Unshackle the Middle Class

http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class/

by sethbannon • 13 years ago

170 140 13 years ago

blog.pmarca.com

More accurately, Sarbox is keeping 96% of Americans away from some crazy volatility -- they are missing out on MSFTesque price appreciation as well as potential bankrupcy of countless new public companies.

JonFish85• 13 years ago

That's what gets lost in this, in my opinion. Certainly there is a big upside that is missed out on, the article makes a good point. But at the same time, SOX burdens companies to have to meet very strict reporting policies, which ultimately is good for the average investor(s) (in my opinion). Not to beat a dead horse, but how did Enron work out for the average Joe/Jane?

pmarca7• 13 years ago

Scott's point is that Enron was a giant, long-established public company. Sarbox may have helped prevent the next Enron, with an unanticipated side effect of all but killing IPOs and growth in the public market. It's like passing a law to prevent the next giant cruise ship from hitting an iceberg, and accidentally killing rowboats in the process.

hga7• 13 years ago

Erm, have you guys heard of things like index funds? There are plenty of ways to play the game and not take too much risk from one company.

joshu• 13 years ago

"Erm," IPOs aren't usually added to index funds till much later.

_delirium4• 13 years ago

Have delayed IPOs really moved the needle on index funds? Not a rhetorical question; it's possible they have. The markets being indexed are so huge I'm somewhat skeptical that companies IPOing later will make any difference in the returns of a passive index investor, though. And that's even assuming that earlier tech IPOs would outperform the rest of the market; they might make the index funds perform worse if that's not true!

gsibble• 13 years ago

While I'm not a fan of Sarbox, I don't think we can simply say that it's going to single-handedly create this two-tiered system. It's not like every private company that would have had access to public capital much earlier would have grown 500x. Microsoft and Facebook are the outliers, not the norm. Not to mention that Sarbox has nothing to do with what defines "accredited". Congress can and has changed that definition at will, including raising the limits necessary under the Obama administration due to Dodd Frank.

That said, Sarbox has had so many unintended consequences and resulted in so much destroyed value that I do believe it should be curtailed in one fashion or another.

hga7• 13 years ago

But you know why they had to use a company like Facebook to make their example? Post-SarBox, which I think was more like the final nails in the coffin vs. "single-handedly", only wild successes like it are able to do IPOs.

Legal and regulatory changes in the late '50s created the ecosystem that had IPOs as an ideal exit, and this had a fantastic half-century run ending with SarBox. And since then people are chasing 140 characters instead of flying cars, to paraphrase Peter Thiel. So much destroyed value I'm sure it has more than a little to do with their being no end in sight for the Great Recession.

muzz14• 13 years ago

They had to pick an outlier as the example, because venture capital returns as a whole are so low that they would contradict the point the author was trying to make. As a whole, VC returns have not beaten simple index fund investing (S&P 500, etc).

salimmadjd• 13 years ago

Becoming more cynical, I'm convinced most laws are vetted by the powerful to ensure their interests are preserved.

Why should we think Sarbox is any different?

lifeisstillgood2• 13 years ago

The secret is to have lots of powerful people with competing interests.

Generally it has worked well to date.

pmarca7• 13 years ago

Supporting that, big established companies have gigantic legal, financial, and regulatory staffs already in place to deal with new regulations like Sarbox.

New companies do not.

dustingetz• 13 years ago

If sarbox did indeed cause delayed IPOs to the extent described here, author didn't even try to make a case for it, he just said it is so.

hga7• 13 years ago

Nobody I know denies that the US IPO market almost entirely shut down after SarBox. Correlation does not imply causation, and I personally think it was only the last set of nails in this coffin, but from that time sequence and a lot of anecdotal data of people saying SarBox is why they aren't going public has resulted in it being the commonly accepted reason.

muzz14• 13 years ago

The data denies it. Number of IPOs fell 90% in the two years preceeding SarBox, and increased afterwards:

http://www.xconomy.com/wordpress/wp-content/images/2008/06/i...

nugget• 13 years ago

I would say that about 96% of investors "buy high, sell low" because they can't stomach real volatility. How many mom and pop investors dumped their equity funds in the deepest depths of the recession? It's sad to think about. Much more important than access to a hot IPO is having enough capital, and enough knowledge, and perhaps enough reassurance, to hang in through the ups and downs. If you can give people that and a few broad-based, low ER index funds then they will do just fine.

steveklabnik• 13 years ago

"The market can stay illogical longer than you can remain solvent."

dangoldin• 13 years ago

I took a quick look at tech companies that went public in the 80s up to today (1) and it's not as simple as Scott makes it out to be. The annualized returns are comparable now to what they were in the "glory days" due to companies like Tesla and Netflix but the massive long term returns are going to be harder/impossible to achieve.

Sure we may not have the chance for another Microsoft going public but there's still opportunity, it just takes a bit more effort and moving money around more frequently.

1. The post itself is not 100% relevant but the table of returns is worth taking a look at: http://dangoldin.com/2013/05/24/investing-in-tech-stocks/

tptacek• 13 years ago

Most of the 96% of "investors" locked out of startup financing because of accreditation rules would be very poorly served by startup investing.

