More accurately, Sarbox is keeping 96% of Americans away from some crazy volatility -- they are missing out on MSFTesque price appreciation as well as potential bankrupcy of countless new public companies.
That's what gets lost in this, in my opinion. Certainly there is a big upside that is missed out on, the article makes a good point. But at the same time, SOX burdens companies to have to meet very strict reporting policies, which ultimately is good for the average investor(s) (in my opinion). Not to beat a dead horse, but how did Enron work out for the average Joe/Jane?
Scott's point is that Enron was a giant, long-established public company. Sarbox may have helped prevent the next Enron, with an unanticipated side effect of all but killing IPOs and growth in the public market. It's like passing a law to prevent the next giant cruise ship from hitting an iceberg, and accidentally killing rowboats in the process.
That's why I said "things like index funds", and many NASDAQ index funds would or could be IPO company origin weighted.
It's the principle; at the opposite end, put your money for this sort of thing into 12 or 20 companies. OK, with a minimum reasonable investment of 100 shares that's a lot of money, but individuals can still do it.
Have delayed IPOs really moved the needle on index funds? Not a rhetorical question; it's possible they have. The markets being indexed are so huge I'm somewhat skeptical that companies IPOing later will make any difference in the returns of a passive index investor, though. And that's even assuming that earlier tech IPOs would outperform the rest of the market; they might make the index funds perform worse if that's not true!
Don't know, I'm focusing more on the non-existant IPOs than the spare handful of eventual, delayed ones. That's where the terrible damage has been done.
Looking at Facebook and Microsoft helps to quantify a very small portion of the total damage, but for many it'll be more convincing that the not visible per se absence of IPOs.
Number of US public companies in 1997: 8800. Number today: 4100. Total stock market index fund return adjusted for inflation between 1997 and today: 0%.
And if you add the year 2003 to those two cherry-picked years, do you still see a correlation between total stock-market returns and number of public companies?
Agreed. Here's the data in chart form, it looks nothing like total stock-market return (the 2008 collapse and subsequent rebound is nowhere to be found, etc):
Total returns would actually be almost double that, since that graph doesn't include dividends, which historically account for just under half of total returns.
Most common price measurements have increased by 100%+ since 1997 (in many cases a lot more), from housing to commodities. There's a very strong case to be made that the real rate of inflation has just about wiped out all stock market returns since the mid to late 1990s.
I don't know if it's 0%, but even 20% inflation adjusted over 16 years is a very bad return.
While I'm not a fan of Sarbox, I don't think we can simply say that it's going to single-handedly create this two-tiered system. It's not like every private company that would have had access to public capital much earlier would have grown 500x. Microsoft and Facebook are the outliers, not the norm. Not to mention that Sarbox has nothing to do with what defines "accredited". Congress can and has changed that definition at will, including raising the limits necessary under the Obama administration due to Dodd Frank.
That said, Sarbox has had so many unintended consequences and resulted in so much destroyed value that I do believe it should be curtailed in one fashion or another.
But you know why they had to use a company like Facebook to make their example? Post-SarBox, which I think was more like the final nails in the coffin vs. "single-handedly", only wild successes like it are able to do IPOs.
Legal and regulatory changes in the late '50s created the ecosystem that had IPOs as an ideal exit, and this had a fantastic half-century run ending with SarBox. And since then people are chasing 140 characters instead of flying cars, to paraphrase Peter Thiel. So much destroyed value I'm sure it has more than a little to do with their being no end in sight for the Great Recession.
They had to pick an outlier as the example, because venture capital returns as a whole are so low that they would contradict the point the author was trying to make. As a whole, VC returns have not beaten simple index fund investing (S&P 500, etc).
Supporting that, big established companies have gigantic legal, financial, and regulatory staffs already in place to deal with new regulations like Sarbox.
Nobody I know denies that the US IPO market almost entirely shut down after SarBox. Correlation does not imply causation, and I personally think it was only the last set of nails in this coffin, but from that time sequence and a lot of anecdotal data of people saying SarBox is why they aren't going public has resulted in it being the commonly accepted reason.
You don't entertain the possibility that the dot.bomb crash and 9/11 had anything to do with that initial fall? Do you note that the number of IPOs failed to recover in the period before the Great Recession?
This is one of the reasons I say it wasn't only SarBox, but that SarBox "was only the last set of nails in this coffin".
That was not your claim. Your claim was: "Nobody I know denies that the US IPO market almost entirely shut down after SarBox", which is simply contradicted by the data
I would say that about 96% of investors "buy high, sell low" because they can't stomach real volatility. How many mom and pop investors dumped their equity funds in the deepest depths of the recession? It's sad to think about. Much more important than access to a hot IPO is having enough capital, and enough knowledge, and perhaps enough reassurance, to hang in through the ups and downs. If you can give people that and a few broad-based, low ER index funds then they will do just fine.
I took a quick look at tech companies that went public in the 80s up to today (1) and it's not as simple as Scott makes it out to be. The annualized returns are comparable now to what they were in the "glory days" due to companies like Tesla and Netflix but the massive long term returns are going to be harder/impossible to achieve.
