Some Thoughts On Public and Private Markets

I had breakfast with Alan Patricof last week. Alan is the dean of NYC VCs, he's been at this game longer than any of us. He was in the business when Intel and Apple went public.

The breakfast came about when Alan wrote this blog post in Business Insider about the problems with the IPO market. I read the post and emailed him with some feedback on the parts I agreed with and the parts I disagreed with.

We decided to have breakfast and chat about it.

My going into breakfast position was that the IPO market isn't all that it is cracked up to be. That the emerging secondary market is allowing companies to stay private longer (maybe forever) while allowing founders, angels, and early stage VCs to get liquidity. I believe that the IPO market should only be for the very best companies that can sustain value creation for long periods of time for their shareholders post the public offering. I think that is a very high threshold that most VC-backed companies cannot meet.

Alan's going into breakfast position is that we have lost our way (read his BI post for details). Back in the days of the IPOs of Apple and Intel, great tech companies would go public at low valuations, there were dozens of small market makers who would do research on the stocks, and most of the investors in these deals were individuals. Now we have markets that are largely closed to the individual investor. VC investing is largely instititional and limited to "qualified investors" (ie rich people). The secondary markets are also largely limited to qualified investors. And the IPOs these days are sold to a dozen or so large hedge funds who are also dominated by institutional investors and rich people.

Like all good discussions, we both came away with an appreciation for each other's point of view. I agree with Alan that we need a way to allow the individual investor to participate in the value creation that large tech companies can provide. And I recognize the the vast majority of people who have participated in the value creation from Facebook, Zynga, Twitter, and Groupon have been institutions and the very wealthy. That doesn't seem right or fair.

I think the SEC needs to rethink the capital market regulations and structure we have in our country. The secondary private market is a good thing and does allow great companies to stay private longer while providing liquidity for founders, angels, and early VCs. But there are issues with the secondary markets as they exist today. There are no disclosure requirements. There is little or no way for individual investors to participate. The 500 shareholder rule is creating all kinds of problems for companies. And we don't have a public market system that allows companies to be public at lower valuations with less capital raised. Alan believes we need a "new nasdaq" where companies can list for $250mm or less and have liquid markets in their stocks that individuals can participate in.

The US has a vibrant tech economy, a VC industry that is the envy of the world, and public markets that are highly liquid. We can and should stimulate the development of some additional layers of capital markets between the VC market and the current IPO market. A vibrant and fair secondary market that provides individuals some access and a new "low cap public market" are the natural additional layers to our current system. I'd also like to see more access for individuals into the VC market.

I hope the SEC is thinking about all of this. I hope they read Alan's post and this post. It is important stuff.

#stocks#VC & Technology

Comments (Archived):

  1. danprimack

    Good post Fred.Question: Do you believe that the vibrant secondary market for private companies is a long-term phenomenon, or simply the outgrowth of a small handful of highly-publicized social media companies (FB, Zynga, Groupon, Twitter) that haven’t gone public, in part, because their revenue hasn’t yet caught up to their hype (not true in all cases, but some). Once those companies either go public or are acquired, do we still see $500m “VC” rounds that provide shareholder liquidity? Is Fidelity/T Rowe still interested?As for Alan’s idea of a micro-cap Nasdaq, it sounds to me like a pipedream. Just don’t see it happening in this regulatory environment (even though it’s worked, for example, in Israel).

    1. fredwilson

      i don’t use second market but i suspect there are dozens, if not more, ofactive markets therei do not think the secondary market is limited to FB, Zynga, Groupon, andTwitter

      1. GraemeHein

        There are better models than the US equity markets.Canada and the UK also have small company exchanges – TSX Venture (the old Vancouver exchange) and AIM respectively. They are both somewhat shark infested but provide access to global equity for small companies in high risk endeavors. These similarities, as well as the large amount of resource firm financing, is what has helped drive the proposed TMX-LSE merger.So instead of remaining a US company, put your headquarters in Toronto, list on a more accessible exchange, and pay lower corporate and capital gains taxes!

        1. Cromwell Coulson

          Or take a look at our OTCQX U.S. marketplace, which is the top tier of the U.S. OTC markets. It is built to be the U.S. version of the AIM and the TSX Venture. We have taken the sponsor idea from the AIM nomad and created a Investment Bank or Securities Attorney Designated Adviser for Disclosure (DAD) to provide the quality check for investors and the advice small companies need.

    2. Dave W Baldwin

      Just off the top of my head, this may be an opportune moment. The current problems in the North with Gov Unions demanding more from taxpayers will probably backfire on those that questionably support those protesters.Bringing around those crazy rules that block those with a discipline toward savings/investment from supporting true R&D into the spotlight as Fred mentions will probably have a favorable viewing. Those that will be against predictably will say, “We are trying to protect you!” as they support the crazy actions pitting government workers against those that deserve better options.

    3. Amnyc

      Personally, as a public market institutional investor, My peOn companies staying private – only the very best companies can afford to stay private as long as a Facebook, Twitter, etc and we should recognize that they are the minority. The vast majority of companies will need capital sooner and VCs will want their exit.One individuals Investors and IPOs – my fundamental belief is that the vast majority of retail Investors do not the 101 on valuations. Ev/ebitda, free cash flow, ROE, ROIC, and even debt levels are complete unknowns to them. I think we should have a mandatory investing class in high school or college.Investing is easy when it’s google, facebook and a hot company – these are the vast minority! The average investor is not prepared for the majority of “average” companies and discern who is a better or worse steward of capital.I have a lot of respect for Fred but Maybe it’s how we define who are not “rich people”. We must do more to educate the entire populace. Institutions on average will always have an edge on mid and large cap companies (and everyone can figure out Apple) but small and micro-caps is where retail can do well “IF” they understand the fundamentals of investing.

  2. Dale Allyn

    Interesting post, Fred. It sounds like a great breakfast talk.Your remark: ” I believe that the IPO market should only be for the very best companies that can sustain value creation for long periods of time for their shareholders post the public offering.” is quite consistent with my view. I don’t like the idea of the public markets having brands come and go, as we so often see in the tech world. I appreciate the desire for accessibility to the “common investor”, but not at the expense of quality of the overall market.I’m not a fan of avoiding an IPO in order to avoid transparency, but waiting until a company has a sustainable position before going public makes more sense to me. And I see some models which would be better served by remaining private indefinitely in order to achieve certain goals, although feel that transparency once a certain critical mass has been reached should be practiced. Relying on the honor system for transparency isn’t practical, so perhaps SEC regs. should stipulate more transparency at a certain stage even if not going public.Thanks for the good Saturday morning start.

  3. reece

    I am lucky to say I’ve met “the dean.” So much experience…I’m curious – you said “We can and should stimulate the development of some additional layers of capital markets between the VC market and the current IPO market.”How do we do that and/or how do you see that playing out?

