Not Too Big To Fail

Flexibility and growth.  Those are the two words being repeatedly talked about as a chief justification for the Private Company Flexibility and Growth Act (H.R. 2167) currently making its way through Congress.  The legislation would strike down what Rep. David Schweikert  (R-Ariz) calls a piece of “burdensome regulation” mandating that all private companies with a minimum of 500 shareholders file with the SEC and go public.

The new bill, in helping entrepreneurs “grow their business, remain competitive, and create jobs,” said Schweikert, who sponsored the bill, would raise the mandatory minimum from 500 to 2,000.  Companies would then be able to remain private for a substantially longer period of time.

“This regulation severely limits the growth stages for companies, which need time and flexibility to develop,” Schweikert said in a statement, adding that the legislation would “unwind rep-tape on small business and allow for growth and job creation.”

While some of the nation’s most well-known private companies like Facebook will almost certainly be lobbying Congress on behalf of the legislation, missing from the uncharacteristically robust bipartisan support the bill appears to be garnering is any meaningful discussion of a principle sadly anathema to Washington these days: transparency.

Though it might benefit a company to remain comfortably behind the anonymity of, say, a Second Market, what does the lack of transparency cost would-be shareholders who might also benefit from discerning earlier rather than later the pitfalls of a potential investment.

Many of the belatedly revealed exotic accounting practices of Groupon Inc. (GRPN), for instance, weren’t brought to light until after the company filed its S-1 with the SEC, requiring that the agency closely scrutinize the company’s financial soundness before approving its bid to go public.  At that time, Groupon, which was valued by some at $30 billion, was a growth story darling on Wall Street, and the sky—at least if you asked any of the company’s A-List underwriters—was the limit.

But as it made its way through the SEC’s “burdensome” regulatory pipeline, people slowly began to gather that the company may not be what it had led everyone to believe.  Indeed, after an SEC review uncovered Groupon’s accounting shenanigans, many people started to ask questions and the company’s estimated value plummeted by half.  Even then, there were still some who vocally questioned whether Groupon was worth as much as $15 billion.  And while investor appetite was generally hearty for slices of Groupon’s IPO pie earlier this month, it would have no doubt been even more aggressive if the SEC hadn’t outed the company.

If we’re going to be a truly free market—as Rep. Schweikert and others openly advocate for—isn’t it only fair that we adhere to one of the most cardinal principles of any free market and let those companies that are unfit meet their Darwinian end?  Keeping a weak company safely within the bosom of the private market any longer than necessary only seems like an exercise in prolonging the inevitable.  Besides, if ordinary Americans are expected to pull themselves up by their own bootstraps, shouldn’t companies be expected to do the same?

Regulation: An Idea Whose Time Has Come

Goldman Sachs CEO Lloyd Blankfein/Saul Loeb/AFP/Getty Images

Take a look around.  Everyone’s  angry.  The 99% are upset that they haven’t been getting their fair share.  The 1% is angry at the suggestion that its own share has been much too large for far too long.  And Washington is engaged in a heated tug of war about how much regulation of the line of demarcation separating Wall Street from Main Street is too much.

While the Republican presidential field is content to point fingers at the White House, arguing that the 99% should be leveling their accusations of corruption and mismanagement not at Wall Street and the financial services industry but at the president, data suggests the American people are still hungry for their pound of flesh from banks and the larger financial services sector.

Indeed, according to a June Gallup poll, “thirty-six percent of Americans have ‘very little’ or ‘no’ confidence in U.S. banks—up from 30% last year and the highest on record.”

If anything, such robust cynicism on the part of average Americans suggests the moment is more ripe now than ever for both sides of the aisle to shelve their pro- vs. anti-Wall Street talking points and come to at least one inarguable consensus: in light of the catastrophe that was the 2007-2008 financial crisis, some form of regulation is necessary.

Yet since Dodd-Frank’s Volcker Rule was released by regulators for comment last month, some of the biggest players on Wall Street—including investment bank Goldman Sachs—appear more defiant than ever, amassing their sizable stockpiles of capital to lobby Washington to take the teeth out of the regulation, which is intended to reduce the systemically risky practice of proprietary trading on the part of banks.

Despite the gargantuan lobbying efforts of Wall Street, though, the hunger for a legitimate and transparent system of checks and balances on the rogue excesses of the few—not all—bad actors in the financial services industry is implacable.  No matter how much wailing or gnashing of teeth Wall Street exhibits, “something’s gotta give” if we’re to successfully reinstill confidence in Wall Street in the minds of those on Main Street.

As several of the Occupy Wall Street protesters professed in a Tuesday op-ed in the wake of the New York City Police Department’s eviction of the 99% from lower Manhattan’s Zuccotti Park in the wee hours of the morning on Tuesday, “you can’t evict an idea whose time has come.”

While many on Wall Street may have breathed a sigh of relief as they sauntered through a Zuccotti Park this morning free of protesters for the first time in months, any sense of respite or vindication they may have felt could ultimately prove short-lived if the issues and concerns raised by the occupiers—however cacophonous and diffuse they were at times—aren’t taken seriously and Wall Street’s overindulgences aren’t sufficiently addressed with all deliberate speed.

