Aside from Tesla and a few others, most of the hot companies with eyebrow-raising values are staying private. Uber is rumored to be raising $2 billion in funding for a valuation of $50 billion. Blue Apron, which ships three million meal kits a month to hungry millennials, has taken in $135 million at a $2 billion valuation. Food-delivery companies Instacart and Delivery Hero are worth a few billion each.
Yet none is going public. The delay can perhaps be blamed in part on Sarbanes-Oxley, a 2002 law that beefed up oversight and made it more expensive to be a public company. There’s also the 2012 JOBS Act, which increased the threshold for public reporting to 2,000 shareholders from 500. Whatever the causes, there is no longer a rush to go public if companies can raise sufficient private capital. “Now, after the IPO, it’s much worse,” Alibaba co-founder Jack Ma put it in June. “If I had another life, I would keep my company private.”
As a shareholder and a lifelong bubble watcher, I’m disturbed. Public markets enforce discipline on companies and push them to improve. . . .
But with Uber at $50 billion, surely we’re in a bubble? Remember: A bubble is not created by high valuations. A bubble is a psychological phenomenon in which investors are tricked—by the company or themselves—into believing that a profit stream is sustainable when it really isn’t.
Case in point is the dot-com bust of the late 1990s. Many companies told me at the time that Goldman Sachs or Morgan Stanley would take them public as soon as they could strike a deal with AOL. So AOL would invest on the stipulation that the company buy pop-up ads on various sites within AOL. Thus AOL turned its cash into sales. The madness stopped when companies ran out of money and AOL ran out of companies.
In 1999, Microsoft invested $250 million in the online ailment manual WebMD in exchange for WebMD paying $30 a month for thousands of physicians for dial-up Internet via, you guessed it, Microsoft’s MSN. Amazon invested $30 million in Drugstore.com in exchange for Drugstore.com paying $105 million over three years for a branded tab on Amazon. It all looked good, but it couldn’t last. It is no different from Bear Stearns using its balance sheet to spike mortgage-backed securities from 2005-08.
Today’s startups aren’t passing money in circles like this yet, though I suspect it will happen. With so many private firms holding wads of cash, the ability to use their balance sheets to drive sales will be too tempting. But without the disclosures required of public firms, this logrolling may be hidden from view.
Hmm.