According to industry reports, we've hit an all-time low in the number of VC-funded technology companies that manage a successful IPO. VC funding of tech companies is also at a low, making it pretty clear that the financial markets have lost their appetite for tech startups. This situation could stall the very process that’s brought us the Internet, the personal computer, open-source software, and a host of other good stuff. We have to fix this for the good of the industry, and for our overall economy.
“How?” is the critical question.
Now, if you’d asked me two years ago what the solution to the tech problem was, I’d have said, “Get something real going again!” The bubble of the late 1990s was created by overhyping the tech space, and given that, it wouldn’t be surprising if the financial markets were skeptical of tech today. But now, I realize two things: First, the bubble wasn’t our fault. In fact, we were played. Second, while we still have to help fix the problem of the bubble, we have to get help fixing the problem that caused it.
Which brings me to my main point: What do the Internet bubble of the late 90s, the savings and loan crisis, the current credit crunch, and the high price of oil have in common? Answer: The financial industry caused them all, and very deliberately.
Any kind of financial instrument, from a stock to a bond to a commodity like oil, goes higher in price because there are more buyers than sellers. That lets a flood of money run up prices, creating what looks like a boom -- and always turns into a bust.
The problem is that, while it lasts, a good speculative scam is a lot more profitable than actually investing in something good and waiting for the returns to come in. In short, financial speculation caused the bubble, the bust, the credit crunch, and the oil price spike that’s crippling the economy today.
The cure is to regulate the financial markets to prevent rampant speculation, period. The solution has to be tuned to each market area -- stocks, bonds and debt, commodities -- but the goal is the same: Don’t let hedge funds pump a half-trillion dollars into something and create so much instant buying volume that the price skyrockets.
Up to now, we’ve waited till the widows and orphans were cast out before regulations prevented a recurrence of the problem. Bad approach; we have to assume that the speculators will always move to the next good, underregulated spot, and get there first. These guys are picking all our pockets, and it has to stop. Not only is the bubble/bust hurting the public directly, it’s siphoning the capital that should be driving technology growth, into unproductive (even phony) schemes.
But what’s to keep speculators from exporting their greed offshore, out of the reach of regulators? And what can help honest investors get back to the technology sector?
I think the answer is actually pretty clear. I used to develop sales programs for tech companies, and one of my precepts was, “A salesman doesn’t do what you tell him to do, he does what you commission him to do." If we want tech to be attractive, we have to make it financially attractive.
The U.S. should have a new tax plan for technology IPOs. For the first six months after an IPO, profit on tech stocks should be taxed as long-term capital gains, not only for the first buyer of the IPO but for all who buy in that period. That creates a powerful financial incentive to buy tech IPOs, which creates exits for the tech VCs, which drives them to invest again in tech companies.
It’s a simple approach. Any company in an area that does an IPO and is designated as a “critical technology area" -- the kind that might qualify for an R&D credit, for example -- would qualify. Because buyers of that company’s stock would enjoy special tax treatment for a time, the IPO would raise more money. The value of these companies would be higher, so the VC’s return on investment would also be higher, and that would bring VC money back to the technology areas we target.
VCs I've spoken with in the last couple of months say they like “green” more than tech because they can create media hype for green companies more easily than they can for tech, and hype makes the speculative wheel turn. But if we curbed speculation and improved the prospects of a profitable exit from a tech venture, we might just have rosy times again. We’d also reduce the collateral damage of all of these speculative bubbles -- and that’s a good thing, too.
— Tom Nolle, software engineer and founder of CIMI Corp.
I agree that the appreciation in share price doesn't hurt the company (and since I had some, it helped me!) but my point is that once a stock is sold by the company the ups and downs of the stock don't change the company's available cash (unless they issue more shares). It's true that the market for stocks that HAVE been issued and the chance that they'll go up is what makes people willing to buy the stock in the first place. The real question is the IPO price, the price set by the company and the underwriter for the shares when the compay sells to the public for the first time. If that price level is too low (because, for example, there is a perception that the stock won't pop to a higher level after it's generally available) then the company won't raise enough money to make the IPO worthwhile. We've seen some companies delay or even withdraw IPOs.
Thanks for the kind words on the article. The whole topic are is really complex and even with a couple of years inside it, it's hard for me to unravel all of the details!
I posted my last comment blindly - I originally thought it was a forum because the article was not visible when I clicked on boards..I should have browsed all the way back.
It was an excellent article! I gain similar enthusiasm reading many of these articles on this site as I did at pre-tech bubble burst events such as Garage.com's (garagetechnology ventures now) hosted conferences and by reading Austin American Statesmen's TechMondays section(when I lived there). TechMondays and Information Week made Mondays my favorite day of the week back then. A complete change from looking forward to weekends.
