Thursday, March 28, 2013

Marc Andreesson: Strangely self-serving?

I'm not sure what to make of this very strange post on Marc Andreesson's blog. It's not by Marc, it's by Scott Kupur who works at the fund.

The post argues three points:

1. The middle class is now missing out on hot-IPO action because all the value creation is happening in private markets, and post-IPO performance is disappointing as the company is already past its prime. Therefore, we should loosen the rules barring non-accredited investors from primary markets.

2. Kickstarter, and other crowd funding projects, actually expose these individuals to seed stage investments that are the most risky.

3. We need to roll-back decimalization, so there is a larger spread in trading small cap stocks, making it easier for financial firms to profit from their trading.

I'm not kidding about the last one:
A number of policy and market changes—all with well-intentioned goals—have created a hostile environment for new IPOs and, in particular, for small IPOs. Arguably the most significant among the changes was the 2001 move to decimalization. Much has been written about the “death star” of decimalization, a phrase first coined by David Weild, former vice chairman of Nasdaq. But simply stated, decimalization eliminated all of the profits from trading small-capitalization stocks. How did this happen? Because decimalization reduced the “tick size,” the minimum increment in which stock prices can trade, to a penny (from its previous level of 25 cents). Thus, a trader who previously might have purchased a block of small-cap shares knowing that a $0.25 tick size likely represented his minimum profit potential on a trade now found his minimum profit potential reduced to a penny. Facing this uneconomic situation, small-cap traders simply abandoned the market, killing liquidity for these stocks.

It's good to be reminded how much one's position influences which side of an argument seems reasonable. I'm sure that Kupur is quite sincere in all of his recommendations, but it's also hard to miss just how blatantly self serving they are.

First, after the internet boom of the late 90s, the technology bubble has shifted to private markets where venture capitalists, and other accredited investors, are investing at too-high valuations. What's different this time is that the public markets aren't stepping up and being the bag holder, so that's trickling down to banks, VCs, and other primary market participants. Naturally, Kupur would like public money to step in and overpay for assets, so his fund could enjoy an earlier liquidity event and not have to deal with dogs like Groupon, Facebook, and Zynga.

Second, many kickstarter projects are very different from the high-potential, high-profit businesses traditionally interesting to VCs. They are things like fancy jeans, or cool font, or an indie film. People aren't investing in these hoping for a return, it's a just a cool (and very SWPL) way to shop.

Finally, the decimalization argument assumes that there should be profit in trading small cap stocks. Why? If a small cap does well and becomes a medium or large cap, then the far sighted investor should be rewarded for that, but why is there some God given right to make money off the flow? I think the crash of 2008 is still too fresh in people's minds for "liquidity" to seem like a worthwhile end in and of itself. Liquidity is never there when you need it most.


Blogger NeilW said...

The far sighted investor will always be rewarded by a stream of dividends from a profitable company.

IMHO half the problem is that we've forgotten that business is there to generate an income stream from real activity.

Not to add chips to the casino table.

12:06 AM  

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