what about companies that never IPO but grow and become successful private entities (and hence, are never acquired)? that seems like a good place to end up
Given that the whole capital structure is in a state of flux right now with the reality of deflation (the exit of money from the system) while massive inflation is going on at the same time (the creation of new money not the increase in prices) why should we expect much of anything good to come out of the next ten years?
I think that a lot of people will take their ideas and implement them on a smaller scale and grow organically instead of getting big fast. This site is filled with people doing or planning on doing just that right now. I'm not optimistic about the next ten years but I think that we'll end up leaving this decade with some rather nice companies that will really contribute something substantial to the ten years that follow this decade. I'm assuming the next ten years will be like 70s with stagflation defining our experience and mainstream economists having nothing useful to say about why it is happening.
I agree that the problem is that web developers don't need funding anymore. Creating a web company is not something "urgent" like it was in the 90s, and it doesn't need large amounts of capital or labor.
The same way small inventors don't need huge amounts of capital, web companies will continue to appear without the need of VC money.
The overall trend is deflation. There is a massive amount of inflation occurring though. It's just happening at a slower rate than the rate of deflation.
Hmmm, the seismic shift from MoreLikelyToIPO to MoreLikelyToGetAcquired happened around the same time as Enron and its ensuing government yoke, Sarbanes-Oxley. Coincidence? I doubt it.
When compliance raises expenses 1%, no big deal. But if that number approaches 50% for small, nimble, well-leveraged tech start-ups, then public markets become closed to them.
SOX is an awfully big variable to not be considered.
Exactly - if you need proof that equity of tech companies is a different investment than equity of staid, ordinary companies, look at the capital structure of successful tech companies.
Google, Microsoft, Nvidia, Apple...No Debt.
The existence of large cash cushions on these balance sheets is insurance against a rainy day, and changes the risk profile. If these companies had been levered during the 03-07 expansion, they would have exploded in value.
They didn't, because it makes no sense to lever a tech company to the hilt, even if you believe it makes sense to lever a manufacturing company to high heaven. Cashflows are too variable and too prone to disruption.
It takes a special kind of tech co to go public, and many (i'm lookin' at you pets.com) weren't that kind.
SOX took effect in late 2002, but the big seismic shift had happened by 2001 (look at the drop-off in IPOs between 2000 and 2001, which never recovered). Seems like the dot-com crash leading to greatly decreased public demand for tech shares is a lot more likely explanation.
Clearly the dotcom bust (and closely-following recessions and wars) explained the immediate drop in IPOs. But those are cyclical matters. Why they haven't come back 10 years later is what requires some structural explanation. SOX is both proximate in time and plausible as a mechanism, on the 10-year scale.
Never mind the crazy IPO levels of bubble years 1999-2000. Why can't we get back to the modest 100-200 IPOs a year of the early 1990s?
SOX is a pain in the ass but it's hardly relevant. If you're planing a multi-100-million dollar IPO, having to do more accounting work isn't your primary or secondary driver.
Higher accounting costs and legal risks every year of being a public company doesn't make being a public company less attractive? Companies don't care about expenses?
We're talking about people making a decision to go public or not. Those legal risks were there anyways (it's illegal to defraud shareholders, even by accident), and if you're raising an IPO you're gonna be skyrocketing your accounting and other overhead costs anyways.
Your single-minded obsession with SOX is missing about a million other general and business-specific factors that would go into this decision, many of which represent a much higher dollar figure than sarbox compliance.
Heck, the costs of actually executing the IPO probably dwarf typical sarbox compliance costs (this statistic totally made up but plausible).
They're not irrelevant, but we're seeing a margin much bigger than they could account for. If there were companies that today could exit with 1990s-style $500m IPOs, I don't think they would walk away from them because of SOX. They're not having those IPOs because there are very few companies today that could convince investors to pay $500m for their stock.
Those who do have a business model, outlook, and revenues that makes them attractive, like Google, can and do still IPO successfully, but there aren't many of them.
I agree that SOX alone is not enough to explain the dearth of IPOs. A least for 2008-2010, the housing/financial crash seems a much bigger culprit.
