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U.S. Tech Funding – What’s Going On?

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Re: U.S. Tech Funding – What’s Going On?

#141

Post by hkmurakami »

javajosh wrote: post #124
Animats wrote: post #117

Earlier quoted context omitted.

"It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley." No, it's a consequence of low interest rates. "Private equity" is mostly borrowed money. Think "leveraged buyout", not "all-cash deal". Here's a list of the top 10 private equity lenders for 2011.[1] #1 is Bank of America. Back in 2000, 1-year Treasury bills were paying around 5.11%. Today they're around 0.26%. Debt financ…

So the rich borrow cheaply, invest the money, and profit?

Yes, at the very bottom (top?) of this food chain, you see banks taking a spread between their loan rates and the Federal Funds Rate. https://en.wikipedia.org/wiki/Federal_funds_rate

Re: U.S. Tech Funding – What’s Going On?

#142

Post by tsotha »

hkmurakami wrote: post #139
tsotha wrote: post #137

Earlier quoted context omitted.

The big payday isn't from an IPO any more, but rather from selling out to a larger company. Big tech companies have more money than they know what to do with.

One benefit of this to founders is that a M&A deal provides instant liquidity (barring earn outs), whereas an IPO largely prohibits you from selling off a large percentage of your stock.

Yeah. The founder of one of our vendors sold his company for eight figures recently. His only obligation after the sale was to stay on for six months (at an exorbitant salary) while the management structure was integrated into the new parent company.

Seems like an IPO is riddled with all sorts of waiting periods and notifications and paperwork people will want to sue you over if they lose money. I'd definitely go the buyout route if the price was right.

Re: U.S. Tech Funding – What’s Going On?

#143

Post by darkmighty »

_delirium wrote: post #130
bane wrote: post #90

Earlier quoted context omitted.

I'd also add that until the public validation of an IPO and some time trading on the markets, tech companies have just become investment "tokens" that hold arbitrary amounts of wealth as "valuations" that make no meaningful sense. M&A efforts are simply capturing this fanciful valuation and hoping they can sell this token off in some way for more to somebody else. It's like putting $1 in a sock and under your mattres…

I'm not sure public markets are a unique way of getting "real" prices. Private-equity sales are a real market with real money; if Google buys a company for $50m, that's an actual market transaction that valued the company at $50m. Is the idea that public markets provide better price discovery than private sales do? If so, is there empirical evidence that publicly traded companies really are more accurately valued tha…

It's a fair hypothesis to me: the public market has a larger amount of people, so more information; it also has mechanisms such as securities that benefit highly and rapidly information bearers.

But the idea that private investors' valuation is not "real" somehow sounds silly to me. The companies are still getting sold. The companies/investors that buy them have real value and expect to generate enough revenue from the acquisitions amounting at least to the acquired value.

The question then (and I think is a good one), is why private investment is getting more prevalent if public markets have more efficient valuation mechanisms. I think the answer is that private investors are more willing to 'kickstart' so to speak the early stages of startups, and from then have grown to dominate the investment market to their great benefit.

Re: U.S. Tech Funding – What’s Going On?

#144

Post by MichaelCrawford »

I've been adamantly opposed to the public trading of tech companies for fifteen years now:

The Valley is a Harsh Mistress

http://www.warplife.com/tips/business/stock/venture/capital/...

Investment yes, Wall Street no.

The reason to seek investment is to grow one's company so that one can grow one's business in ways that would not be possible to fund out of one's current revenue.

One of the very wealthiest people I have ever met founded "The Nation's Largest Sperm Bank" in the early 1970s with $2,500.00 of his own money, along with just one other partner, mostly for liquid nitrogen dewars, medical lab equipment as well as pr0n.

Re: U.S. Tech Funding – What’s Going On?

#145

Post by cmullen »

Animats wrote: post #117
thorfish wrote: post #3

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is…

"It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley." No, it's a consequence of low interest rates. "Private equity" is mostly borrowed money. Think "leveraged buyout", not "all-cash deal". Here's a list of the top 10 private equity lenders for 2011.[1] #1 is Bank of America. Back in 2000, 1-year Treasury bills were paying around 5.11%. Today they're around 0.26%. Debt financ…

This isn't really applicable for high-growth venture backed companies because generally, they aren't leverageable. It's almost impossible to lever a minority equity investment in a private company. It's true equity capital going into late stage VC / growth equity.

However, for mature tech businesses that have real cash flow, LBO valuations are driven by a levered cash flow yield. Valuations in this world are increased with higher debt availability and low interest rates.

