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As More Tech Startups Stay Private, So Does the Money

• deleted 11y ago
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• msgilligan 11y ago
  I started to read this article and saw no mention of Sarbanes-Oxley. I searched for 'Sarbanes' and 'SOX'. How old is Farad Manjoo? How old is his editor? Or does this cluelessness come from the filter bubble of working for the New York Times?
  • icebraining 11y ago
    He's 37, in case you're really wondering. I do find it funny that he wrote a book called "True Enough: Learning to Live in a Post-Fact Society" :)
  • bpodgursky 11y ago
    It's either uninformed or a hit piece, if it doesn't cite SOX as the main cause. Either way adds nothing to the general public understanding.
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  • ashurbanipal 11y ago
    That's a great point. I wish everything written by Farhad had a warning label on it for gross stupidity. Sarb-Ox is clearly a big deal. However the bigger challenge facing these "stay private" companies is their massive need for cash. Traditionally, private companies generate a lot of positive cash flow which they use to support debt loads from either banks or the bond markets. These companies are starting to access the debt markets (witness Uber's large LOC and recent convert issuance) but without the cash flow to back up that debt. This will become an issue, because as of yet there is no private market for equity capital to be used to pay off debt at par - private equity and VC investors are not in that business as they have time-limited funds which need to produce positive cash returns in 7 - 10 years to pay back the LPs... The public markets represent the largest pool of permanent capital out there so unless the Unicorns stop bleeding cash they will have to come to the public markets eventually. AMZN seems like the best possible outcome for these companies.
  • jseliger 11y ago
    Here is his response: https://twitter.com/fmanjoo/status/616624526374256640 https://twitter.com/fmanjoo/status/616624526374256640 : "@seligerj a whole article about a complex issue and no mention of my pet interest that is just of many factors in the discussion!!!!??" Does anyone have good data / sources on the role of SarBox?
    • msgilligan 11y ago
      OK, that answers a few questions. It's not ignorance, it's bias.
• DiabloD3 11y ago
  So, the article is demonizing companies that never become publicly traded? Thats rather disgusting in of itself.
  • solve 11y ago
    What's equally disgusting is that all of these VCs are upset that the more sophisticated, harder working, more data-driven investors, who used to only be on wall street, are now moving to the earlier and earlier stages, taking away the easy money that the top VCs have enjoyed for so many years. No more VCs sitting on the beach while collecting fat checks from their carry percentage and toying with companies, sometimes even hurting companies for their own personal enjoyment, at the expense of the LPs. VC is changing fast, and today's VCs are very upset about it.
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• nrao123 11y ago
  I don't get it. A lot of people (e.g. a16z) are saying that late stage financing / "private IPOs" are keeping the wealth in private investors instead of public investors when there is a public IPO. But- the investors in these "private investors" such as Hedge Funds, PE funds or even late stage mutual funds (Rowe Price / Fidelity...) are LPs such as pension funds. The money in these pension funds are that of the common man again right? So the common man is taking a longer term view & getting a better return through alternative investment vehicles (PE funds etc). That is a good thing overall right? We complain about public markets being short term. But then we also complain about common people taking a long term view via LPs investing in late stage funding. From the article: If the private investors are wrong, employees, founders and a lot of hedge funds could be in for a reckoning. But if they’re right, it will be you and me wearing the frown — the public investors who missed out on the next big thing.
  • prostoalex 11y ago
    1) The set of people who have access to venture capital through pension funds is smaller than the set of people who have access to public stock market. 2) Historical figures of stock market performance include such breakaway successes as MSFT and AAPL with the stories of "if you bought 100 shares of X on the day they went public, it would be worth [high dollar amount] today". Remove the outliers responsible for such gains, and general public will respond by removing liquidity from public markets until it becomes more attractive. 3) Things like DJIA and S&P 500 for better or for worse are viewed as proxies of US economic health, and are frequently used as underlying metrics of investor optimism, etc. Flatter indices are boring and are frequently interpreted as "going nowhere".