Also regularly overlooked: the risks to startups of accepting funding from underqualified investors. Equity is ownership. Ownership involves baggage. A degree of trust and reputation protection undergirds both sides of startup investing --- and we still get occasional horror stories.

This is a situation that looks terrible in black-and-white numbers, but is probably not as bad as it seems.

gjm112• 13 years ago

Most of the 96% of "investors" locked out of startup financing because of accreditation rules would be very poorly served by startup investing.

I basically agree, but will make the following observation anyway: the figure that matters isn't what fraction of that 96% would be very poorly served, but what fraction of the ones who would invest in startups if they could would be very poorly served.

Imagine a university that targets exceptionally smart students, and also is only prepared to educate the very rich. (Or people whose surname begins with the letter A. Or almost any other small group that isn't basically equivalent to "very clever people".)

Then it will be true that (1) most of the people "locked out" by its rich-people-only policy would be poorly served by studying there, but also that (2) removing that policy would be a public benefit. (Assuming there weren't other adverse effects, e.g. running out of money because they could no longer charge such high fees.)

Going back to startup investing, it's at least plausible that most of the 96% wouldn't choose to do it because of the high perceived risks, and that those who would will be those who (1) are more risk-tolerant because they have more money and/or (2) think they understand the market particularly well. Both of these are probably correlated with being not so poorly served by startup investing.

(They may well not be correlated enough with that to make it a good idea, which is why I basically agree with your point despite the quibbling. But the quibble seems like a generally important distinction whether or not it makes a difference in this particular case.)

foobarbazqux• 13 years ago

Delayed IPOs = 96% of Americans don't have access to wealth creation of investing in the fastest growing companies

48% of Americans don't own stocks at all.

jellicle• 13 years ago

And most of the the rest own an absurdly tiny amount, like a few hundred dollars in a 401k plan.

A venture capitalist trying to get legal changes made by putting on a faux-populist claim of "it's for the middle class" is vomit-inducing.

asanwal• 13 years ago

The post on A16Z can be characterized as "talking one's own book" [1]

While convenient to cherry-pick MSFT as an example, there was also countless wealth lost in the dot com explosion (Webvan, eToys, Pets.com, etc)

Yes going public today is harder and that means companies generally have to have a better answer to "how will you make money (profitably)" than they once did. And that is probably a good thing.

It's also surprising that venture capitalists who have on the whole been unable to beat the S&P500 think that the layperson investing in tech companies would fare so well.

[1] http://invest.yourdictionary.com/talking-one-s-book

_delirium4• 13 years ago

Groupon and Zynga are two more recent big examples.

muzz14• 13 years ago

Examples or counter-examples? I.e., are you saying that the public should have been allowed to invest in Groupon and Zynga earlier?

x0x02• 13 years ago

see also Keith Rabois' answer on the subject [1]; sorry for the quora link but it's worth it.

tl;dr: reasons given to avoid ipo include lower speed/innovation (counterexample: apple), problems with short-term market expectations (cex: google), outside capital not required, maintaining a low profile, and sox compliance. Keith asserts that the real reasons are (a) incorrect assessments of above; (2) BoD issues, and (3) -- the important reason -- private company valuations are detached from reality and have been substantially inflated, so companies have to defer exits for years until their business can actually support the valuation.

[1] http://www.quora.com/What-are-some-of-the-main-reasons-that-...

codezero• 13 years ago

Rather than (or in addition to) apologizing for a Quora link, just add ?share=1 to the end of the URL so that none of the sign-up call to action or answer blurring appears.

pmarca7• 13 years ago

Actually there's a good case to be made that Scott is talking against our own book. We have entirely private money locked up for 13+ years, we benefit from longer private holding periods. Whether that's good for the industry or the country are separate questions.

absherwin• 13 years ago

You can fix this without government intervention: Launch an a16z ETF. It could help you as well because you could secure more favorable terms if you so desired to offset the additional work.

This may yield higher returns to investors than they could otherwise receive but, if so, it's only because they underestimate you. If the return on funds invested with you is expected to be higher, the ETF's price will increase until the perceived risk-adjusted return is equal to that in the market. What causes the types of entities who receive above average returns through nontraditional vehicles to achieve them is some combination of the the higher cost of raising that money, more limited availability and social convention.

hkmurakami2• 13 years ago

4% seems like an awfully high fraction of the population that would theoretically have access to the best startup investment opportunities. Even if you are an accredited investor, you simply don't have access to many of the best performing hedge funds. They are simply closed to you. They don't want your money.

I imagine there would be something similar in venture investing as well. One such example would be the lack of personal contacts which prevents us from investing at the best opportunities. It's debatable whether secondary exchanges have enough liquidity and trading volume to make investing in them pragmatic for anything less than the top 0.5% of the population with respect to net worth. Even then, the lack of due diligence would be frightening.

lifeisstillgood2• 13 years ago

That's partly true - if we simply imagine the past but bigger, then like hedge funds, startups have a limited capital requirement and will be hard to find at a suitable early stage

However it seems the world is not shaping up like that - if we take the theory that startups will simply be the new path into high flying careers, supplanting MBAs and certain colleges, then unlike hedge finds which are capital limited, startups can take almost unlimited amounts of cash. For example if the tech startups world is a guide you should do a degree then take three years to run a startup. It sounds better than junior graduate trainee. If this holds true for even a decent percent of the world, across all industries, you could shovel cash at these guys forever.

