Timothy Lee interviews Marc Andreessen on the death of the IPO

by on June 27, 2014 at 2:21 am in Economics, Law, Web/Tech | Permalink

It is excellent throughout, here is one good sentence:

The funny thing about Piketty is that he has a lot more faith in returns on invested capital than any professional investor I’ve ever met.

Here is another:

The result of all that is the effective death of the IPO. The number of public companies in the US has dropped dramatically. And then correspondingly, growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor…

Most American retirement savings is invested in the public stock market. Most Americans can’t invest in private companies and most Americans can’t invest in venture capital and private equity funds. They’re actually prohibited from doing so by the SEC. If you both prohibit them from investing in private growth and wire the market so they can’t get into public growth, then you can’t be invested in growth. That raises the societal question of how are we going to pay for retirements. That’s the question that needs to be asked that nobody asks because it’s too scary.

The full interview is here.

prior_approval June 27, 2014 at 2:41 am

‘The funny thing about Piketty is that he has a lot more faith in returns on invested capital than any professional investor I’ve ever met.’

Warren Buffet is poilitely laughing.

‘That raises the societal question of how are we going to pay for retirements. That’s the question that needs to be asked that nobody asks because it’s too scary.’

The Germans have a word for it – Generationenvertrag. And considering that the first country to introduce a public pension system has been able, more or less continuously for more than 130 years, to ensure pensions (starting under a monarchy, followed by a democracy, followed by a totalitarian dictatorship, followed by a splitting of the country, where approximately 20 percent of the people receiving pensions today never paid into the West German pension system at all), the fundamental point of a pension system is not its funding, but the willingness to provide those past a certain age enough support so they do not starve or freeze to death. After all, at least two of Germany’s previous governments went completely bankrupt – and the empire that created the German pension system has no connection to the current democratic government. Apart from the fact that social policies first implemented under that well known socialist Bismarck in the 1880s are still in place today.

Doug June 27, 2014 at 2:56 am

“Warren Buffet is poilitely laughing.”

So can I assume that in your personal financial planning that you’re assuming a *conservative* a 25% Berkshire return?

prior_approval June 27, 2014 at 3:11 am

Nope – it is just that, conceivably, Marc Andreessen hasn’t met the appropriate professional investor. Soros comes to mind as another example – faith in the 4 decade run of the Quantum Fund does not seem misplaced, and let’s face it – nailing the pound for a cool billion profit requires a certain amount of faith in ROI.

Meegs June 27, 2014 at 3:26 am

Let’s just privatize Social Security and put all of the money in the Quantum Fund.

Thanks p_a, you just solved the retirement problem.

dan1111 June 27, 2014 at 4:25 am

+1

andrew' June 27, 2014 at 6:02 am

Leveraged currency bets?!

Brian Donohue June 27, 2014 at 10:15 am

Swing and a miss. Buffett is not operating on faith. You highlight the difference between an academic scribbling and someone with real understanding.

Doug June 27, 2014 at 2:52 am

Some stock investors are of the opinion that private equity and venture capital act as adverse selection on the performance of the market. VCs obviously have very high information about the companies, before deciding when to take them public. On the flip side PE gets preferential access to a company’s financials and internals during the due diligence phase. It’s kind of weird to think about that a mutual fund manager who gets a hot tip from the CEO that a company’s about to go bankrupt, then decides to sell it from his portfolio is committing insider trading. Yet a PE firm can comb through the internals, discover the same red flags, then cancel the deal.

From an economic equilibrium perspective both activities are exactly the same. The insider trading mutual fund manager will end up under-exposed to low quality firms leaving the rest of the market overexposed. And the same can be said of the PE firm practicing perfectly legal due diligence. Yet the latter is perfectly legal.

The precense of mega pools of private equity may augur in favor of large caps, which are too large for PE or VC and avoid the adverse selection effect. It’ll be interesting to see if the small cap return premium persists against these headwinds.

dead serious June 27, 2014 at 7:59 am

What do you mean by “internals?”

If the information is public, even if it’s buried and extremely time-consuming to comb through, it’s fair game.

If the information is told in secrecy or is garnered through non-public means, it’s insider trading. Hence the word “insider.”

Greg July 6, 2014 at 12:24 am

It’s fairly well-known that acquisition due diligence goes through tons of non-public information, down to customer lists and the employment contracts of key employees. I’m not familiar with the legal framework, but we’re definitely not talking about going through SEC filings.

