Capital Minded graphic ❏ black square THIS WEEK The coming IPO wave link Subscribe right arrow graphic ❏ Lately we’ve been running into deliverability issues. Hopefully all is solved this week, but as a reminder, check spam if you find us missing from your inbox. heading level 2 STORY heading level 1 Tech companies If you haven’t heard, this year is looking to be a robust vintage for IP Os. Among those expected to go public in 2019 or 2020: Uber (biggest of the crop), Lyft, Slack, We Work, Postmates, Airbnb, Robinhood, Pinterest, Space X, Palantir, Stripe, Instacart and more. People are mad it took so long It’s no secret that, post financial crisis, the fastest growing companies have stayed private for much longer than similar companies in the past. This has given birth to a scary narrative you may have heard, it goes like this: block quote Onerous regulation and the burden of going public have made companies like Uber and Airbnb stay private much longer. Thus, you haven’t been able to participate in their growth like you could in the past. Venture Capitalists and their rich clients have kept all of the profits for themselves while you missed out on gains from the fastest growing sector of our economy. out of block quote I must say, it’s a compelling and sinister sounding argument. It is partly true: if Uber went public earlier, even index fund investors could have benefitted from those early years of faster growth. Instead they'll have to buy Uber as a big, slower growing company in 2019. Luckily, we have a few prior models for benchmarking exactly how much we’re missing out on. There’s been 2 times in the recent past when everyday ( retail ) investors could participate in early growth of start ups, because they went public much earlier. Let’s start with the first; roughly 1995 2000. 1995 2000 This was a world before the $100B Soft Bank Vision fund and the $360B Saudi Sovereign wealth fund. When everybody had to raise capital from public markets to fund continued growth. During this time, the average age of a company at IPO was just 4 years old vs. 11 years old today. Since retail investors could participate in earlier growth, everybody got rich and retired early. Oops, sorry. Actually 95 to 2000 was the tech bubble. A terrible time for retail investors in start ups. People were scammed left and right by pump and dump IP Os promising to change to world. By 2001, it was revealed the emperor had no clothes, and the average investor, net losses. Ok bad example; let’s look at the next. 2017 2018 In 2017, a disruptive innovation arrived, allowing average people to buy in to early start ups once again and bypass the rich Venture Capitalists in the process. The ICO, or initial coin offering, democratized early stage investing for the world. Millennials ended up making so much money, everybody bought Lamborghini’s and moved out of their parents basements. Oops. I guess that one ended up being a scam fueled bubble as well (even more scam fueled than the last!). I think you get where I’m going with this. Here’s the truth The rich private investors screwing you over narrative is appealing because it preys on your fear of missing out. It’s actually just textbook survivorship bias. The problem isn’t that Uber going public earlier would be bad. The problem is that 99.99 percent of companies aren’t Uber… dot and the majority of people who’s literal job it is to pick Ubers can’t even pick Ubers. Uber like success is exceedingly rare. Tech media doesn’t advertise that the total return of Venture Capital as an asset class is in fact negative. This means most venture funds which are diversified across potentially hundreds of the most hyper vetted, top decile start ups lose money. Even winning companies for V Cs (those which go on to IPO) are considered the black hole of investing. Historically, they link underperform the broader market. The reason tech companies stay private for longer today isn’t anything sinister. It’s that the public markets have now expressed they prefer companies who wait longer to IPO…as explained in link this Barron’s article: block quote Looking at the cohort of tech companies that have IPO’d in the last three years and their trading multiples relative to their market cap… dot you can see a very demonstrable story. bullet $0 $500m: 1.7x sales bullet $500m $1B: 4.5x sales bullet $1B plus (Unicorn level): 4.6x sales This is a very clear preference for larger companies public markets assign more than double the sales multiple for companies with more than a $1 billion market cap out of block quote It’s simple. If you want to maximize the return for your investors and employees, you stay private until your company has proven success. Unlike the inevitable speculative bubbles of the past, this is a better incentive structure for everybody involved. black square heading level 2 NUMBERS ROUND heading level 1 900,000,000 Google paid the EU 900 million dollars more in fines than it did in taxes last year. heading level 1 10,000,000 The yearly cost to shareholders for Mark Zuckerberg’s private security detail. That’s approximately the revenue generated from 350,000 American Facebook users. heading level 2 WATCH slash READ slash LISTEN movie camera Africa’a Capitalist Cowboys this half hour mini doc from Vice (circa 2013) follows a group trying to execute a dangerous transport contract across Africa into South Sudan for the UN. A crazy look at the infrastructure and corruption problems that that plague developing countries. link Youtube up-right arrow page facing up While Buzzfeed and the Huffington Post have layoffs, Bill Simmons’ big bet on Podcasts at the Ringer seems to have payed off. On podcast economics: link The WSJ up-right arrow page facing up Speaking of the media business, Ben Thompson has a very interesting take on the path forward for written media in 2019 link Stratechery up-right arrow page facing up The legendary Jim Grant returns to Barron’s to give some historical perspective to where we are now in markets link Barron’s up-right arrow headphone Re: the pitfalls of early stage tech investing…this binge worthy podcast details the exploits of Elizabeth Holmes as she executed an elaborate con at Theranos. link The Dropout up-right arrow headphone Late to the game on this one, but check out this series on the psychology of pyramid schemes. I’m only on the 3rd episode, but so far excellent. link The Dream up-right arrow heading level 2 QUOTED heading level 1 The curious task of economics is to demonstrate to men how little they really know about what they heading level 1 imagine they can design. Friedrich August von Hayek heading level 2 END If you enjoyed this issue, support us by forwarding this email to a friend or telling them to subscribe at link Capital Minded dot com Cheers, Kevin Scott Disclaimer: All Capital Minded content is for informational and education purposes only and is not intended as tax advice, legal counsel, investment advice or a solicitation to buy or sell securities. The information provided in Capital Minded is obtained from sources which the Author believes to be reliable. However, neither the Author, the publisher, nor any of their respective affiliates guarantee the accuracy or completeness of any such information. You are receiving this email because you signed up at link Capital Minded dot com dot Don't want any more of these briefings? link Unsubscribe Powered by link Email Octopus