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Tech bubble? Pah. IPOs just return cash to early-stage investors
So says Andreessen Horowitz's leaked slide deck
Unicorns! How dare you impugn the sacred market
The VCs largely aren't funding those unicorns; they might be organising capital raisings but their own funds (or rather, their own managed funds) are going where they always used to: that is, to earlier stage companies. Also, IPO proceeds used to generally be used as funding for the companies themselves: as those late stage rounds are these days. It was well after the IPO that the insiders and early investors used to cash out some decent portion of their holdings: today that happens quite a bit at the IPO itself.
So, really, the statement being made is that the IPO is coming at a later stage of the development of the company. Not when it is still gorging on capital in order to grow, but when it is just on the turn and about to start throwing off capital back to investors. This is not an entirely true statement, rather an indication of the direction of travel. And that ties in quite neatly with the observation that this is true of the public capital markets in general. They're not so much places to raise capital to do something, they're places where the profits from previous raisings are distributed.
And it all goes back into those private investors' (or their funds') pockets so as to be invested again in those private markets.
As I say, there's nothing particularly right or wrong about either model of capitalism. Capital is raised in the public or the private markets and capital is repaid in the public or the private markets. As long as we have efficient methods of doing both – of raising capital for new adventures, and returning the profits from them to investors to a) provide the incentives to invest and b) the funds to do so – we're cool.
This is also a reflection of a much larger and much longer running change, the decline of the value of the conglomerate. Back when capital was truly scarce, and cost a fortune to assemble (whether in cash terms, or just the effort needed to get some together from a group of people) it made great sense for an organisation that had some extra, as a result of having made a profit on an earlier investment, to retain it and find another project to invest it in. Now that the process of capital raising is so much cheaper it makes more sense to keep each activity as a separate organisation.
Make a profit from having done something, send that back to the people who own it, and let them make the decision as to where to invest it further. 30 years ago BP invested a lot in solar power. Not that people who know how to drill for and process oil have much expertise in solar cells or even electricity, but it did make some sort of sense to recycle fossil fuel profits into some other form of energy.
Capitalism's just fine and dandy, my boy
These days, why bother? Make the money from oil and give it back (after the Americans have fined you $53bn) to investors, and they can decide to put it into First Solar, Trina, panels on the roof or some solar thermal plant somewhere. The capital markets have become vastly more efficient in their operation, switching the optimal strategy. That BP will die if it stays with only oil (at some point at least) is just fine. The oil business will die eventually anyway and there's no specific value in having the organisation that used to specialise in it continuing to exist. So, take the capital and recycle it into other organisations, rather than trying to adapt the organisation itself.
This change in the VC market – the rise of the unicorns well past the stage that an IPO would formerly be done at – these are just specific examples of that larger change in the capital markets as a whole. Private markets are, these days, where the investment into new stuff happens; public markets are where the profits of the old are distributed. Why? It's the greater efficiency of the capital markets as a whole that allows this to happen.
It's no longer necessary to use public markets to fund the later stages of a new and great adventure. So, people don't. Shrug. ®