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Tech bubble? Pah. IPOs just return cash to early-stage investors
So says Andreessen Horowitz's leaked slide deck
Worstall on Wednesday A internal presentation from Andreessen Horowitz aimed at its limited partners, that has to be taken with the appropriate shovelful of salt, has emerged – and the insights it reveals into the “tech bubble” are absolutely fascinating.
Take it with a shovelful of salt because limited partners are the people Andreessen Horowitz raises money from. But assuming that it's not flat out lying about it all, the numbers are intriguing.
The major point they're making is that there simply isn't a tech bubble as there was back in the 90s. This does not mean that there is no heroic pissing away of wealth going on. It just means that, if the micturation is happening, it's happening in a different manner from what we all assumed.
Andreessen Horowitz's point is that there's been a shift in the method of investing in firms. This is really the mirror image of another complaint that we're seeing around the place, that US corporations aren't investing money back into their businesses. Instead they're spending all their profits on dividends and buybacks
“All” is a bit strong there but it's definitely the majority of listed company profits that are being handed back to shareholders in different ways, instead of (for example) Company X's profits being used to, say, improve Company X's products, or to build more factories and so on.
The VC times, they are a-changin'
Some of the numbers are fun in themselves: back in the dotcom boom times, 53 per cent of IPOs were of firms less than two years old. These days 80 per cent are of those older than three years. And of companies that do IPO these days, the median age is 11 years. That, given the speed at which tech works, is definitely the age of a mature company. The IPO just isn't, in most cases at least, a funding round of a developing business any more.
And that is all a change in the underlying funding models. The fact that currently listed companies all seem to be pumping their money back to investors rather than investing within the corporate shell is another symptom of much the same thing. Public equity markets are the go-to place for dispersing the profits from economic activity these days, rather than the place to raise the money to fund economic activity, as they used to be.
In theory there's nothing wrong about this at all: either model is just fine, in fact. We want to have some method of raising money for new ventures, just as we want to have some method of handing out the profits of those that succeed. What the models are isn't all that important. The point being made is that the model seems to have changed.
Another number is that tech VC funding is under three per cent of GDP these days, when it was over 10 per cent of GDP back in the 1990s. So we've got people addressing an almost infinitely larger market (OK, two orders of magnitude maybe, in numbers connected to the internet) with a smaller percentage of GDP. That's not exactly evidence of a funding bubble. But more than this, the funding structure has changed.
That last round of funding for a company, which used to be the IPO, now seems to have moved over to the private markets. It's largely the same investors playing in both: it used to be the pensions funds, the insurers and so on who would take a chunk of an IPO and they're the people investing in those late stage rounds in the private markets today. So it's the same people, largely, funding the late stages of those unicorns, just in a different manner.