By CCN: 2019 has been the year of the hot tech IPO. Already, Uber, Lyft, Pinterest, and Beyond Meat have…
By CCN: 2019 has been the year of the hot tech IPO. Already, Uber, Lyft, Pinterest, and Beyond Meat have headlined the group of new companies coming to market. That's not all. WeWork, AirBnb, and Slack are among other hot tech companies that are rumored to be listing their shares later this year. Some of the world's most innovative tech companies were finally an investible proposition for young investors.
But there's a dark side to this tech bonanza. Insiders are cashing out with huge profits while dumping risky, high-priced stock to average joes. In many cases, these insiders include filthy rich venture capital investors and private fund managers. Bitcoin, by contrast, wasn't an exercise in making the rich even richer.
Entrepreneur Naval Ravikant showed the stark difference between your average Silicon Valley IPO and Bitcoin in an incisive tweet:
There's nothing wrong with the traditional startup model. But each step dilutes the eventual benefit to an outside investor. Once a startup has to raise money and hire lots of employees, a great deal of the potential upside goes away. As Naval alludes to, the cap table - a listing of each investor's ownership stake - quickly gets crowded by wealthy early investors.
The government makes it difficult for people to invest in startups unless they are accredited (aka wealthy) investors. This means that in many successful startups, most of the money will be made by already rich people, leaving just crumbs for everyone else.
Uber is a great example. It had many famous people, including Jeff Bezos, invest in it early. Bezos reportedly turned a $3 million Uber investment into nearly $700 million by the time the stock IPOed. Chris Sacca, the celebrity Shark Tank judge, turned his stake into $2 billion.
The startup game favors the elites. Bezos helps demonstrate this. While regulation keeps little folks out, the wealthy and connected get to invest in tomorrow's hottest companies at huge discounts to their eventual IPO prices. Just look at some of Bezos' early investments, including in Google:
Bitcoin, however, was open to everyone. You could be unemployed, a teenager, or living in a developing country and bitcoin was still happy to have you. No bankers, government folks, or lawyers could keep investors out of bitcoin. And bitcoin's founder gave away all the equity in the project. That's unlike most startups and even other crypto projects like Ripple whose founders got filthy rich.
Here is a chart comparing eight large tech IPOs:
As you can see, in the past, tech companies came public when they were already profitable. But nowadays, the venture capital folks are getting greedier and dumping companies on the stock market while they are incinerating cash by the millions. Snap led the way for this trend, IPOing in 2017 while making gigantic losses. Its stock is down by nearly half since then. Similarly, Lyft stock has already plummeted from its opening price of $87 to just $58 in a few short weeks.
This leaves ordinary investors in a terrible situation. They are forced to shoulder high risk, buying these stocks at huge valuations without any certainty that the companies will ever make money. The fat cat insiders, on the other hand, have already cashed out a huge chunk of their gains on these new tech IPOs.
Another table of 15 recent IPOs makes a similar point. Out of this whole bunch of hot tech launches, only two made a profit last year:
This certainly puts a different perspective on all those arguments that bitcoin is worthless because it doesn't generate profits. It's perplexing how the same folks that eagerly promote money-burning infernos like Uber and Lyft at the same time can bash on bitcoin.
With a paradigm-breaking new technology like bitcoin, it is hard to forecast with any certainty where we will end up in five or ten years. Perhaps hedge fund manager Mark Yusko is right and the price eventually hits $500,000. Or maybe the bears will win and bitcoin will plummet to just $1,000.
Either way, bitcoin has already created far more value than just about any other tech startup. It democratized a new technology, let ordinary people in on the ground floor, and relies on the community - rather than a group of bankers or lawyers - to keep advancing its future. While a few of 2019's new tech IPOs will likely make ordinary folks rich, most will simply transfer money from the general public to a few fortunate insiders. In a capitalist system, that comes with the territory. But bitcoin, by avoiding this fate, managed to be a rare startup for the people.
This article was edited by Samburaj Das.