Indeed, as financial regulator turned University of Missouri-Kansas City professor William K. Black notes in drawing parallels between the largely unregulated financial services industry today and the “looting” that followed the deregulation of the savings and loans industry in the 80s and 90s, “The costs of regulation are trivial relative to the costs of [another financial crisis.]”

Consumer Lending Institutions Face Strong Headwinds

Bank of America CEO Brian Moynihan/Courtesy of Greater Boston Chamber of Commerce

It seems that banks have been taking a battering in the current post-recession climate as a potentially fatal cocktail of uncertainly arising from the European debt crisis and continued volatility domestically continues to push banks to the limit.

Some banks, like Bank of America, continue to deal with losses due to mortgage-backed securities. B of A’s recent fortunes have largely been tied to its 2008 purchase of home lender Countrywide, prompting new CEO Brian Moynihan to take sizable steps as he attempts to restructure and rebuild the image of the nation’s largest bank.

Even investment bank Goldman Sachs, once thought to be impervious to the elements that have traditionally given other banks fits, has been hit hard by losses as of late.  According to DealBook, Goldman, “weighed down by problems in its private equity portfolio and the broader global economic woes, reported a loss of $428 million, compared with a $1.7 billion profit a year ago.” Underscoring the magnitude of the loss, it was only the second time since the company went public in 1999 that Goldman suffered a loss.

It’s unclear whether banks will be able to collectively rebound from the malaise currently engulfing them, but their progress—or lack thereof—in doing so may be an important indicator as to whether the economy as a whole is righting itself or still teetering precariously close to yet another downturn.

What Every Start-Up Can (And Should) Learn From Groupon

 

Dan Frommer, Business Insider

Groupon was the latest Internet juggernaut to IPO this year after LinkedIn did so back in March, officially going public after a long-awaited, much-scrutinized and oftentimes much-maligned road to the stock market’s opening bell on Friday.

As expected, Groupon, the web’s most popular daily deals destination, which raised an estimated $700 million in what was the largest Internet company IPO since Google’s $1.9 debut in 2004, saw its stock surge straight out the gates.

The Chicago-based company’s stock climbed 30.6 percent from its $20 initial price to close the trading day at $26.11, making founder and CEO Andrew Mason an instant billionaire and earning early investors like Marc Andreessen and Ben Horowitz returns on their investment numbering in the tens of millions.

Yet while many will of course be fawning over the official birth of another promising tech company in the coming weeks, there are a number of valuable lessons budding start-ups—many of whom watched the delivery of Groupon’s IPO baby with a palpable sense of anticipatory glee—can learn from companies like Groupon.

Sadly, they’re not very good ones.

First, if you’re going to build a start-up, try as best as possible to distinguish yourself.  In the tech world, if you really want to break free of the herd, you’ve got to either enter into a venture with relatively high barriers to entry for competitors or, like Apple, offer the public an incomparable product (read: iPhone or iPad) customers are willing to scale to obscene price points to acquire.  Ideally, you want both of these conditions to be the case.

Groupon, as it’s become increasingly clear, fails on both fronts.  Besides not producing anything, the barriers to entry in the daily deals space are relatively non-existent, leaving the door behind Groupon wide open for any of its growing horde of rivals to crash its party.

While imitation is the greatest form of flattery in some circles, to a tech company—which depends on innovation and staying one, if not two, steps ahead of the pack—the ability of others to easily mimic you suggests you simply didn’t set the bar high enough from the outset.

Now, Groupon’s peers, which not only include LivingSocial and Bloomspot but a number of other portals too numerous to mention, may soon pose a serious threat to Groupon’s dominance.  For the time being, though, they seem content to slowly winnow away the company’s market share as they build their own customer bases, some of which, I’m sure, will necessarily culled from the ranks of disaffected Grouponers seeking even lower price points on deals elsewhere.

Skyrocketing marketing expenses, which Groupon has said it intends to curtail, won’t do all that much to save the company if rivals begin to undercut its price points en masse, since at the end of the day a better deal essentially sells itself.

Once you’ve realized who or what you are, the game you’re in and you’ve successfully assessed all of the other competitors in your field, it’s important to be real with yourself and investors about what you can capably deliver.

Over-promising, while it may earn you a few extra VC dollars today, will only hurt you in the long-run, as you’ll ultimately be punished by the markets when your company fails to meet overly ambitious earnings estimates quarter after quarter.  In fact, companies like Apple have made a practice of doing precisely the opposite, routinely outpacing its own stated earnings targets.

While Groupon’s 30.6 percent jump on its first day of trading isn’t a bad start, it’s a far cry from the 109 percent LinkedIn shares soared its first time out, closing at $94.25 a share after debuting at $45.

And LinkedIn, with decidedly less pomp and circumstance, mind you, already garnered over 100 million users before it hit the open market.  Facebook, still in the process of considering its own IPO, has already eclipsed 800 million.  Mason and company, by contrast, can claim just shy of 40 million.

Is Groupon overvalued?  Maybe it is.  Maybe it isn’t.  But looking over the sum total of its performance thus far, I would have expected more from a company with the largest Internet coming out party since Google.

But that’s just me.