Monday, June 30, 2014

Sarbanes Oxley working as planned

Contra Fred Wilson, let me make a case for why Sarbanes Oxley is working as planned with regards to the current Internet market (frothy in private markets, OK in public markets). Fred says:
Marc lists investments like Netscape, Microsoft, Oracle, HP, and IBM as companies that went public at relatively small valuations and grew their valuations in the public markets. I would add Apple, eBay, Yahoo!, Cisco, and a host of other silicon valley success stories to that list...
The Netscape IPO was a genuine event and kicked of the Internet 1.0 bubble of the late 90s. The company was bought by AOL for $10B in 1999, shut down 8 years later, and is now a discount ISP brand. I don't think it ever earned cash to justify it's initial loft valuation, so I'm surprised to see it cited as a market success, although it certainly made it's early investors very rich (including Andreeson). If Sarbanes Oxley was designed to stop Netscape IPOs, then I don't see why that's a bad thing and it's good to see it's working.
Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.
Agreed, but you can also add Pets.com, Kozmo.com, and even Netscape in that same category. If the private markets today are making the same mistakes public markets made in the late 90s, then that's hardly an argument that public markets are worse than they were.

The question of course is whether the private valuations are accurate, and even if they are accurate, they strongly suggest that companies are getting fully valued out before they trade shares publicly. It is possible that Airbnb may go from being a $10bn company to a $100bn company, but I don't think that individual retail investors are best positioned to speculate on that nor do I think enabling that is important for markets.

Turning to look at private markets then, it's worth noting that just as sky high valuations were tied to small floats back in the late 90s, today's valuations may be more a sign of entrepreneur strength than actual valuation per se. Palm had a massive valuation when 3Com span it off, but the number of shares available were pretty small and everyone thought mobile computing was going to be big. The combination of strong demand and limited supply pushed the ticker price about $95.

In the private technology market, there are only a small handful of usual suspect companies with material traction, so there must be oceans of promising start-ups that aren't getting traction (cue complaints about Apple's iOS discovery support). So if you are a private investor and you want more start-up exposure, you only have a handful of options, so entrepreneurs may be able to get the cash they need without having to give up much of the company, with the resulting valuation being very high. There may not be much more to this story than limited supply, not much cash needed, and entrepreneurial savvy and bargaining strength.

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