    1. fredwilson

      we will need the SEC to be involved

      1. kidmercury

        wrong. once you guys realize that, then fixing things will be rather easy. until then, fixing things will be impossible.there are only two solutions:1. MASSIVE overhaul at the federal government level. this requires going beyond the two party system. this is playing the incumbent’s game (goldman sachs, banking crowd) on their turf. good luck with that.2. virtual economies. your case of option #1 or option #2, the first step is fixing the currency. can’t have stable financial markets without a stable currency.either option #1 or option #2 requires A LOT of political will. this is the real challenge. as people are STILL under the delusional belief that it is advantageous to ignore 9/11 being an inside job, i doubt the political will or required level of education is present. no worries though. the situation will continue to deteriorate until people choose to wake up.ignorance is futile. only the truth can set us free.9/11 was an inside job,kid mercury

      2. Cromwell Coulson

        The SEC needs to hear more voices of entrepreneurs, capital providers and most importantly investors that want to invest in smaller earlier stage companies. Too often, all they hear are complaints after investors lose money, rather than from investors who quietly read financial statements and find market inefficiencies.An important rule change would be the raising of the limit for Reg A Offerings which do not require SEC registration, from $5 million to $30 million. This is something Bill Hambrecht and others have been calling for and almost made it through the last (Democratic) Congress. More voices need to join this call.The SEC made a hugely positive change right before the financial crisis to their Rule 144 that made any non-affiliates shares in a company free trading after a one year holding period. That means that a company with a base of angel investors or other outsiders can be traded in the OTC market without SEC registration. I expect that as more companies are funded by angel investors, we will see a lot more companies who can benefit from having their shares traded in the OTC Markets. That will be especially true if Reg A offering sizes can grow, and investment banks can use it as a tool to tap angel demand.

        1. fredwilson

          totally agree. maybe i should have titled this post “dear SEC”

  4. andyswan

    We have the potential for quality markets in the OTC Markets (Pink Sheets, OTCBB, etc). Their capability is there to be the “next Nasdaq”….I think guys like me and you could make it happen.As for the SEC….they’re thinking about this stuff, but not in the direction you want. They’re making it MORE restrictive. They’re REDUCING the pool of “accredited investors” by raising the capital requirement.Paris Hilton can invest in Twitter but the PHD professor at Harvard Business School can’t put $25k into his students’ idea.We literally have a government that says “only rich people are allowed to invest in private companies. For the rest of you— we have a ponzi called social security….and for you really down and out folks, try these lotto tickets. Someone’s going to win MILLIONS!”The next time you sit with Schumer, tell him that these policies are restricting innovation. That the government’s job is to stop and prosecute the scam, not the investor.Liberty and the pursuit of happiness means having control over the fruits of our labor.Get out of my way.

    1. fredwilson

      i will do that but i’m not sure he will sit with me because i am not sure hewants to hear about all the stuff he’s for and i’m not

      1. andyswan

        I know….I wasn’t trying to single you out…..we should all be letting our reps know this stuff. A lot of them don’t want to hear it, a lot of them already know it, but maybe a few of us can catch the ones in between.Thoughts on existing OTC Markets?

        1. Cromwell Coulson

          I have a lot of thoughts on the existing OTC Markets as I am the CEO of OTC Markets Group. We operate the worlds largest electronic interdealer quotation system for unlisted stocks. Last year, over $144 billion dollars of trading took place in securities on our platform.I am very positive on the opportunities for entrepreneurial and owner managed companies to use the unlisted markets over the next few years. As it is taking longer and longer to get to the size of company that can support the number of committees required to list on NYSE or NASDAQ, our offering a compelling entry level public market should be of great value. Growing companies will be able to lower their cost of capital by providing investors the trading opportunities of a transparent secondary market.We operate what was once the Pink Sheets, and have made a fair amount of changes to both the trading process (making it much more Open, Transparent, and Connected with a real-time platform) as well as to the ability of investors to easily find out the level of information availability through segmentation into market tiers. Once known as the darkest and most opaque part of the markets, today our real-time firm prices are on all the major online brokers and 96% of the dollar volume takes place in securities with current information available.Three years ago we created a new tier of the OTC markets called OTCQX. It was based on the simple idea that if we could wrap around our broker-dealer trading marketplace the information and services that intelligent investors needed, we could radically close the gap between an exchange listing and the existing BB/Pink paradigm. It is working, especially for international companies, and today we have over 160 securities that have joined OTCQX. By providing investors with better information the OTCQX companies are seeing substantially more liquidity than comparable BB/Pink companies.As we have made our platforms better, and our information has been distributed more widely, broker-dealers have dropped what was known as the FINRA OTC Bulletin Board for our better technology. Today there are almost 10,000 equities on our platform with over 60k individual broker-dealer priced quotes. This compares with the FINRA BB that has gone from over 40,000 broker-dealer priced quotes a couple of years ago to less than 3,000 today and is losing securities all the time.Last year we established a mid tier called OTCQB for companies that are reporting through a U.S. securities or banking regulator to fill the void created by FINRA’s operation of their BB. Our next step is introducing products for OTCQB companies to help the reputable management teams solve the investor trust problems that exist with BB companies. We have some good ideas that will show up in the form of services for the companies in the next year, and as we attack the problem we will hopefully discover some efficient solutions to make intelligent investors more informed. Change will be good for an important part of the capital markets. In the last two years, over 150 OTCQX, OTCQB or Pink securities have graduated to NYSE or NASDAQ. But we can do much better by improving our platform and getting more growing companies to use them.I would like to hear other participants thoughts and comments on what is needed to make the OTC markets better meet investors and entrepreneur’s needs. We will be listening.NOTE – I posted earlier, but it hasn’t shown up. Probably caught in the SPAM post blocker as I included a URL. Hopefully the moderator can free it.

          1. andyswan

            I certainly think you guys are on track. If you’d like to contact medirectly, I can be reached at andy [at] andyswan [dot] comI think there are big opportunities for the companies that I invest in/starton your market, but I’m far from clear on the capital/revenue requirements,costs and regulatory requirements.Thanks for participating in a Saturday discussion. I’ve been watchingPink/OTCBB etc for some time, and I really like where your market is headed.

    2. Dave W Baldwin

      And now the vultures are sitting around the table with US CEO after sitting in reserved seats at the State of Union.The real protest that needs to happen is for the public at large to demand the rights of the rich. If you think about it, we could truly mess up the Capital switchboards and so on. In a sense, show the world how we can use the social web to protest without having to be there in person.

    3. Mark Essel

      The pure capitalists are bootleggers.Time to add last man standing to my netflix queue tonight :).

    4. kidmercury

      ultimately the SEC will go where the money is, as that is what thieves always do. those interested in sustained reform will need to live in cognizance of this reality and plan accordingly.

    5. Dave Pinsen

      There are a few quality companies on the Pink Sheets and OTCBB today, but you’ve got to do some due diligence to find them. I’ve blogged about examples on occasion.

      1. andyswan

        Agree. Isn’t nintendo? It was when wii came out i think.The market itself is better than the companies on it. We could change that

        1. Dave Pinsen

          Sure, Nintendo is an example of a foreign large cap company that trades on the Pink Sheets (Nestle is another). But I was alluding to quality nano caps that trade there as well. Here is an example of one I’ve blogged about a few times.

          1. andyswan

            Thanks. I’m going to do some research on what the process is like to goPink Sheets.

          2. Dave Pinsen

            No problem, but I should note that the company I linked to above initially went public on the OTCBB. It had fewer than 500 shareholders, so it was able to voluntarily de-register and trade on the Pink Sheets.I know a couple of guys in CA (one’s an attorney, another runs an Edgar filing business) who have worked with boutique investment bankers to bring a few companies public on the OTCBB via reverse mergers. If you want, I can e-mail you their info.

          3. David Semeria

            I can’t believe Nestlé is pink sheet. Seriously?

          4. Dave Pinsen

            Sure. I mentioned it (and linked to its Pink Sheets listing) in a blog post a few months ago, “The Pink Sheets, then and now”.

          5. Cromwell Coulson

            Yes, Nestle’s ADR NSRGY is OTC Pink. Even better, adidas, Roche, Zurich Financial and other investor friendly national champion’s ADRs are OTCQX.

          6. Dave Pinsen

            OTCQX is mainly a marketing tool of Pink OTC Markets, as I mentioned at the link. Companies on the “Current Information” tier of the Pink Sheets (such as Nestle) still offer quarterly financials and audited annual reports.

