the media and listen to their friends who listen to the media. Bubbles typically start out of real economic growth. The problem is that they outgrow market indicators when you get too many lemmings playing the telephone game and ignoring fundamentals. From what I see around the bay area there seem to be a lot of indicators of this social dynamic playing out. There is lots of money chasing other money to nowhere but Ill agree its not as bad as it was in 2000.
I try to listen to what people I trust from the industry say about the existence of a bubble. Pretty much all of them say that there is none. For example Ben Horowitz (of Andreesen Horowitz) consistently argues that there is absolutely no bubble (and he was around for the real bubble occurred). See 5:10 - http://www.youtube.com/watch?v=9xzcJnqcTP4
I think that often when markets become hot, people automatically think of a bubble, but that's not necessarily true. The internet has grown from 50 million users to over 2 billion and smartphones were non-existent in the 90s. So perhaps higher valuations for tech companies are justified due to higher potential.
But you could be right, only time will tell.
Everyone has a vested interest in what they deal with (or they're amateurs, hence I don't need their opinion). That doesn't mean they never say the truth.
E.g. dot com boom: Basic premise was right, "software will eat the world", only the speed at which it would happen is overestimated.
This is what makes growth investing so difficult: Quite easy to predict solar or electric cars will take off, very hard to predict which company in the cambrian explosion will win.
Overall history has proven over and again that in aggregate, value investing beats growth investing for exactly this reason.
I have to agree it seems that many signals are pointing towards a big tech bubble, though personally I will wait to see the tech IPOs following the hype of Facebook IPO to call a definite big bubble.
Hands down the funniest thing I've read in a while.
Removing independent accounting requirements isn't the same thing as making fraud legal.