Until I read your article/blog, I weighed in more stubbornly on believing (or making myself believe) that gas prices and other economic indicators served as a buffer to this economy exploding. My reasoning was that almost every time I noticed DJIA and NASDAQ surging upward, the gas prices would rise. When this happened, the market would dip slightly or level off. When the gas prices dropped, I would notice the market would jump again. I'm sure there is a logical explanation as to why that occured.
I still say that innovation COUPLED with economics governs the barriers of entry of the next big thing. Maybe this is all in preparation for other means of energy sources to take its position. I guess you can't just 'plop' cold fusion down and say it's available...EVEN IF THE TECHNOLOGY IS AVAILABLE.
At any rate, thanks again for the article!! I do slightly have mixed feelings about VC's only interest in the bottom line(profits) - which was expected and understandable, however I'd rather hear that they are innovation driven vs profits only driven...wishful thinking perhaps and maybe even unreasonable from a business standpoint.
Hi Tom - "The company made $33 dollars, but the guy who sold that first share
made $162, which was more than the company made! Tell me how that
makes sense?"
First I will honestly say that I was not aware that it worked that way. It sorta makes sense to me because if I'm borrowing money with a promise to the lender that I will make them money, I've got what they promised to lend to do what I need to for my business, the profit that the lender made by providing capital is my promise delivered earlier than expected..from an ethical and perhaps non-business perspective. My concern and question would be, what is the direct backfire from something like that happening. Let's say the stock was well worth the $162 and more, or proved to be worth more. How does it 'shake' the company in the short run? other than the obvious of losing out on the additional capital that could have been raised.. the company still got what was sought.
I guess the only way to make sense of everything the speculators are risktakers
they could lose their money as fast as they make it my could only assume
when they subtract the losses from their gains . they must have some kind of
formula that gives them a net Gross profit.
and some of them probably in the long-term , become V,C with longer-term goals.
I once got involved with say voip starter at $.50 a share seven days later it was $49 a share talk about hype, made a little $$$$ on that one and reinvested in
that other voip Co. a was talking about ran up to $28 but took about three years.
The way I've seen it work is something like this. There's a general relationship in a given industry between the earnings per share of a company (net income) and the company's stock price, called the Price-Earnings multiple. It's typically around 14 for an established industry. When the P/E multiple goes higher, the "reason" (which is more than likely a "justification" somebody made up) is that there is an expectation that future earnings will be higher, so the market is essentially anticipating that growth. Over the long haul, the expecations tend to level out with the reality of the industry the company is in.
When a company does an IPO, there is often a big "bubble" in the price as soon as it goes public because the stock is a new commodity and there is a hope it will go up. Hope equals more buyers, so it does. The company gets only the price of the initial offering. I remember one time in the '90s when a company in the tech space went public at an offer price of (I think) $33 bucks a share or so, and the very first public trade was for $195! The company made $33 dollars, but the guy who sold that first share made $162, which was more than the company made! Tell me how that makes sense?
I see! You are correct, an I understand your point, why would you think any company
would want to take the position of an IPO? In today's retrospect in regards
to past speculative players? Why would anyone take the chance on ruining the overall credibility and validation of a new company and new technology over stock manipulation an causing short-term erratic stock oscillation.
there should be an intrinsic value underscoring the erratic stock oscillation long-term correct?
I have to admit I understood that companies offer stock to grow their businesses
over longer periods of time, I would imagine these kinds of companies don't look
too much in the short term of their stock, but to five years out would that make sense?
for instance oil stocks presently the spreads can vary $15 per barrel one way or the other based on the news of the day but I would suspect the underlying value
could be in the price range of $100 dollars the rest is based on speculative
information short-term. do you think I'm understanding the comparisons correctly?
That's another one of my favorite topics! I was a partner in a hedge fund for a couple of years as a part-time activity to learn a bit about the financial markets. The problem is that stocks go up because more people buy them than sell them and vice versa, not because they represent something good. The "goodness" is useful only if it promotes more buying, and hype is an easier way to do that than substance.
There's a general problem in the financial markets, starting with the VCs and moving into public companies, that seems to have come from the notion of "momentum" trading; buy what's going up and sell what's going down. The VCs favor concepts that can generate a lot of glitz and glamor and promise a quick exit, over concept that are fundamental to the industry but take time to develop. I'm not sure how to best eliminate this problem, but one way may be to provide tax breaks for IPO shares in select technologies, which would create an exit and drive investment. Or maybe not; as long as there's a dodge to play I think the financial markets will play it.
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