          7. Cromwell Coulson

            Dave,OTCQX is actually very useful for companies that want to provide the highest level of information to their U.S. investors. It is clear that investors benefit from the superior information availability, trading transparency, easier access through their broker-dealers and financial advisers, financial standards, and quality control they receive when companies list on NYSE or NASDAQ. By solving many of those problems, although in a slightly different manner, through our OTCQX services, we are creating access to a wider pool of liquidity than is available to companies that are on our OTC Pink tier.Feel free to email me cromwell at otcmarkets dot com so I can walk you through the services that make OTCQX more than “mainly a marketing tool.” We have some case studies that I hope you will find educational.Also we recently dropped the Pink from our corporate name to become OTC Markets Group Inc. as we have grown to be more than just the Pink part of the unlisted markets.

      2. ShanaC

        Second. All of this would be a lot easier for average joe investor if we could make the due diligence process easier

        1. Dave Pinsen

          The due diligence is process is probably easier now than it ever was, thanks to the info available on the Internet, but it does require some homework.

          1. ShanaC

            More homework in some ways than before. Gathering all that information is aterriblely long process, then sorting through the logic of what works asinformation and what is a blind alley.

          2. Dave Pinsen

            That’s why some investors use screeners. A lot (though not all) nano cap stocks will show up on certain screeners. But there is no substitute for complementing quantitative screens with qualitative, common sense analysis, and that does take some time. As Spinoza said though, “All things excellent are as difficult as they are rare”.

  5. LukeH

    Totally with you on this. I’m part of a small company that will never be a candidate for public markets as they exist now. We don’t need VC money, and the control issues that come with, but having a minor league public market would be an attractive alternative.

  6. William Mougayar

    A very good discussion indeed. I was wondering what that breakfast pow wow tweet was about!It would be good to get some transparency on these secondary market transactions. It looks like a black box to most of us. Suddenly, out of the box, billionaires come out and a very happy bunch of early investors. You can’t blame the creativity of financial instrumentation, but this seems like a stop-gap or a a cope-out to real, healthy public markets. Maybe an over-reaction to regulation that doesn’t make sense.I was speaking to a successful start-up CEO 2 days ago who has just set-up a JV in China with tons of local government support, free office space, etc..Any company with a minimum of $5million in revenues and profitability for 3 years can become publicly listed in China. Pls let’s not enter China’s human rights record in this discussion- I’m mentioning China because it was used as an example in Patricof’s article (346 Chinese issued IPOs listed vs. 120 in the US in 2010)I agree there is a segment that’s not being addressed, somewhere between penny stocks and higher end public markets. Whatever happened to the Nasdaq Small Cap market?

    1. JLM

      Actually in the US, we used to have some very prosperous regional exchanges which carried with them a hidden benefit. If you were listed on the Boston Exchange as an example and one other you were exempt from all the blue sky provisions of State laws.But the other thing was that those regional exchanges provided a bit of geographical focus and would conduct their business in the local time zone thereby extending the trading day in NYC.I suspect we will see some regional or product specific exchanges resurrected because of the ease of deploying electronic intelligence and technology. They will be driven by different exchange rules which will provide increased integrity to the flow of information.

      1. William Mougayar

        That would be a good thing for diversification.

  7. sbmiller5

    Interesting take on wanting more individuals in VC – wouldn’t that make your LP meetings and updates a pain is the ass?

    1. fredwilson

      I don’t necessarily want them as LPsCoinvestors in deals is better

  8. Dave W Baldwin

    Very good post! The only logical way to deliver innovation, placing us where we should truly be at this moment is a restructuring.We are at the point where the amount of money needed to produce something truly useful is not on the order where the timid feel safe waiting for the government to do it. When you have the combination of CEO’s, Billionaires and Politicians sitting around, you end up with a smaller mind pool determining what we get.So, big VC funds should be able to do more (with the right merged entities) with the smaller wealth pooled to at least the level of a decent Angel level. There will be winners/losers, but if you approach it straight up, you’ll find many who will want to exchange information about legitimate vs. illegitimate.

  9. Emil

    A just idea, but what would stop the secondary market becoming primary?

    1. fredwilson


  10. paramendra

    Alan Patricof? “First time we are seeing him!” (Movie: Heat)I am with Alan on this one. Facebook needed to go IPO years ago.

  11. pj

    How about we just let the market decide?The SEC are not angels, they will act in a way that keeps them relevant (i.e.regulation to keep them busy).

  12. chris dixon

    why in the world should “regular people” be speculating on individual stocks? does anyone seriously believe regular people, on average, make money speculating on individual stocks? especially when on the other side of the trade are hedge funds with far more information.

    1. fredwilson

      Because its a free world and a free market. I bet there’s someone out therewith 50k or less to their name that could pick winners better than both ofus

      1. kidmercury

        lol, it is? since when?9/11 was an inside job,kid mercury

      2. chris dixon

        I agree with the principle of freedom, choice etc, but in practice Wall Street is a giant mechanism for transferring wealth from regular people to insiders.

        1. David Semeria

          That’s too extreme Chris – and you know it.What about mutual funds like Magellan in the eightes and nineties?Such funds provided excellent returns for the average punter.

          1. steveplace

            That’s selection bias for a fund operating during a secular bull market.

          2. David Semeria

            Peter Lynch outerperformed the market for 20 straight years – and anyone could come along for the ride.

          3. honam

            I believe the typical investor in Magellan during their golden years when Peter Lynch was the fund manager lost money even though the fund beat the market over a very long period. Lynch was one of those extremely rare investors who beat the market over a long time. Certainly, if you bought into Magellan and just left it there for 15+ years during the 80s and 90s you would’ve done very well. But most people jump in when the market and/or fund is doing well. Then they pull out when the market and/or fund does not do well. Buy high, sell low, follow the crowd – that what most people do. It’s a shame but that’s reality. So, you still want individuals to make bets on individual stocks? It is a free world. They can goto Vegas too and many do.

        2. andyswan

          I could apply the exact same logic to starting a company.”Most new companies fail. Only the venture guys and the service providers consistently make money. Therefore, only rich people should be allowed to start companies.”

        3. Dave Pinsen

          Why doesn’t that describe the economy as a whole, including venture investing?

      3. Scott Varland

        yes, i’m sure there are people who have less money who are better at picking, but i’d bet that this is actually a smaller population than people who have more money [than you] and pick worse.more layers in capital markets make sense, but not sure that we’d do a service by making them more accessible. we can’t seem to get the average babyboomer to save 50K in cash before they retire — let alone have margin for high risk speculation.

        1. kaisershahid

          you make it seem like a no-brainer that people can and should save.i wonder how it is then that people who pay off their homes can lose them due to higher property taxes.thanks for the advice, daddy scott.

      4. Matt A. Myers


      5. perfy

        Fred,Do you think the real obstacle is the SEC or is it the critical mass of investors that you would need to have true liquidity for companies that are smaller than 250 Million? My only thoughts are how illiquid things like penny stocks are now. Not that it’s an exact analogy, but I think after the “financial meltdown” and so many americans having lost what they thought was safe fortunes in their home values, how many are going to be likely to want to invest in smaller businesses?While you are right that there are most likely some, liquidity takes volume, and I don’t know that the world has a stomach for this right now. And it may be long time if ever that they do.

    2. kidmercury

      siding with wilson in this beef. the average person doesn’t make money, but some can. most are insufficiently educated and watch too much CNBC, that is the problem.