• amirmc 11y ago
  "If you can get $200 million from private sources, then yeah, I don’t want my company under the scrutiny of the unwashed masses who don’t understand my business," said Danielle Morrill" Wow. I get that private money is easier to deal with but disparaging the public markets as 'unwashed masses' seems rather uncouth. I expect leading a public company requires quite a different skill-set than a private company and the 'scrutiny' is a necessary part of that (information release etc).
  • mattmanser 11y ago
    It's a disturbing trend in tech that's going on. Here's an upvoted, but vile, close-minded, comment from another thread: The [general populace] are lazy, and if given money, will sit watching reality TV and stuffing their face with ice cream. The arrogance of techies is getting obscene, but the reality is we lucked out on enjoying mucking around with computers and now we're starting to believe we deserved it all along...
    • benihana 11y ago
      I find it interesting that two quotes from individuals is enough to get you to think all techies think the same.
      • mattmanser 11y ago
        They're examples, it's more a reflection of the general tone of the discussion the last few years.
    • user_0001 11y ago
      A generalisation no doubt, but you are blinded if you cannot see some truth in the statement. Nor is it a view held only by "techies". The sit down, do nothing, consume group of the general population is large. There is a lot of money in keeping them as they are.
    • doctorshady 11y ago
      If this is true on a wide scale, it kinda gives some merit to the anti-Silicon Valley types running around the Bay Area.
• tinkerdol 11y ago
  > By relying on private investors for a longer period of time, start-ups get more runway to figure out sustainable business models Can anyone explain, what is the rough amount of runway that a company should need? For instance, are there rough estimates expected for when a company should be able to reach profitability depending on product type? I was watching the How to Start a Startup lecture on how to raise money (http://startupclass.samaltman.com/ http://startupclass.samaltman.com/) and was astonished about how many rounds of funding VC's expect to give out after seed funding (A, B, C, D rounds, the letters seem to keep going). I'm thinking of bootstrapping a company and easily also see the appeal of getting funding, in order to hire a team and get the product out faster. But why are so many rounds necessary? Is there some business or economics theory out there that would explain the amount of runway needed for each business or product type? For instance, if I were launching an ice cream truck tomorrow, I'd expect profitability in the very short term compared to say, something like SpaceX.
  • suprasanna 11y ago
    As a quick 'part answer' to your question, a lot of the reasoning behind so many rounds for many companies is actively choosing to stay unprofitable by pouring would-be profits (and new investment dollars) into gaining more customers. The idea being that as long as you "know" you can get your customer to be worth more than you paid to acquire her, eventually your company will be profitable once you slow down (or hit a 'max') with user acquisition.
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    • Loughla 11y ago
      Do you care to expand on that at all?
    • tinkerdol 11y ago
      I don't know anything about investing, that's why I'm asking :) Tell me where to start.
• michaelochurch 11y ago
  I'm of two minds about this. On one hand, I sympathize with Ms. Morrill's position. I could see myself running a 50-person tech company. By the time it was public, I'd be looking for a replacement and planning to cash out. I hate having to justify my own work to people less intelligent than I am, and that becomes your life when you're the CEO of a publicly traded company. "Unwashed masses" was off the mark and probably unneeded-- the actual enemy isn't 100-IQ average Americans (who, since it's 2015 and not 1347, are probably as clean as we are) who prefer fishing over running tech companies-- no one has a problem with them-- but management consultants and VC-land celebrities who think they're what I actually am (Dunning-Kruger) and are just so hilariously not, but somehow end up in charge despite their intellectual mediocrity. Still, I understand her sentiment completely and I feel the same way. If I'm CEO, then as soon as my job is begging for permission to do great work and justifying time and expense to inferior copies of myself who have no insight but all the power, instead of just fucking doing great work, then please cash me out and fire me. On the other hand, I don't think that the VCs are, on the whole, better than the mainstream business elite. Person by person, they're worse: less intelligent, less capable, far more immature, and a hell of a lot worse in terms of organizational and social insight. The steel company CEO may not understand Haskell, but he fucking knows how to lead people and run a complex human organization. The typical Sand Hill Road VC doesn't know either and is, therefore, pretty fucking useless except for the fact that he's a