published Mar 3rd 2017, 8:03 am, by Matt Levine

(Bloomberg View) —

Snap.

The main worry about tech unicorns is a pretty simple one: Will public stock market investors pay more for tech companies than Silicon Valley venture capitalists? Traditionally the answer has been yes, which is why venture capital can be a business: Venture capitalists invest at lower valuations, then sell at higher ones. I mean it’s not as simple as that: The model is that the venture capitalists invest in riskier, earlier-stage companies, and then cash out to the public when those companies succeed. But as companies stay private longer and private fundraisings get bigger, that model has broken down a bit. The recent concern about a “unicorn bubble” has been not so much that tech valuations are universally high, as that private-market valuations have gotten ahead of public ones.

So good news! Snap Inc., whose last private valuation was about $18 billion last spring, priced its initial public offering on Wednesday at about a $24 billion valuation, and jumped on its first day of trading yesterday, closing up 44 percent at about $34 billion ($24.48 per share). (Those are fully-diluted numbers including options, etc.; the simple market capitalization numbers are about $20 billion and $28 billion, respectively.) Public investors were willing to pay almost twice as much for Snap as private investors were. Of course Snap is a year more mature now than it was in its last private round (though still not profitable), but that’s the way it’s supposed to work. The venture capitalists nurtured it for a while, and then passed it along to public investors who were willing to pay more.

Snap is a weird unicorn, and may not be a harbinger of anything. But as other big tech companies ponder their own IPOs, the basic question will be: Can we get more money out of the public market than the private one? And Snap’s answer is: Sure, yeah. Not only that! Snap’s answer is that you can get more money out of public shareholders, and you don’t even have to give them voting rights. Or mail them a proxy. Or worry about short-term-focused activist investors monkeying with your vision. Or be a profitable business. Or explain how you’re going to be a profitable business. “We’re going to have to go through an education process for the next five years to explain to people how our users and that creativity creates value,” said Snap co-founder Even Spiegel, after the IPO.

We talk a lot around here about how private markets are the new public markets. Private technology can now raise billions of dollars, at 11-digit valuations, from a lot of the same investors (big mutual funds, retail) that they would find in the public markets. The need to go public — to raise money, to raise your public profile, to make your stock an acquisition currency — has been diminished. Of course you still want to go public to cash out your venture-capital investors and your founders. (Spiegel and his co-founder, Bobby Murphy, each sold $272 million worth of stock in the IPO.) That works best when the public markets are at least as attractive as the private ones: when the public investors will give you a higher valuation, for one thing, but also when they’ll trust the founders’ vision as much as private investors will. Measured like that, Snap is a huge success. By going public with non-voting shares, it has cemented its founders’ control and found a way to turn public markets into the new private markets.

This success is obscured a little bit by the fact that Wall Street says mean things about Snap. Before the IPO, there was a lot of grousing from governance authorities about the non-voting shares. Since the IPO, according to Bloomberg data, five research analysts have introduced coverage on Snap, three with sell or equivalent ratings and two with holds. (Target prices range from $10 to $22, versus yesterday’s $24.48 close.) This is in part an artifact of IPO rules: If you’re a bank research analyst and are bullish on Snap, there’s a good chance you’re at one of its 26 underwriters, and will have to wait 10 days to initiate coverage. In general, though, Wall Street has a really effective way to express its collective opinion, and it’s not by writing research notes or complaining to reporters. It’s price. And measured by price, Wall Street loves Snap.

What else? I suppose we have to talk about the notion, debated after every successful IPO, that Snap “left money on the table” by selling shares at $17 when it could have sold them at $24 (where the stock opened yesterday morning). That’s not really true, first of all. Snap and its shareholders sold 230 million shares for $17 in its IPO (counting — as you should — the shares underlying the greenshoe option). About 26.4 million shares traded at $24 in yesterday’s opening cross. (Total volume for the day was about 217.1 million shares.) Demand for shares is probably downward-sloping with price; Snap probably could have sold 26 million shares at $24, but not 230 million.

But it could have sold the 230 million at $19, anyway, and didn’t: Given the interest, Snap could have priced the shares at $19 each, the person said, but executives wanted to ensure that shares would make a decent gain in their debut.