That will take industrial levels of cash shovelling - the sort pension funds are good at, but VCs and even hedge funds really really bad at (high we are raising a limited round for 3 years at 2and20 vs give me 10% of your lifetime earnings and start now!)

ksar2• 13 years ago

Agreed on the above point that patronage/network access locks out most accredited investors from the hottest deals. PE/VC is a prime example of this, where the top decile make out like bandits. I'd like to add that speculating on IPOs is like participating in pseudo-alternative asset class - not necessarily capturing value through public equities as the author describes. The level of your earnings/expected earnings, retirement goals, age, level of risk-aversion etc. affect where you place your money. Common sense says that far fewer than 96% of Americans would be well-served having access to this class.

pmarca7• 13 years ago

I think this discussion gets too polarized around "speculating on IPOs" too quickly. Think instead about the general characteristics of the overall equity market. Assume for example that you simply hold the market index.

What's happened over the last 15 years is that growth has been mostly stripped out of the public market -- due to the collapse of IPOs and the reduction in publicly listed US companies from 8800 in 1997 to 4100 now. The result is a public market that is more and more just old, slow-growing companies. That's fine if that's what you want, but for people who are investing their retirement savings over a multi-decade period, that's bad news. (E.g. the overall stock market is flat over the last 15 years adjusted for inflation -- I don't think that's a coincidence.)

pmarca7• 13 years ago

That's right. The percentage of individuals who have access to top decile hedge funds, PE funds, and VC funds (and in all three categories the top decline generates almost all the returns) is infinitesimal.

In practice, the investor base of those funds is a very small number of high-net-worth individuals and families, plus a set of long-lived private institutions such as Ivy League universities, multi-generational foundations, and the like. Sovereign wealth funds (national treasuries of countries like Abu Dhabi, China, Singapore, and Hong Kong) are becoming a larger part of that base now. (Not the US though, the US has no sovereign wealth fund.) Some big pension funds invest heavily in private equity but not as much into venture capital or hedge funds.

The result is that the vast majority of retirement savings for normal Americans -- whether managed by individuals or institutions -- can't access compelling private market opportunities.

7Figures2Commas• 13 years ago

1. The list of top performing funds is not static.

2. The number of individuals and institutions invested in these funds who actually understand the instruments these funds invest in (particularly in the hedge fund world) is infinitesimally smaller. In other words, they couldn't give you an educated explanation as to why they invested, they simply got lucky.

3. Access doesn't guarantee returns. Sending your money to John Paulson in 2008 was very rewarding; if you invested in his PFR Gold Funds, you're down more than 50% in 2013 alone. It is almost impossible to predict top performers, particularly given point 2 above, and even if you do invest in a top performing fund, at best your investment is likely to constitute a modest portion of the total funds you have invested.

4. Success is a double-edged sword for fund managers: it's possible to raise a lot more capital (management fees, yay!) and launch new funds with ease, but finding investment opportunities that can deliver meaningful results becomes increasingly difficult as the size of the positions you need to establish grows. In other words, by the time you're investing in a fund manager because of past performance, there's a good chance you've already missed the big gains.

5. If you go back decades, particularly before 2008, hedge funds on the whole provided significantly better returns than buying a major index. But in the past several years, the S&P 500 has outperformed a number of indexes that track hedge fund performance. When you consider fees, most hedge fund investors have overpaid for underperformance the past several years.

6. A number of investment banks are exploring the launch of retail investor-friendly hedge funds with modest minimums (four-figures low in some cases), and Goldman has already launched its own. This is seen as a growth market for the investment banks so you can expect a lot of action in this space in the coming years.

Compelling market opportunities, private and public, do exist and the number of financial products promising average Americans access to them has grown considerably over the past decade. If I want a leveraged investment in publicly-traded mortgage REITs, for instance, UBS has an exchange traded note I can buy tomorrow. If I want to invest in investment-grade bonds denominated in renminbi, there's an ETF for that. And so on and so forth.

The number of sophisticated (and sometimes incomprehensible) financial products available to everyone will continue to grow but that doesn't really matter: the number of individuals who will be invested in the right products at the right time, and keep their gains over the long haul, will always be small. Put simply, access has very little to do with actually being able to exploit compelling market opportunities.

makomk• 13 years ago

Oh, I'm sure there'd be plenty of crap investment opportunities available to ordinary investors. There's an interesting idea called rational ignorance - basically, investigating an investment opportunity costs time and money, and it's irrational to spend more on investigating it than you'd lose if it failed outright.

So being able to offer poorly-regulated "high-risk investments" to normal people who can only invest a small amount would be a scammer's dream; they can't put nearly as much resources into investigating the investment, or into recovering funds if it turns out to be a scam.

Nearly all the good opportunties will continue to go to a handful of well-connected wealthy people because it's far less work to raise money that way.

bmahmood• 13 years ago

While not a whole solution, there were aspects of the 2012 JOBS Act that sought to relieve some of the provisions of SOX on small-cap companies.

http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...

Part of why there are fewer small-cap IPOs since 2000 has been due to the required external audits on companies - on average costing $2M. This had forced many companies to delay their IPO until they had the revenue to afford the audits, at which point often they no longer needed an IPO (due to folding, or selling).