Why don't these Dang Kids get off my Lawn?!! June 27, 2014 at 3:11 am

A big part of the modern world is noticing things you aren’t supposed to. Now I usually take what the Silicon Valley futurists have to say with a grain of salt – a lot of them are fanatics of one sort or another suffering from various defects in their thinking – but on some issues I think they’re correct. We saw the big explosion of IPOs before being largely driven by millenials, since the millenial generation is so trasnaction based, Haquim and Jose just wanted to get their money as quick as possible so they could bail out and blow it all on typical millenial stuff neck tattoos and weed. Now that the millenial generation has failed and is back living on their parents’ couches we start to see the return to reponsible long-term investing decisions. But the problem is The Cult and the CML is still going strong as ever. That’s why you are seeing this big backlash against Silicon Valley these days – the one major innovation you’re seeing from the Cult is the rise of the Fake Nerd. It used to be back in olden tymes that nerds were not cool – they were dorkey guys who used to sit in their basement building Frankensteins and other contraptions. But now being a nerd has become the Cool Kid thing to be. I can’t tell you how many of my Liberal Friends go on and on about how much they love science – the funny thing is none of them have a degree in any scientific field or have even tried to build a Frankenstein. Now these Fake Nerds have crowded into San Fransico to try and recreate the 1990s boomtime but most of them are foaming at the mouth cultists who want everyone to eat moss This doesn’t seem to bode well for the future of Silicon Valley but I guess that’s just how The Left wants it.

msgkings June 27, 2014 at 4:41 pm

I wonder if this Z parodying guy is the same as the ummm parodying guy who used to post as ‘Just another MR Commentor’. That guy seems to have disappeared, and now this new ‘Damn Kids’ guy arrives…

Chris Brown June 27, 2014 at 3:53 am

This is a guy talking his own book. He is a high fee charging private equity investor who is saying private equity investing is a better bet than public equity investing. Surprise!

I don’t think there is much evidence to support this. Private equity returns are by their nature private but talk (as I do) to larger institutional investors and they will likely tell you their low cost, passive public equity investments have greatly outperformed their high fee private equity/angel investments, especially when you adjust for leverage and/or early stage risk.

Bill June 27, 2014 at 7:32 am

What I liked were his comments about if he could just not have Sarbanes Oxley he would be able to do more.

Bring back the dot.com bust. Enron. MCI.

Dan Weber June 27, 2014 at 8:49 am

If SOX is having a bad effect on anything, it’s on start-ups trying to IPO, who have the least amount of scale required to meet a constant level of legal burden.

Is the only choice Sarbanes-Oxley or Enron? Nothing in between?

Finch June 27, 2014 at 10:16 am

+1

Thomas Sewell June 27, 2014 at 12:35 pm

It’s worse. What makes you think SOX will actually prevent the next Enron, as opposed to advantage incumbent companies over newer ones?

guest June 27, 2014 at 1:41 pm

legal burden? Dont make me laugh, most law firms are desperate to cement themselves as securities powerhouses, startups for the most part get free legal advice as a bet on them by the law firm.

guest June 29, 2014 at 11:21 am

it’s free? Really? (think hard)

Finch June 27, 2014 at 10:13 am

If you moved some of those investment opportunities from private to public, you’d also remove the exorbitant fees.

The cost is mostly there because the firms are private, not because they are growth or small, at least until you get really small.

ChrisA June 27, 2014 at 4:19 am

Quite an enjoyable rant by Andreessen. He makes the same points about regulations and unintended consequences that many libertarian philosophers make. In essence the more you regulate the more you favor big companies. Anyone concerned about the influence of big companies in US politics needs to think this through.

ummm June 27, 2014 at 5:04 am

VC is where the easiest money is. Picking winners is easy to do, or at least I have found it so .

msgkings June 27, 2014 at 4:43 pm

LOL. Pics or it didn’t happen.

andrew' June 27, 2014 at 5:12 am

Almost all these issues (e.g. my preferable sub standard insurance) can be solved by a sheet of paper where we agree and sign to be big boys and girls. This is what being a qualified investor is. It is odd that it is based partly on wealth.

andrew' June 27, 2014 at 5:16 am

But I also don’t quite buy the argument. What would Jack Bogle say? So we “missed” $79B Facebook vs Msft. So what?

