The IPO of LinkedIn demonstrated a public premium: public markets offered a higher valuation than the private markets did. Valuations can be higher because discount rates are lower. Think about it: public investors get maybe 15% in a strong year. Private Equity investors are organized around discount rates of 20% or higher. If your discount rate is so high, future profits are simply not worth as much.
There is another important reason for a public premium: regulated standards of conduct and transparency. When owners (shareholders) are more informed and confident, risk is reduced and value goes up.
The reason to hope this is the case is for the public good. If IPOs and public listings are shown to be a rational — because the cost of compliance is less than the valuation premium — then more companies will be public and capitalism will be more broadly accessible. Also, this will lead to higher overall investment rates and stronger economic growth.
The information age has transformed the economy. The financial service industry has been a tremendous beneficiary with huge financial rewards for innovation and engineering. The financial services sector grew to at least 2nd largest in the US on at least 2 occasions, and that’s not counting banking and securities brokerage*.
Financial engineering created such large returns in the investment industry that it absorbed a large number of top talent from the global workforce for a generation. The industrial world, through automation and logistics applications has changed, too, but not like the financial markets.
Financial engineering has matured and the breakthroughs for systemic outperformance and securitization are harder to find. There is still obvious room to improve how to tailor services for individuals, but you know what I’m saying. Rather than choosing to innovate in the financial services, more engineers will see the best opportunities in industry.
And that gets me to the point: As the information age matures, I think we will see that financial engineering will give way to industrial logic as the most powerful force in the economy. Now that capital is being allocated so efficiently, productivity gains will increasingly come from industrial logic: information systems tied to production and services.
APIs** will be a catalyst for industrial communications. Companies can become part of a global network of improving efficiency, production, services, and innovation.
Reading my Clay Shirkey book from Christmas has me all optimistic.
Happy New Year. Get back to work,
* based on my recollection of Value Line data from over the years…
** It stands for Application Protocol Interface. Just like consumers have been blessed with this new smartphone app phenomenon, developers have been blessed with APIs. APIs let companies talk to companies over the internet. They can send data and receive responses with other data. It’s great.
Feeling down on angel investing? I am. But maybe we shouldn’t.
An interesting new study, “The Economic Future Just Happened,” found that more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, along with nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies.
There are clear innovations and implementations of current technology that can be safely called inevitable. One of these is ubiquitous wireless. We will be surrounded by secure broadband available by subscription, and compatible with wireless devices. Wireless devices compatible with broadband will include laptops, PDAs, phones, and electronics built into vehicles, etc.
If this is true, then some industries will join the buggy-whip industry:
Phone companies: why pay for phone service if your wireless phone is a tiny part of a cheap broadband service. Internet traffic incurred by telephone quality duplex audio is a drop in the bucket.
Cable providers: If I have access to streaming video straight from the media companies, why pay a cable company for anything? I might pay HBO for access to their channel, but there is no room for Comcast. The old line between broadcast and cable TV will be irrelevant.
Traditional and Satellite Radio: Internet radio is already catching on. When devices and wireless grow to maturity, there is no need for radio. Your music preferences will be targeted much more specifically than a set of 20 FM stations can satisfy, making the listening experience far better. The 2-way directionality of streaming radio (broadcasters know what IP addresses are listening, and when) make the value proposition for advertisers far better. Finally, the global nature of IP eliminates the problems of range and signal quality.
I don’t mean to sound gloomy, in fact, this is not a gloomy forecast. Leaving horse drawn buggies for cars was a major milestone in economic advancement. So too, leaving single-application wires for IP-based wireless broadband is going to be a great milestone. Communications technology is the lubricant of innovation and trade. I would expect global growth to accelerate into these advancements, and remain at a generally accelerated pace thereafter.
In this speculative possible state of the world, investors might benefit from:
underweight companies with revenues largely based on phone, cable, and radio