The JOBS Act offered a series of exemptions for small-cap companies to be exempt from such audits, though I'm not sure what stage of implementation the SEC has taken it.

HistoryInAction• 13 years ago

Hmm, that used to be my theory, but the data doesn't seem to support it. The rise in M&A as exit over IPO is the key metric I tracked in researching this. The inflection point seems to be around two years earlier than the 2002 passage of SarbOx, c. 2000: http://www.xconomy.com/national/2008/07/01/whos-afraid-of-an... and http://smallbiztrends.com/2010/05/trends-in-exits-from-vc-ba...

That said, the modern startup path does seem to structurally delay IPO, which in the short term has resulted in 20-50% shaves of post-IPO public investors and long term difficulties in adding value of the sort Garry mentions. Just the causality basis isn't clearly SarbOx.

My current theory is the tilting of the king vs. cash towards king, as epitomized by Zuck. It's possible that the market had started driving companies towards private control to emphasize long-term growth over short-term, quarterly stock performance, which drove the Enron-era scandals. The collapse of the tech bubble might have had an impact, too. I concur with Bilal that private audits are a more likely causal link than SarbOx, though that could be our mutual gov't experience talking.

The JOBS Act created the IPO on-ramp (5 year SarbOx tapered exemption to reduce costs of public compliance), as well as 10x expanding the Reg A ($5M → $50M mini-offering cap) exemption to make it easier for startups to blend over into public exposure. However, these non-standard pathways are little known to both the investors that traditionally take early board seats and certainly early-stage founders. It's also unclear how much of JOBS has even been implemented due to continuing backlogs from political obstruction of Dodd-Frank at the regulatory level.

yummyfajitas• 13 years ago

Eliminating decimalization is basically just a way to increase the profits of market makers at the expense of retail and other long term investors. Minimum increments are just a minimum wage law for high frequency traders.

I blogged about this last year:

http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html

http://www.chrisstucchio.com/blog/2012/subpenny_rule_respons...

hudibras• 13 years ago

Yeah, what a weird solution to his supposed problem.

If I saw a blog post titled "Unshackle the Middle Class," I would never in a million years have guessed that one of the unshackling mechanisms was a return to "IBM was up three-eighths, closing at sixty-seven and five-sixteenths."

rdp2013• 13 years ago

What the vast bulk of Americans need is increased Social Security benefits. 401k's are a huge failure, pensions are nearly gone as an option for most. http://www.newamerica.net/publications/policy/expanded_socia...

blahbl4hblah• 13 years ago

Wow. "what the world needs now is lo...I mean more speculative investment..."

Give me a fucking break...

rkeller• 13 years ago

Yes, this is a great point, lack of investment opportunities is clearly what is holding back the middle class, not stagnant wages since the mid 70s in the face of dramatic cost of living increases.

The housing collapse was fun and all but it's 2013, we need to be finding new ways to increase financial risk for the failing consumer base.

jakarta• 13 years ago

Why would it be a good thing for the Middle Class to participate in IPOs which are typically skewed against them? The IPO process is one in which you're usually buying into a company whose price has been bid up considerably (these are "Growth" stocks).

I think it's been proven that investors aren't adequately compensated for taking on "growth" risk. The risk premia attached to "growth" doesn't outperform passively owning the index over long periods of time.

Seems like all A16Z is trying to do is juice the IPO market for more liquidity (from dumb money middle class investors) so that they can have an easier time exiting when they're ready.

rayiner2• 13 years ago

I'm not sure Scott has the causation/correlation right on this, but the trend away from taking companies public is troubling. I don't think the regulation in this area is helping: Sarbanes Oxley is pretty draconian in its regulatory burden, and I view things like "sophisticated investor" requirements with deep distrust. I think they're an overly paternalistic solution to a non-existant problem, or one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.

But I think there is something deeper and more structural than merely regulatory burden. Public companies suffer from the agency problem. When ownership is diffuse, that problem is more acute, and managers' interests more easily diverge from shareholders' interests. This is true regardless of the regulatory structure. That is to say, it's a fundamental economic problem rather than an artifact of whatever regulatory system is in place. One of the benefits of taking companies public later, if at all, is that ownership stays concentrated during a longer period and owners have much more concentrated influence on management.

There is another economic phenomenon in place, which is this: the economy is awash in capital and companies don't need public capital. When there are hedge funds with billions to throw around, and private equity companies who can engage in billion dollar transactions, why do companies need to turn to the public markets? If there is some profit to be made investing in the next Microsoft, and a private fund can swing the necessary size of investment, what purpose is there to resort to the public markets? Is it ever more efficient or more effective to supply a given amount of capital via the public markets instead of via some private investment Overregulation doesn't help this problem, but it's also ultimately an economic phenomenon. Concentration of wealth (there are a lot of new foreign oil/resources billionaires these days) means more private entities that can raise the kind of money that previously one could only raise in the public markets. Moreover, fewer opportunities for investment means that private funds can meet the underlying economy's need for capital, making public funding less relevant. Changing the regulatory structure isn't going to change that dynamic.

pyoung• 13 years ago

This is something that has been worrying me for some time. More and more, the IPO is being used as a method for cashing out, rather than as a source of funding. I am an advocate for low cost index funds, as historically, it is one of the best returns an ordinary investor can expect to achieve. But this recent trend in private/public markets has me second guessing that position.