david June 27, 2014 at 5:51 am

a reasonably large number of people genuinely do not seem to understand that the point of investment is to earn a return with an acceptable level of risk, not to expensively display one’s moral affiliation toward the entity whose bonds or debt you are buying. worse, it seems nigh impossible to educate people out of a conviction that refusing to lend to some cause indicates a condemnation of it

this shouldn’t really be surprising – capitalism is only a few centuries old, and for most of human history, moral compasses on lending have been aimed at building social bonds in the wake of agricultural weather shocks, not to accumulate capital. So laymen still treat lending like social welfare and signalling.

this does mean that trusting laymen to be “big boys and girls” rapidly makes a small number of charismatic schemers fantastically rich and a large number of retirees destitute. That’s what being “big boys and girls” means to those retirees – they make personal sacrifices, sometimes very great, to fund whatever cause that a country’s best conmen can talk them into – and likewise they are liable to be unreceptive to the argument that modern liberalism says that they are not entitled toward history’s traditional way of dealing with those usurers when those schemes inevitably fall apart

andrew' June 27, 2014 at 5:56 am

That is where the sheet of paper comes in.

I also wonder because the people who fell for / abetted Madoff did so for the returns not for signaling.

david June 27, 2014 at 6:01 am

Why does the sheet of paper matter? Did you not read my last sentence?

andrew' June 27, 2014 at 11:47 am

When you agree to accept responsibility you sign the paper.

I don’t understand your last sentence.

Brevity is my forte June 27, 2014 at 12:14 pm

Your last sentence was 5 lines long.

Brevity: my forte June 27, 2014 at 1:37 pm

FTFY

joan June 27, 2014 at 5:56 am

Yet another critic of Piketty who has not read his book. If he had he would know that there is data it the book showing that wealthy people earn higher returns that ordinary investors and is one of the reason he expects inequality to increase.

andrew' June 27, 2014 at 5:58 am

If average investors invest in total market and r>g his does that figure?

Joe Teicher June 27, 2014 at 8:12 am

Average people have very low net worth. If you have $10k of net worth its not all going to be in an index fund. A significant portion is going to be in something like a checking account because you need some liquidity. That kills your overall return. If you have millions then unless you live very large or are very leveraged you have low need for liquidity as a fraction of your net worth and so you can earn a higher return.

Cliff June 27, 2014 at 10:32 am

A checking account is not an investment!

dead serious June 27, 2014 at 11:14 am

I think that’s his point. Many people don’t have spare cash with which to make “investments.”

That’s also Piketty’s main point, isn’t it?

Axa June 27, 2014 at 7:05 am

No IPOs coming out of Silicon Valley? We need to react fast, the system is collapsing, impeach the regulators!!!!!……….or wait, investors can work with boring and unsexy equity such as steel pipes, energy, lodging, pharmaceuticals, healthcare and food. http://www.bloomberg.com/visual-data/best-and-worst/largest-us-ipos-in-2013-stocks

Jon June 27, 2014 at 7:41 am

Marc Andreessen does not show how many losers people bought along with their microsoft IPOs. The study in the article cited below suggests public investors should not mourn the loss of small company IPOs and that other economic factors are driving the trend away from small company IPOs. I have not yet delved into the guts of the analysis to see what limitations or flaws it may have.

http://fisher.osu.edu/supplements/10/12092/Where%20Have_April_3_2012.pdf

btw: Marc is behind the times—people now brag about their Apple stock, not their Microsoft.

ThomasH June 27, 2014 at 7:58 am

The way to pay for retirement is a) don’t “retire” with many expected years of life left and b) save based on low 0-1% real return assumptions.

JasonL June 27, 2014 at 9:21 am

There’s no reason you couldn’t get public access by way of some kind of professional intermediary like a fund. If it becomes a big enough thing, it seems like it can be solved.

rayward June 27, 2014 at 9:21 am

This misreads Piketty. It’s not that he has confidence in the investment skills of the wealthy, it’s that the wealthy have come to prefer speculation over long-term investment in productive uses, which in turn produces an unstable financial system and recurring financial crises. The preference for speculation is also why so many public companies have gone private and private companies don’t go public. And it’s the investment partnership (private equity, hedge fund, etc.), by allowing the wealthy to pool their capital, that has facilitated speculation and contributed to the financial instability. What Piketty gets wrong, in my view, is that every financial crisis to come will be met by governments and central banks with the same counter-measures as they adopted in the last financial crisis, thereby preventing the collapse of asset prices and preserving inequality (and the financial instability). I hope Piketty is right and I’m wrong, because if I’m right, we are in for a fall.

