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As More Tech Start-Ups Stay Private, So Does the Money


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We were in Morgan Hill CA. When I was brought in as Director of Operations for a Santa Clara Internet startup in December 1999 - June 2000, when the tech sector balloon popped, and ended my short Silicon Valley career. We had just started working on our first funding round request with a Sand Hill VC the owner was friendly with socially. The owner worked at Intel for their day job.

 

I got a good look at the pre-bust assumption that all good ideas would get at least an initial round of funding, and how VC presentations are done.

 

But today it seems the VCs are doing what Shark Tank purports to do; find and tend unicorns. as an employee of a startup, this might be a bad thing. But as an investor we get left out in the cold for the initial pop. But when we can invest, will it really be "safer?"

 

Excerpt:

 

"Not long ago, if you were a young, brash technologist with a world-conquering start-up idea, there was a good chance you spent much of your waking life working toward a single business milestone: taking your company public.

 

Though luminaries of the tech industry have always expressed skepticism and even hostility toward the finance industry, tech’s dirty secret was that it looked to Wall Street and the ritual of a public offering for affirmation — not to mention wealth.

 

But something strange has happened in the last couple of years: The initial public offering of stock has become déclassé. For start-up entrepreneurs and their employees across Silicon Valley, an initial public offering is no longer a main goal. Instead, many founders talk about going public as a necessary evil to be postponed as long as possible because it comes with more problems than benefits.

 

“If you can get $200 million from private sources, then yeah, I don’t want my company under the scrutiny of the unwashed masses who don’t understand my business,” said Danielle Morrill, the chief executive of Mattermark, a start-up that organizes and sells information about the start-up market. “That’s actually terrifying to me.”

 

Silicon Valley’s sudden distaste for the I.P.O. — rooted in part in Wall Street’s skepticism of new tech stocks — may be the single most important psychological shift underlying the current tech boom. Staying private affords start-up executives the luxury of not worrying what outsiders think and helps them avoid the quarterly earnings treadmill.

 

The delay in I.P.O.s has altered how some venture capital firms do business. Rather than waiting for an initial offering, Maveron, for instance, says it now sells its stake in a start-up to other, larger private investors once it has made about 100 times its initial investment. It is the sort of return that once was only possible after an I.P.O.

 

But there is also a downside to the new aversion to initial offerings. When the unicorns do eventually go public and begin to soar — or whatever it is that fantastical horned beasts tend to do when they’re healthy — the biggest winners will be the private investors that are now bearing most of the risk.

 

It used to be that public investors who got in on the ground floor of an initial offering could earn historic gains. If you invested $1,000 in Amazon at its I.P.O. in 1997, you would now have nearly $250,000. If you had invested $1,000 in Microsoft in 1986, you would have close to half a million. Public investors today are unlikely to get anywhere near such gains from tech I.P.O.s. By the time tech companies come to the market, the biggest gains have already been extracted by private backers."

 

All the details, and more about the startup staffing effects, are in the article here: http://www.nytimes.com/2015/07/02/technology/personaltech/as-more-tech-start-ups-stay-private-so-does-the-money.html?emc=edit_tu_20150702&nl=technology&nlid=36852580&_r=0

 

But it looks like the private investors like us, will have far less opportunity to get returns like I did with Tesla. The big boys are going beyond their advantages over us unwashed with after hours trading and millisecond investment server algorithms.

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