Retric• 13 years ago

What I think is more interesting is the idea that private markets are less rational. If you look at venture capital over the last 30 years it's underperformed the stockmarket. There are a few big winners but if you look at the total returns of the funds which invested in them it's a lot less amazing. Which arguably comes back to the lack of hard data plus the effort involved in managing these small investments.

PS: Also of note he ignored dividends and inflation when looking at microsofts returns which is a sign of basic incompetence.

Domenic_S3• 13 years ago

one that should be non-existant if Social Security was maintained as the proper safety net retirement system it was intended to be. Enron wouldn't have been such a disaster if all of those people had a solid retirement from Social Security.

Hmm, don't know what you mean by this. As it stands, the safety net is working -- nobody who worked a significant portion of their lives is living on the street for lack of funds.

What SS does not give is a retirement of the same quality as a rich person's retirement, which should make sense on the face of it. Those Enron folks did have a Social Security retirement, what they lost was the more lavish retirement they had planned for themselves (nb: I'm not using "lavish" in any derogatory sense).

SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.

muzz14• 13 years ago

I think it was a pretty feeble attempt at excusing a $60 Billion accounting fraud

sageikosa• 13 years ago

SS was intended to be a safety net, not a golden parachute, so elderly people didn't die freezing and starving in the streets. By and large, it has accomplished -- and continues to accomplish -- this mission.

Now if we can just broaden the population pyramid widely enough (and lucratively enough) to support the great height of the future retirees, we can kick that can so far down the road even we 40-somethings won't have to worry about the scheme's stability.

netcan• 13 years ago

Good points.

Also, I would point out that middle classes typically (and by definition, according to some definitions) make money from skilled labour, not investment. Stock profits is just not that big a percentage of a middle class person's lifetime earning.

rayiner2• 13 years ago

It should be noted that half the US has no 401K. 80% of stock is owned by 10% of the population. So "middle class" really means "above the median" if we're talking about people with any substantial stock investments.

joshuaellinger2• 13 years ago

How about some more progressive taxation and some real regulation of the banks?

contingencies2• 13 years ago

I can't believe you were downvoted.

noarchy2• 13 years ago

I can. The people who tend to read this site are not generally going to be from lower income brackets, so a more "progressive" tax just means more picking of their pockets.

Regarding the banks, that's a real uphill fight. I don't know if there is a more protected, favoured sector. I'd be happy if the mentality that led to the bailouts were to end. That would be a great start.

joshuaellinger2• 13 years ago

Oh, I can. It just shows that this talk of helping the middle class is just talk.

If I really wanted to get downvoted, I'd point out that trade unions correlate with a strong middle class.

adventured4• 13 years ago

"Thus, the public investors in Microsoft have had the opportunity to realize $233.5 billion in market cap appreciation; the private investors had only a $500 million head-start. From IPO, a single share of Microsoft stock has appreciated close to 500x."

That's an ok point, but it ignores the extreme multiplier benefits from participating in that first $500 million. That is to say, very few (likely none) of the private investors would pay at a $500m valuation on a $500m IPO.

If you got in at $50m your return was upwards of 5,000 (4,680) fold vs. 500 fold at $500m. And of course this is all theoretical as Microsoft didn't take meaningful outside money.

Scott tries to say that private investors only had a $500m head start, and compares that to the total $234b market cap. $500m vs $234b is not the important stat line, rather it's the way the returns massively increase if you got in with the private money early. It's the difference between being perhaps being a billionaire versus having $25 or $50 million. Both are great outcomes, but there's no sense in pretending the first $500m shares much in common with the last $234 billion.

Point being: no, the private investors did not just have a tiny head start in the grand scheme of things (ie compared to the market cap now), and that is almost always the reality. They had an extremely massive head start over the IPO money, no matter how you calculate it. Early money multipliers can almost never be touched by public investors.

kenster07• 13 years ago

Before I can read this article, I think someone should explain the assumption that the middle class is "shackled" in the first place.

muzz14• 13 years ago

Certainly the middle class isn't being shackled by paying ordinary income tax rates of as much as 39% while VCs pay much lower taxes (previously 15%) as capital gains via the carried interest loophole.

Certainly that isn't an advantage worth mentioning at all when comparing the struggles of the middle class to the opportunities available to VCs...

http://en.wikipedia.org/wiki/Carried_interest

http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-...

http://www.npr.org/blogs/money/2012/01/19/145449117/carried-...

bpatrianakos2• 13 years ago

This comes off as having been written in a bubble. What I hear is someone arguing for their own self interest while using the Middle Class to gin up support. Who wouldn't want to help the middle class? I'm sure the middle class could be helped by more IPOs and less regulation to get more of them but I'm also positive it'll help the wealthy even more.

How about this idea: lets start human trials of drugs earlier and require less regulations before medications are released so we can help fight disease in 3rd world countries... And boost my Pfizer stock.

adventured4• 13 years ago

Pfizer benefits massively from a highly regulated, FDA controlled market, in which only the big players can bribe their way through challenging approvals, and only big players can afford the massive cost of creating new drugs + bringing them to market fully.

