Times Are Changing and We Live in a Brave New World

Today, my friend who works at a major hedge fund passed along this article in the Economist titled Reinventing the Company. In the article, a few advantages of being a privately held company are highlighted:

· Private companies do a better job of hiring employees and compensating them in ways that make them owners of the business and incentivized to create real value.

· Private companies can measure and prove their success by tracking key performance indicators rather than pointing to complicated accounting practices.

· These private companies are no longer holed up in Silicon Valley, rather they are driving millions of people to work (Uber), flipping the hospitality world upside down (Airbnb) and changing capital markets (LendingClub).

· These companies can grow more quickly because rather than buying, they rent on-demand (think Amazon Web Services, Alibaba, O-Desk).

What if these companies stay private forever?

What will happen if these companies start to become profitable and are able to access all the capital they need from major growth equity funds, hedge funds and mutual funds?

What if early investors and employees are able to seek liquidity by selling shares in the secondary market or via controlled offerings brokered by bankers?

And what if dealing with private investors forever and never going public just feels a lot better and allows us to builder greater companies with real long term visions?

And what if regulators decide that once a company has raised over a quarter billion in equity capital there should be some hybrid requirements that aren’t the same as those imposed on public markets, but at least protect the LP’s invested in fund managers who act as the owners of those businesses.

Well, if all those things happen were in for a lot of change. Secondary markets will reach once promised potential, the general public will continue being annexed from wealth creation now captured by the “accredited” (aka the already wealthy).

Perhaps investors will get more serious about valuations. Maybe secondary markets will become so liquid it will feel as if companies are public much like Facebook felt pre-IPO.

And maybe… this is all a good thing. Maybe, companies will be able to act with more integrity, and shoot for higher, grander dreams. Maybe we’ll live in a world of space ships that go to Mars, and cars that drive themselves, and energy companies that can re-invest in clean alternatives.

Or maybe companies will act more sinister. And maybe there won’t be anyone to check them. And maybe the board meetings will be full of plans to corrupt the whole universe in preparation for an LBO.

And perhaps this will expedite socio-economic disparity. Or maybe it’ll drive more wealth to the employees and solve it.

The bottom line is we don’t know — but we do know things are different than they were and I’m not sure they’re going to come back. We keep analyzing companies and markets using logic built for and existing in a former type of economy.

We now live in the 1099 economy — where flexible work is being praised, and criticized, and talked about. We understand that the rules of employment have probably changed forever.

And now we’re also living in a private market economy. And we’re not talking about it. And things are going to change. And the rules will be different.

And it’s really exciting, and scary, and none of us really know what is going to happen…

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s