The increasing emphasis on the short term prospects of a publicly traded company is a problem. But is there anything here that's specific to software and web-focused companies? Others have been writing about this for years. John Bogle for example has argued that the increasing concentration of shares in a handful of pensions and mutual funds prevents the company's owners from acting like long-term owners.
Pension funds have longer time horizons than the VCs they are being swapped out with. The issue is that these long-term holders require a fraction of short-term holders to give them liquidity, i.e. the safety of knowing that one can exit the investment without a substantial haircut if one needs to.
The present problem is that the proportion of short-term to long-term holders in the market is too high. The former are there to support the latter.
Another point is that the latter, at some point, demand dividends. The antipathy to Apple that I saw on HN recently when it announced its dividend programme is also anathema to a healthy public capital market.
There is something slightly more specific, which is that we have some technology-related gris-gris[1]. The basic problem is that everyone feels more or less qualified to guide a company's technological progress. One very chilling story which exemplifies this comes from about 7-8 minutes into a Clojure talk:
But really what this is is, "I'm afraid. Because I don't want to choose
something that might put my job at risk, and so I will easily pick
something that is less effective but more industry-accepted, rather than
something riskier where I might risk really good success but also
failure." ... I was literally in a meeting at one point with a CTO and
he said, "We believe that the only way this project will ever be a
success is if we pick Delphi, but we're picking PowerBuilder." Knowing
that it's going to fail, but that's the safer choice politically because
if they pick Delphi, they might win, but they might lose and if they
lose and they picked something weird then they get fired.
So if you're a tech company and you go public, right, the salient fact is that your company is no longer self-valuing, but its value is being set by an (extremely meta) popularity contest: I think that this news will make others value you less, so I immediately sell a little cheaper than I think it's valued, thus driving the price down, and so forth. Normally you would say "who cares what someone says my value is?" but unfortunately the people who are playing this game ultimately own the company, so it matters by fiat. They can and perhaps will fire people who don't make that stock price go up.
The gris-gris enter in just about here. Some are owned by the market as a whole, and your owners will be anticipating them and responding to them. But the more dangerous gris-gris will belong to your owners themselves, I suspect -- "You used Lisp? What the hell is that? You're fired."
So that's where I would focus the discussion. Random people on the stock market probably have just enough technical knowledge to think that they know much more than they know. That puts them in a dangerous position when they own your company. If Zuckerberg is careful to keep more than 50% of his company while going public and in doing so releases an open document saying essentially "Facebook is about hackers," I would understand him as trying to violate some taboo on the open market (where "hacker" is a bad word) as well as trying to make sure that people can never muscle out the hacker approach that, in his view, probably makes Facebook exactly what it is. He doesn't want the Ownership to start pressuring the Developers with technological misunderstandings.
[1] A gris-gris (gree-gree) is a voodoo talisman. The key feature here is that it is unquestionably believed to work.
IPOs will continue to remain the preferred liquidity event until there is a better vehicle for fast-growing companies, particularly those who are growing fast but are not throwing off cash.
The spirit of going public has always been better liquidity, more transparency, and access to cheaper capital. That spirit hasn't changed so much as been polluted a bit by SarBox and short-sighted board members and investors. The solution isn't to stop going public; it's to fix SarBox and choose your board more wisely.
On that side note, does anyone know what ever happened to Goldman Sach's special vehicle for outside Facebook investments? I.e what stops companies from setting up their own vehicles for the stock options of their employee's to avoid the 500 rule?
Goldman only sold their Facebook shares to non-US clients, because in the US, the deal would violate other rules regarding the privacy of private offerings (essentially too many people knew that Goldman were offering Facebook shares and the offer ceased to be "private" enough for the SEC).
For me the state of 'liquidity' events is a biproduct of our unsustainable consumption culture. Until people start 'thinking differently' about the type of people, and the type of world they want to be/create, we will continue to see liquidity events of this type.
IMO it became obvious after 2000 that the company cycle ( birth, growth, plataeu, decline, death ) for internet companies is much faster than the regulatory/financial cycle. For traditional 'technology' companies it still makes sense. You could see a hardware company do the whole cycle. But I don't think it works for internet companies. And it fundamentally destroys them, a la Yahoo and now Google.
"Look at it this way: When Apple went public in 1980, it had 54.2 million shares outstanding. It has since split three times, so those original 54.2 million shares have now become 434 million shares. But in fact, Apple currently has 929 million shares outstanding. Many of the extra 495 million shares—worth well over $200 billion, at current valuations—were issued over the years to pay for companies or people. And Apple isn’t even particularly acquisitive. All that equity has no value if there isn’t some way to convert it into cash eventually."
Surely AAPL with fewer shares would be worth a lot more per share. Markets pay keen attention to P/E.
Why doesn't anyone mention the private option? Multi-Billion dollar operations like Koch Industries are private. You aren't forced to go public per se.
I suspect it's the VC pressure. VC's are mid-term owners, needing to return cash to limited partners 5-7 years after funding.
Going public should be a way to swap VCs out with pension funds and other long-term holders. Unfortunately, our public markets, while doing some of that, also swap in a bunch of short-term holders (who, fairly, are needed in some quantity to give the long-term holders the option to "exit" their position freely as well as know, to some degree of confidence, how much their stake is worth).
Too many shareholders mean that you're forced to report like a public company. Then you might as well be public. Presumably Koch has only a few shareholders.
For posterity's sake let's make this clear: the SEC rule regarding 500 owners is as follows:
> Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.
It requires firms to file special reports. The reason why people presume that it means that the firm must go public is simple: there are only a few additional requirements to go public, and the economic advantages in many cases outweigh the paltry effort.
For posterity's sake, this is worth repeating: THERE IS NOTHING FORCING A FIRM TO GO PUBLIC. NOTHING.
It would be more accurate to say that Facebook decided that it would rather go public than stay with <500 owners. It was hardly "forced", since there's nothing forcing you to have more than 500 owners of a company!
If you keep a handful of owners and pay employees with cash-money instead of equity, you can stay private forever. Mars, Inc. was founded in 1911, has revenue ten times as much as Facebook, and has never been forced to go public.
a million people who weren't smart enough to invent in the first place require that the few who DO invent, to do it in a way they understand and approve. where's the sense in that ? Asking high tech companies to 'drive' the economy as though they were bus drivers is like asking aviator-adventurists to fly passengers london-to-calais while filing daily status reports.
But what about the pension funds etc. that finance seniors' retirements? There should be some way for them to get in on the action, otherwise seniors might end up putting even more strain on the social safety net. If pension funds were able to participate, then it would be a good thing. Does the model suggested in this article support such an investor?
Liked the post a lot, there are a lot of things wrong with the investing and valuations frenzy these days. Personally, I was wondering whether a hybrid model is possible: while I do wanna grow organically from the profits of my company, I'm likely to need some initial funding usually in the seed range
I think Apple's performance in recent years must give some ammunition to execs who favor long-term goals over short-term goals. In addition Google has demonstrated that two-tier type stock voting schemes (like the one Facebook is going to use) can ameliorate many of the issues described.