      1. howardlindzon

        If you watch CNBC you should and likely will lose money and I embrace it’s existence and hope they expand. NOT watching is the small investors edge.People dont understand that no inside information was needed to catch Netflix, LULU, Apple, Exxon etc…It is thrilling for me to hear comments that indivisuals cant do it. I will worrry when individuals and sophisticated investors like Chris, think we CAN do it.

        1. David Semeria

          Well said Howard.A stock doesn’t know who owns it.

          1. ShanaC

            that is not a good thinking. If I am holding a stock in the longterm, I want to be able to push forward good for the company that I own.

          2. David Semeria

            It is good thinking Shana.

          3. ShanaC

            To have no vested interest in what I buy is not a good idea. It is probably what allows mass long tail speculation- i just care about making money of the security, not if the security actually makes the company better

        2. fredwilson

          all my kids bought $aapl with their bar/bat mitzvah money. it was obvious. and they all made money. lots of money

    3. Aaron Klein

      Chris, you’re one of the smartest guys I read but even if you’re right and no one really should invest in individual stocks, what gives the haves the right to lock the have-nots out of an entire market?Sounds greedy and anti-competitive to me.

      1. chris dixon

        I agree in principle, I just don’t think in practice that’s how the world works. Wall Street insiders would love nothing more than to increase the number of regular people trading stocks so they can take their money.

        1. Aaron Klein

          Of course you’re right – the status quo on Wall Street is completely misaligned with the interests of individual investors. This is something I’m very passionate about fixing.One piece of it is giving people better algorithmic tools to make risk/reward decisions aligned with their own financial goals and tolerance for risk.I’m launching into a new startup in about a week to work on that problem.

        2. Dale Allyn

          Chris, I agree with your sentiments regarding Wall Street. I have done rather well with individual stocks, buying Apple at around $50 and all the way down to $14; did great with Cardinal Health a few cycles of the yo-yo; P&G; Albertson’s, and many more. The worst I did was break even on any single issue over several years with the exception of JDSU (got creamed on it by getting in way too late).I now have no money in the market and feel very good about it. I hate that trading (for we mere mortals) is based on crap information while the “real players” are involved in a completely different game. By the time I invest, the conditions are already set by those who have access to real info and have the mass to move the markets to suit their goals.Fortunately, I do have a place to put monies that I would otherwise invest in something such as the stock market, due to a unique element of my business. And with all the foregoing, I’ll still probably consider re-entering the market for IRA stuff, but not in a way like I did before (no time to maintain it). Still, I feel like a blind fool in the market as I know that us “regular people” aren’t privy to the facts.Edit for clarification: I only recently divested from the market (the last remaining positions), selling my Apple shares and a few others because I’m involved in a startup and wanted the money for other use. While the returns have been good, I still feel better not participating for now, because of my sentiments regarding the players and the environment.

        3. David Semeria

          A huge oversimplification.Goldies can use their super computers to front-run my $20k buy in GOOG. Fine, they chiseled me for $100 – and if they do that 10,000 times a day they’ll make a great risk free return.But it doesn’t matter.If GOOG is up 70% six months later, I’m still quids in.The hedgies and other insiders have moved into micro trading to offset market risk – but the long end of the curve is where the true equity returns have always been.In other words: the longer you invest for, the more level the playing field.

        4. JLM

          Wall Street is and has always has been rigged.Just when the world begins to catch up, they invent a security to re-establish their advantage.When they know they are peddling shit, they unabashedly — in the same damn building — take the other side of the trade their firm invented and solicited customers to buy.They are organizationally corrupt — witness the “expert” information gatherer scandal.They are literally unable to maintain a confidence — witness the unending stream of insider trading scandals.They are unable to serve a single client foregoing others — witness their being on both sides of some of the sleaziest derivatives trades sponsored by their own firm on one floor and shorted by their firm on another while their own partners/corp money is in both deals at different times.Public beheading and hanging is what is needed to fairly regulate Wall Street.

          1. David Semeria

            Do some basic research. Really understand why you are buying this one stock as opposed to all the others you could buy.Hold it for enough time for your ideas around the stock to form.When it is no longer trading at a price at which would you buy it, sell it.There is nothing the most corrupt, immoral, well heeled, tech-savvy middleman can do to stop you making money.That’s the market: do your homework, pay your money, take your chance, present yourself at the pay window.

          2. JLM

            I agree with you completely and I think the easiest bet in the world to make today is on countries and regions through ETFs and focused MFs.My comment was focused on Wall Street — trading, stock brokerage, investment banking, research, hedging, derivatives, money management, corporate finance, securities underwriting — all rigged businesses.

          3. Dave Pinsen

            Also, consider looking at stocks that are so small Wall Street tends to ignore them. Greater inefficiencies in pricing there means greater opportunities for individual investors to buy good companies at low prices.

    4. howardlindzon

      Chris – come onnnnnnThe stock markets is AMERICA. It’s a noble and American right to speculate and learn to trade. I am watching so many 20 year olds in the Valley learn to trade while they have jobs not because it’s easy, but because they are getting fantastic mentoring, no different than the entrepreneurs using mentoring.Hedge Funds and banks and financial marketing firms have done more damage to this great American freedom than individuals so you are completely wrong. Information is not all that matters. Money Management is all that matters.

    5. Dave W Baldwin

      If I remember right, you gave a presentation to Middle Schoolers and were surprised… I was able to have intelligent Q&A with High Schoolers about the coming tech around us as we truly move closer to AGI (proto conscionseness) per my showing things coming in the future (this decade).There will be some who bet foolish if we expand to the ‘regulars’ but the timid will not get involved. Those that have money sitting yet would like a chance to get a better return will do the research.In the end, the taxpayer who is at the mercy of our government to ‘solve’ everything, can finally have a chance to vote with their investment.

    6. Jeff

      Chris – next time we are on a panel together, I am giving you my copy of “One Up On Wall Street” by Peter Lynch

      1. Dave Pinsen

        Speaking of Peter Lynch, I remember him arguing against indexing, because one of the market’s roles was to use the wisdom of crowds to allocate and price capital, and indexing precluded that. I think he had a point.

        1. David Semeria

          Indexers get a free ride when it comes to price discovery.Imagine a world where there were only indexers – ie nobody did any fundamental research – how would prices be set?

    7. andyswan

      Why is that your decision to make?

      1. chris dixon

        I’m not making any decisions about this. I just think this talk about fewer IPOs being some kind of tragedy is way overblown.

        1. andyswan

          K sorry I read your post as in some way advocating that someone other than the individual (and the recipient of the investment) should be deciding whether the individual should be “allowed” to invest.

        2. JLM

          I agree more with you than you do with yourself.

    8. Dave Pinsen

      Is the economy better off with hedge funds, quants, and the index managers at companies like Russell and Standard & Poors making most of the market’s decisions instead?

    9. ShanaC

      Hmm, well, do you think regular people should speculate on exchange traded funds of private companies?

    10. PhilipSugar

      Sorry, but that attitude is why the markets have gotten into the mess where they are now.”You can’t possibly understand” just let the pro’s bleed money off of you slowly and surely.

  13. Stephen Purpura

    It’s extremely unlikely the SEC will take action on this without proposals coming from PhDs and business leaders.The trend in trading is to move to private markets and it is not surprising that the MBAs that work with financing successful tech companies are following this trend.

  14. William Pietri

    Thanks for posting this, Fred. I agree completely, but have one question about a short-term fix.Is it possible today to have a publicly traded private equity company? If somebody sharp like you were investing with public money in the secondary market for later tech startups, that’d be the kind of thing I’d recommend heavily to friends and family. (I’d invest myself, but as an entrepreneur I’m already pretty exposed to the tech sector.)

