Many of today's investors were paying close attention to prior tech IPOs, and have watched the stratospheric rise in their share prices over the years. They also learned that it's much cheaper to buy into those companies before they go public. Microsoft as an investor is an example of this. In October 2007, Microsoft reportedly bought 1.6% of Facebook for $240 million at a $15 billion valuation. Facebook's current market cap hovers around $475 billion, and that 1.6% stake would be worth well over $7 billion today.
Did Microsoft have any inkling the returns would be that significant? Microsoft's pre-IPO revenues and valuations were a bit different than Facebook's, which struggled to monetize its platform for years. But Microsoft was well-versed in big ideas that can gain steam in the public market.
IPO FOMOWhat if Uber is right about the future of transportation? Or if Pinterest is right about the future of search—that the real money is in image search, not keywords? What if SpaceX commercializes space travel and eventually reaches Mars? They're all longshot plans, to be sure, but so was Amazon's. Jeff Bezos never planned on sticking to the books, and a mere 20 years after its IPO, the Amazon retail model has upended dozens of industries, with many more potential disruptions on the way. It took a while, but we now realize—and see—what Bezos was talking about all along.
Technology is no longer under the radar. Clickbait articles that calculate the large sums of money one would have made by investing at the IPO stage for the likes of Apple, Microsoft or Amazon have become their own genre. None of today's unicorns will come close to those gains, since so much of their potential value has already been priced in. But some ideas clearly have exponential staying power, whether they're housed in the private or public markets.
The Power Law is a real thing. In VC parlance, the Power Law stipulates that one absurdly successful investment can make up for all the duds. The handful of successes are so potent they negate all the disappointments. That's how venture capitalists can afford Ferraris thanks to one portfolio company, while the vast majority of their other investments are written off entirely.
When Peter Thiel co-authored "Zero to One" in 2014, he pointed out that "the dozen largest tech companies were all venture-backed" and were cumulatively worth more than $2 trillion—"more than all other tech companies combined." Since then, two of those companies have achieved $1 trillion market caps by themselves. Thiel's point was well-taken at the time, but if he had waited four years to publish, it would have been even stronger. Chalk it up to tech hype if you'd like, but trillion-dollar hype doesn't happen in a vacuum; it happens after some of those longshot goals are actually achieved. Not without reason, investors pile into those companies when it becomes clear what their next longshot goals are.
A premium on influenceReturns of 30x are venture-esque, and not every private unicorn will become a public success story. How to spot the ones that do? One bellwether is potential influence. It's easy to see in hindsight, but retail investors don't tend to take iconoclast CEOs as seriously as venture firms do. History, though, is littered with hints and clues that those iconoclasts may be on to something. The tricky part is interpreting them correctly.
Consider how influential Facebook has become since Microsoft's investment. A year prior, Facebook had just introduced its news feed, which caused a ruckus around privacy among friends and colleagues. How quaint things were back then. These days Mark Zuckerberg is hauled before congresses and parliaments to discuss the same topic, privacy, but on a vastly larger scale. Say what you will about the whole mess. The underlying point is how influential Facebook became in such a short amount of time.
Twitter is another example. Watch Joe Rogan's second interview with Jack Dorsey if you haven't—one point of contention was how Twitter's hate speech policies have veered away from constitutional standards, and ultimately whether Twitter can be trusted as an even-handed social platform in today's culture. Dorsey was joined in the interview by corporate counsel, who handled most of the sticky questions.
It's becoming clear that today's tech companies are wrestling with some fundamental ideas that are larger than the technology they're introducing. What other big ideas are floating around in the private markets? And are they willing to take a meeting before they go public?
This column was originally published on Forbes' website.
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