The primary mechanism by which low interest rates influence late stage VC / growth equity valuations is in the amount of capital the LP community / institutional investor base allocates to those asset classes. Right now, that allocation is quite large driven by the need to move into riskier asset classes to drive investment yield.

Re: U.S. Tech Funding – What’s Going On?

#146

Post by cmullen »

darkmighty wrote: post #143
_delirium wrote: post #130

Earlier quoted context omitted.

I'm not sure public markets are a unique way of getting "real" prices. Private-equity sales are a real market with real money; if Google buys a company for $50m, that's an actual market transaction that valued the company at $50m. Is the idea that public markets provide better price discovery than private sales do? If so, is there empirical evidence that publicly traded companies really are more accurately valued tha…

It's a fair hypothesis to me: the public market has a larger amount of people, so more information; it also has mechanisms such as securities that benefit highly and rapidly information bearers. But the idea that private investors' valuation is not "real" somehow sounds silly to me. The companies are still getting sold. The companies/investors that buy them have real value and expect to generate enough revenue from t…

Public markets investors typically have far less information about companies than do private investors. For most technology companies, the probability of success / profit is driven more by specific company factors rather than larger industry and macro trends. Most public tech companies are understandably worried about disclosing detailed sales metrics / technology roadmap to all investors for competitive reasons; however, as part of any PE / VC backed investment process, private investors are typically given access to all of this detailed information.

Re: U.S. Tech Funding – What’s Going On?

#147

Post by twotwotwo »

timr wrote: post #27

Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead. Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy. If you believe this data, it does…

Interdependence is a big deal.

Some real, present revenue to big companies comes from the startup world. Maybe it's where I live and what I do, but startups seem to pay for a ton of the Twitter and Facebook ads I see. Amazon makes good money running datacenters for them. Apple and Google see a lot of the value of their mobile platforms created by startup app developers. The big companies' current revenue helps determine how much they're willing to invest, including investments in the form of acquisitions, so the dollars invested into the system can themselves contribute to exit amounts in a weirdly circular way. I'm not the first to observe this.

That in itself proves very little; both sustainable and unsustainable systems can feed on themselves. And all these large companies I'm mentioning are certainly sticking around.

But it does suggest there are paths were one thing goes bad first--new investment falters, the market starts pricing ads drastically lower, big regulatory interventions shake up some subsector or other--and the ripples are bigger and reach further than might be expected.

Re: U.S. Tech Funding – What’s Going On?

#149

Post by cmullen »

jeffreyrogers wrote: post #106
timr wrote: post #27

Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead. Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy. If you believe this data, it does…

Yeah, I thought the same thing when reading through the slides. It's pretty disingenuous of them to do that, since I think when most people say "tech bubble" they're referring to the inability of most of the VC funded companies to go public. A couple of months ago there was a blog post by Mark Cuban that made a similar argument. It wasn't well received on HN largely because most commenters just looked at the words te…

GP commit is always at least 2%. Also, I think its pretty disingenuous to say that partners at VC / PE make money whether the fund does well or not. The management fee (2%) almost all goes into operating expenses - mostly salaries for mid-level / junior folks, professional / legal fees, research, consultants, etc. Partners make almost no money off of the management fee (LPs make sure that the management fee is just sufficient to cover the operating expenses of the fund) The way that partners make real money is through carried interest. Most funds have a hurdle rate of return (around 8%) below which, no carry gets paid. Furthermore, the vast majority of LP agreements have clawbacks associated with early carry paid in the event that later investments prove unsuccessful. So, unless the fund returns 8% per year to its investors, the partners make only their salaries.

Re: U.S. Tech Funding – What’s Going On?

#150

Post by timr »

twotwotwo wrote: post #147
timr wrote: post #27

Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead. Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy. If you believe this data, it does…

Interdependence is a big deal. Some real, present revenue to big companies comes from the startup world. Maybe it's where I live and what I do, but startups seem to pay for a ton of the Twitter and Facebook ads I see. Amazon makes good money running datacenters for them. Apple and Google see a lot of the value of their mobile platforms created by startup app developers. The big companies' current revenue helps determ…

Yeah, this is definitely a reasonably-sized elephant in the room. It's clear that a big chunk of tech revenues come from spending by other tech companies. You can't throw a stone in SOMA without hitting the fancy offices of a startup-servicing startup.

In the late 90s, this happened because all of the companies were buying ad contracts from one another, booking the total value of the contract as revenue, and using that to pad revenue growth. Today's version is the deferred ARR, which turns a tiny cash flow from subscription software into a magically big top-line number. But what goes up quickly, can fall just as fast...it doesn't take many companies to pare back on spending before your fictional deferred revenue graph falls off a cliff.

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