    1. mcprs


    2. fredwilson

      i don’t want to go near the public markets with our firm

  15. Harry DeMott

    So I was at the apple store on 14th and 9th the other day and two “geniuses” were talking to each other.Genius 1: So how many shares of Pandora did you get?Genius 2: Bought 300Genius 1: Share post I assume?Genius 2: Yeah.So there are people participating – Techcrunch just doesn’t report on them.The SEC has a general philosophy that the public is a bunch of idiots and they need to be protected from themselves and those smarter – thus tougher and tougher regulations – more and more restrictions. I’m not sure this is going to change anytime soon.I actually believe the best way to deal with any of this would be to set up an exchange in a neutral site (Switzerland or something like this) and literally disrupt the exchange model. I’m sure any number of countries would love to be able to court this business. Electronic exchange. Complete transparency. Reporting requirements but not the crazy restrictions on companies. Rather than try to co-opt the U.S. government – just restart the system elsewhere.Anyone who has been involved with a company going public in the last decade has seen the increasing madness. Really, there’s absolutely no reason to go public unless you can arbitrage the cost of growth capital between public and private sources – or your investors are demanding a certain level of liquidity that Share post and others cannot provide – and you don’t want to sell the company. Otherwise, why put up with the hassle? Why put up with talking to mutual and hedge funds?

    1. kidmercury

      now we’re talking…..harry demott droppin’ it like it’s hot! time to hit the ignore button on government and roll our own system.

      1. Dave W Baldwin


    2. Dave W Baldwin

      Per Kidmercury, we do need to ignore the government and do something independent.The higher up’s do not base their rules on the belief in needing to protect, for if you can experience the power and enjoy all that comes with being on the inside of everything, you will limit the ‘fools’ in flyover country.Fred is right regarding the expansion of the pool to allow the rise of those who do know better, but are kept in the dark.Dixon is wrong due to the ‘fools’ are that way because they can’t play, so why would they know any better. There will be winners/losers but the weak and timid will generally stay out of the game due to their make up. Otherwise (if I remember right), he should remember the reaction to his presentation among the Middle School age group.

    3. howardlindzon

      yes – just leave shit alone and prosecute the freaking wrongdoers already in a ‘risk’ prison. the guuily ones, in the thousands are plain to the naked eye and we are being lazy about this.

    4. Donna Brewington White

      “The SEC has a general philosophy that the public is a bunch of idiots and they need to be protected from themselves and those smarter…”Any thoughts on what they base this philosophy on?super-like this comment, btw

    5. fredwilson

      liquidity at scale

  16. howardlindzon

    It’s great that the two of you both great friends and respected mentors broker some bread. There is no simple answer but as Second Market and Sharespost and even Kickstarter are showing that people will find a way to make and find markets.Maybe it is this bull cycle that will break down these walls and the private market will be a better screen that the actual OTC and BB markets that Andy mentions.The social graph in my mind will solve this problem one day and Angel List if done right should be the next major bank if not Tech Stars.

    1. JLM

      A time will come shortly when some big company is going to wake up and realize that all the to-ing and fro-ing of options trading, shorting and hedging has overwhelmed the simple auction process that was intended to fairly marry buyers and sellers in an “outcry” system in order to make the ownership of its stock and the ability to go to that marketplace and make secondary offerings attractive.They will simply create their own marketplace. And computers and the Internet will provide the transparency and fairness which is the only truly useful function of the securities exchanges. All the sharpies will be left at the doorstep.In much the same way that Charles Schwab decoupled the cost of research and advice from the traditional stock brokerage business and thereby repriced stock trading as a “transaction” rather than a “service” — car parks v valet parking — someone will realize that all those exchange fees and negative impacts (options, short sellling, hedging vehicles using their stock) are not doing anything for the company or a guy who wants to own 1000 shares for 30 years.In today’s environment, there is no administrative reason for a fair sized company to belong to an exchange as they can create their own auction with less drag, less unintended friction and more elegant simplicity.The Hambricht reverse Dutch auction is an example of the Schwabing of a ponderous and unnecessary hurdle to raising money. Stock markets will happen soon.

  17. Jeff

    Great Post Fred, I think there is another problem. In the current environment the primary exit for early investors and founders is a Merger. This is horrible for innovation, and horrible for the long term health of the USA. big companies kill innovation. We must never forget del.icio us !

    1. fredwilson

      there are few lessons that have been as burned in as that one

  18. Davealevine

    There is a reason for institutional status. Most people don’t know the difference between a stock price and valuation. Thus, allowing more individuals to speculate on ridiculously valued companies is dangerous. I agree we should democratize access, but frankly you should do that with your fund (and other “institutional” managers should do the same). That way smart managers could provide good advice and value to everyday people.

    1. fredwilson

      on the average you are rightbut not everyone is average

      1. Davealevine

        Fair that some individuals are better than average… But a more direct way to level the playing field is to allow access to managers like USV and the like. Seems much more straightforward and democratic (and feasible).

      2. Davealevine

        Fair that some individuals are better than average… But a more direct way to level the playing field is to allow access to managers like USV and the like. Seems much more straightforward and democratic (and feasible).

        1. fredwilson

          nobody has access to USV anymore because we have all the money we would everneed and we are can’t fix that problem by letting individuals inand 90 percent of our investors are individuals

  19. ivanhoff

    The growing private markets popularity is a clear vote against the absurdity of SOX. It is expensive to be public and it makes sense to do so only at extreme valuations.Smart people will always find a way to participate in the monetization of a great social or business trend. You don’t even have to be an accredited investor. You can either:- start to work for the company you want to own;- get together with some friends, start a LLC that can invest in the private company you want to own;- invest in public companies that are related in some way to the company you want to own.There is always a way. It is true that governments can either stimulate or hinder the creation of wealth, but they can’t stop it.

    1. howardlindzon

      good stuuff ivan

    2. Stevie Morrow

      I think your point on SOX is key and it creates a lot of barriers to capital.Companies (especially those with a global market) should remember that the capital markets are global too and should consider good international secondary markets or small cap markets like AIM (UK), PLUS Markets (UK) or TSX-V (Canada) as a cheaper and easier way of reaching a wide investor market.

  20. Tom Labus

    In the early 50’s, Merrill Lynch brought stocks to middle america by offering research on companies. Before this there was no way to understand a public company unless you were a big customer of a large bank.Maybe research and more info will help create a way for the average investor to take part in the best part of investing. Right now it’s a closed and private market.

    1. JLM

      The very best research is not publicly distributed. Would you have expected it to be so?

      1. Tom Labus

        That means there’s an opportunity to fill that void.

        1. JLM

          The companies are so small and thinly traded that there is no mass market for the research so the very best generate and use it themselves.You would starve peddling such research.Believe me I have spent years standing in the anterooms of nanocap and microcap investors and visiting with them about their own organic research.

          1. Dave Pinsen

            There are some automated/algorithmic research tools available (e.g., Audit Integrity or Short Screen), but the economics is a challenge when it comes to offering in depth, qualitative research on nano cap stocks. I have an idea about how to change that though.

          2. JLM

            The real problem is how can one justify preparing, selling or buying the research when the companies themselves are so small.Screening tools are useful but they are not research.I got very interested in this subject years ago and focused on only Austin TX and found Dell, Whole Foods, National Instruments, Silicon Labs.I knew all of the CEOs, some through YPO.I did OK on their stocks but I could not find any more beyond that short list.

      2. ShanaC

        So where is this research?