At the margin, though, SOX's costs cause private companies to delay going public, and provide a relative advantage to older/larger/already-public companies -- acquirers -- for whom compliance costs are proportionately smaller.
And since the cycle of IPOs depends on emulating prior successes, even a small initial effect could depress the follow-on rate for years.
Google is sui generis, the most successful venture-backed company of the past 30 years. If being 'like Google' is the yardstick to IPO, the system is seriously broken.
Surely the whole tech bubble is a much bigger factor in this? Although correlation is not causation... :) Here's my thinking:
In the bubble, IPOs abounded and investors were buying whatever shit they could lap up if it had "e" in the name. Post-bubble, tech companies that survived have been successful (by definition) and have sought to absorb smaller companies both to gain technologies and to kill off competitors; whereas investors have been wary of new tech stocks. This alone could explain the shift from IPO to acquisition.
Also, a small, nimble, well-leveraged tech start-up surely doesn't want or need an IPO anyway. An IPO doesn't make sense if you don't need the cash (unless you VC would rather have an "exit" than profits†). It is hard for investors to evaluate the potential of a small tech company; acquisition makes much more sense.
† VCs demanding an exit in a fixed time frame might make an IPO impossible -- is this something that happens? Do any VCs accept dividends instead of a buyout?
Is that all we're about though? Building some silly widget, and then finding some sucker to buy it, and then laughing all the way to the bank? If that's the case, then how are we any different than the guys on Wall Street pushing credit swaps?
That's not a sustainable model.
I agree that building a company to quickly flip or IPO is going to be increasingly difficult, but that doesn't mean there isn't room for growth and innovation in the field. After all, MS started during the recession of the 70's...
SOX doesn't explain the macroeconomic picture, though.
Recall the high unemployment rate; the government has dumped money into several tried-and-true methods to stimulate growth and bring back jobs, but whatever growth we've seen in the last few quarters hasn't translated into expansion of operations. We can infer from this picture that companies are sitting on their money and spending frugally. They did so in the early 2000s as well. SOX explains why it's hard for a small-to-mid-cap to break out, but it doesn't explain why existing big businesses would restrict their spending.
My conjecture, which I don't have a watertight case for, is that business(as a whole) doesn't want to grow, or can increasingly meet growth targets via productivity alone, and so the whole rationale driving IPOs - and the capital/labor side of the economy - is broken.
That's scary because Web 2.0 companies aren't the be-all end-all of the world. We're in a decidedly fantastic spot, don't get me wrong. However, people are going to need batteries that last longer, they'll want windows in their houses that change shade, or soil that repairs and replenishes itself (South America looking at you.) This type of thing takes the hard money web companies don't need. It's the real source of growth.
Tom Seibel once said during an interview at Stanford that Big Innovation in software is over. 90s won't come back and another startup of Microsoft/Google is unlikely.
When asked what are the areas of future growth/innovation he said: energy, water management and green technologies.
My take on this is that software has changed so much, that it became kind of enabling/supporting service that nobody can do anything without, i.e. even in green tech field (assuming it indeed is going to be huge) there's plenty of code to be written (and sold)
In general it seems to refer to the fact that drinking and irrigation water is becoming more scarce in parts of the world and we need both technological and social systems for managing this resource. Aside from pure diminishing of water stock a practical example could be one country building a dam upriver from some other country.
I'd disagree, Facebook is a great counter point to the "another startup of Microsoft/Google is unlikely". Every 2 years now software seems to be going through huge shifts (web => web 2.0/Cloud => mobile....). With each transition there is a chance to create another MSFT or GOOG.
We need to act now to reverse these long term trends, otherwise innovation will dissipate rather quickly, as the world braces austerity and the second US recession
Yeah, imagine a production line hooked up directly to a web-based storefront where people are buying things to build. We're not far from it, and when this happens it probably won't be in China.
Very true, but still not a great place to be. Whether the boogeymen are robots or chinese workers, not having a market for manufacturing labor is a bad position for an economy.
