Loosen the Rules Stifling IPOs by Venture-Backed Startups
[Editor’s Note: We asked selected Xconomists a series of questions designed to zero in on the big issues of the year, including “What would you be willing to throw a punch over?”]
What would I be willing to throw a punch over? Solving the small-cap IPO bottleneck … to unleash the job creating potential of emerging growth companies.
For more than 25 years, America’s entrepreneurs have benefited from a capital system that has uniquely supported their independence and innovation. Once they had developed their products using private capital, emerging growth companies could capture markets or invent wholly new ones by accessing public capital to continue their growth and compete successfully across the globe. High-growth companies that go public create more jobs, generate more revenues in the U.S., and grow at a faster pace than their public peers.
But because the hurdles and costs of going public are higher today than ever, more and more companies delay or cancel their plans to go public. In fact, most turn to being acquired—a job killer in the short run as redundant positions are eliminated. If you look at the number of venture-backed company IPOs as a proxy for all small, high growth companies, there was a 75 percent decrease in IPOs between the last two decades. The result is a dangerously threatened ecosystem that is delivering fewer jobs, creating less wealth, and delivering lower tax revenue. Like any healthy ecosystem, the American economy needs new companies and competitors to continue a prosperous cycle of growth and replenishment.
So how are we starving this engine of growth that has served the U.S. economy for decades?
Over the last 15 years, market regulations intended for large public companies have disproportionately impacted emerging growth companies—those very same companies that deliver the job growth our economy so desperately needs. For example, accounting scandals from massive public companies like Enron, Tyco and WorldCom forced legislators and regulators to respond with an understandable “never again” approach. However, the accounting and reporting compliance designed for the complex accounting structures of large conglomerates like these are not scaled to fit newly public companies.
But it’s not just recent legislation that has impacted the growing companies of the innovation economy. Truth is, the bulk of financial market regulation that guides public companies today was created before the computer had been commercialized or the polio vaccine invented. These rules and requirements should simply be modernized while maintaining the regulatory principals that serve to protect investors.
In addition, regulations that govern investor communications and research have appropriately been rewritten over the last 15 years with the objective of consistent disclosure that limits the opportunity for conflict. All of that remains important to small and large companies alike. However, some aspects of these rules can unintentionally stunt the growth of newly public companies by limiting their ability to build direct relationships with their new public investors.
Add to this the consequences of the Spitzer Decree and decimalization, which have collectively shifted the volume and, therefore, the economics in the securities markets towards the frequently traded issues of large cap stocks. The objective was to insure low cost, frictionless trading. The unintended result is that new, small cap issues can struggle in today’s public markets.
If we don’t modernize these one-size-fits-all public company rules and regulations, I’m doubtful our economy will ever see the next wave of small public companies that grow to become this generation’s blue chip leaders. I’m talking about companies such as Apple, Amazon, Cisco, Fedex, Intel, Genzyme, Google, HP, Microsoft and Oracle, each of which was able to go public, allowing them to create new industries, and with them, tens of thousands of high-quality jobs. These once small IPOs are now global industry leaders, employ almost 1 million people, have created $1.3 trillion of shareholder wealth while paying billions of dollars in annual taxes to federal, state and local governments. To maintain that level of job creation and growth, we need to get the IPO market back on track.
As an investor in young private companies with massive potential, there is nothing I enjoy more than working with a great entrepreneur to help a company grow. Yet the biggest impact of private companies comes when they enter and flourish in the public markets. Research shows that 92 percent of job growth in venture-backed companies typically occurs post-IPO. Today venture-backed companies that were able to go public account for 21 percent of America’s GDP. We need to act decisively to bring about a return of this level of job growth to the U.S. economy.
Given the many Americans who are searching for these jobs, count me in to throw a punch or, even better, lend a helping hand to solve this problem.