September 10, 2010

‘Cause One Is Born Every Minute: Pre-IPO Investment Farce

by Freddy J. Nager, Founder of Atomic Tango LLC & Dotcom-Bust Survivor

Sucker!

"Look, we caught another one for a pre-IPO investment!"

“If you buy a share of Facebook and flip your shares in a few years, you could make millions. Oh, but wait: You can’t. Facebook isn’t a public company. The only people who can invest in it already are millionaires. The hot IPO market of the 1990s, which allowed Regular Joes to buy stock in new companies, has been replaced by a rich insider’s club that trades in pre-IPO equity sales. The middle-class folks who daytraded their way through the dotcom boom are now locked out. And that’s a problem. The current government regulations just make the rich richer, and they block alternative avenues of investment at a moment when funding is hard to find. It’s time to change the rules.” — Paul Boutin, “Let the Little Guys in on Pre-IPO,” Wired Magazine, August 2010

While you’re at it, Boutin, why just mention Facebook? Why not Wesabe, Radar, EventVue, or DotBlu? After all, those are all hot, highly touted tech startups that have attracted millions of dollars in pre-IPO investments from millionaires…

Oh, wait, my bad — I should have written that sentence in the past tense: those all were hot startups that had attracted millions. Now they’re all dead companies, with all their millions in investments evaporated into bad dreams and fairy dust.

For every Facebook, there are thousands of startups that never make it past their first birthday, least of all to an IPO. You can find a few of their obituaries in the TechCrunch Deadpool, but most are not even big enough to warrant that dubious honor. So go ahead, take a plunge into the Deadpool and see how many startups sounded as promising as Facebook at one time, but are now case studies in failure.

Later in his article, Boutin writes, “Sharp, up-to-the-minute financial advice is no longer beyond the reach of the middle class. We’ve got the Motley Fool to keep us abreast of stocks…” Really, Boutin? The millionaire investors can actually demand multiple meetings with the entrepreneurs themselves, scour their confidential business plans, and grill them on everything from their business education to their revenue models. And the middle class gets Motely Fool?

Boutin wrote this article at the same time that Goldman Sachs was fined half-a-billion dollars for deceiving experienced institutional investors. He wrote this on the heels of a stock market implosion that wiped out the investments of millions of stockholders. He reminisces about the “dotcom boom” where Regular Joes could daytrade in hot startups, but fails to mention the massive dotcom BUST when scores of other publicly traded startups wiped out billions in shareholder value, much of it from those same middle-class investors.

Keep in mind that the stock market consists of post-IPO companies that have jumped through thousands of hoops under the scrutiny of the SEC, and yet investors still get burned badly on a regular basis. How’s that Fannie Mae stock doing? Or — if you like tech startups — Sirius/XM? And now Boutin wants to open up public investment in unvetted, barely regulated, pre-IPO companies that have yet to earn a dime.

There’s a reason the government limits pre-IPO investment to millionaires who have the resources and expertise to thoroughly research startups, and who can afford to lose every cent of their investments. Pre-IPO investing is high-stakes gambling with many more losers than winners. The average middle-class investor is far safer betting on horse races — at least there, one horse has to win.

Boutin concludes, “The masses could once again play a role in America’s thrillingly adventurous startup economy without having to land a job at Twitter.” I think you have a typo there, Boutin: instead of “masses,” you meant to write the word “suckers.” And millionaire investors can never have enough of them, right?

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

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