The team is joined by Guest Kats Rosie Burbidge, Stephen Jones, Mathilde Parvis, and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Hayleigh Bosher, Tian Lu and Cecilia Sbrolli.

Friday, 5 June 2015

When trade secrets lead to a herd mentality in investing: the FoMO phenomenon

While this Kat does not personally know all our IPKat readers, he assumes that one thing unites us: we all have one or more phobias. The list of phobias is long, including such well-known maladies as “acrophobia”- fear of height and “claustrophobia”- fear of confined spaces. The IPKat weblog, being what it is though, assumes that none of you suffers from “ailurophobia”- fear of cats. However, at least one notable phobia is missing on most lists, because its designation does not include the word phobia, namely FoMO (“fear of missing out”). Whether or not FoMO is exactly of the same clinical category as acrophobia, claustrophobia, and the like, its potential to distort behaviour is still notable. And when FoMO is joined with the world of finance and trade secrets, it can significantly impact investment behaviour, especially in the hi-tech area.

FoMO is described by Wikipedia as
"a pervasive apprehension that others might be having rewarding experiences from which one is absent”. This social angst is characterized by "a desire to stay continually connected with what others are doing". While others defined FoMO as a fear of regret, which may lead to a compulsive concern that one might miss an opportunity for social interaction, a novel experience, profitable investment or other satisfying event. In other words, FoMO perpetuates the fear that we have made the wrong decision on how to spend our time, as "you can imagine how things could be different".
What does this have to with trade secrets and investing? The reasoning goes something like this. Investors are supposed to favour as much disclosure as possible about the object of their investment. The securities regulation apparatus put in place was intended to protect the public investor from investing blindly and many a Wall Street or City of London lawyer has enjoyed a well-remunerated life dealing with the minutiae of the disclosure requirements imposed upon public companies. But such disclosure requirements run up against the fact that a hi-tech company may rely on trade secrets as a way to protect its technology. Thus, while a patent, or even a published patent application, can be examined by a potential investor, a company’s trade secrets cannot. The upshot is that the investor is told that the company’s secret sauce is in a black box, which is hermetically sealed from public scrutiny.

In such a circumstance, the public investor faces a difficult choice, Does he withdraw from the potential investment, or does he seek other types of information that can somehow make up for his lack of access to the company’s essential trade secrets? It is at this point that FoMO comes into play—the investor’s lack of information, and the investment hesitations that flow from this, may be more than compensated by the feeling that by failing to invest, the investor will have missed out on the next big thing. This is particularly likely to occur when the stock market is robust and investors are reminded constantly about the investment that got away. Bingo—IPO (initial public offering) after IPO attracts a high company valuation, and even to a run-up in the share price that the public is willing to pay to be a part of the action. In other works, as a group, their investment was driven by the “fear of otherwise missing out”. Frothy hi-tech markets, not to speak of bubble markets, are the result in part of FoMO behavior by investors.

This Kat has encountered a variation of the FoMO phenomenon where the investment is private rather than as part of public fund-raising. Even here, the target may limit (or even prevent) disclosure of the inner sanctum of its trade secrets as part of the due diligence process, with the result that the investor remains in the (at least relative) dark about the company’s trade secrets. The target obviously wants the funding, but at what cost to disclosure of its trade secrets? The ultimate investment result may well depend upon how strong is the investor’s sense of FoMO with respect to the investment. When the investor is part of an investment consortium, the potential FoMO-based pressures that may be brought to bear on each other will only be magnified. An investor may choose to invest in a herd-like fashion even when no trade secret is involved. But the presence of the trade secret as a potentially central asset of the company highlights the sometimes uneasy relationship between trade secret protection and other public and private interests.

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