      3. fredwilson

        i suspect Buffet and Munger do their own research

  21. JLM

    Having run fairly large private companies using private securities forms (REITs) and having been involved in taking companies public and currently running a nano-cap public company, I could write literally for days on this subject as I have both studied it and lived it.We have essentially lost our way as it relates to securities exchanges which once upon a time existed to serve companies and shareholders as auction houses. Now they are casinos.The Internet and virtually unlimited access to trading and information are slowly but surely re-injecting a bit of democracy back into the exchanges by virtue of computer based order execution.If you want to have reliable, fairly priced, transparent and readily tradable securities and actually freely trade them publicly then you are going to have to have regulation, standardization, underwriting, due diligence, research and engagement with the management of companies.The preceding is not exactly what is going on today with the casino nature of exchanges and the conduct and focus of the SEC. They are doing what they think best in a casino environment and I would not impugn their intentions but they are always a couple steps behind the boys with the mousse in their hair.Way stations between being private and public are not useful as they are some of each but do not provide the protections of either. To use the sentiment of one of Fred’s recent posts, they are a “bridge” which always ends short of the goal.They are at the end of the day, just a liquidity event for impatient folks who are not really focused on owning a chunk of a company but of getting to the pay window as quickly as possible.Not an indictable offense but simply not useful in the creation of long term sound securities.That’s all for now because I literally could go on for days. Sorry.

    1. Donna Brewington White

      Was hoping you’d chime in. Thanks, JLM.

    2. David Semeria

      It’s not the market that is broken, JLM, it’s the instruments.As long people realize that there can *never* be a free lunch with any security, they’ll be fine.If I try to sell you a car and tell you the sale price covers all maintenance costs for the lifetime of the vehicle, you can clearly guess the expected maintenance costs are factored into the price.For some odd reason, people don’t understand exactly the same principle applies to securities.And so it follows that the less transparent the instrument, the higher the chance you’re going to get shafted by the mousse boys.People who stick to plain and simple stocks will be fine.

      1. JLM

        We are in complete agreement. Once securities “advanced” beyond common stock in a real company, the mischief became an ingredient.All of the money in the world could be accommodated if we just had common equity.

  22. Dave Pinsen

    David Weild IV, former Vice Chairman of NASDAQ, wrote about some of the problems he sees in the structure of U.S. capital markets in a letter to the editor of the FT last year (free registration required). Here’s an excerpt of it:Once upon a time, US market structure provided economic incentives to employ people in the business of providing high quality research, committing capital to create liquidity, and putting salesmen on the phone with investors to discuss individual stocks. Fundamental investors dominated the market and valued stocks. By contrast, today’s low commission, penny spread, fragmented and hidden markets destroyed economic incentives to support stock selection. Wall Street research budgets were slashed, analysts fled to hedge funds, stockbrokers became asset allocators, and capital was pulled from trading desks draining liquidity from small cap stocks.Today, market structure has induced an era dominated by derivative interests and computerised trading – where stock index funds, exchange-traded funds and stock index futures replace the need to value individual stocks, while computers arbitrage these “derivative” securities against their underlying stocks; where computers don’t care whether the stock is Intel or Exxon or General Electric; where computers put orders a penny in front of your order to leverage your intent to their advantage.[…]Increasingly, it is clear, the stock market caters to the interests of a few – large trading concerns and large investment banks – while undermining the interests of small public companies, small broker dealers, fundamental investors, the US economy and jobs. Sound familiar?

    1. Cromwell Coulson

      Small stock liquidity has suffered because of a viewpoint of U.S. regulators that broker-dealers supplying liquidity to their customers orders are somehow doing something questionable. Thus the rule making to limit these activities has trended towards removing the opportunities and incentive for broker-dealers to sell liquidity to their customers as a principal.The effect has been less liquidity and more volatility for stocks. Regulation is moving principal trading to firms with no customers that are more focused on getting ahead of investors rather than supplying liquidity to investors. In large cap stocks these firms will trade a lot more when there is liquidity to get ahead of. The flash crash was a warning sign that HFT liquidity is a fair weather friend that can easily disappear in times of crisis.I would hope that this trend will reverse as it can be especially harmful to smaller companies where there is not a strong book of investor limit orders. OTC traded companies do not trade hundreds of times a second, so market structures should be developed that are designed around attracting more liquidity providers by providing them with opportunities to earn a fair return on their capital.

      1. Dave Pinsen

        Cromwell,I’m responding to you here, because Disqus doesn’t allow me to respond to your other comment. I didn’t realize you worked for OTC Markets before (it wouldn’t hurt to have identified yourself that way initially). Had I known, I probably wouldn’t have brought up my point about OTCQX here, out of respect for your business, but as recently as last October, when I last checked your OTCQX listing requirements, they didn’t appear that selective. Perhaps you have toughened them since then.I do think you can offer a valuable service in helping to separate the wheat from the chaff, and I do think you deserve to get compensated for doing so, but there is an inherent conflict in that the more companies you classify as potential wheat, the more potential customers you have for the QX tier.

        1. Cromwell Coulson

          Dave,We have the viewpoint that less than 20% of the OTC markets can qualify for the financial standards of OTCQX, and many of those that did would not make it past the qualitative standards. There are of course many companies traded OTC that are disengaged from their outside investors and sometimes even hostile. OTCQX is not for them. By creating OTCQX we are making it easier for investors to identify the disengaged or dark companies traded OTC and price those securities with a higher level of risk.SOX and other regulatory changes have been targeted at solving problems of large companies. It should be noted that the SEC staff has a lot of experience and understanding of situations where outside directors and compliance committees did not perform as expected and passive investors were harmed. So they have good reasons for making the corporate governance process of listed companies more democratic and hopefully better designed to protect passive investors who complain loudly when the system does not work. Thus the regulatory trend in corporate governance in exchange listed companies has been to give more power and responsibility to independent directors and compliance committees.These changes have inversely reduced the power of founders and active outside investors when companies list on an exchange. As a result, exchange listings are delayed by founders and active investors that are still rapidly growing their businesses and want to retain the power needed to run a dynamic and nimble organization.With that situation in mind, we did not try to replicate the NYSE or NASDAQ listing process because clearly that is not working for a significant number of smaller companies. Instead, the OTCQX qualification process has been designed to efficiently separate the wheat from the chaff in a manner that is tailored for smaller emerging growth companies that are often controlled by founders or management and have active outside investors who are adding considerable value.The cornerstone of the process is having an outside professional review the companies disclosure and management team. This has been taken from the AIM Nomad and modified to fit the U.S. markets and litigation environment. To be a sponsoring Designated Adviser for Disclosure (DAD), a firm must be a FINRA member investment bank that has a proven record of raining capital as well as meets financial standards, or a securities attorney. We believe making a knowledgeable third party with reputation risk central to the process reduces the inherent conflict you pointed out and will have more credibility with investors. On a basic level we are trying to make sure there is adequate information in the market and management is reasonably trustworthy at the time of qualification.The DADs have the ability to engage in limited due diligence which should be more efficient in separating the wheat from the chaff. We do not expect it will be a perfect process from day one, but with time and experience, it will improve. Take a look at the U.S. companies that are on OTCQX and you should be presently surprised with the type of management teams that DADs have been sponsoring.If you visit OTCQX dot COM and look at the DADs we have brought on board, I think you will see that we have the beginnings of a great community of professionals that can really help improve the capital formation process for small companies as they enter public markets and provide liquidity to their investors.Companies have a choice of being SEC registered, or meeting our alternative reporting standard if they have less than 500 holders of record. Our alternative reporting standards requires MD&A and an audit by a PCAOB accountant, but not 404. It should also be noted that it is very hard for a company that has securities held by investors at their broker-dealer to go over 500 holders of record because it is the custodians that are counted, not the beneficial holders.One problem with 404 is that many management teams have not perceived that they have received enough value for what a 404 audit has cost. It could be said that public companies pay their accountants to do enough work so the accountant is protected, their lawyers so management is protected through fair disclosure and their investment bankers to make sure investors understand their business and raise capital.We hope that the OTCQX qualification process will tilt the process so company managements see the value of good disclosure, having investors understand their story and better access to capital through a longer term relationship with their investment bankers.If founders and management teams want to build a company that grows and endures independently, public trading has substantial benefits. A publicly traded security gives confidence to employees and other investors as value becomes more than just theoretical. It also allows investors with different time frames to enter and exit at a price they feel is more fairly set, so management can continue to execute their vision, while lowering their cost of long term capital.OTCQX is designed to provide an entry to public trading for the securities of entrepreneur, family, or management controlled American companies, as well as national champions and emerging global companies. It should prove a good training ground for smaller companies to grow into exchange listings, and thus be a compliment to NYSE and NASDAQ. As I pointed out in a previous post, over 150 OTC traded companies have graduated to an exchange listing in the past two years, but there could be many more.Cromwell CoulsonCEOOTC Markets Group

