Who to blame for failed IPOs?
techcrunch.com
techcrunch.com
TL;DR version : Companies go public later, non-qualified investors don't get a chance to invest during their growth phase, so 'regular' folks are missing out on that wealth creation.
All of that is true, and 'regular folks' are also missing out on the wealth destruction. The author uses FaceBook as their stalking horse, they point out that people who invested when Facebook was only valued at 550M have done really well, and people who bought at the IPO price or since, haven't. But here is the rub. Is Facebook a good investment or not?
If you have any sort of maturity as an investor at all you realize that more money is made by the real growth post IPO than is made leading up to the IPO. That is because it occurs over a longer time and starts from a bigger base. If you had invested in LinkedIn at their IPO (they have a credible business model, and traction) even after the 'pop' you would have paid between $90 and $95 a share. That same stock today is worth $108. That is a 13% gain in a bit over a year. Pretty good in an otherwise stumpy economy. If you bought Stratsys (NASDAQ:SSYS) last year like I did because I thought "gee, I think 3D printing is going to be a huge growth industry." You could be up 200% (I bought it around $25 and its up over $60 now.)
The bottom line is that nothing 'bad' has happened to 'investing' but we appear to have successfully avoided re-creating the dot-com bubble craziness of the last century.
But the author, perhaps reading glamorous stories of people who talked about how many 'Porsche units' of money they earned on their over valued stocks that day, has come to realize its not going to be like that. Ideally not ever, but at least until the old farts die who remember how crazy it was. Going middle-class => multi-millionaire => middle-class does something to a person. Maybe it turns their cynicism dial up to 11, I can't say for sure. But there is no sense complaining about not having a bubble happen.
What this makes me wonder is what new and innovative way we as an economy will find to screw it all up and cause another bust. Hopefully less catastrophic than the last one.
The trick, as always, is trying to be skeptical and check your data. Not always easy.
It is very much like musical chairs where there is all this money in the bubble and everyone is circling the bubble with what they feel is a claim to all of it, certainly a lot more than they put in. They are in it for the money not the market so they stay in play right up to the end. When folks start taking money out because the bubble has stopped inflating, there is a 'run for the exits' and everyone grabs what they can and high tails it out of town. Blam, the bubble bursts.
Wish it were different, but as WOPR said, "The only winning strategy is not to play."
Sarbanes and Oxley.
Startups don't want to deal with all the red tape of the Sarbanes-Oxley Act [1] and are putting off going public until either they're big enough that the cost of compliance is small compared to the total size of their business, or they're legally required to do so because the number of shareholders exceeds some threshold. (Facebook falls in the latter category.)
If your company's large already, it kills growth prospects. It's a lot easier to turn a $40 million company into a $400 million company than it is to turn a $40 billion company like Facebook into a $400 billion company.
It's not clear that companies should be IPOing any earlier, even despite SOX. Companies seem to have an easy enough time raising on the private market and they're raising at roughly appropriate valuations, as evidenced by low VC returns. Why would a company want retail investors if they can get the same amount of cash from a couple of investment firms?
The IPO market partly thrives on the fact that there are highly speculative and/or uneducated investors out there willing to invest in any new offering. Investors must expect IPOs will fail without blame, in my opinion, and diversify accordingly. Unfortunately, the uneducated speculators are the ones that likely lose it all on something "guaranteed" to be hot.
The gravy growth train eventually stops somewhere and it seems perfectly fair that the farther you are from personally contributing to that growth that the less rewards you are entitled to.
Most investors in Facebook from $0 market cap to about $10 billion, we professional investors that most likely contributed something to the company. Earlier investors probably had a lot more to contribute than late investors. There is practically nothing that Joe Consumer would be contributing besides cold hard cash that would help Facebook grow.
Here's the World's tiniest violin playing for people who play it safe instead of taking on actual risk and personally contributing labor, smarts and connections to growth on a capital investment.
It is a little bit difficult to figure out how to argue with someone who sees absolutely zero value in public markets, but let me ask you this - how does anyone who meaningfully participated in the building of Facebook (using your critera) convert their ownership of the company into cash? Are you arguing that all companies should just remain private and the shareholders simply receive dividends as a return on their investment?
People, for many reasons including 2008-9, MF Global, PfG Best, R Allen Stanford, Madoff, CFTC, TBTF, flash crash, TVIX, decided the investment environment is too toxic to play in.
- Employees with stock have seen their FB-related wealth fall by nearly 50%. Of course, had the IPO been priced properly, they would have never have the "lost" wealth in the first place, but there is a psychological aspect that makes the current situation worse for most people.
- Attracting new talent (of which they will need a lot of, since they need to grow relatively quickly in order to justify their P/E) will be harder with a poorly-performing stock.
- Management will likely be distracted by unhappy shareholders and will likely make decisions differently than if the stock price were not creating pressure.
You can certainly argue that IPOs where the stock makes a significant jump immediately are mispriced and bad for the company, but I have a hard time buying that companies are just fine to see their stock price cut by roughly 50% just months after IPO.
Goldman Sachs.
Thanks Techcrunch, you're really adding to the discussion with that swell research.