How High Private Valuations are Contributing to the Decline in IPOs

I just read this piece from March written by Scott Kupor, a partner at VC firm Andreessen Horowitz.  I broadly agree with most of his argument (though I think he overstates the importance of the IPO market to strengthening the American middle class).  Taking a company public today is a bigger regulatory and financial burden than it needs to be.  The more onerous parts of Sarbanes-Oxley should be amended and reverting back to a higher minimum tick size should be changed as well.

Also, Kupor doesn’t point this out, but the pressure created by the quarterly earnings cycle is as intense as ever (see declining CEO tenure)  Simply put, with late-stage private financing opportunities abundantly available for the best companies, why should founders/management opt for the IPO route?

Companies are staying private longer in favor of a “private IPO.”  That’s to say that they’re both issuing new shares and offering secondary share sales to large institutional investors to achieve investor, founder, and early employee liquidity.  Only in these “IPOs” there is no public participation.

I think one of the more subtle factors at work here isn’t simply that companies are choosing to stay private longer through late stage financings, but also that these rounds are being done at extremely high valuations.

From a public markets perspective, the current financials of many of these companies wouldn’t support the valuation they’re getting in the private market.  I’m not going to get into whether public market investor are applying a more rigorous standard or are simply naive (i.e., they don’t get the story behind tech), though I tend to think they’re pretty rationale and that investors understand consumer web, SaaS, and other types of businesses than they have in the past.

Late-stage, private investors are clamoring to get into the “hottest” companies – Evernote, Uber, Fab, etc. and once private companies like Facebook, Zynga, and Groupon.  The excess supply of capital and fear of missing out on the next homerun are driving some valuations above where they would trade if public today.    Some of these companies have to delay an IPO because they don’t have the financials to support the valuation they require to earn an appropriate return for the last round investors.

Twitter is a good example.  It’s only in the last year that its advertising efforts and revenue trajectory have really taken off.  The late stage bets being taken in 2009-10 were being taken on the site’s awesome user growth and assumption that monetization would eventually catch up.  Financials at the time wouldn’t have supported the valuations these rounds were being done at.  As the valuations being to support the valuation, the main beneficiaries will be the private investors, not the public guys.

Thoughts on Coursera After a Few Weeks In

I recently started taking two courses on Coursera, spending time on them late at night and on weekends.  One course is on Startup Engineering (i.e., basic web programming) and the other is on Competitive Strategy (i.e., game theory for business).  After a couple of weeks, I have to say that what the team at Coursera has built is pretty awesome.

If you’re unfamiliar with Coursera, the concept is pretty simple.  It’s an online platform that provides free classes from university instructors.  The structure of the classes is similar to a class in the real world.  There’s a course syllabus, weekly video lectures, weekly quizzes, supplemental reading material, etc.  There are also online forums where you can post questions and interact with other students and the instructors.

The quality of the instructors that Coursera has assembled is impressive and is the first aspect that stands out.  These are top academics from top universities in the US and abroad – Stanford, Duke, Columbia, Michigan, Berkeley, etc.  Each has invested significant time and effort in building the course material, recording videos, and all the other work that the product requires.

Every course is free as well, which is leading to massive adoption from people around the world.  The Startup Engineering course had over 100k signups at the time it started.  I expect Coursera to keep the service free as that really removes one of the main barriers to adoption.  There are all sorts of ways they can make money eventually – premium features, employers paying for student placement, etc.

I also like the fact that the course catalog spans the full breadth of disciplines – humanities, social sciences, engineering, law, business, the arts, etc. rather than focusing more narrowly on say more vocation or “hard skills” (e.g., computer science).  In that sense, Coursera’s offering really does mimic a world-class university.

A frequent debate I’ve seen is whether online education efforts like Coursera can replace the university.  One of the frequent criticisms of the online model is the high “virtual dropout” rate.  I think these types of criticism and the very question of “replacing the traditional college model” miss the point.

Coursera isn’t about necessarily about providing an alternative to traditional higher education.  For someone like me, the choice is between Coursera and nothing.  I wouldn’t be taking a class in game theory or startup engineering if there wasn’t the Coursera option.  Maybe I’d buy a book and try to self-teach, or more likely I probably wouldn’t do anything.  My guess is most people are in this category.

The beauty of Coursera is that it allows you to get as much or as little out of a given course as you want.  If you want to spend hours every week watching every lecture, taking every quizz, reading all of the supplemental material, etc. then that is your choice.  If you want to take a “light” approach and be more casual about the work, you can do that as well.  Coursera doesn’t need to replace anything to be an awesome education tool.

Scoring on Our Own Goal: the US’ Self-Created Fiscal Problems

The CBO released a revised US national debt forecast last month, which I wrote about here.  Basically, a combination of the sequester, fiscal cliff, improving economy, etc. mean that the deficit as a percent of GDP will shrink over the next 2 years and then begin to slowly rise, all at a manageable rate.  In other words, we’ve accomplished Republicans’ #1 economic priority – deficit reduction.  This of course assumes that intermediate events don’t change that forecast, either for better or for worse.

It’s worth exploring what caused that deficit in the first place.  Ezra Klein wrote a great piece last week on Republicans’ odd willingness to trust 30-year CBO projections.  He used the chart below from a Pew Foundation report to show how wildly off the CBO can be in terms of even 10-year projections.  Note that the chart isn’t entirely up-to-date, but I think the broad conclusions are the same.

I want to talk about a point different from the one Klein made, namely that much of the rise in debt is self-inflicted.  It’s us scoring on our own goal through legislative choices like unnecessary tax cuts that disproportionately benefit the wealthy and a wholly unnecessary war in Iraq.  And, as must be pointed out, the most egregious examples started under the last administration.

Four big facts stand out to me:

1. The biggest single driver of debt growth has been the reduction in revenue caused by cyclical downturns in the economy, especially the recession that started in 2007-08.  As we are starting to see, the number one thing the US can do to stabilize deficit spending is to grow the economy.  We can’t cut our way to no debt.  This seems like a basic fact to me, but it’s not necessarily accepted wisdom in Washington, especially among Republicans.
2. It’s hard to overstate how damaging the 2001/2003 tax cuts under GW Bush have been to debt levels.  After the economic downturn, these tax cuts were the single greatest contributor to rising debt.  If this doesn’t serve to dispel the fanciful notion that on their own tax cuts always raise revenue, I don’t know what will.
3. The tax cuts and war in Iraq were entirely unnecessary.  They were very poor choices and, in the case of the Iraq War, it’s consequences reached far beyond helping to explode the debt.  These are examples of us self-inflicting pain.  I’d add the 2009 decision to continue and to escalate the war in Afghanistan – a decision made by Obama – to this list as well.
4. TARP and the 2009 stimulus barely register as major contributors to the debt.  Combined, they account for <7% of the rise in the debt after 2001.  The two wars and the 2001/2003 tax cuts account for 4x the rise in debt.  If Republicans really want to address the debt issue and win back public support at the national level, they need to honestly reckon with this fact.  They haven’t so far and will continue to lose national elections until they do.

As best as we can predict the next 10 years, our near term fiscal house is in order.  The US economy continues to recover, albeit slowly and weakly.  The focus should be on stimulating demand to accelerate this progress.

Much of the fiscal and political problems we’ve had over the last decade are entirely self-created.  Compared with the much of the globe, the US has an excellent opportunity to lead the world out of recession and to have a more productive decade than the last.  That will not happen, though, if we enact dumb legislation and fail to pass sensible laws (think Immigration).  We need to stop scoring on our own goal.