IPOs made of sand

Merchant banks do apparently gamble vast sums on hunches.

Watching the Facebook IPO launch on Friday struck me as a typical example of Emperors New Clothes syndrome. Mainly because I’ve lived through it before.

In March 1999 my agency picked up the global ad account for a new dotcom that was going to revolutionise the world of clothes retailing. It was called boo.com. Started by three twenty something Swedish entrepreneurs operating out of glamorous offices on Carnaby Street (which were soon replaced by bigger and even more glamorous offices on Regent Street), we stood on the sidelines and watched as investors in the company were swept along on a tidal wave of enthusiasm, lavish spending and unbridled and unquenchable ambition.

Throughout the process we kept asking ourselves questions about the company. Why was all this funding, delivered from the some of the world’s wealthiest individuals and large merchant banks, arriving in a seemingly never ending supply, when there seemed so many flaws in the business model. There was no clear positioning for the company, indeed no clearly definition of what the company was going to sell, the technological ambitions for the site far outstripped what was apparently feasible back then, systems seemed flawed and everything appeared very hand to mouth.

Yet, we reasoned, these big merchant banks weren’t stupid. No one would pile all this money into a start up without a clear vision for how they were going to get their money back. Would they? We concluded over and over again, that it must be us – we simply didn’t understand the machinations of high finance.

Well, we quickly found out differently (as has been well documented) and a valuable lesson was learnt. Things can be too good to be true, merchant banks do apparently gamble vast sums on hunches, and our Finance Director, who said from the word go that it was all built on sand and would end in tears, really did know what she was talking about (hats off, Shirley).

And of course, what was true of the dotcom bubble was true for many other areas which the merchant banks were, ahem, investing in - with no one brave enough to shout ‘look, they’ve got no clothes on’.

Which is why I shudder when, despite all that has happened in the last 5 years, with the worlds wealth apparently built upon a mountain of doubt like some giant ponzi scheme, the banks – yes, the banks again – can decide that an 8 year old company with negligible assets is worth 200 times its annual profits, in a sector that saw its predecessor collapse from market leader to junk in a matter of months. And while there a few people shouting ‘Emperors New Clothes’, the banks carry on propping up their investment – because they can’t be seen to be gambling again…..

But until we all start acknowledging that perhaps investments should be based on things like assets, guaranteed income, historical precedent and sensible(rather than high risk) growth, then nothing in the global economy is going to sort itself out.

Meantime, if you run into a banker today who has invested in Facebook, just say one thing to them. Boo.

Photograph: Getty Images

Richard Morris blogs at A View From Ham Common, which was named Best New Blog at the 2011 Lib Dem Conference

Photo: Getty Images/Carl Court
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Nigel Farage: welcoming refugees will lead to "migrant tide" of jihadists

Ukip's leader Nigel Farage claims that housing refugees will allow Isis to smuggle in "jihadists".

Nigel Farage has warned that granting sanctuary to refugees could result in Britain being influenced by Isis. 

In remarks that were immediately condemned online, the Ukip leader said "When ISIS say they will flood the migrant tide with 500,000 of their own jihadists, we'd better listen", before saying that Angela Merkel, the German Chancellor, had done something "very dangerous" in attempting to host refugees, saying that she was "compounding the pull factors" that lead migrants to attempt the treacherous Mediterranean crossing.

Farage, who has four children, said that as a father, he was "horrified" by the photographs of small children drowned on a European beach, but said housing more refugees would simply make the problem worse. 

The Ukip leader, who failed for the fifth successive occassion to be elected as an MP in May, said he welcomed the prospect of a Jeremy Corbyn victory, describing it as a "good result". Corbyn is more sceptical about the European Union than his rivals for the Labour leadership, which Farage believes will provide the nascent Out campaign with a boost. 

 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.