I understand an economy that does not produce any of its own goods is in a jam -- it's an external critical dependency that can be wielded like a club against you. But if you have adequate internal production, what does it matter if it's done by humans, robots, or hyperintelligent cyborg orangutans? It may take a generation or so, but the people who would have been manufacturing labor will be absorbed into other markets -- or should be, as I understand it.
If "absorbed into other markets" means "wal-mart greeter", then that's bad. I'm all about efficiency and won't advocate make-work jobs, but if you don't have a base of demand in the form of a healthy middle class, it's hard to find people to buy the goods that you do manufacture.
I'm not sure how that affects the economy, but it certainly is a bad thing for a country. Not everyone can be a white-collar button-pusher; if no labor-based jobs exist anymore you'll make a significant portion of your citizens very unhappy
It's not just IPOs that have had a lost decade. All major US stock indices have not increased in value (inflation adjusted) since 2000. As an equities investor in the last decade, chance are you haven't made any money at all.
In 2000 some warned about a Japan-style slump, people said it coudn't happen. They still say that today, not realising, that, for 10 years, it's already true. Sure, there was a runup from about 03-07, but unless you got out at the top, you're back to where you started. And it's not just stock indices, it's also real estate and the number of jobs.
It could be called the end of PC era and personal computing in general. Look at this shift from general purpose desktop devices to specialized (TVs, consoles) and mobile ones.
Also the web is not something special nowadays. It is rather overloaded and boring. To many blogs, social networks which no one read anymore.
The web will remain, of course, the primary commercial media, that is why google buys that travel search service. Web is a perfect media for such services.
But it is not for a small, let alone individual players. So, we could speak rather about the end of PC-era, rather than lost decade of IT-investing.
43 comments
[ 3.5 ms ] story [ 109 ms ] threadI think that a lot of people will take their ideas and implement them on a smaller scale and grow organically instead of getting big fast. This site is filled with people doing or planning on doing just that right now. I'm not optimistic about the next ten years but I think that we'll end up leaving this decade with some rather nice companies that will really contribute something substantial to the ten years that follow this decade. I'm assuming the next ten years will be like 70s with stagflation defining our experience and mainstream economists having nothing useful to say about why it is happening.
The same way small inventors don't need huge amounts of capital, web companies will continue to appear without the need of VC money.
When compliance raises expenses 1%, no big deal. But if that number approaches 50% for small, nimble, well-leveraged tech start-ups, then public markets become closed to them.
SOX is an awfully big variable to not be considered.
Google, Microsoft, Nvidia, Apple...No Debt.
The existence of large cash cushions on these balance sheets is insurance against a rainy day, and changes the risk profile. If these companies had been levered during the 03-07 expansion, they would have exploded in value.
They didn't, because it makes no sense to lever a tech company to the hilt, even if you believe it makes sense to lever a manufacturing company to high heaven. Cashflows are too variable and too prone to disruption.
It takes a special kind of tech co to go public, and many (i'm lookin' at you pets.com) weren't that kind.
Never mind the crazy IPO levels of bubble years 1999-2000. Why can't we get back to the modest 100-200 IPOs a year of the early 1990s?
Your single-minded obsession with SOX is missing about a million other general and business-specific factors that would go into this decision, many of which represent a much higher dollar figure than sarbox compliance.
Heck, the costs of actually executing the IPO probably dwarf typical sarbox compliance costs (this statistic totally made up but plausible).
Those who do have a business model, outlook, and revenues that makes them attractive, like Google, can and do still IPO successfully, but there aren't many of them.
At the margin, though, SOX's costs cause private companies to delay going public, and provide a relative advantage to older/larger/already-public companies -- acquirers -- for whom compliance costs are proportionately smaller.
And since the cycle of IPOs depends on emulating prior successes, even a small initial effect could depress the follow-on rate for years.
Google is sui generis, the most successful venture-backed company of the past 30 years. If being 'like Google' is the yardstick to IPO, the system is seriously broken.
In the bubble, IPOs abounded and investors were buying whatever shit they could lap up if it had "e" in the name. Post-bubble, tech companies that survived have been successful (by definition) and have sought to absorb smaller companies both to gain technologies and to kill off competitors; whereas investors have been wary of new tech stocks. This alone could explain the shift from IPO to acquisition.
