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BofA Merrill Lynch: the Four “Canaries in the Coalmine” Died

On the Nasdaq and the New York Stock Exchange combined, 251 companies have gone public this year as of September 26, up 73% from last year. Their IPOs raised $77 billion, nearly double the amount raised last year at this time. It was the second largest amount in history, behind only the year when all IPO craziness came to a head and finally blew up, the infamous year 2000, which, for this period, clocked in at $84 billion.

IPOs are risky. Especially those IPOs that are pushed out in all haste while the IPO “window” is open, and the window stays open only a short while. For early investors, such as venture capital funds, it’s the moment to exit and take their cash and run. And the “public” is buying. That “public” isn’t actually the people for most part but institutional investors, such as mutual funds that then stuff these shares into people’s retirement funds.

The “IPO window is open” is a euphemism. It means that desperate and crazed investors buy anything even if it doesn’t pass the smell test, they’re buying without looking, they believe in all the hype and forget to do the math. No earnings, no problem. Sky-high valuations, no problem, even if the company is only good at burning investor cash. Risks don’t exist. This is an opportunity. Buy, buy, buy. That’s a “healthy IPO market,” another euphemism. It’s healthy, but for whom?

Then the window closes, the money dries up, and these young companies that keep burning cash suddenly have trouble raising more, and many of them will turn into financial sinkholes. Everyone knows that – except when the IPO window is open and amnesia reigns.

And it doesn’t matter that a mini-revolt is already brewing in the venture capital world, though they’re still throwing money hand over fist at their portfolio companies – 47 of which have “valuations” of over $1 billion, with Uber sitting at $18 billion, and Snapchat, which still doesn’t have any revenues, at $10 billion.

Even VCs are now complaining vociferously about the excessive cash burn rate of their portfolio companies. It started with Bill Gurley, a partner at Benchmark and investor in Uber, among others, who lamented the “excessive amount of risk” piling up in Silicon Valley, where “the average burn rate at the average venture-backed company” is at an “all-time high since ’99 and maybe in many industries higher than in ’99” [read…. ‘Excessive Amounts of Capital’ Doom the Startup Bubble].

He’d struck a chord, and others chimed in. On Thursday, it was Marc Andreessen, founder of long-forgotten Netscape, which had made him rich and a VC. In a series of18 tweets, he warned: “When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE.”

And he offered other party-pooper messages: “New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST.” His final and most eloquent tweet: “Worry.”

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