Tesla and Spotify say public markets have major flaws. Do they have a point?

All charged up.
All charged up.
Image: AP Photo/Kiichiro Sato
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According to two prominent executives this week, the stock market isn’t all that it’s cracked up to be. Initial public offerings are broken, according to Spotify CFO Barry McCarthy (paywall). Tesla CEO Elon Musk says stock investors are too focused on the short-term, and his threat to take the company private sent traders, bankersfans, and government watchdogs into a tizzy.

McCarthy and Musk aren’t alone in their worries. The number of IPOs and listed companies in the US is shrinking: There were an average of 310 public offerings annually from 1980 to 2000, according to an analysis by Jay Ritter, a finance professor at the University of Florida. The average has slipped to 108 since then.

A common complaint is that public markets are too demanding. It’s expensive to comply with regulations, and these days there’s ample private money available for companies to tap without all the hassles of dealing with analysts, short sellers, quarterly reporting, and the rest of it. There are many factors at work (pdf).

Ritter, who has personally been short Tesla for the past few weeks, says IPOs have dwindled mainly because small companies are getting gobbled up by larger ones. Regardless, the abundance of cash for investment has enabled entrepreneurs to agitate for change. For Spotify’s McCarthy, the “elephant in the room” is the discount given to institutional investors on shares before a company begins trading. This is the reward they get for risking money on an untested company.

The reason bankers underprice IPOs so routinely is to reward clients who overpay them on commissions for other things, says Ritter, who is known as Mr. IPO. Spotify’s non-traditional direct listing skipped this step. It went directly to the public, saving some money on fees and potentially much more on the IPO discount. If the company needed to raise capital, McCarthy argues the company could issue more shares to do it, and at a slimmer discount than in an IPO. Other businesses could, too.

Musk has other concerns, like short sellers and the distractions of running a listed company. But stock investors, despite their reputation for short-termism, have actually been generous and patient with Tesla (paywall). Maybe too generous, which is why so many short sellers are betting it’s overvalued. There are other companies with better autonomous driving technology, and other (profitable) car makers can also make electric vehicles, Ritter says. Even so, Mr. IPO concedes that “this week has been painful.”

If Tesla could point to profits and cash flow, maybe Musk could dismiss the flock of short sellers circling the company. As Stephen Miles of Livingstone Partners points out, when you’re selling a dream, you can’t ignore the people betting against you.

Tesla and Spotify have different complaints, but their comments this week show that they aren’t beholden to the way things have been done traditionally. Entrepreneurs have more options than they used to, suggesting the stock market could become more friendly to startups, and less so to Wall Street, in the coming years.

The future of finance on Quartz

  • We’ve reached peaked blockchain—in terms of hype, at least. While enthusiasm fades, IBM, which leads other tech companies in distributed-ledger investments, still believes in its world-changing potential.
  • Amazon customers aren’t paying for things with Alexa, according to a report. Instead of becoming an algorithmic salesperson, so far it’s mostly for music and asking about the weather.
  • The closer Wall Street gets to bitcoin, the more its price seems to drop. Recent interest in digital assets from the likes of the New York Stock Exchange’s owner and Goldman Sachs hasn’t seemed to boost demand.
  • Crypto is in regulatory limbo in Africa. Governments have flip-flopped between warning citizens and researching policy proposals. Ready or not, Africans are increasingly trading digital coins.
  • Next-generation banking has stalled in India. Payment banks were supposed to help extend services to the un-banked, but they’ve been slowed by regulatory concerns and other hurdles.

The future of finance elsewhere

  • The traditional wallet will become extinct. The Wall Street Journal publishes a eulogy for folded leather money holders.
  • Lending Club’s net loss widened. While revenue rose to a record, the peer-to-peer lender has been trying to turn itself around since an internal investigation discovered a series of loan malpractices.
  • Ant Financial has added China’s first target-date mutual fund to its wealth management lineup. The service could become a model for western tech companies.
  • US watchdogs delayed making a decision on a proposed bitcoin ETF. Officials at the Securities and Exchange Commission said they were giving themselves more time to deliberate.
  • Most online trading platforms have security holes. These cyber weaknesses range from mild to serious, though upper-tier brokers tend to have better security.

Previously, in Future of Finance Friday

Aug. 3: The most influential financial revolutionary is an 89-year-old with no interest in crypto

July 27: With or without Amazon, asset management is getting disrupted

July 13: A simple way to make America’s trillion-dollar student loan system more sane