Are IPOs the New Ponzi Scheme?

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 22 May 2019

⏱️ 31 minutes

🔗️ Recording | iTunes | RSS

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Summary

How venture capital funded startups run up massive losses while justifying premium valuations using creative profitability metrics. These private companies are now going public allowing early investors to cash out with sizable gains. Meanwhile, these new publicly traded companies are added to equity indices, forcing passive managers to purchase them for their index funds and ETFs.

In this episode you will learn:

How venture capital and initial public offerings work.
How many venture capitalists are there and how have they performed.
Why do startups stay private for longer and then go public while still incurring massive losses.
What is blitzscaling.
How startups use creative profitability metrics to attract investment capital at premium valuations
How the current venture capital regime contributes to income inequality.
How to get an allocation to an initial public offering.

Thanks to Policygenius and TripActions for sponsoring the episode.

For show notes and more information on this episode click here.

[0:19] What are IPOs?
[2:12] The growth of new venture capital firms.
[5:22] Blitzscaling and the willingness of venture capitalists to initially lose money.
[8:33] How start-ups are choosing to exit.
[11:18] The cost of going public at premium valuations.
[13:26] The social and economic repercussions of blitzscaling.
[18:16] How money-losing firms try to create a profit.
[19:38] How unprofitable companies convince investors to buy at high valuations.
[21:20] How individuals participate in venture capital without investing in an IPO.
[24:08] Possible solutions to IPO’s problems.

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Transcript

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0:17.4	Welcome to Money for the rest of us. This is a personal finance show on money. How it works, how to invest it and how to live without worrying about it. I'm your host David Stein today is episode 253. It's titled Are IPOs the new Ponzi scheme? IPOs it stands for initial public offering. It's when a company sells stock to the investing public for the first time.
0:29.3	Ponzi scheme is a enterprise or maybe it's not even an enterprise where early investors are paid off
0:39.5	and earn profits from the funds of later investors. The IPO market, the
0:47.2	startup market, the venture capital market is very different from what it was
0:51.6	really in the 90s and up until the year 2000.
0:57.0	The initial approach and venture capital has been around since the 1940s. The idea is an entrepreneur has an idea or a team of
1:07.5	entrepreneurs. They get funding for that idea. They take that funding, they build out infrastructure, marketing plans, etc.
1:17.0	And this initial funding from the venture capitalist, and maybe there's a couple of additional funding rounds but the idea
1:26.5	is to get a viable enterprise overcome kind of that period where expenses are higher than revenue as the idea
1:35.4	catches on but eventually after a few years the company is taken public. They
1:40.6	raise additional capital from the public market that allows the enterprise to continue to grow.
1:47.0	And as investors, we are able to participate in that company's growth over time as it expands. Great examples are Google, Amazon, Facebook. Now it's very much a different game when it comes to venture capital and private investing of raw.
2:10.0	The size is much greater.
2:12.0	Back in episode 219 I did an episode on this show. The size is much greater.
2:12.8	Back in episode 2019 I did an episode on the shrinking stock market,
2:16.8	the public stock market, and I shared how the number of listed companies,
2:22.3	publicly traded companies in the US has gone from 7,000 in 1997 to around 3,600 today.
2:30.0	At the same time, McKinsey Global Private Market Review, their 2019 report, shows that the value of private companies has grown 7.5 times since 2002, twice as fast as the public market
2:48.8	in terms of the overall market capital founded. Back in 2010, there were only 800 managers in the entire venture capital industry.
3:07.0	Now the amount of money being raised is staggering.
3:11.0	Venture funds raised over $80 billion in 2018. That's the highest since the
3:17.5	height of really the tech bubble back in 2000. And the number of deals being done, my old firm, Fund Evaluation Group, where I helped
	...

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