Companies like Pfizer would be more likely to get toppled in a free market, than not. As it is, their position is guaranteed by the FDA. They're a government protected company, similar to Verizon or Boeing or Exxon. They roll in the profits, and all they have to do is buy up smaller players that can't hang around long enough to get approvals. The only threat to Pfizer right now is massive European pharmas.

Pfizer loves the system exactly the way it is.

bpatrianakos2• 13 years ago

Okay, it's obvious I don't know much about how pharma companies work but that's not the point. Let me put it another way: Lets do something that greatly benefits me, marginally benefits you, and wrap it up in good will and fuzzy feelings so you'll buy it.

saosebastiao3• 13 years ago

On a scale of 1 to 10 of importance to the middle class, buying early into IPOs is about a 0. Try housing prices, health care costs, stagnant wages, an unpredictably irrational criminal justice system, and the all-but-inevitable revolution that comes when today's young realize that it is stupid for them to pay 30% of their salaries to support the retirement of an entire generation of selfish people who politically could never make hard decisions and passed the buck onto their kids.

peterjancelis• 13 years ago

30%? That's far from the breaking point I am afraid. I'm from Belgium and graduated with a good job - from day 1 I was in the highest tax bracket: 50%. This bracket starts at 31K or so btw, nothing extraordinary.

saosebastiao3• 13 years ago

30% for social security and medicare/medicaid. Income taxes on top of that. It was hyperbole, but not by much.

wildgift4• 13 years ago

I just looked at the IRS site. The total of social security and medicare taxes paid is 15.3%. Half is paid by the employee as a deduction from their wages. Half is paid as payroll tax by the employer. The self employed pay the full 15.3%.

Where do you get 30%?

saosebastiao3• 13 years ago

It goes to 22% in 20 years for just SS/Medicare. But don't forget Medicaid, of which a significant portion goes to the elderly and is likely to increase, and can also be funded by additional state taxes. Californians especially are f*ed. I'm not throwing out a vetted number, but given all the evidence 30% doesn't seem unrealistic.

wavesounds2• 13 years ago

Why wouldn't companies just increase the price of their shares by a factor of 4 to counter the increase in tick size by 4? Thus keeping the percentage of tick size to asset value the same ($1 stock with $0.0025 tick size = $4 stock with $0.01 tick size).

rokhayakebe• 13 years ago

Can someone explain this to me, please: Because IPOs democratize wealth creation and create jobs for the 99.9% of Americans who are unlikely to be the next Zuckerberg

_pmf_2• 13 years ago

Can someone explain this to me, please: Because IPOs democratize wealth creation and create jobs for the 99.9% of Americans who are unlikely to be the next Zuckerberg

The author believes that Ponzi schemes are a way to generate lasting wealth, and we are all stupid communists for not seeing this.

wildgift4• 13 years ago

How can he even say 99.9%? To even invest in these IPOs you need to have not only savings, but have your insurance in order. There are millions without HEALTH INSURANCE, and many without auto insurance. They need subsidized house and fire insurance. And after that, their savings are not that large.

muzz14• 13 years ago

The purpose is to lay down the false premise that IPOs are largely (solely?) responsible for wealth creation so that if you don't participate you are missing out, and that jobs are created in the process. As if the capital structure of a business caused those results, not the actual goods and services produced by the business.

swamp40• 13 years ago

There is no more "middle class". Trust me, I grew up there, and it is gone, gone gone.

It has nothing to do with the fact that they can't/couldn't buy into stocks while the getting was good - and crowdfunding is nothing more or less than a new type of lotto ticket for them.

The sophisticated investors have been putting one over on the new, unsophisticated money for a long time. It has always been that way, and always will be. Still not responsible for the demise of the middle class.

$18,000 a year health insurance for a family of four, homes that cost 10x your annual wage, companies that toss 40+ year olds with 20 years loyalty into the profit volcano, student loans of $150K+ that can't be discharged with bankruptcy and suck you down till the day you die, nursing homes that burn $4K/month for 20 years or until you run out of assets...THAT's what killed the middle class.

jmspring2• 13 years ago

I'm not convinced it is gone yet. In the Bay Area (a lifer, myself), yes, you aren't buying a house anywhere near the critical mass -- maybe in Stockton, Brentwood, etc...maybe...assuming you have the job.

That said, large parts of this country (and it's not small) do have industries that are thriving and housing prices that aren't insane.

So "no middle class"? I disagree with. Certainly an endangered one. However, if we keep up the diversity in terms of regions, population centers, etc. it will be hard to wholly homogenize that.

And, I agree, costs are going up.

wavesounds2• 13 years ago

It doesn't matter if its gone or not yet. The point is its clearly leaving. Wages are decreasing, prices for food, gas, school, health care, housing, taxes are all going up. More money is being amassed in the 1% and less in the 99% (this article is one example of why) and none of these trends show any signs of reversing.

Solution is simple too, just tax the rich more and redistribute that wealth where its needed. There's no reason to feel guilty about this, we fight their wars, work in their factories, guard their houses and build their roads, if they want to keep this the greatest country on earth they need to invest more in the middle class, like they used to [1].