          1. Dave Pinsen

            Cromwell,I understand that it doesn’t make sense for you to replicate the listing requirements of the NYSE or the Nasdaq. There is a spectrum between where you are and where they are though. But as you said, this is a work in progress.The addition of DADs is a good idea. Another idea might be to incorporate objective/quantitative assessments, such as those offered by Risk Metrics or Audit Integrity, and require certain minimum scores for admittance to OTCQX.I updated my post about the Pink Sheets / OTC Markets with a link to our discussion here.

  23. Ariel

    OpenTable went public almost two years ago at $24/share and is now trading at $90.Seems to me that their is still an opportunity to participate – sure it may not be Facebook or Twitter but it’s an excellent company generating strong financial returns.

  24. Donna Brewington White

    Really love this post, Fred!Reading the comments and thinking what a great panel discussion this would be…well, I guess in some ways it is…but to actually see and hear it…on a topic like this…that would be amazing,

  25. cutback

    I agree, especially considering that it’s ordinary people that have made these companies great. Where would facebook, twitter, zynga or groupon be without the man (or woman) in the street signing up to these services? Nowhere. So it seems odd that most ordinary folks are shut out of the same companies they help make great.

  26. ShanaC

    Honestly, after reading all the comments:We’re not as all as smart as we think about investing. We’re missing lots of research. Though I disagree with Chris. If this country can have elections based off gold and silver standards, regular people have enough alignment with industry that given enough information access, they can make smart decisions based of their needs.It also seems that the interent has made research both better (I can go searching for hours) and worse(I can go searching for hours) How do we make quality exchanges of information so that regular people can invest for whatever there whim is is a big problem.

    1. Dave Pinsen

      Freedom includes the right to make bad decisions as well as good ones.

  27. Dave Pinsen

    Fred,Re this:I agree with Alan that we need a way to allow the individual investor to participate in the value creation that large tech companies can provide.Another way for average Americans to participate in that value creation would be working at those tech companies. But as Andy Grove noted last year (“How America Can Create Jobs”), Silicon Valley creates 10 jobs in China for every 1 job in the U.S. Grove’s essay is worth reading in full, but here are a few key excerpts:A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up. […]How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. It’s not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.”I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.[…]The story comes to mind of an engineer who was to be executed by guillotine. The guillotine was stuck, and custom required that if the blade didn’t drop, the condemned man was set free. Before this could happen, the engineer pointed with excitement to a rusty pulley, and told the executioner to apply some oil there. Off went his head. We got to our current state as a consequence of many of us taking actions focused on our own companies’ next milestones. An example: Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck. We should put away our oil cans. VCs should have a partner in charge of every startup’s “U.S. strategy.”

    1. fredwilson

      i read andy’s piecehe’s right to a point. but i bet chinese companies don’t share the equity with their employees at quite the same levels as US tech companies do

      1. Dave Pinsen

        You may be right, but that’s an issue for Chinese workers. Lack of jobs here, and our declining industrial capability, is an issue for us. What do you think of Grove’s proposed solution?:The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

      2. Calvin Chin

        You’re right. Most Chinese companies don’t share equity nearly as much as US tech companies do – even most Chinese tech companies share less than US tech cos.

  28. Alex Martsenyuk

    the private markets and letting everyone get a share of facebooks and groupons is great as long as these companies keep growing and keep creating more value. What the commission has also to account for is the times of trouble (e.g. the bubble burst 10 years ago). In these markets typical investors are scrambling for a way out, but lack of liquidity pretty much drives the prices to the floor. Such sell-offs are not good for investors and can kill companies too.I always thought that the limitation to only accredited (ok, rich) investors to participate was in large part the protection for bad times, when these types of investors are somewhat less likely to withdraw (I agree it is a debatable assumption, but it has its merit).That being said I think one way to encourage the growth of private markets is through special vehicles/platforms with preset liquidity windows (can be yearly for example). This is largely how secondmarket is operating now and I think with some tweaking it can control the problem of sell-offs I’ve pointed at above.

  29. James Fazio

    I don’t agree with Patricof’s “new nasdaq.” I think it is a poor financing decision for the companies unless they have no other options. I think there are some costs that haven’t been discussed that really matter when it comes to firm size and IPOs not being a great option.First: The IBs have to make their spreadSecond: The legal and other fees associated with the IPOThird: UnderpricingForth: Cost of SOXThe smaller the firm, the smaller the issue size. Generally, the larger the offering, the better negotiating power the firm has with the IBs on what their spread will be. May only be a percent or two, but it is still a huge factor. Additionally, the legal fees are about the same no matter how large the offering, so the smaller the offering, the lower the percentage of capital actually received by the firm. And finally, the smaller the firm, the greater they tend to get underpriced at offering (leaving money on the table unless there is a secondary offering).I think you have to get above 80mil in issue size to get the percent of procedes under 20% (includes the underpricing) for these expenses. Is that too expensive a cost of capital? So the question is if IPOs are a good financing option for smaller firms?I don’t have the numbers but I would bet if you look at longer term returns vs. firms size, the smaller the firm, the worse the return, and it is probably negative (would love to see this excluding the dot com bubble).

  30. Guest

    I think you’re missing something here. Consider what companies can do in terms of being private and acquiring a public company. For example, a few years ago NVE Corp. did this and look where they are today, at $60/shr:…Comments?

  31. Guest

    Another start-up I know of, Mimvi, a mobile app search engine is leveraging the OTC markets too:… they could move to Nasdaq taking this route.

  32. uno

    Rather than a new NASDAQ what is needed is a “free market”.People who think America has a free market especially in stocks are in my opinion simply ignorant or they directly benefit from the current casino pyramid, called the US market, and so deny there is a need for change.Many in America no longer understand what a “free market” is. It is actually a “fair market” highly regulated. Many believe “no regulation” = free market.De-Regulation has destroyed American free and fair markets to where they are now speculative casinos where the house (a small group of people) always win -> those that run the casino, work for the casino, ect…To have a strong fair and free market, you need strong and fair regulations and a strong and fair regulatory body. We no long have any of those.That is the reason the IPO market is currently so screwed up in America.

  33. Ted Dintersmith

    Great discussion. The big issue about this for our country is the impact on our growth private companies and job creation. I’ve been in venture capital for twenty-five years. For most of it, the very best teams we backed had an IPO as their goal. Now, most founding teams view an IPO as a good outcome for passive investors, but hellish for the management team. Instead, they often opt to sell their company. And once a company is acquired, its innovative drive is erased by the acquirer. Imagine how the US would look today if Fairchild had acquired Intel, IBM had acquired Microsoft, Excite had acquired Google, Ashton-Tate had acquired Oracle, DEC had acquired Cisco, etc. If our country is serious about innovation and job creation, we need to make it more attractive for growing young companies to go public and expand.