Sure we may not have the chance for another Microsoft going public but there's still opportunity, it just takes a bit more effort and moving money around more frequently.
Most of the 96% of "investors" locked out of startup financing because of accreditation rules would be very poorly served by startup investing.
Also regularly overlooked: the risks to startups of accepting funding from underqualified investors. Equity is ownership. Ownership involves baggage. A degree of trust and reputation protection undergirds both sides of startup investing --- and we still get occasional horror stories.
This is a situation that looks terrible in black-and-white numbers, but is probably not as bad as it seems.
> Most of the 96% of "investors" locked out of startup financing because of accreditation rules would be very poorly served by startup investing.
I basically agree, but will make the following observation anyway: the figure that matters isn't what fraction of that 96% would be very poorly served, but what fraction of the ones who would invest in startups if they could would be very poorly served.
Imagine a university that targets exceptionally smart students, and also is only prepared to educate the very rich. (Or people whose surname begins with the letter A. Or almost any other small group that isn't basically equivalent to "very clever people".)
Then it will be true that (1) most of the people "locked out" by its rich-people-only policy would be poorly served by studying there, but also that (2) removing that policy would be a public benefit. (Assuming there weren't other adverse effects, e.g. running out of money because they could no longer charge such high fees.)
Going back to startup investing, it's at least plausible that most of the 96% wouldn't choose to do it because of the high perceived risks, and that those who would will be those who (1) are more risk-tolerant because they have more money and/or (2) think they understand the market particularly well. Both of these are probably correlated with being not so poorly served by startup investing.
(They may well not be correlated enough with that to make it a good idea, which is why I basically agree with your point despite the quibbling. But the quibble seems like a generally important distinction whether or not it makes a difference in this particular case.)
The post on A16Z can be characterized as "talking one's own book" [1]
While convenient to cherry-pick MSFT as an example, there was also countless wealth lost in the dot com explosion (Webvan, eToys, Pets.com, etc)
Yes going public today is harder and that means companies generally have to have a better answer to "how will you make money (profitably)" than they once did. And that is probably a good thing.
It's also surprising that venture capitalists who have on the whole been unable to beat the S&P500 think that the layperson investing in tech companies would fare so well.
see also Keith Rabois' answer on the subject [1]; sorry for the quora link but it's worth it.
tl;dr:
reasons given to avoid ipo include lower speed/innovation (counterexample: apple), problems with short-term market expectations (cex: google), outside capital not required, maintaining a low profile, and sox compliance. Keith asserts that the real reasons are (a) incorrect assessments of above; (2) BoD issues, and (3) -- the important reason -- private company valuations are detached from reality and have been substantially inflated, so companies have to defer exits for years until their business can actually support the valuation.
Rather than (or in addition to) apologizing for a Quora link, just add ?share=1 to the end of the URL so that none of the sign-up call to action or answer blurring appears.
Actually there's a good case to be made that Scott is talking against our own book. We have entirely private money locked up for 13+ years, we benefit from longer private holding periods. Whether that's good for the industry or the country are separate questions.
You can fix this without government intervention: Launch an a16z ETF. It could help you as well because you could secure more favorable terms if you so desired to offset the additional work.
This may yield higher returns to investors than they could otherwise receive but, if so, it's only because they underestimate you. If the return on funds invested with you is expected to be higher, the ETF's price will increase until the perceived risk-adjusted return is equal to that in the market. What causes the types of entities who receive above average returns through nontraditional vehicles to achieve them is some combination of the the higher cost of raising that money, more limited availability and social convention.
4% seems like an awfully high fraction of the population that would theoretically have access to the best startup investment opportunities. Even if you are an accredited investor, you simply don't have access to many of the best performing hedge funds. They are simply closed to you. They don't want your money.
I imagine there would be something similar in venture investing as well. One such example would be the lack of personal contacts which prevents us from investing at the best opportunities. It's debatable whether secondary exchanges have enough liquidity and trading volume to make investing in them pragmatic for anything less than the top 0.5% of the population with respect to net worth. Even then, the lack of due diligence would be frightening.
That's partly true - if we simply imagine the past but bigger, then like hedge funds, startups have a limited capital requirement and will be hard to find at a suitable early stage
However it seems the world is not shaping up like that - if we take the theory that startups will simply be the new path into high flying careers, supplanting MBAs and certain colleges, then unlike hedge finds which are capital limited,
startups can take almost unlimited amounts of cash. For example if the tech startups world is a guide you should do a degree then take three years to run a startup. It sounds better than junior graduate trainee. If this holds true for even a decent percent of the world, across all industries, you could shovel cash at these guys forever.
That will take industrial levels of cash shovelling - the sort pension funds are good at, but VCs and even hedge funds really really bad at (high we are raising a limited round for 3 years at 2and20 vs give me 10% of your lifetime earnings and start now!)
Agreed on the above point that patronage/network access locks out most accredited investors from the hottest deals. PE/VC is a prime example of this, where the top decile make out like bandits. I'd like to add that speculating on IPOs is like participating in pseudo-alternative asset class - not necessarily capturing value through public equities as the author describes. The level of your earnings/expected earnings, retirement goals, age, level of risk-aversion etc. affect where you place your money. Common sense says that far fewer than 96% of Americans would be well-served having access to this class.
