Recently, the world witnessed the largest IPO ever. Saudi Aramco went public and just a couple of days later it hit the $2 Trillion level in market value. The company has been around in one form or another for decades and it is somewhat ironic that the world’s largest company, and the first to go public at such a valuation, is an oil company. Given the “unicorn-like” mentality of venture capital nowadays, one would have thought it would be a social networking application or a ride-sharing company, or a real estate leasing arbitrage company parading around as a technology company that would be the first to hit such lofty levels. One can only imagine that this is quite disappointing to the twenty-first century Silicon Valley venture mavens who are convinced windmills and sun-worshipping is the key to our energy future, but I digress. The real scandal in the news of this massive IPO has nothing to do with energy. Instead, it is the lack of energy that has persisted in the financing of core technology startups thus far in this century and has resulted in a persistent lack of IPOs in general
We are constantly asked, “what do you mean ‘core technology’?” Well, how about anything that allows software to run, connectivity to be achieved, or in the medical world, enables human ailments to be treated more effectively?
What is core technology
It’s a marvel that network bandwidth capabilities have generally kept pace and allowed the myriad software applications running “in the cloud” to function at all. Simply put, the types of advancement in semiconductor and telecom infrastructure technology needed to fuel the next massive wave of bandwidth needs for the likes of AI, machine learning, virtualization of network infrastructure and distributed ledger computing are not happening as readily in Silicon Valley as they were in previous decades.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Instead, these advancements are happening in other parts of the world: in tiny Israel, certainly, but increasingly in Asia, and specifically China. While the “cloud titans” like Google, Amazon, Apple and Facebook have led the early twenty-first century wave of the “cloud” and are American companies, the next wave of the cloud, a more distributed one, doesn’t appear to be taking root in the U.S., at least not from a standpoint of leadership. We can’t help but believe that this development is due at least in part to the fact that the U.S. venture community has shunned the kinds of core technology companies that were born in the 1980s and 1990s and helped fuel that first cloud wave.
In the wake of the dot.com debacle, which in its implosion took with it a plethora of tech/telecom companies who were certainly priced for perfection but didn’t justify a hit to valuations that took 15 years to recover from (if at all), there developed a veritable desert for young companies working on advancing these telecom and bandwidth technologies trying to get financed. Clearly, the shock of September 11, 2001, then the 2008-2009 financial fiasco and the “risk aversion” that resulted, created an environment that was toxic for companies related to those network infrastructure industries. Instead, the old-school VCs either retired or became enamored with “green investing,” and the next generation of VCs all chased each other in driving the valuations of unicorns to the stratosphere — and appear to still be doing so today. We can only hope WeWork is a sign of “peak unicorn,” but don’t hold your breath!
China is beating us in key areas
Venture capital, or now “private equity” — as they seem to have become one and the same these days – have become victims of their own success, much like the mutual fund industry. Both suffer from too much money. As Milton Friedman taught us, inflation is “too much money chasing too few goods.” In this case, the “too few goods” are young companies that private company investors can understand and give them a story to tell about “monthly active users” or “eyeballs” which can be inundated with advertisements and mined for precious data, whether the eyeballs want those ads and that data-mining or not.
Growing up in the Silicon Valley in the 1970s and 1980s, I myself and those I knew had a strong general sense that the Bay Area economy was very diversified among all the core technology names like Intel, Hewlett-Packard, Sun Microsystems (and on and on). And it truly was, in that era.
The real estate market reflected the strength of that diversified economy. Today it does not appear that the so-called “tech” economy of the Bay Area is nearly as diversified, and the real estate market appears to be financed by these unicorn plays that continue to get financing for their seemingly endless losses by those same VC/PE investors who simply have “too much money” and are desperately looking for places to invest it.
In the mutual fund industry, the same phenomenon has manifested itself in most of the money being “managed” (if you can call it that) by the top 100 firms in size (well over 90% of the money is run by those 100 largest firms). They are so big that they have simply given up trying to outperform themselves (ah, that would be impossible!). As such, they have cooked up new ways to market to the unsuspecting masses who have been convinced that in the name of “cost efficiency” they really need to have second-by-second liquidity in the form of “exchange-traded funds” (ETFs) that are now the supposed panacea for investment success.
Nobody really knows how these things work: if they tell you they do, they are lying, or hiding how the real money is made by those gargantuan firms known as “authorized participants” and the ecosystem that has grown up around the ETF industry (more arbitrage, anyone?).
Core technology: VCs, mutual funds and Aramco
Regardless, whether it is the VC world, or the world of the mutual fund giants, the reality that these “investors” have actually given up on real investment has resulted in a stultification of new company formation in the public markets. We have gone from roughly 8,000 to 4,000 publicly-listed US companies in the twenty-first century, and this is not a good thing for anyone, except perhaps the largest and the most well-connected. The Saudi Aramco IPO, going public at valuations in the trillions, is the biggest indicator to date of the massive change that has taken place, a change which was foreshadowed by unicorn companies going public at IPOs valued in the tens of billions, where much of the most lucrative growth in a company’s valuation took place outside of the public markets, where only a restricted few well-connected investors could reap the gains.
We can only long for the day when companies regularly went public at valuations in the hundreds of millions instead on tens of billions (or trillions?) and regular investors in public companies had a massive choice of young growing companies that could be bought at values that would allow both investors and the companies themselves to reap huge gains, all while remaining public and competing against larger companies in the same space that could not grow as fast or be as nimble and innovative.
Here’s hoping for a return to those days!