rayward June 27, 2014 at 9:28 am

Conservatives have already learned that right-wing populism is difficult to control. My fear is the convergence of right-wing populism and left-wing populism and a resulting political response to a financial crisis that leaves us vulnerable to economic collapse.

derek June 27, 2014 at 10:54 am

As opposed to copying all the mistakes Japan has made?

charlie June 27, 2014 at 9:40 am

“Most Americans can’t invest in private companies and most Americans can’t invest in venture capital and private equity funds. They’re actually prohibited from doing so by the SEC. ”

Most americans don’t have any money to invest.

Cliff June 27, 2014 at 10:34 am

Most? Maybe 40-some %?

Brian Donohue June 27, 2014 at 10:40 am

Maybe less if you are counting 401(k)s.

Also, before we lament the submerged tenth, I will note that Social Security provides higher pay replacement to low-paid workers. Something like 25% of current retirees basically live on Social Security alone. Unlike health care, the math on fixing Social Security is pretty straightforward.

So there is a decent chunk of the population for whom investing doesn’t really matter.

David R. Henderson June 27, 2014 at 9:41 am

Tyler,
Good interview.
Andreessen makes the following statement:
If you actually get regular compounding growth of stocks of that form, then basically what you have is an economic boom — a sustained boom in productivity. If the gains from the market exceed the gains from economic growth, the delta is productivity growth. That’s the math. This is why I say he has so much more faith in the progress of capitalism that even the capitalists do.
I haven’t worked my way through the whole book yet, but is Andreessen right that the delta is productivity growth. I’ve grown up as an economist thinking that productivity growth is *part* of economic growth.

Sam June 27, 2014 at 1:25 pm

I thought the same. In Solow models doesn’t total output grows at g + n, where g is the technology factor representing productivity growth?

SeanB June 27, 2014 at 11:12 pm

I also thought this. But that leaves me wondering: how do investors get returns greater than economic growth? Is it some kind of zero-sum appropriation? Or maybe it comes from global economic growth being cashed in on by domestic multinationals?

Brian Donohue June 27, 2014 at 10:29 am

I think most people are missing his key point. In the past, public market index returns produced a lot more exposure to ‘growth stocks’, since companies went public earlier.

Overlay this with the increasing conviction that most investors should avoid the big boy waters altogether (there’s a sucker at every poker table, and if you don’t know who it is…), and Andressen is suggesting that future returns may be lower due to lack of ‘growth’ exposure.

It’s an interesting argument. I think it is consistent with Piketty’s idea that the rich may achieve higher rates of return (which they always should have anyway based on higher ability to bear risk).

Now cynics think the ‘above index’ returns sharpies advertise result in fleecing of investors. I’m agnostic here- I think these guys can produce better returns, but they gotta get paid out of that too. Anyway, this is a tussle between rich sharpies and their rich clients, so I don’t see it as a big public policy matter.

I’m not nearly as pessimistic as Andressen as to what this means for retirement. The S&P 500 index is still plenty volatile for most small fry and a pretty good deal for small investors with long horizons compared to alternatives. Bonds are only gonna earn 3-4% over the next 20 years, so the bar is pretty low right now.

Vivian Darkbloom June 27, 2014 at 11:50 am

Who says the small guys can’t get part of the enchilada? I just watched a program featuring the CEO of Chilango who indicated his company got 80 percent of their funding from crowd funding.

Ryan June 27, 2014 at 12:04 pm

There is some evidence for Andreessen’s views, in the data on public firms. I review here http://updatedpriors.blogspot.com/2014/06/whats-up-with-those-post-2000-ipos.html

In short, prior to 2000, new cohorts of IPOs rapidly grew to occupy a large share of total public employment (or sales). The post-2000 cohort grew very slowly and is less dynamic than, say, the 1980s-1990s cohorts.

Leona June 29, 2014 at 8:12 am

Single different maps are not re-playable so you can’t scene anybody not in the match-readiness mapping and one-time vindicate on the single individual in which struck anybody.
This is where you can swim, even though the water is
very cold. Conclusion There are a lot of Apple fans who
play the above game all across the globe.

Comments on this entry are closed.

Previous post:

Next post: