Financial Revolution: How IT Startups Change The Rules On Wall Street
When last year’s IPO was conducted by Snap (it manages the Snapchat project), it managed to sell 200 million shares, none of which gave owners the right to vote and the opportunity to influence the business. Spotify streaming service did not attract funds during the recent access to the exchange. In 2016, investors wishing to invest in Uber could do this through a specially created fund, New Riders LP, by Morgan Stanley – while they did not receive any information about Uber’s revenues, the company’s costs. They could not understand if the business model of the company was viable.
These are just a few recent examples of a new trend: for successful technology companies, the usual rules of Wall Street do not work. About what it can mean for business and the global financial market, says Wired columnist Felix Salmon. We present to your attention the main theses of this material.
With the recent placement of Spotify shares on the New York Stock Exchange, the company’s CEO did not even come for an official ceremony (as the management of large companies used to do earlier), staying in Sweden. Moreover, he published an article on the blog in which he stated that nothing particularly remarkable had happened and that it was “just one more day in our journey.”
Technological companies managed to do something that was not possible for representatives of other industries – they were able to reduce the influence of bankers. Previously, financiers have always strived to penetrate as deeply as possible into any promising industry, but they can not do it in the field of technology. Since the middle of the 2000s, when Google conducted its IPO using the new technique of the Dutch auction, Silicon Valley has increasingly used the services traditionally offered by investment banks.
- For example, during an IPO, banks usually created a book building, which determines the demand for shares – and this allowed them to help buy out significant volumes of future placement by the right customers. At the same time, when the stock price is determined in advance during an open Dutch auction, the bankers have much less power, and they will be able to earn much less on commissions.
Similarly, Spotify held its revolutionary direct placement of shares, which does not imply the sale of shares by the company itself – and a commission of banks with Wall Street at 7% in this case, too, is not necessary.
Savings on fees during the IPO – just the tip of the iceberg of a new financial reality. Much more importantly, today, companies that develop with the involvement of venture capital generally want to avoid entering the exchange. They “raise” money, constantly selling shares. Just for this, they do not have to use the open market, which means that you do not need to cooperate with banks, which are the only entry point to these markets. Only in the first three months of 2018, venture capitalists invested $ 28.2 billion in shares of private companies. During the same period, with the help of IPO, the companies attracted only $ 17 billion.
Credits can also be taken in a new way
The situation on the debt market is very similar. It is impossible to attract borrowed capital without interactions with banks: if the company wants to issue bonds, it will need the help of the bank, and if it wants to take out a loan, then it will be issued by the same bank.
At the same time, Uber recently managed to borrow $ 1.25 billion from a syndicate of non-bank funds (Apollo, Bain, Blackrock, etc.), avoiding interactions with Wall Street. Bankers are used to very carefully assess risks, and the company constantly generates a loss, and the regulators do not like very much when banks give money to borrowers who do not understand how they will return.
- But now the experience of Uber shows that such transactions can be carried out with the help of companies that are not subject to such a tight regulatory press, but can give the same as the bank, even without the attendant million commissions and fees.
But why then do you want to issue shares? During the IPO of Google, the company raised $ 1.67 billion, and to get this money she had to issue 19.6 million shares at $ 85 each. Today there are other ways to attract similar amounts. An example is the ICO of the Telegram messenger, which, during several close rounds, sold to selected investors the tokens for $ 1.7 billion. At the same time, the founder’s share of the project did not decrease in any way, as no one sold shares. This is another major blow to Wall Street.
In the modern economy, there is no reason to maintain the dominance of banks at the current level. Today, the finance sector is taking too much place – according to some sources, one dollar out of seven spent in the world ends up in the pockets of Wall Street bankers. Is it too much for the sector, which, according to the former banker and expert on financial regulation, Adair Turner, is “socially useless”? Not surprisingly, technology companies were able to develop a scheme in which the situation is changing, and resources are left to them and their investors.
Surprisingly, the fact is that no one is trying to implement this scheme anymore. This is a very serious innovation, which has not yet surpassed the technological sector. Why does no one else conduct an IPO using the method of the Dutch auction, as Google did? Why is it not audible that some non-technological company considers the option of entering the exchange “in the style of Spotify”, attracting loans “by the method of Uber” or ICO “as in Telegram”? The answer lies in the existing balance of power: over the years, large companies have become too dependent on banks and the many services they offer – and in the non-technical sphere, for business to grow seriously, it often takes years, if not decades.
On the contrary, technology companies are young and do not live in a paradigm, in which banks are the only tool for working in the financial market, so they are not afraid to act bypass.
And this is exactly the approach that is important how to study companies from other spheres of the economy. To deprive Wall Street of the role of a world mediator between business and money is quite possible, there are no reasons preventing the wider spread of the trend set by Silicon Valley.