Also, a small, nimble, well-leveraged tech start-up surely doesn't want or need an IPO anyway. An IPO doesn't make sense if you don't need the cash (unless you VC would rather have an "exit" than profits†). It is hard for investors to evaluate the potential of a small tech company; acquisition makes much more sense.
† VCs demanding an exit in a fixed time frame might make an IPO impossible -- is this something that happens? Do any VCs accept dividends instead of a buyout?
VCs aren't the issue - the investors, the folks/companies who put money into their funds are.
VC funds are partnerships which divvy up the stuff bought with the money. The investors value liquidity.
I agree that building a company to quickly flip or IPO is going to be increasingly difficult, but that doesn't mean there isn't room for growth and innovation in the field. After all, MS started during the recession of the 70's...
Recall the high unemployment rate; the government has dumped money into several tried-and-true methods to stimulate growth and bring back jobs, but whatever growth we've seen in the last few quarters hasn't translated into expansion of operations. We can infer from this picture that companies are sitting on their money and spending frugally. They did so in the early 2000s as well. SOX explains why it's hard for a small-to-mid-cap to break out, but it doesn't explain why existing big businesses would restrict their spending.
My conjecture, which I don't have a watertight case for, is that business(as a whole) doesn't want to grow, or can increasingly meet growth targets via productivity alone, and so the whole rationale driving IPOs - and the capital/labor side of the economy - is broken.
When asked what are the areas of future growth/innovation he said: energy, water management and green technologies.
My take on this is that software has changed so much, that it became kind of enabling/supporting service that nobody can do anything without, i.e. even in green tech field (assuming it indeed is going to be huge) there's plenty of code to be written (and sold)
http://www.imdb.com/title/tt0804529/
2. Android.
- US venture capital industry is expected to shrink considerably (http://techcrunch.com/2010/07/13/report-u-s-venture-capital-...)
- Immigration brain drain takes place. Only 18,000 applications had been filed for regular H-1Bs so far this year. (http://money.cnn.com/2010/06/14/news/economy/immigration_bra...)
- US manufacturing jobs keep slipping away, and the trend will likely continue - Nation's 100 biggest markets have lost ~40% jobs compared to a decade ago (http://buffalo.bizjournals.com/buffalo/blog/the_score/2010/0...)
We need to act now to reverse these long term trends, otherwise innovation will dissipate rather quickly, as the world braces austerity and the second US recession
I understand an economy that does not produce any of its own goods is in a jam -- it's an external critical dependency that can be wielded like a club against you. But if you have adequate internal production, what does it matter if it's done by humans, robots, or hyperintelligent cyborg orangutans? It may take a generation or so, but the people who would have been manufacturing labor will be absorbed into other markets -- or should be, as I understand it.
If "absorbed into other markets" means "wal-mart greeter", then that's bad. I'm all about efficiency and won't advocate make-work jobs, but if you don't have a base of demand in the form of a healthy middle class, it's hard to find people to buy the goods that you do manufacture.
A recent study shows that a better price can be extracted from the acquiring company if the sellers adopt this dual-track strategy. See http://news.byu.edu/archive10-jun-dualtracksellouts.aspx
From Blank's "Lessons Learned", no.1: "Advice that’s more than 5 years old is obsolete."
The blurb under his "Posts from an Entrepreneurial Career: "Steve Blank's 30 years of Silicon Valley startup advice."
So, does that mean that 83% of his book is obsolete?
In 2000 some warned about a Japan-style slump, people said it coudn't happen. They still say that today, not realising, that, for 10 years, it's already true. Sure, there was a runup from about 03-07, but unless you got out at the top, you're back to where you started. And it's not just stock indices, it's also real estate and the number of jobs.
Also the web is not something special nowadays. It is rather overloaded and boring. To many blogs, social networks which no one read anymore.
The web will remain, of course, the primary commercial media, that is why google buys that travel search service. Web is a perfect media for such services.
But it is not for a small, let alone individual players. So, we could speak rather about the end of PC-era, rather than lost decade of IT-investing.
It is a time to invest into a global services.