[1] http://www.americanprogress.org/issues/2012/08/pdf/middle_cl... - first chart

Domenic_S3• 13 years ago

The middle class forsook classic middle-class values (free time, time with family, a small home in the 'burbs, seeing raising kids as something worth your time, etc) to play the money game with the rich folk, and surprise surprise, they're getting outplayed.

The only winning move is not to play.

intended2• 13 years ago

Thats very revisionist.

Lets take an average middle class person pre boom:

You are urged to take out a mortgage against your property because "House prices have only gone up!".

Your banks are giving you great rates, "you'd be an idiot to not take them. We're giving it out to people with No Income, No Job or Assets! We made the cover of Time with the way prices are going up!"

Everything is rosy, and you would be remiss and getting behind if you didn't take care of your future.

This is what people faced.

Do note - the Middle class isn't the one responsible for manipulating the banking system or creating exotics to over leverage a housing bubble.

Nor are they the ones who are meant to be the educated sophisticated investors.

Further the root of the issue, the housing bubble, required banks to actively sell their products, all the while telling average people that its all turning out great!

In essence: the Banks were derelict in their duty to be wary of leverage, and abused the information asymmetry they enjoyed to convince customers to "Just get a mortgage! You can get that new kitchen you always wanted".

I'd say the middle class got played.

jgh• 13 years ago

Wages have stagnated for 40 years and everything else is getting more expensive, what are people supposed to do? If wages had have continued growing with productivity as they should have, would we have had the middle class looking for fast cash in the stock market in the 90s? Or in the housing market of the 2000s?

_pmf_2• 13 years ago

homes that cost 10x your annual wage

Well, welcome to Europe.

$18,000 a year health insurance for a family of four
student loans of $150K+

Nope, not Europe after all.

smackay• 13 years ago

Don't cherry pick. Student loans, though a new idea in the UK, are rapidly inflating in price. Not to the astronomical levels of the USA but heading in that general direction. Care for the elderly is a growing rapidly also. I don't have any close family in that situation but I there are extended family members who are and the costs are comparable to the figure quoted - though I don't have exact figures.

So, not so different after all.

jmspring2• 13 years ago

Minor point to an interesting discussion, happy to see pmarca joining in on this (and learning a lot).

I agree with his belief that total market funds tend to pick up newer IPOs (where valid) sooner than those that, say, stick to the S&P 500.

runawaybottle• 13 years ago

I think the systematic deindustrialization of America for the past 30-40 years, along with massive upward wealth accumalation (understatement) and corporate infiltration of government, and worldwide governments for that matter (globalosscilation I believe it's called), is what "shackled" the middle class. And by shackled, I mean face fucked.

I'm going to have to respectfully disagree with the OP, and suggest that, no, I don't think getting in on a few tech IPOs would have solved much.

sthomps• 13 years ago

I'm sure Scott is incredibly intelligent, and I have the utmost respect for A16Z, but this is a moronic, self-serving, bubble-mentality post.

Firstly, you seriously think that the middle class is being eradicated due to the fact that they can't invest in private market companies early enough? You believe that most of the middle class has their investable cash at the ready, but is being limited by IPO listings?

No one will argue that IPO times need to come down and we don't need overvalued companies bloating up the stock market. But you are making the presumption that the investable upside of private companies outweighs those that are available in the public market. I'll take 10 shares of BRK any day over some random Ponzi scheme tech startup, thx.

The average returns in the venture market underperform the S&P, which is not constrained to purchase. And the S&P is not exactly everyone's first choice. The issue is not access to private companies, it's access to 1) knowledge, 2) investable cash and then 3) comparable opportunities.

If the issue is that getting access, both on the private and public side, to liquidity sooner than we are currently seeing, I agree. But it has very little to do with the middle class. The title is just linkbait.

muzz14• 13 years ago

Moreover, he believes that individual middle class investors will be able to invest and compete for returns with venture professionals, whose returns as you point out are not even as good as S&P 500 index funds.

pjmorris• 13 years ago

It isn't overpriced housing, healthcare or the lack of jobs, but decimalization that's holding the middle class back? No wonder people think the elites are out of touch.

muzz14• 13 years ago

It's almost as if you are repeating what the middle class considers to be its economic woes. Clearly, they cannot articulate their own economic woes-- it requires a multi-millionaire venture capitalist to tell us what is holding the middle class in shackles...

2pasc• 13 years ago

I think the issue described here is real. Truth is, today IPOed tech stocks tend to go public much later than previously in their life for many reasons. Look at PayPal. They went public with a $20M revenue run rate, growing 50% Q over Quarter. Today, private investors with $50-$250M rounds and secondary offerings where founders/early employees take money off the table completely wiped out the opportunity for consumer investor to make money out of tech IPO Companies. Funny enough to see that A16Z (or KPCB) are some of these late stage funds (even though they are stage agnostic, they also invest late stage)

CleanedStar• 13 years ago

Yes, a VC is looking to unshackle the middle class, thank you! Someone is looking out for the US middle class, Scott Kupor, managing partner Andreessen Horowitz apparently.

Barf. Who is dumb enough to swallow this? Sounds like an echo of Bill O'Reilly's "I look out for the little guy".