Snap did leave money on the table, but intentionally. Getting the last possible dollar out of this offering wasn’t the priority; making investors like Snap was. Which makes sense. Everyone here is a repeat player. The bankers, sure, want the deal to pop, because they will have to sell other deals and want investors to think fondly of them. But Snap’s venture-capitalist private owners are also at least as invested in the broad tech-unicorn ecosystem as they are in Snap itself, and a successful deal on a high-profile unicorn does their next unicorn good. Snap’s founder-owners are keeping far more shares than they’re selling, so they want investors to remain bullish on the company.

Meanwhile: “Simon Chiu, the president of Saint Francis high school in Mountainview, said the school board agreed to invest $15,000 in seed money in Snap in 2012, when the company was just getting started.” It cashed out two-thirds of its shares for $24 million in the IPO. Is there anything in Northern California that is not also a venture-capital investor? Apparently the religious high schools are. Are there any, like, volunteer fire departments or hippie communes on Zen monasteries or Girl Scout troops or animal shelters that don’t have a sideline in seeding hot social media companies?

Hedge fund succession planning.

If you run a hedge fund, how do you get people to give you money? The basic answer seems to be that you persuade them that you have a rational, logical, repeatable process to produce market-beating investment insights. (Obviously having a track record of beating the market helps with this.) When they ask how you invest, if you stare at them, point at your forehead, and say “it’s my braaaaain,” they will probably pass.

And yet. The thing about having a good process to identify good investments is that the market is probably the best process ever devised to identify good investments. The market has lots of people doing lots of things to find good investments, and a powerful weighing mechanism to aggregate all of their work into prices. What makes your process, run by a dozen people wearing fleeces in a room full of computers, better than the market’s process, which is run by thousands of people in fleeces in thousands of rooms full of computers? I said the other day that “investing in hedge funds requires a willing suspension of disbelief in the efficient markets hypothesis.” How do you cultivate that suspension of disbelief?

Some hedge funds have plausible answers, processes that capture the imagination and might rival the market’s. Bridgewater Associates’ economic machine and relentless self-criticism, Renaissance Technologies’ secretive machine learning: These are processes with long track records of success, but they also show an obviously genuine commitment to the processes themselves. If tomorrow all financial markets were closed forever, a thousand Bridgewater employees would probably still come to work just for the sheer joy of analyzing each others’ flaws. If you invest in Bridgewater, it is because you believe in their process, and you trust that they do too.

But if you go to the average — or even the best — fundamental equity manager and ask about his process, he’ll be like “well, we read a lot of 10-K’s” or whatever. (That’s Warren Buffett’s process!) The idea that most hedge fund managers have built proprietary machines for finding good investments that can rival the market’s machine — that can synthesize and analyze information better than the market can — just seems implausible. But people give them money anyway! Sometimes they even beat the market! Sometimes they even develop long consistent track records of beating the market! I think any plausible story about how this works has to include some room for pure personal skill, some residue of investing acumen or instinct or luck that can’t be reduced to a written checklist. The way you get the suspension of disbelief is through personal charisma: Deep down, the investor believes not that this fund has a robust process for finding good investments, but that this fund’s manager has a quasi-magical intuition for finding good investments.

Anyway succession planning at big hedge funds (and Buffett’s Berkshire Hathaway Inc.) is difficult, but why wouldn’t it be? “It can be challenging to groom the next generation when success is built on a founder’s skill and reputation.” It is not easy to pass on that unteachable residue, or to transform charisma into bureaucracy.

Goldman cell phones.

Here’s a sad little story about how Goldman Sachs Group Inc. will now chip in 10 dollars/pounds/euros towards its bankers’ cell-phone data charges, as opposed to just paying the bills itself. “The new plan is rankling some dealmakers.” Two good rules of thumb are:

If you spend all your time on your cell phone bringing in lots of big deals with multimillion-dollar fees, your employer should really pay your whole phone bill; and If you get paid many millions of dollars for bringing in those deals, it is kind of petty for you to complain about the phone bill.
The fact that Goldman has stopped paying the bills, and the bankers are complaining, suggests that neither of those two conditions is especially true any more.

Disclosure: I used to work at Goldman, where I had a work-issued Blackberry. Come to think of it, I can’t remember what that was like. Intellectually I am almost certain that I had a Blackberry and used it for work email, but I have no visual or tactile memory of carrying around a Blackberry or typing on it. I guess I don’t miss it very much. You’ll be okay, Goldman people.

Happy bitcoin/gold crossover day!

According to Bloomberg data and my calculations, one bitcoin would buy about 30.5 grams of gold at the end of Wednesday, and about 31.7 grams at the end of Thursday. This is of course a round-number milestone, but only if you weigh your gold in troy ounces, which to be fair most people do. A troy ounce is 31.1 grams. That means that, as of yesterday, “the price of a bitcoin has climbed above that of a troy ounce of gold for the first time on record.” The canonical gold price was $1,234.25 (per troy ounce), while the canonical bitcoin price was $1,257.94 (per bitcoin), so congratulations everyone, that number that used to be smaller than that other number is now bigger than that other number. As meaningless numerical achievements go, this one is pretty meaningless, but, you know, what units were your Dow 21,000 celebrations in?

Should index funds be illegal?

Goldman Sachs quant investor Andrew Alford says nah:

The return of an indexed portfolio depends on the return of the underlying index, and not the return of one stock at the expense of another (as is often the case for an actively managed portfolio). Most broad-based equity indexes comprise a wide cross-section of the stock market, and the performance of a broad-based index, like the equity market as a whole, is directly impacted by the performance of the economy generally. To the extent that vigorous competition helps promote economic growth, index managers (and their investors) have every incentive to encourage competition among index constituents.

Also: “Active investing still occurs, but via thematic portfolios and/or at the asset-class level rather than via individual stocks.” Meanwhile, “Goldman Sachs Group Inc. has amassed $3 billion in its exchange-traded funds in just 18 months, one of the most successful debuts in the industry.” And elsewhere: “What exactly is in those Bible-based ETFs, anyway?”

Should you eat weed at work?

This story about workday marijuana microdosing gives a useful taxonomy of companies where you should and shouldn’t eat low-dose edibles at work, or at least, where you should and shouldn’t talk about it on the record with a reporter. So go ahead and nibble if you work:

At a “venture firm that backs cannabis-related companies,” or as the “director of IT at a law firm.”
Those are pretty obvious; I always assumed that a lot of law-firm IT managers were stoned all the time. On the other hand, skip the weed mints if you:

“Drive a forklift,” sure, or work at “Kiva Confections, a California-based edibles maker,” which bans workers from getting high on its own supply during the workday, “citing safety concerns.”
Marijuana capitalists, yes; marijuana factory workers, no. What would Marx say? Elsewhere in workday weed: “Bets on marijuana companies helped an Australian manager soar 145 percent last year to become the world’s best-performing hedge fund.” And: “Trump Policy on Recreational Weed Seen as a Logistical Nightmare.”

People are worried about unicorns.

I mean, you’ll never be lonely worrying about Uber:

Uber Technologies Inc. has a lot of work to do on its workplace culture, a senior executive said, after crises capped by the emergence of a video showing CEO Travis Kalanick dressing down a driver.

Such moments don’t reflect the company’s values and “are causing us to take a hard look into our culture,” Andrew Macdonald, the ride-hailing platform’s general manager for Latin America and Asia Pacific, told reporters Thursday at a briefing held by the Foreign Correspondents Club in Jakarta.

One problem with the overuse of corporate buzzwords is that you sometimes find yourself saying that your culture doesn’t reflect your values. Whose values does it reflect? Elsewhere: “Self-Driving-Truck Startups Race to Take On Uber.”

Things happen.

‘Flash Boys’ Exchange IEX Criticizes Nasdaq Order-Type Proposal. Pimco’s New Bond Chief Is Nailing It. “General Wireless Operations, the joint venture between Sprint Corp. and former RadioShack owners, is preparing to file for bankruptcy, according to people familiar with the matter.” Bank of America CEO Calls for Changes to Volcker Rule. SEC’s Piwowar: Obama-Era Retirement-Savings Rule Boon for Trial Lawyers. Dismantling Dodd-Frank May Have to Wait. U.S. Agents Raid Caterpillar Over Offshore Tax Practices. Was Aubrey McClendon a Billionaire, or Broke? Wealth of China’s richest 200 lawmakers tops $500bn. Africa’s Top Hedge Fund Starts Food-Focused Private-Equity Unit. Palantir Provides the Engine for Donald Trump’s Deportation Machine. Senate Democrats Raise Concerns About Labor Department Data Under Trump. Alaska’s Pebble Mine and the Legend of Trump’s Gold. Nassim Nichoals Taleb: “Assassination as Marketing.” Who Gets to Be a Restaurant Critic? A Tolkien Truther From Colorado Says He’s the Real King of England. Creepy turkeys. Firefighters rescue same dog from roof twice in an hour.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
To contact the author of this story: Matt Levine at mlevine51@bloomberg.net To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net
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