I think this discussion gets too polarized around "speculating on IPOs" too quickly. Think instead about the general characteristics of the overall equity market. Assume for example that you simply hold the market index.
What's happened over the last 15 years is that growth has been mostly stripped out of the public market -- due to the collapse of IPOs and the reduction in publicly listed US companies from 8800 in 1997 to 4100 now. The result is a public market that is more and more just old, slow-growing companies. That's fine if that's what you want, but for people who are investing their retirement savings over a multi-decade period, that's bad news. (E.g. the overall stock market is flat over the last 15 years adjusted for inflation -- I don't think that's a coincidence.)
People should hold money in an asset allocation (mix of equities, bonds etc.) that is appropriate for their risk profile - not necessarily in 100% index-tracking funds. You're suggesting that investors beat the market by taking on more risk. As an aside, a great deal of real value has been created by publicly listed companies over the last 15 years.
That's right. The percentage of individuals who have access to top decile hedge funds, PE funds, and VC funds (and in all three categories the top decline generates almost all the returns) is infinitesimal.
In practice, the investor base of those funds is a very small number of high-net-worth individuals and families, plus a set of long-lived private institutions such as Ivy League universities, multi-generational foundations, and the like. Sovereign wealth funds (national treasuries of countries like Abu Dhabi, China, Singapore, and Hong Kong) are becoming a larger part of that base now. (Not the US though, the US has no sovereign wealth fund.) Some big pension funds invest heavily in private equity but not as much into venture capital or hedge funds.
The result is that the vast majority of retirement savings for normal Americans -- whether managed by individuals or institutions -- can't access compelling private market opportunities.
1. The list of top performing funds is not static.
2. The number of individuals and institutions invested in these funds who actually understand the instruments these funds invest in (particularly in the hedge fund world) is infinitesimally smaller. In other words, they couldn't give you an educated explanation as to why they invested, they simply got lucky.
3. Access doesn't guarantee returns. Sending your money to John Paulson in 2008 was very rewarding; if you invested in his PFR Gold Funds, you're down more than 50% in 2013 alone. It is almost impossible to predict top performers, particularly given point 2 above, and even if you do invest in a top performing fund, at best your investment is likely to constitute a modest portion of the total funds you have invested.
4. Success is a double-edged sword for fund managers: it's possible to raise a lot more capital (management fees, yay!) and launch new funds with ease, but finding investment opportunities that can deliver meaningful results becomes increasingly difficult as the size of the positions you need to establish grows. In other words, by the time you're investing in a fund manager because of past performance, there's a good chance you've already missed the big gains.
5. If you go back decades, particularly before 2008, hedge funds on the whole provided significantly better returns than buying a major index. But in the past several years, the S&P 500 has outperformed a number of indexes that track hedge fund performance. When you consider fees, most hedge fund investors have overpaid for underperformance the past several years.
6. A number of investment banks are exploring the launch of retail investor-friendly hedge funds with modest minimums (four-figures low in some cases), and Goldman has already launched its own. This is seen as a growth market for the investment banks so you can expect a lot of action in this space in the coming years.
Compelling market opportunities, private and public, do exist and the number of financial products promising average Americans access to them has grown considerably over the past decade. If I want a leveraged investment in publicly-traded mortgage REITs, for instance, UBS has an exchange traded note I can buy tomorrow. If I want to invest in investment-grade bonds denominated in renminbi, there's an ETF for that. And so on and so forth.
The number of sophisticated (and sometimes incomprehensible) financial products available to everyone will continue to grow but that doesn't really matter: the number of individuals who will be invested in the right products at the right time, and keep their gains over the long haul, will always be small. Put simply, access has very little to do with actually being able to exploit compelling market opportunities.
Oh, I'm sure there'd be plenty of crap investment opportunities available to ordinary investors. There's an interesting idea called rational ignorance - basically, investigating an investment opportunity costs time and money, and it's irrational to spend more on investigating it than you'd lose if it failed outright.
So being able to offer poorly-regulated "high-risk investments" to normal people who can only invest a small amount would be a scammer's dream; they can't put nearly as much resources into investigating the investment, or into recovering funds if it turns out to be a scam.
Nearly all the good opportunties will continue to go to a handful of well-connected wealthy people because it's far less work to raise money that way.
Part of why there are fewer small-cap IPOs since 2000 has been due to the required external audits on companies - on average costing $2M. This had forced many companies to delay their IPO until they had the revenue to afford the audits, at which point often they no longer needed an IPO (due to folding, or selling).
The JOBS Act offered a series of exemptions for small-cap companies to be exempt from such audits, though I'm not sure what stage of implementation the SEC has taken it.
That said, the modern startup path does seem to structurally delay IPO, which in the short term has resulted in 20-50% shaves of post-IPO public investors and long term difficulties in adding value of the sort Garry mentions. Just the causality basis isn't clearly SarbOx.
