Private markets

perplexedsign3-300x199I got together with someone I have known since the mid-90’s.  He had a successful outcome with his business and has gone on to have an interesting career still connected to the technology industry.  Once an entrepreneur always an entrepreneur as he is starting to think about his next company.  It is always good to see that.

We had an interesting conversation about the private markets vs the public ones.  We both lived through the technology boom and bust in the late 90’s.  It wasn’t pretty but many of us saw it coming.  Valuing companies that had nothing but smoke and mirrors at prices comparable to profitable publicly traded companies just didn’t add up.  When things don’t add up they usually don’t stay where they are.

We are living in a technology era where the advent of technology is creating change in every sector of our lives.  It is exciting.  Many are starting to talk about the “bubble” but I am not convinced there is a bubble as much as there will be a time to recalibrate.  There will still be many new ideas and companies to enter the market but the valuations will be more in line of what they should be worth.  The escalation of valuations have to do with so many different factors from ego to accelerators to ownership to competition.  It is easier to create those type of numbers in the private market.  The public market place is more of a reality check to what the company is worth.

My guess is that we will be seeing a lot of private money get lost.  Some companies will just close their doors while others will just change their valuations in down rounds and continue to build into a meaningful business based on real worth.  The impact will be felt particularly in the crowd funding arenas where many have followed supposed leaders in their investments.

I heard from someone the other day who wanted some advice and a bit of a reality check on her investment strategy and expectations on some crowd funding sites.  The way she worded it was as if she expected a certain return and just wanted to understand the time frame.  It scared me.  Investing in start-up companies is a huge risk.  It is important to look at a portfolio with not one or two investments but multiple where you put in the same amount of cash in order to mitigate your risk.  You never know who will be the winner but you do hope one will pull out of the box and pay for all the companies that might not have succeeded.  You can also see zero returns and all losses.

I have been at it for a decade and certainly behind the curtain for a long time.  I am still learning.  I believe in the companies that I have invested in but who knows maybe it will turn out that I am a terrible investor.  I made bad choices.  That is why as an investor it is important to make your own decisions, do your own diligence and trust your own gut.

The public markets are based on real facts, real earnings and a real audience.  It is great to see so many companies grow and change the landscape of our economy but the private markets are starting to make me feel a little on edge.

Comments (Archived):

  1. William Mougayar

    I’ve been through the 99-00 euphoria through thin & thick with scars & good memories together.As much as the tech ecosystem is much more resilient today than it was back then, there are signs that are worrisome on both ends of the spectrum.On the low end, I’m seeing now valuations “asks” that are totally unrealistic. And at the high end, the private markets funders are thinking again, like in ’99 that the sky is the limit.I have 2 words for everybody:Speed kills.Take it easy. Take your time. Prove the market & you will get rewarded later. There are no shortcuts, and if you find one, there is a heavy price. Just saying. Been there.

    1. Gotham Gal

      I like that. Speed kills

    2. Eric Woods

      To what extent do you think social media, non-existent in the late 90s, had exacerbated the notion of FOMO?

      1. Gotham Gal

        Not sure.

      2. William Mougayar

        Good point. I would guess it is a factor today that affects the not so smart investor. Social media amplification has its benefits for sure, but also has pitfalls I think.

    3. David Fox

      I’m not so sure there is time to be taken. The successful few are rewarded ever more richly while the rest are quickly starved of funding. The rate of churn accelerates putting ever more pressure on startup teams. It’s never been easier to start, never more challenging to succeed – at least if you’re competing in one of the “hot” markets where equity investors like to play.

  2. pointsnfigures

    Interesting, because I think that sometimes public markets get way out of whack. I used to be able to make a nice living in the futures markets when they did! I guess it depends on your time horizon, and the way one frame’s it. I agree, to me seed stage valuations are way out of hand. I think one of the reasons is convertible debt but I digress. It also seems to me that some regulations, like Sarbox, have created economic incentives for companies to stay private longer. Markets being algorithmic and electronic are less hospitable to earlier stage companies going public as well. The herd likes to short and punish them (see $ETSY) That means there is a lot of cash chasing too few later stage deals and it drives up price. At the same time, QE forever has devalued currency and changed risk/reward ratios in ALL asset classes. This plays a small part in driving up seed stage valuations.We are certainly going to see down rounds. Will investors have an appetite for them? Will CEO’s be able to hold their company together when it happens?