Opinion

The Great Debate

from Breakingviews:

Rob Cox: Crazy valuations not only sign of bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Crazy valuations – even after a recent dip – are not the only signal that parts of the U.S. stock market, particularly internet companies, are in bubble territory. The willingness of investors in hot initial public offerings to accept second-class stock and governance that favors insiders suggests an imbalance between providers of capital and its consumers. Add head-scratching market caps based on contorted metrics, and this risks storing up trouble when the inevitable headwinds arrive.

The best description of the stock being hawked in this way is “coattails equity.” It offers little beyond a chance to tag along with entrepreneurs from Wall Street, Silicon Valley and China. Buyers of shares in IPOs such as those of Box, GrubHub, Moelis & Co, Virtu Financial and Weibo – and probably $100 billion-plus giant Alibaba – must give up rights that have traditionally accompanied the ownership of common shares, like a representative voice in corporate decisions.

It’s a big shift in the paradigm of stock ownership, and it could make the next downturn trickier in some ways even than the tech collapse at the turn of the millennium. The most obvious governance problem is a multiplicity of classes of shares. Weibo, the Twitter-like service of Chinese internet conglomerate Sina, is selling Class A shares in New York. These take a back seat to the B shares that Sina will continue to own and which carry triple the votes.

That’s nothing compared to Box, the company Aaron Levie founded in his dorm room. Box sells a service with not very obvious barriers to entry that allows customers to store their digital files on the internet. Box’s Class A shares have just one-tenth of the votes that attach to its Class B shares, which should allow Levie and his backers to call the shots long after their economic interests shrink.

The NBA has America’s model migrant worker program

If you’ve watched the NBA playoffs, you’ve seen the Oklahoma City Thunders’ rangy Swiss guard, Thabo Sefolosha, and his courtmate, human basketball swatter, and Spanish national, Serge Ibaka. To get to the finals, Sefolosha and Ibaka beat Tony Parker and Manu Ginobli, two international anchors for the very American San Antonio Spurs. In the finals, Sefolosha and Ibaka are facing off against Ronny Turiaf, the Miami Heat’s erstwhile benchwarmer, who hails from France, to see who gets to take the NBA Finals trophy away from German forward Dirk Nowitzki, the MVP of last year’s championship.

This seems like common sense – the best in their field want to come ply their trade in America, so why wouldn’t we let them? The increased competition has improved revenue for teams and created a better product for fans. But other sectors of the economy can’t follow the example of professional sport leagues. The government won’t let them.

The NBA is not alone in investing in importing the best human capital from around the world to maintain its edge. The Stanley Cup-winning Los Angeles Kings were powered by the goal scoring of Yugoslavian center Anze Kopitar; Ichiro’s arrival in Seattle to play for the Mariners was accompanied by a crush of Japanese advertising.

from MediaFile:

Instagram’s Facebook filter

The startup had millions of users, but, from the beginning, just one customer.

The predominant way of interpreting Facebook’s billion-dollar purchase of Instagram, in light of the social-networking giant's forthcoming IPO, is that Mark Zuckerberg had to pick up the photo-sharing app to boost his company’s mobile engagement. That would allow him to guard the mobile flank against incursions from Google, Twitter, and whatever other social-media tools might next arise.

That may be true – and it may even be the way Zuck thought about the deal when he swallowed hard and ponied up the purchase price. But that way of analyzing Facebook’s pickup, and the pickup of dozens of other startups, not just by Facebook but by Google, Twitter, LinkedIn and others, is probably not telling the whole story. Here’s a different theory, one that better describes the tech world that we, the users of the Internet, now inhabit: Instagram may have had millions of us as its users, but it was really built for just one customer: Facebook.

Silicon Valley, for too long, has confused the issue of what it means to be a user of a website, service or app, and what it means to be a customer of the app. Intuitively, you’d think they would be one and the same: The person using the app is the person consuming the app. But increasingly, apps are being made to grab the attention of the hegemonic companies in tech. Whatever it takes to get bought.

from Paul Smalera:

Facebook.coop

Facebook shouldn't pay its users. Its users should pay to own Facebook.

“Facebook was not originally created to be a company,” founder Mark Zuckerberg wrote in his letter to investors announcing the IPO of his already hugely successful and profitable company. “It was built to accomplish a social mission — to make the world more open and connected.”

Facebook has succeeded wildly, despite internal admonitions that its “journey” is only 1 percent finished. Journalists have latched onto Zuckerberg’s statement that Facebook wants to “rewire” the way the world works. In a world of thousands of self-anointed “social media experts,” only Zuckerberg can claim to have basically invented what the world thinks of as social media. He has etched himself into the timeline of human innovation.

Pity then, that Zuckerberg hasn’t turned his talents or attention toward Facebook’s financial underpinnings. After all, an IPO? How ho-hum can he get? If Mark really wants to accomplish his social mission with Facebook, he should share the company’s ownership with the people who helped him create it. Not just his Harvard contemporaries. Not just the programmers. Not even just the venture capitalists.

How home prices helped kill the first tech boom

By Ryan Avent
The opinions expressed are his own. 

The late 1990s was a wild time in Silicon Valley. The NASDAQ was soaring, and seemingly anyone could start a company, stick a .com at the end of its name, put together an IPO and retire a millionaire. The great boom ultimately took on a speculative character that led to wasted investments and the collapse of many poorly-grounded operations. But it was rooted in a surge of not-unrealistic optimism about the potential of the internet to change the world of business.

Among the striking features of the era, one of the most startling is this: the rate of high-tech entrepreneurship in Silicon Valley seems to have been below the national average from 1996 to 2000, according to a recent analysis of business creation during the tech boom. And from the late 1990s to the early 2000s — after the bust — Silicon Valley’s rate of high-tech entrepreneurship actually increased. How can this be? How is it that during the first great boom of the internet era, Silicon Valley was less of a hotbed for new firm formation than the country as a whole?

Economists Robert Fairlie and Aaron Chatterji suggest that the answer lies in the extremely tight labor market conditions that prevailed at the time. The tech boom was remarkably good for Silicon Valley workers. Average earnings rose by nearly 40% from 1997 to 2000 — more than twice as fast as the increase for the country as a whole. Non-salary compensation also soared, thanks to the popularity of stock options and the skyrocketing value of equity in tech firms. These generous pay increases made it unattractive for workers to leave established companies to strike out on their own. Entrepreneurship fell because life on salary was too lucrative to risk self-employment.

The death and resurrection of the tech IPO

ericauchard1– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

The U.S. venture capital industry is desperate to repair the market for initial public stock offerings, but reviving the goose that once laid hundreds of golden eggs may not get very far.

The National Venture Capital Association (NVCA) this week set out its comprehensive plan to revive the IPO market and the heady investment returns that once fueled the tightly knit venture capital industry’s success.

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