The San Francisco Board of Supervisors debate over whether to give Twitter and other San Francisco-based Internet media companies relief from certain city payroll taxes raises triggers a somewhat optimistic observation.
California Governor Jerry Brown is going to have a very successful third term since he’ll probably be able to solve – or claim he’s solved – the state’s budget mess next year. Brown – the Steve Jobs of politics – is going to be the beneiciary of what can only be called pent-up demand in both the venture capital business and the stock market. In other words, people who need to sell their stock to earn their keep (venture capitalists, angel investors) have plenty of customers (wanna-be shareholders). And the stock market’s increasingly looking healthy enough to support large-scale stock offerings.
This isn’t silliness – or Silicon Valley seduction – on my part; economist agree with me. Google’s 2004 public offering is widely considered to have saved Arnold Schwarzenegger’s first term, deferring some of state’s more difficult spending decisions (and adding to today’s woes).
Back in 2004, when the market in tech stocks was slowing, Google sold $1.6 billion worth of stock in its initial sale to the public, giving it a (real market) valuation of about $23 billion. But what’s going to happen over the next year or so – if all goes well – is going to make that $1.6 billion seem like Monopoly money for the state’s treasury.
Consider the valuations (theoretical) of companies expected to start selling their stock on the public markets next year. Facebook’s investors believe it to be worth at least $50 billion. Groupon, the discount coupon site thinks is worth $25 billion. Zynga, the game company, puts its worth more than $5 billion. The most recent number on Twitter was just under $8 billion. Yelp, the ratings site, clocks with with a modest $200 million valuation. Add in another handful of smaller companies with more modest valuations – LinkedIn, FourSquare – and figure there’s another lot of stock that can be sold to enthusiastic buyers.
Valuations – insiders’ estimates – aren’t written in stone. And they’ve often have precious little to do with how much stock is sold or its acutual price. But there’s been enough activity on Silicon Valley’s private equity markets – where share of all these companies are trading nicely – that it’s pretty clear whatever’s sent to Wall Street will get a warm reception.
Why? Most of these companies (unlike their dot.com predecessors) have revenue, earnings and have had for at least three years – time during which they’ve been unable to raise money on the public markets. They’re making money, in other words, not getting it from investors or shareholders. That doesn’t necessarily justify the valuation – at this point, that’s just a number based on shareholders’ ides of their holdings – but it makes their ability to raise money on Wall Street a more than reasonable expectation.
So it’s not unrealistic to use some of the prices in those private equity markets as a reference point. Let’s say of the high-profile companies here does about what Google did – sell at about $80 a share. And let’s say each sells around 20 million shares (including sales of stock by founders and employees). That would give each company a Google-like valuations in the low billions. And there’s more than one of them. And it’s not just the first time sale; once a stock is public it can be bought and sold again and again. And anyone living in California who sells shares has to pay the tax man.
These days, the capital gains rate (the rate you pay if you sell your stock within days of acquiring it – which your accountant will demand you do if you’re employed by any of these companies) is whatever your income tax rate is. That’s going to be at least 30% for anyone working at any of the companies under discussion here.
No, it’s not the $11 or so billion that Brown needs to plug holes in the state’s current budget. But with the cuts he is making, it’s more than a drop in the bucket. What it will give Brown is the room to negotiate real change in how California runs its finances.