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The financial revolution: how IT startups change the rules of the game on Wall Street



When Snap conducted the IPO last year (manages the Snapchat project), it managed to sell 200 million shares, none of which gave holders the right to vote and the ability to influence the business. During the recent exchange, the streaming service Spotify did not attract funds. In 2016, investors who wanted to invest in Uber could do this through the New Riders LP foundation, specially created by Morgan Stanley Bank - and they did not receive any information about Uber's revenue, the company's costs. They could not understand whether the company's business model is viable.

These are just a few recent examples of a new trend: for successful technology companies, the usual Wall Street rules do not apply. About what this may mean for business and the global financial market, says columnist Wired Felix Salmon. We present to your attention the main points of this material.
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Sunset ipo


With the recent placement of Spotify shares on the New York Stock Exchange, the company’s CEO didn’t even fly in for the official ceremony (as the management of large companies often did before), staying in Sweden. Moreover, he published an article in a blog in which he stated that nothing particularly remarkable happened and this is “only one more day on our journey”.

Technology companies managed to do something that representatives of other industries could not do - they were able to reduce the influence of bankers. Previously, financiers have always sought to penetrate into any promising industry as deeply as possible, but in the field of technology they fail to do this. Since the mid-2000s, when Google conducted its IPO using the new technology of the Dutch auction , Silicon Valley has been using the services traditionally offered by investment banks less frequently.

For example, in the course of IPO, banks were usually engaged in creating a book of orders (book building), which determines the demand for stocks - and this allowed them to help redeem significant amounts of future placement with the right customers. At the same time, when the stock price is determined in advance during the open Dutch auction, bankers have much less power, and they will be able to earn money on commissions much less.

Similarly, Spotify conducted its revolutionary direct placement of shares, which does not imply the sale of shares by the company itself - and the commission of Wall Street banks at 7% is also not necessary in this case.

Saving on IPO fees is only the tip of the iceberg of a new financial reality. Much more important is the fact that today companies that are developing with the involvement of venture capital in general tend to avoid entering the stock exchange. They “raise” money by constantly selling stocks. Just for this they do not have to use the open market, and therefore do not need to cooperate with banks, which are the only entry point to these markets. In the first three months of 2018 alone, venture capitalists invested $ 28.2 billion in shares of private companies. Over the same period, using the IPO, the company attracted only $ 17 billion.

Credits can also be borrowed in a new way.


The situation in the debt market is very similar. It is impossible to attract borrowed capital without interactions with banks: if a company wants to issue bonds, it will need the help of a bank, and if it wants to take a loan, 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-banking funds (Apollo, Bain, Blackrock, etc.), avoiding interactions with Wall Street. Bankers are used to very carefully assess risks, and the company constantly generates losses, and regulators are not very fond of when banks give money to borrowers who do not understand how they will be returned. But now Uber's experience shows that such transactions can be carried out with the help of companies that are not subject to such a rigid regulatory press, but can give the same as a bank, even without the accompanying millions of commissions and fees.

But why then issue shares at all? During Google’s IPO, the company raised $ 1.67 billion, and in order to receive this money, it 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 Telegram Messenger, which during several closed rounds sold to selected investors tokens for $ 1.7 billion . At the same time, the shares of the project founders did not decrease in any way, since no one sold the shares. This is another serious blow to Wall Street.

In the modern economy there is no reason to maintain the dominance of banks at the current level. Today, the sphere of finance is too important - according to some information, 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 former banker and financial regulation expert Hadair Turner, is “socially useless”? It is not surprising that technology companies were able to develop a scheme in which the situation changes, and the resources go to themselves and their investors.

Perspectives


What is surprising is that no one else seeks to implement this scheme. This is a serious innovation that has not yet gone beyond the technology sector. Why no one else conducts an IPO using the Dutch auction method, as Google did? Why can't I hear anything about some non-technology company considering the option of entering the exchange “in the style of Spotify”, attracting loans “according to the Uber method” or ICO “like a Telegram”? The answer lies in the current balance of power: for many years of their work, large companies have become too dependent on banks and many of the services they offer - and in the non-technical sphere, for a 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 instrument of work in the financial market, therefore they are not afraid to work around.

And this is exactly the approach that is important for companies to learn from other sectors of the economy. It is quite possible to deprive Wall Street of the role of a mediator between business and money, there are no reasons preventing a wider spread of the trend set by Silicon Valley.

Other materials on finance and stock market from ITI Capital :


Source: https://habr.com/ru/post/354614/

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