We welcomed Reuters finance blogger — and recent Loeb Award winner — Felix Salmon to the Crawford Family Forum last Thursday to talk IPOs, as part of my "DeBord Report Live" series. Specifically, whether the IPO is D-E-A-D. Felix has lately been making a very strong case against the traditional IPO, in Wired and elsewhere. He's outlined an alternative model, of sorts. So we got to engage in some lively conversation on the topic, and we enjoyed some excellent contributions and questions from the audience.
We also got more mileage out of the three terrible slides I grabbed to contribute to the conversation than I ever thought possible.
An interesting product of the evening's discussion was our kind of shared realization that the business of Silicon Valley (broadly defined, but basically the Bay Area tech scene) isn't necessarily the creation of new companies — it's the creation of venture capitalists.
You might think that entrepreneurs are entrepreneurs and would want to keep right up entrepreneuring until the day they die. Not so, necessarily. These days, it can seem as if founders want to start a company, run it on the backs of folks who are willing to work cheap 24/7 for the promise of that big payout, either through IPO or acquisition, and then if they make a pile of money, jump to being a funder of companies, rather than starters of companies.
In other words, leave the trenches of startup-land and move to the higher, strategic plane of venture capital. Function at the meta-levels of figuring out what the next big Internet trends are and aiming money in that general direction. You can get very cynical about all this and accuse VCs of essentially extracting capital from pension funds and the like and using it to roll the dice over and over until they hit their number. You could also accuse modern VCs of running high-risk investment funds functioning as rarefied money managers rather than front-line investors.
This sets up an ecosystem of theoretically tremendous innovation but in practice a lot of failure, with a dysfunctional compensation structure (as Felix points out in the clip I've included from the full conversation, at left): youthful underpaid geek drones with dreams of future riches at the bottom; seasoned VCs in their forties and fifties providing the funding; and savvy, ambitious founders in between facilitating the arrangement (and headed, quite possibly, toward VC-dom themselves).
It is what it is, and it certainly can succeed and succeed wildly. But it could, circa 2012, be damaging the innovation engine of the tech sector.
As an alternative, you could try to get Marc Andreessen to fix the IPO process by acting less like an investor and more like an investor who's also a kind of a VC/manager/mentor. Felix has been critical of Andreessen before, but he has now worked him into his congealing plan to bring the IPO back from the dead:
As a venture capitalist, Andreessen has a fiduciary responsibility to his [limited-partner investors] and he needs to give them returns on their investment, in cash, after five or ten years. It’s a lot easier to do that when you can exit via an IPO. But the way to make IPOs easier and more common is not to gut the governance that’s in place right now [as Andreessen has done]. Instead it’s to embrace it, and make public companies more like private companies: places where management and shareholders work constructively together and help each other out as and when they can. Mark Andreessen is a very active and helpful shareholder of the companies that Andreessen Horowitz invests in — and he has a level of access to management and corporate information that most public shareholders can only dream of. If he likes that system, maybe he should start thinking about how to port it over to public companies, as well.
We're definitely at some kind of inflection point with both the IPO as we knew it and VC as we knew it. And if we want innovation to work in the U.S., then we need to get it right. Helping public companies to operate more like private companies could be a good way to go.