My current theory is the tilting of the king vs. cash towards king, as epitomized by Zuck. It's possible that the market had started driving companies towards private control to emphasize long-term growth over short-term, quarterly stock performance, which drove the Enron-era scandals. The collapse of the tech bubble might have had an impact, too. I concur with Bilal that private audits are a more likely causal link than SarbOx, though that could be our mutual gov't experience talking.
The JOBS Act created the IPO on-ramp (5 year SarbOx tapered exemption to reduce costs of public compliance), as well as 10x expanding the Reg A ($5M → $50M mini-offering cap) exemption to make it easier for startups to blend over into public exposure. However, these non-standard pathways are little known to both the investors that traditionally take early board seats and certainly early-stage founders. It's also unclear how much of JOBS has even been implemented due to continuing backlogs from political obstruction of Dodd-Frank at the regulatory level.
Eliminating decimalization is basically just a way to increase the profits of market makers at the expense of retail and other long term investors. Minimum increments are just a minimum wage law for high frequency traders.
Yeah, what a weird solution to his supposed problem.
If I saw a blog post titled "Unshackle the Middle Class," I would never in a million years have guessed that one of the unshackling mechanisms was a return to "IBM was up three-eighths, closing at sixty-seven and five-sixteenths."
Yes, this is a great point, lack of investment opportunities is clearly what is holding back the middle class, not stagnant wages since the mid 70s in the face of dramatic cost of living increases.
The housing collapse was fun and all but it's 2013, we need to be finding new ways to increase financial risk for the failing consumer base.
Why would it be a good thing for the Middle Class to participate in IPOs which are typically skewed against them? The IPO process is one in which you're usually buying into a company whose price has been bid up considerably (these are "Growth" stocks).
I think it's been proven that investors aren't adequately compensated for taking on "growth" risk. The risk premia attached to "growth" doesn't outperform passively owning the index over long periods of time.
Seems like all A16Z is trying to do is juice the IPO market for more liquidity (from dumb money middle class investors) so that they can have an easier time exiting when they're ready.
I'm not sure Scott has the causation/correlation right on this, but the trend away from taking companies public is troubling. I don't think the regulation in this area is helping: Sarbanes Oxley is pretty draconian in its regulatory burden, and I view things like "sophisticated investor" requirements with deep distrust. I think they're an overly paternalistic solution to a non-existant problem, or one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.
But I think there is something deeper and more structural than merely regulatory burden. Public companies suffer from the agency problem. When ownership is diffuse, that problem is more acute, and managers' interests more easily diverge from shareholders' interests. This is true regardless of the regulatory structure. That is to say, it's a fundamental economic problem rather than an artifact of whatever regulatory system is in place. One of the benefits of taking companies public later, if at all, is that ownership stays concentrated during a longer period and owners have much more concentrated influence on management.
There is another economic phenomenon in place, which is this: the economy is awash in capital and companies don't need public capital. When there are hedge funds with billions to throw around, and private equity companies who can engage in billion dollar transactions, why do companies need to turn to the public markets? If there is some profit to be made investing in the next Microsoft, and a private fund can swing the necessary size of investment, what purpose is there to resort to the public markets? Is it ever more efficient or more effective to supply a given amount of capital via the public markets instead of via some private investment Overregulation doesn't help this problem, but it's also ultimately an economic phenomenon. Concentration of wealth (there are a lot of new foreign oil/resources billionaires these days) means more private entities that can raise the kind of money that previously one could only raise in the public markets. Moreover, fewer opportunities for investment means that private funds can meet the underlying economy's need for capital, making public funding less relevant. Changing the regulatory structure isn't going to change that dynamic.
This is something that has been worrying me for some time. More and more, the IPO is being used as a method for cashing out, rather than as a source of funding. I am an advocate for low cost index funds, as historically, it is one of the best returns an ordinary investor can expect to achieve. But this recent trend in private/public markets has me second guessing that position.
What I think is more interesting is the idea that private markets are less rational. If you look at venture capital over the last 30 years it's underperformed the stockmarket. There are a few big winners but if you look at the total returns of the funds which invested in them it's a lot less amazing. Which arguably comes back to the lack of hard data plus the effort involved in managing these small investments.
PS: Also of note he ignored dividends and inflation when looking at microsofts returns which is a sign of basic incompetence.
> one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.
Hmm, don't know what you mean by this. As it stands, the safety net is working -- nobody who worked a significant portion of their lives is living on the street for lack of funds.
What SS does not give is a retirement of the same quality as a rich person's retirement, which should make sense on the face of it. Those Enron folks did have a Social Security retirement, what they lost was the more lavish retirement they had planned for themselves (nb: I'm not using "lavish" in any derogatory sense).
SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.
"As it stands, the safety net is working -- nobody who worked a significant portion of their lives is living on the street for lack of funds."
Right. They're working at Walmart and living in hotels, three to a room. I suggest you get out more and actually invest some time in learning what's actually happening in America; it will save you from spouting ridiculous statements like that one.
> SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.
Now if we can just broaden the population pyramid widely enough (and lucratively enough) to support the great height of the future retirees, we can kick that can so far down the road even we 40-somethings won't have to worry about the scheme's stability.
Also, I would point out that middle classes typically (and by definition, according to some definitions) make money from skilled labour, not investment. Stock profits is just not that big a percentage of a middle class person's lifetime earning.
It should be noted that half the US has no 401K. 80% of stock is owned by 10% of the population. So "middle class" really means "above the median" if we're talking about people with any substantial stock investments.
I can. The people who tend to read this site are not generally going to be from lower income brackets, so a more "progressive" tax just means more picking of their pockets.
Regarding the banks, that's a real uphill fight. I don't know if there is a more protected, favoured sector. I'd be happy if the mentality that led to the bailouts were to end. That would be a great start.
Intelligence probably led to a lot of that wealth being created, as well as the desire to protect it from those who have no legitimate claim over it. There is indeed selfishness at work here. There is the selfishness of those who don't want their wealth to be confiscated. There is also the selfishness of those who want to take the wealth of others.
"Thus, the public investors in Microsoft have had the opportunity to realize $233.5 billion in market cap appreciation; the private investors had only a $500 million head-start. From IPO, a single share of Microsoft stock has appreciated close to 500x."
That's an ok point, but it ignores the extreme multiplier benefits from participating in that first $500 million. That is to say, very few (likely none) of the private investors would pay at a $500m valuation on a $500m IPO.
If you got in at $50m your return was upwards of 5,000 (4,680) fold vs. 500 fold at $500m. And of course this is all theoretical as Microsoft didn't take meaningful outside money.
Scott tries to say that private investors only had a $500m head start, and compares that to the total $234b market cap. $500m vs $234b is not the important stat line, rather it's the way the returns massively increase if you got in with the private money early. It's the difference between being perhaps being a billionaire versus having $25 or $50 million. Both are great outcomes, but there's no sense in pretending the first $500m shares much in common with the last $234 billion.
Point being: no, the private investors did not just have a tiny head start in the grand scheme of things (ie compared to the market cap now), and that is almost always the reality. They had an extremely massive head start over the IPO money, no matter how you calculate it. Early money multipliers can almost never be touched by public investors.
Certainly the middle class isn't being shackled by paying ordinary income tax rates of as much as 39% while VCs pay much lower taxes (previously 15%) as capital gains via the carried interest loophole.
Certainly that isn't an advantage worth mentioning at all when comparing the struggles of the middle class to the opportunities available to VCs...
This comes off as having been written in a bubble. What I hear is someone arguing for their own self interest while using the Middle Class to gin up support. Who wouldn't want to help the middle class? I'm sure the middle class could be helped by more IPOs and less regulation to get more of them but I'm also positive it'll help the wealthy even more.
How about this idea: lets start human trials of drugs earlier and require less regulations before medications are released so we can help fight disease in 3rd world countries... And boost my Pfizer stock.
Pfizer benefits massively from a highly regulated, FDA controlled market, in which only the big players can bribe their way through challenging approvals, and only big players can afford the massive cost of creating new drugs + bringing them to market fully.
Companies like Pfizer would be more likely to get toppled in a free market, than not. As it is, their position is guaranteed by the FDA. They're a government protected company, similar to Verizon or Boeing or Exxon. They roll in the profits, and all they have to do is buy up smaller players that can't hang around long enough to get approvals. The only threat to Pfizer right now is massive European pharmas.
Okay, it's obvious I don't know much about how pharma companies work but that's not the point. Let me put it another way: Lets do something that greatly benefits me, marginally benefits you, and wrap it up in good will and fuzzy feelings so you'll buy it.
On a scale of 1 to 10 of importance to the middle class, buying early into IPOs is about a 0. Try housing prices, health care costs, stagnant wages, an unpredictably irrational criminal justice system, and the all-but-inevitable revolution that comes when today's young realize that it is stupid for them to pay 30% of their salaries to support the retirement of an entire generation of selfish people who politically could never make hard decisions and passed the buck onto their kids.
30%? That's far from the breaking point I am afraid. I'm from Belgium and graduated with a good job - from day 1 I was in the highest tax bracket: 50%. This bracket starts at 31K or so btw, nothing extraordinary.
I just looked at the IRS site. The total of social security and medicare taxes paid is 15.3%. Half is paid by the employee as a deduction from their wages. Half is paid as payroll tax by the employer. The self employed pay the full 15.3%.
It goes to 22% in 20 years for just SS/Medicare. But don't forget Medicaid, of which a significant portion goes to the elderly and is likely to increase, and can also be funded by additional state taxes. Californians especially are f*ed. I'm not throwing out a vetted number, but given all the evidence 30% doesn't seem unrealistic.
Why wouldn't companies just increase the price of their shares by a factor of 4 to counter the increase in tick size by 4? Thus keeping the percentage of tick size to asset value the same ($1 stock with $0.0025 tick size = $4 stock with $0.01 tick size).
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[ 2.3 ms ] story [ 377 ms ] threadIt's the principle; at the opposite end, put your money for this sort of thing into 12 or 20 companies. OK, with a minimum reasonable investment of 100 shares that's a lot of money, but individuals can still do it.
Looking at Facebook and Microsoft helps to quantify a very small portion of the total damage, but for many it'll be more convincing that the not visible per se absence of IPOs.
http://blogs-images.forbes.com/sageworks/files/2012/05/Publi...
Google finance graph: http://bit.ly/1d7JXnm
I don't know if it's 0%, but even 20% inflation adjusted over 16 years is a very bad return.
That said, Sarbox has had so many unintended consequences and resulted in so much destroyed value that I do believe it should be curtailed in one fashion or another.
Legal and regulatory changes in the late '50s created the ecosystem that had IPOs as an ideal exit, and this had a fantastic half-century run ending with SarBox. And since then people are chasing 140 characters instead of flying cars, to paraphrase Peter Thiel. So much destroyed value I'm sure it has more than a little to do with their being no end in sight for the Great Recession.
Why should we think Sarbox is any different?
Generally it has worked well to date.
New companies do not.
http://www.xconomy.com/wordpress/wp-content/images/2008/06/i...
This is one of the reasons I say it wasn't only SarBox, but that SarBox "was only the last set of nails in this coffin".
Sure we may not have the chance for another Microsoft going public but there's still opportunity, it just takes a bit more effort and moving money around more frequently.
1. The post itself is not 100% relevant but the table of returns is worth taking a look at: http://dangoldin.com/2013/05/24/investing-in-tech-stocks/
Also regularly overlooked: the risks to startups of accepting funding from underqualified investors. Equity is ownership. Ownership involves baggage. A degree of trust and reputation protection undergirds both sides of startup investing --- and we still get occasional horror stories.
This is a situation that looks terrible in black-and-white numbers, but is probably not as bad as it seems.
I basically agree, but will make the following observation anyway: the figure that matters isn't what fraction of that 96% would be very poorly served, but what fraction of the ones who would invest in startups if they could would be very poorly served.
Imagine a university that targets exceptionally smart students, and also is only prepared to educate the very rich. (Or people whose surname begins with the letter A. Or almost any other small group that isn't basically equivalent to "very clever people".)
Then it will be true that (1) most of the people "locked out" by its rich-people-only policy would be poorly served by studying there, but also that (2) removing that policy would be a public benefit. (Assuming there weren't other adverse effects, e.g. running out of money because they could no longer charge such high fees.)
Going back to startup investing, it's at least plausible that most of the 96% wouldn't choose to do it because of the high perceived risks, and that those who would will be those who (1) are more risk-tolerant because they have more money and/or (2) think they understand the market particularly well. Both of these are probably correlated with being not so poorly served by startup investing.
(They may well not be correlated enough with that to make it a good idea, which is why I basically agree with your point despite the quibbling. But the quibble seems like a generally important distinction whether or not it makes a difference in this particular case.)
48% of Americans don't own stocks at all.
A venture capitalist trying to get legal changes made by putting on a faux-populist claim of "it's for the middle class" is vomit-inducing.
While convenient to cherry-pick MSFT as an example, there was also countless wealth lost in the dot com explosion (Webvan, eToys, Pets.com, etc)
Yes going public today is harder and that means companies generally have to have a better answer to "how will you make money (profitably)" than they once did. And that is probably a good thing.
It's also surprising that venture capitalists who have on the whole been unable to beat the S&P500 think that the layperson investing in tech companies would fare so well.
[1] http://invest.yourdictionary.com/talking-one-s-book
tl;dr: reasons given to avoid ipo include lower speed/innovation (counterexample: apple), problems with short-term market expectations (cex: google), outside capital not required, maintaining a low profile, and sox compliance. Keith asserts that the real reasons are (a) incorrect assessments of above; (2) BoD issues, and (3) -- the important reason -- private company valuations are detached from reality and have been substantially inflated, so companies have to defer exits for years until their business can actually support the valuation.
[1] http://www.quora.com/What-are-some-of-the-main-reasons-that-...
This may yield higher returns to investors than they could otherwise receive but, if so, it's only because they underestimate you. If the return on funds invested with you is expected to be higher, the ETF's price will increase until the perceived risk-adjusted return is equal to that in the market. What causes the types of entities who receive above average returns through nontraditional vehicles to achieve them is some combination of the the higher cost of raising that money, more limited availability and social convention.
I imagine there would be something similar in venture investing as well. One such example would be the lack of personal contacts which prevents us from investing at the best opportunities. It's debatable whether secondary exchanges have enough liquidity and trading volume to make investing in them pragmatic for anything less than the top 0.5% of the population with respect to net worth. Even then, the lack of due diligence would be frightening.
However it seems the world is not shaping up like that - if we take the theory that startups will simply be the new path into high flying careers, supplanting MBAs and certain colleges, then unlike hedge finds which are capital limited, startups can take almost unlimited amounts of cash. For example if the tech startups world is a guide you should do a degree then take three years to run a startup. It sounds better than junior graduate trainee. If this holds true for even a decent percent of the world, across all industries, you could shovel cash at these guys forever.
That will take industrial levels of cash shovelling - the sort pension funds are good at, but VCs and even hedge funds really really bad at (high we are raising a limited round for 3 years at 2and20 vs give me 10% of your lifetime earnings and start now!)
What's happened over the last 15 years is that growth has been mostly stripped out of the public market -- due to the collapse of IPOs and the reduction in publicly listed US companies from 8800 in 1997 to 4100 now. The result is a public market that is more and more just old, slow-growing companies. That's fine if that's what you want, but for people who are investing their retirement savings over a multi-decade period, that's bad news. (E.g. the overall stock market is flat over the last 15 years adjusted for inflation -- I don't think that's a coincidence.)
In practice, the investor base of those funds is a very small number of high-net-worth individuals and families, plus a set of long-lived private institutions such as Ivy League universities, multi-generational foundations, and the like. Sovereign wealth funds (national treasuries of countries like Abu Dhabi, China, Singapore, and Hong Kong) are becoming a larger part of that base now. (Not the US though, the US has no sovereign wealth fund.) Some big pension funds invest heavily in private equity but not as much into venture capital or hedge funds.
The result is that the vast majority of retirement savings for normal Americans -- whether managed by individuals or institutions -- can't access compelling private market opportunities.
2. The number of individuals and institutions invested in these funds who actually understand the instruments these funds invest in (particularly in the hedge fund world) is infinitesimally smaller. In other words, they couldn't give you an educated explanation as to why they invested, they simply got lucky.
3. Access doesn't guarantee returns. Sending your money to John Paulson in 2008 was very rewarding; if you invested in his PFR Gold Funds, you're down more than 50% in 2013 alone. It is almost impossible to predict top performers, particularly given point 2 above, and even if you do invest in a top performing fund, at best your investment is likely to constitute a modest portion of the total funds you have invested.
4. Success is a double-edged sword for fund managers: it's possible to raise a lot more capital (management fees, yay!) and launch new funds with ease, but finding investment opportunities that can deliver meaningful results becomes increasingly difficult as the size of the positions you need to establish grows. In other words, by the time you're investing in a fund manager because of past performance, there's a good chance you've already missed the big gains.
5. If you go back decades, particularly before 2008, hedge funds on the whole provided significantly better returns than buying a major index. But in the past several years, the S&P 500 has outperformed a number of indexes that track hedge fund performance. When you consider fees, most hedge fund investors have overpaid for underperformance the past several years.
6. A number of investment banks are exploring the launch of retail investor-friendly hedge funds with modest minimums (four-figures low in some cases), and Goldman has already launched its own. This is seen as a growth market for the investment banks so you can expect a lot of action in this space in the coming years.
Compelling market opportunities, private and public, do exist and the number of financial products promising average Americans access to them has grown considerably over the past decade. If I want a leveraged investment in publicly-traded mortgage REITs, for instance, UBS has an exchange traded note I can buy tomorrow. If I want to invest in investment-grade bonds denominated in renminbi, there's an ETF for that. And so on and so forth.
The number of sophisticated (and sometimes incomprehensible) financial products available to everyone will continue to grow but that doesn't really matter: the number of individuals who will be invested in the right products at the right time, and keep their gains over the long haul, will always be small. Put simply, access has very little to do with actually being able to exploit compelling market opportunities.
So being able to offer poorly-regulated "high-risk investments" to normal people who can only invest a small amount would be a scammer's dream; they can't put nearly as much resources into investigating the investment, or into recovering funds if it turns out to be a scam.
Nearly all the good opportunties will continue to go to a handful of well-connected wealthy people because it's far less work to raise money that way.
http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
Part of why there are fewer small-cap IPOs since 2000 has been due to the required external audits on companies - on average costing $2M. This had forced many companies to delay their IPO until they had the revenue to afford the audits, at which point often they no longer needed an IPO (due to folding, or selling).
The JOBS Act offered a series of exemptions for small-cap companies to be exempt from such audits, though I'm not sure what stage of implementation the SEC has taken it.
That said, the modern startup path does seem to structurally delay IPO, which in the short term has resulted in 20-50% shaves of post-IPO public investors and long term difficulties in adding value of the sort Garry mentions. Just the causality basis isn't clearly SarbOx.
My current theory is the tilting of the king vs. cash towards king, as epitomized by Zuck. It's possible that the market had started driving companies towards private control to emphasize long-term growth over short-term, quarterly stock performance, which drove the Enron-era scandals. The collapse of the tech bubble might have had an impact, too. I concur with Bilal that private audits are a more likely causal link than SarbOx, though that could be our mutual gov't experience talking.
The JOBS Act created the IPO on-ramp (5 year SarbOx tapered exemption to reduce costs of public compliance), as well as 10x expanding the Reg A ($5M → $50M mini-offering cap) exemption to make it easier for startups to blend over into public exposure. However, these non-standard pathways are little known to both the investors that traditionally take early board seats and certainly early-stage founders. It's also unclear how much of JOBS has even been implemented due to continuing backlogs from political obstruction of Dodd-Frank at the regulatory level.
I blogged about this last year:
http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html
http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...
If I saw a blog post titled "Unshackle the Middle Class," I would never in a million years have guessed that one of the unshackling mechanisms was a return to "IBM was up three-eighths, closing at sixty-seven and five-sixteenths."
Give me a fucking break...
The housing collapse was fun and all but it's 2013, we need to be finding new ways to increase financial risk for the failing consumer base.
I think it's been proven that investors aren't adequately compensated for taking on "growth" risk. The risk premia attached to "growth" doesn't outperform passively owning the index over long periods of time.
Seems like all A16Z is trying to do is juice the IPO market for more liquidity (from dumb money middle class investors) so that they can have an easier time exiting when they're ready.
But I think there is something deeper and more structural than merely regulatory burden. Public companies suffer from the agency problem. When ownership is diffuse, that problem is more acute, and managers' interests more easily diverge from shareholders' interests. This is true regardless of the regulatory structure. That is to say, it's a fundamental economic problem rather than an artifact of whatever regulatory system is in place. One of the benefits of taking companies public later, if at all, is that ownership stays concentrated during a longer period and owners have much more concentrated influence on management.
There is another economic phenomenon in place, which is this: the economy is awash in capital and companies don't need public capital. When there are hedge funds with billions to throw around, and private equity companies who can engage in billion dollar transactions, why do companies need to turn to the public markets? If there is some profit to be made investing in the next Microsoft, and a private fund can swing the necessary size of investment, what purpose is there to resort to the public markets? Is it ever more efficient or more effective to supply a given amount of capital via the public markets instead of via some private investment Overregulation doesn't help this problem, but it's also ultimately an economic phenomenon. Concentration of wealth (there are a lot of new foreign oil/resources billionaires these days) means more private entities that can raise the kind of money that previously one could only raise in the public markets. Moreover, fewer opportunities for investment means that private funds can meet the underlying economy's need for capital, making public funding less relevant. Changing the regulatory structure isn't going to change that dynamic.
PS: Also of note he ignored dividends and inflation when looking at microsofts returns which is a sign of basic incompetence.
Hmm, don't know what you mean by this. As it stands, the safety net is working -- nobody who worked a significant portion of their lives is living on the street for lack of funds.
What SS does not give is a retirement of the same quality as a rich person's retirement, which should make sense on the face of it. Those Enron folks did have a Social Security retirement, what they lost was the more lavish retirement they had planned for themselves (nb: I'm not using "lavish" in any derogatory sense).
SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.
Right. They're working at Walmart and living in hotels, three to a room. I suggest you get out more and actually invest some time in learning what's actually happening in America; it will save you from spouting ridiculous statements like that one.
Now if we can just broaden the population pyramid widely enough (and lucratively enough) to support the great height of the future retirees, we can kick that can so far down the road even we 40-somethings won't have to worry about the scheme's stability.
Also, I would point out that middle classes typically (and by definition, according to some definitions) make money from skilled labour, not investment. Stock profits is just not that big a percentage of a middle class person's lifetime earning.
Regarding the banks, that's a real uphill fight. I don't know if there is a more protected, favoured sector. I'd be happy if the mentality that led to the bailouts were to end. That would be a great start.
If I really wanted to get downvoted, I'd point out that trade unions correlate with a strong middle class.
That's an ok point, but it ignores the extreme multiplier benefits from participating in that first $500 million. That is to say, very few (likely none) of the private investors would pay at a $500m valuation on a $500m IPO.
If you got in at $50m your return was upwards of 5,000 (4,680) fold vs. 500 fold at $500m. And of course this is all theoretical as Microsoft didn't take meaningful outside money.
Scott tries to say that private investors only had a $500m head start, and compares that to the total $234b market cap. $500m vs $234b is not the important stat line, rather it's the way the returns massively increase if you got in with the private money early. It's the difference between being perhaps being a billionaire versus having $25 or $50 million. Both are great outcomes, but there's no sense in pretending the first $500m shares much in common with the last $234 billion.
Point being: no, the private investors did not just have a tiny head start in the grand scheme of things (ie compared to the market cap now), and that is almost always the reality. They had an extremely massive head start over the IPO money, no matter how you calculate it. Early money multipliers can almost never be touched by public investors.
Certainly that isn't an advantage worth mentioning at all when comparing the struggles of the middle class to the opportunities available to VCs...
http://en.wikipedia.org/wiki/Carried_interest
http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-...
http://www.npr.org/blogs/money/2012/01/19/145449117/carried-...
How about this idea: lets start human trials of drugs earlier and require less regulations before medications are released so we can help fight disease in 3rd world countries... And boost my Pfizer stock.
Companies like Pfizer would be more likely to get toppled in a free market, than not. As it is, their position is guaranteed by the FDA. They're a government protected company, similar to Verizon or Boeing or Exxon. They roll in the profits, and all they have to do is buy up smaller players that can't hang around long enough to get approvals. The only threat to Pfizer right now is massive European pharmas.
Pfizer loves the system exactly the way it is.
Social security tax is 6.2% of the first 113k of income, 0 after that
Medicare is 1.45% for income under 200k, 2.35% for income above 200k.
At no income level do these add up to anything more than 7.7%
http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240/~/so...
Where do you get 30%?