    1. fredwilson

      So true TedWhen people talk about selling the best companies in our portfolio I give avery similar version of your comment

  34. Eric Risley

    Fred:I have personally been part of a conversation with the key constituents with a stake here in the room. Leaders in the VC, legal, investment banking, institutional investor, research, issuer, stock exchange; all but representatives from the SEC and congress. The good news is that ALL acknowledge the problem and speak as though they want to solve the problem. However, with all respect for those involved, I sense more words than action.As noted in the Business Insider report, Bill Hambrecht and others have been working hard to achieve some regulatory relief via amending Regulation A. That is a good step but it isn’t enough by itself. This is a problem that requires the coordinated efforts of all the stakeholders above to solve. We need an active working group putting themselves out there and committing to progress and action. Also, I’d offer the thought that while a “comprehensive solution” would be great, perhaps we should be focused on creating a few individual small cap IPO success stories to build momentum around.I’ll be using this discussion as a personal catalyst to increase my efforts to be part of the solution.Eric RisleyArchitect Partners LLC

    1. fredwilson

      Let me know if I can help

  35. Renee

    What do you think “more access for individuals into the VC market” will look like? One of the things that I’ve been looking into is crowdsourced VC funding, something like Kickstarter but for companies that aren’t selling a tangible product. Profounder is the closest thing to a solution that I’ve seen, but they are still limiting investment to family and friends of founders to remain in compliance with SEC rules.Regarding the low-cap public market: I’ve seen comments below mentioning OTCBB. OTCBB doesn’t exactly have a sterling reputation; there’s a lot of opportunity for price manipulation and a strong adverse selection component – when firms get dropped from exchanges, they wind up there. Even assuming that you are able to start a low-cap public market that doesn’t have the same negative associations, I’m not sure I understand the incentive for companies to take themselves public on an OTCBB-like structure. The good ones would still be able to get venture funding, retain control of their equity, and keep their financials private until they decide to IPO on a large exchange, right?

  36. Bill Phelan

    Back to Fred’s discussion with Alan. The individual investor has long ago voted with their feet by placing their dollars in mutual funds and exchange traded funds. The mutual fund is the proxy for individual investors to put money to work in IPOs. While the entire thread here is interesting, I am not seeing how it addresses the key question you are raising. As for putting dollars to work directly in an IPO, as a former investment banker (Cowen & Co.) in tech and healthcare, let’s face it. The goal of an IPO is to extract the highest valuation possible from the IPO for existing investors. Bankers win and loose deals based upon their pitch books and proposed valuations. Bankers also pitch their firms based upon their research coverage and their institutional / retail sales mix. If VCs want retail investors, they can pick retail firms. When VCs are all looking for Goldman Sachs on their covers, they are stating that they do not want retail investors in their deals.Of course, their are no shortage of mutual funds interested in helping VCs overprice their companies. Just like with small retail investors, the mutual funds are just products of funds flows. For the last few months, inflows to the mutual funds are way up, so MF money managers are hot to put $$ to work in IPOs.The price for “overpricing” is the privilage of “flipping” and it is harder for this to occur when Goldman places the securities with high net worth investors where they control the trades and the securities are illiquid. Seems to me that VCs are currently in a place of Nirvana on this very issue. I believe the implicit assumption that high net worth investors are getting a special deal is flawed….VCs and founders buy into the Goldman machine for the unfair advantage they are getting from efficient pricing.Absent current company, I do not know a VC or private equity investor who is worried about getting stock into the hands of individual investors, unless it means they can get a lower cost of capital. They calculate their returns on their LP distribution dates anyway.So I guess I am still struggling to understand the point.Thanks for reading this.

  37. Florian

    It is the choice of companies to allow or not certain investors… It would not be right or fair neither to force them to welcome any investors…And everyone can participate in the value creation by other means than investment…Employees get a job,Users get a service,Others can create a business on top of another…

  38. Pixelm1

    The new private markets actually undermine the scheme – the point is that if you have 500 stockholders you need to make your financial and other information available. The private markets allow people to invest without information – and that’s dangerous. The theory of allowing private investors to invest is that they have the ability to do their own diligence, something not present in this scheme. To me the interesting question is why companies like Facebook and Twitter, if they have this need to provide employee liquidity, don’t provide a public market by registering with the SEC. We need to identify the (legitimate) disincentives to being “public” and eliminate them. As Patricof says – let the public have the opportunity to participate in value creation instead of creating the perception that IPOs are only for the time when insiders want to bail out.


    I understand that VC investment is contingent upon having a mechanism to exit. When government imposes regulations that block exits, a new one will emerge. And in this case it is the private market, which the WSJ reports after this post is now being looked at more closely by the SEC.I think Patricof’s article is self-serving. It is a rationale for why he had no choice but to be one of a few profiting from Huffington Post’s sale to AOL (in which he was the lead investor). He should have just come out and said that if an IPO were a viable option for the all the upaid bloggers and commentators to profit from their time, referrals, and content to read, he would have chosen that path over selling to AOL.It seems to me that what the world needs now is some fresh, curious thinking about a business model for new business development which capitalizes on the democratic potential of the internet, consistent with Henry Ford’s economic theory of a “Virtuous Circle.”The private market may be a short term fix and Patricof may have had no choice in order to meet his fiduciary responsibility to his investors. But if the VC investors want to lead the way to sustainable economic development, how about thinking bigger and more long term – namely getting back to the intent of public markets as a part of the Virtuous Circle Economic theory.Katherine Warman Kern@comradity

    1. fredwilson

      Alan was not the lead investor in huffpo and made very little on thatinvestment. You are ascribing motives on him that are not accurate

      1. COMRADITY

        See above response.

    2. fredwilson

      Alan was not the lead investor in huffpo and made very little on thatinvestment. You are ascribing motives on him that are not accurate

      1. COMRADITY

        “‘What goes around comes around, in a good way,’ Patricof, whose 40-year career in the venture-capital industry includes early investments in Apple Inc., said in a telephone interview yesterday. ‘It’s been a successful investment for everyone.'”The deal makes New York-based Huffington Post, a political blog known as much for its outspoken leader as its content, the best investment so far for Greycroft Partners LLC.”My source is:…If Patricof is saying one thing to the press and something else to you, then the model really is broken and it is time for a bold straightforward approach which doesn’t have to be spun or rationalized in the press.

        1. fredwilson

          successful can be interpreted anyway you want

          1. COMRADITY

            Some successes have only one interpretation.In response to your question below. Nothing disrespectful is meant by it at all. Some success stories have multiple interpretations, depending on the audience or relative to expectations. Others are straightforward relative to anyone’s expectations. “all boats rise with a rising tide” sort of thing.

          2. fredwilson

            wtf does that mean?

  40. Jacob

    Great article. My boss Paul Azous has been saying this for a long time. Regulations for small business in particular need to be undertaken with the small business community, or at the very least to get their input. Thanks for the article.Jacob Evans

  41. Matt A. Myers

    Thanks for sharing that. made my blah day a little better

  42. Dave Pinsen

    Great anecdote.Charlie, see my comment elsewhere in this thread, where I link to and excerpt an essay by Andy Grove on the downsides of our current trade policy with China. I think you will appreciate what Grove wrote.

  43. Austin Clements

    Great story. He’s an exceptional man.One of Patricof’s partners at Greycroft, Ian Sigalow, just started a blog at the top of the year and has one post that touches on this same subject Fred discusses in this post.