You tend to hear this term "middle class" from on high a lot, as it means absolutely nothing. What is the middle class in the middle of? Apparently people with income of $200k or over, or assets of $1 million+ are not middle class in his definition. Excluding worth of primary residence of course, which he neglected to mention. I guess this means doctors are not middle class. They must be in the upper class - a doctor is in the same class as Alice Walton, who inherited $26 billion. What is the dividing line between the middle class and the class under it? What class are janitors in, middle, lower? Class used to mean ones relation to production, but that doesn't fit into the kind of babble people like to put out.

To the big point of why this is nonsense. If you look at the Survey of Consumer Finances done by the Federal Reserve, that 4% of Americans he speaks of are the ones who hold the majority of stocks, the majority of bonds and whatnot. Just look through one of these Federal Reserve papers and you'll see that, other than primary residences, this top 4% own almost everything. Outside of primary residences, the next 5% to 20% swallow up pretty much everything the top 4% does not get. Which is not much, relatively. The bottom 80% have virtually no wealth outside of primary residences.

The idea that the median American will benefit from investing in VC is ludicrous. The median American does not have the money to invest and benefit from this. Stocks, dividends and profits are a weapon against the median American. They are dependent on the stock owners, the small top minority, getting the lion's share of the wealth created by the median American. If American workers had strong unions and most of the created wealth in corporations went to wages, not dividends, this would hurt the owners of stocks. The weaker the median American is in this equation, the better the stock does. The median American is all about wages, the crumbs of VC he might pick up are almost nothing. He has no money to invest, so even if his shares go up 20% a year, it amounts to very little.

Obviously, this is yet another thing to benefit the very wealthy. But to sell it, people have to say it's for the middle class. Whereas the middle class, whatever that means, is actually hurt when the wealth they create at companies goes to profit and not wages. It is coming out of their pockets - they create the wealth, then it goes out to heirs like Alice Walton in the form of dividends. Or payments to limited partners from VC. And the like.

muzz14• 13 years ago

Arguably the most significant among the changes was the 2001 move to decimalization

Wow, the claim that the ability to trade stocks in dollars and cents, as opposed to dollars and fractions, is one of the most significant factors in creating a "hostile environment" for IPOs, because then the minimum potential profit is 1 penny. Essentially re-iterating that stocks are merely trading vehicles, and that underlying value isn't responsible for movement in stock price but rather the mechanics of trading.

wildgift4• 13 years ago

Another way to get at the money is to raise taxes on the top 4%.

vbuterin• 13 years ago

Okay, I normally view arguments that regulation is hurting the middle class very favorably, but these arguments are very sketchy for a number of reasons:

1. Decimalization. The argument that the author is making is essentially that "market makers are only interested in working at spreads higher than $0.01, the minimum spread got reduced to $0.01, so market makets are not interested and we have no market makers anymore." Let me restate that in non-financial terms: apple farmers are only willing to sell apples for at least $10, before the government and/or the farmer's market operator mandated that apples be sold for at least $15, now the minimum price was reduced to $5, so we don't have apples anymore. The fallacy is obvious: if there's no supply at $5, then the price of apples will just go back up to $10 or $12 or $15 until there's an equilibrium again. Same with market making and spreads; if no market makers participate with spreads of $0.01, spreads will go up to $0.05, or $0.10, or maybe even $0.23 and we'll end up with a better situation than we had before.

2. Investment and public/private companies: here, the argument seems to be that investing in an early seed round is basically a lottery, investing in public companies is too late, so the middle class should invest in mid-cap firms. That seems oddly specific - the one kind of investment that government won't let us make is exactly the kind of investment that will finally make the middle class prosperous again. The coincidence doesn't invalidate the argument, but it does make it somewhat suspicious.

3. The focus on IPOs as a route to wealth creation assumes that money is generally spread out among the masses. This is increasingly false; the poorest 25% of Americans have less than zero net worth - that is to say, they literally have less to invest than a starving Ethiopian. Deregulation should focus more heavily on the processes of actually creating wealth rather than investing it even if it is ultimately welcome in both.

And the fact that the article does not even mention SOX is just weird...

aidenn0• 13 years ago

The middle-class needs a positive savings rate before anything like the article suggests can help.

muzz14• 13 years ago

The return of pre-IPO venture invest industry trails the performance of the post-IPO returns of the Dow, Nasdaq, and S&P 500 (not to mention that those are highly liquid, regulated, have more disclosure, are more accessible, etc):

http://www.avc.com/a_vc/2013/02/venture-capital-returns.html

Not sure why the author believes that somehow individual middle-class investors will be able to compete with venture professionals who do this for a living and still cannot beat simple stock market index funds.

davidf18• 13 years ago

The author is ignoring the cost side of the equation. Higher education (even public), housing, and health care, have all significantly outpaced wages. Public Universities have increased in price as states have basically stopped funding them. Housing has increased because of artificial scarcity through restrictive zoning regulations which prices the middle class out of markets. Today's NYTimes describes of the last apartment listed for less than $600K in Manhattan's West Village (a total of 408 sq feet for $595K). http://www.nytimes.com/2013/07/09/nyregion/amid-housing-scar...

The dramatic rise in housing was through politics that restrict construction that benefits existing landlords over the middle class.

Housing and public higher education costs can both be addressed by electing public officials that are concerned about living standards for the middle class by simply restoring state funding of higher education and deregulating restrictive zoning laws.

Unshackle the Middle Class

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