US Startups Don't Want To Go Public Anymore (qz.com)

According to a new working paper from the National Bureau of Economics, the number of American firms listed publicly in the U.S. has dropped more than half. In 1997, more than 7,500 American firms were listed publicly in the U.S. Nearly two decades later, in 2016, the number had dropped to 3,618 firms. Quartz reports: The crux of the issue is that U.S. startups are increasingly shunning stock market boards. That could have worrying implications for America's long-term economic prospects. One big reason young companies are shying away from IPOs is that public listings don't offer much benefit to promising startups, say the paper's authors, economists Craig Doidge, Kathleen Kahle, Andrew Karolyi, and Rene Stulz. In fact, going public can hurt them. The upside of public listing is that it lets companies raise huge sums of capital, issue more shares, issue debt with relative ease, and use equity to fund acquisitions. But because of the ways the American economy has evolved, those advantages are less important than they once were.

When industry powered U.S. growth, companies grew by spending on capital investments like factories and machinery. Back in 1975, firms once spent six times more on capital investments than they did on research and development. But as the U.S. shifted toward a services and knowledge-based economy, intangible investments became increasingly important. In 2002, R&D expenditures for the average firm surpassed capital expenditures for the first time. It's stayed that way since; nowadays, average R&D spending is roughly twice that of capital expenditures. The problem is, two features of public listings -- disclosure and accounting standards -- make things tough on companies with more intangible assets. U.S. securities law requires companies to disclose their activities in detail. But startups are wary of sharing information that might benefit their competitors.

Comments

That disclosure is a killer

[Anonymous Coward]

The disclosure is pretty much a killer for 1 or 2 product tech startups. Your competitors get to see how big your market is, how the market share is growing, how much cash you have left, and disclosure on r and d spend etc etc. Very easy to make judgements on if they are worth buying, or just competing directly with or otherwise the competition playing with you some how.

I've been following a product that was developed in a startup listed company, then sold to a non-listed venture capital based company 3 years ago. I have really zero information about what is happening to that product now. But for the 3 years before it was sold, I know the sales volume, gross profit margin, growth rate and final sale figure which is what I'm using to validate and extrapolate from there. In the private company all that information has stopped.

Nothing new on Wall Street

[sjbe]

Once upon a time, people buying stock looked at a company and tried to decide the long time worth for that company. Essentially, did you, the investor, belive in the company and its products/services. For investing in it you got dividends if it was profitable.

That's a nice little fairy tale you are telling yourself. The reality is that people were day trading way back in the 1920s. The notion that investors back in the day were any different from investors today is demonstrably nonsense. Human greed hasn't evolved or changed in the last 100 years. The technology to facilitated it has advanced but the basic behavior of people in a stock market is no different today. It just moves faster is all.

So, now tell me, why a starting company would like those kinds of investors?

There have ALWAYS been short term investors who don't give a shit about the long term prospects of a company. This is nothing new. See the corporate raiders of the 1980s. I lived through that and I assure you that absolutely nothing has changed in the last 40 years except the speed on the transactions.

Re:Investors

[jebrick]

The article was about IPO and not VCs. Going public changes how a company can be run.

Private companies are not required to publicly disclose financial information, while public companies are required by the Securities and Exchange Commission to file an annual report documenting their performance in detail. Because private companies don’t have to disclose financial information, they can focus on long-term growth instead of making sure shareholders are getting their quarterly dividends. Private companies don’t need shareholder approval for operational and growth strategy decisions made by the company, as long as that is stated in their corporate documents.

Public companies must inform shareholders about and get approval for the company’s operations, financial performance, management actions, and other decisions.

Going public is expensive, and there is unlimited liability for a company’s owners.

Public companies may have an easier time raising large amounts of capital by selling securities. Investors are more likely to invest in a public company because there is less risk and more potential to reap large rewards.

Public companies can return to the stock market and raise more capital via a secondary stock offering or by issuing a bond.

Public companies must comply with the rules established by the Sarbanes-Oxley Act, which was enacted to protect investors. The act contains a myriad of regulations concerning board responsibilities and requires the Securities and Exchange Commission to administer rules that comply with the law.