gatekeeper to the man-child oligarchy that holds all the cards. The main benefit that you get as a private company (cf. Ms. Morrill) isn't that you're accountable to a higher quality of people (because VCs are not that) but that you're accountable to fewer people and, therefore, have a better chance of drawing only aces. If you're accountable to as many people as you are, once public, the probability of drawing all aces becomes really low-- and the 3's and 4's (which are found in both decks) often have better social skills and become the dominant decision-makers. The major reason why VCs want to keep companies private, furthermore, has nothing to do with "long-term vision". Sand Hill Road is essentially taking equity-market strategies (namely, insider trading and market manipulation) that have been illegal for nearly a century on the public market, and applying them to private markets. If you use inside information to beat up the public market, you go to jail. If you pick up a phone and tell your buddies to dump their Quuxbin stocks all at once you can corner it on the cheap and put your underachieving, favor-dependent friends into executive positions... then you're guilty of market manipulation and go to jail. That kind of stuff happens (legally or at least quasi-legally) all the time in Silicon Valley. The Sand Hill Road cartel (or, as I prefer it, man-child oligarchy) shows us a parallel universe in which pump-and-dump is the norm and businesses soar or fail not according to market demand for their (typically uninspiring) products, but based on the fluctuating needs of self-interested, careerist investors. This is not only ethically problematic, but it also contributes to the geographic concentration of technology funding, which has become toxic (both for the residents of the Bay Area, who pay obscene rents, and for the capital-deprived "flyover" rest of the country). See, anyone who wants to know why VC is so Bay Area-centric need only pay attention to what the VCs are actually doing. Because so many of the conversations that VCs have would utterly fucking ruin them if ever printed, they have to work face-to-face. That doesn't mandate a specific area (e.g. San Francisco) but it does require geographic concentration.
• rm_-rf_slash 11y ago
  Maybe it's just me but I've always felt that the corporation should be owned by the corporation. There is something disingenuous about founders who do their job for $1 a year cause they're multimillionaires that own 10% of the company. What happens 100 years down the road? Your descendants - assuming they haven't squandered their inheritance and aren't interested in being a part of a corporate dynasty - will put every ounce of pressure on the company to increase profits, and that means hefty compensation packages to attract executives while midlevel white collars have to fight tooth and nail for a measly hundredth of a percent in options.
  • orkoden 11y ago
    Welcome to the exploitative system that favors the rich: capitalism
    • rebootthesystem 11y ago
      These comments are ignorant beyond comprehension. Go start a non trivial company with your own money and run it for ten years. Then come back to see just how utterly ignorant these comments will sound to you.
      • orbifold 11y ago
        Capitalists think that because they take on the risk, it is somehow morally justified to exploit others for wages. It is pretty obvious that it isn't much better than feudal indentured servitude and that ideally in any enterprise the risk and reward would be shared by everyone proportionally to their contribution.
        • rebootthesystem 11y ago
          > Capitalists think that because they take on the risk, it is somehow morally justified to exploit others for wages. I don't know what you are smoking but you better stop. Maybe you are trying to be funny. I don't know. Such horse shit.
• mparr4 11y ago
  This article mostly seems to be about companies going public later than they might have a few years ago. What about companies that never go public? To ask an admittedly naive question: is it possible to get funding and remain private? Does that even make sense? Obviously investors want to make money, can profits at a private company serve that function? Or are tech investors mostly (only?) interested in > 100x ROIs?
• sjg007 11y ago
  What probably matters most for many people here: “We probably need to fundamentally rethink how do private companies compensate employees, because that’s going to be an issue,” said Mr. Kupor, of Andreessen Horowitz." Many of these private IPOs restrict employees to selling shares back to the company at say 10% of the vested allotment. This forces people to the secondary market. Also new language in options agreements try to prohibit secondary market selling.. So it is basically a mess and practically impossible to get information. At least most of the unicorns have extended the 30 day exercise after you leave issues. Don't join a startup that doesn't give a longer (e.g 2-10 year) time frame for buying your vested options. Odds are post series A you won't be able to afford them unless offered a private liquidity event and then you can only sell some small percent anyway.