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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.
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.
If that were so why aren't you rich and instead a broken whiny faggot on the internet, lusting after what libtards have?
Why go pubic? you need a viable business plan and other annoyances like profits and disclosure to do that.
It's much more comfy to be bank rolled by VCs and stay in dreamland.
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.
Now, when you can trade immediately and it is more profitable, not to wait for dividends but rather selling the stock to someone else, many investors are not interested in the company itself, but the changes in the perceived value of the company. You don't care if the company goes belly up after you sell your shares, as long as you did a profit in selling them. There is very little incentive for long term investment for the good of the company.
So, now tell me, why a starting company would like those kinds of investors?
On the other side of the coin, the company has the relative freedom to focus on what should matter; the customer. Once upon a time, stock increasing in value was a side effect of a company performing well, providing viable products and service to consumers. Fast forward, and companies will do anything to increase value for the shareholder. That's backwards and damaging. You end up with short term solutions like mass layoffs, skimping on quality and offshoring, which ultimately hurt the company in the long run... but no one is in it for the long run anymore.
You got that right. As soon as the business schools started chanting the mantra "maximize shareholder value" (I first heard it when I was in business school in the early 1980's), it was downhill from there. I thought it was crap then, and after 35 years of watching its effect, I know it's crap now.
A good business has three constituents - customers, employees, and shareholders. Take care of the first two, and the third will be fine. Focus only on the third, and the results are predictable.
If your company makes consistent profits, as Valve does with Steam, what is the motivation to go public? You lose control of the company and can often end up focused on short term profits instead of long term success.
If your company is crap, like Twiiter, then obviously there's a strong motivation to dump it on to other people while it is perceived to be worth something.
This is why a lot of companies listed on the market are junk.
This is just another result of the concentration of wealth (and, in particularly, fiat wealth) in society.
An interesting assessment. My question is, what should we do about this?
Should we tax the wealth from these people? I fail to see how this helps the middle class. Taking their money because they have "too much" seems rather arbitrary. How much is "too much"? Is it just those in the 1%? Well, mathematically speaking there is always someone in the top 1%. The people in this top 1% isn't always the same people all the time either. Some people lose some wealth and fall out of this status. Some gain this wealth. People die. People are born and inherit this wealth. How can we decide who has too much wealth?
Let's assume we can figure out who has too much. We still need to figure out how to "fix" this. The government will be involved here. Either they will have to take it from these people, or somehow declare how another person will take it from them and not call this theft. So, for a lack of ideas on how else to do this we'd have to develop some tax. An income tax won't do, because a lot of people with this wealth don't make an income, or at least not enough of one to tax.
So, we'll just have everyone file with the government how much wealth they have and if they have "too much" the government will take some portion of it. Then what do we do with corporations? Are they "people" too? A corporation is not just a company that builds things. A trust that owns some land, or artwork, or intellectual property, is a corporation. City governments are often considered corporations. A trust might own some old family home. This "family" might be a single person, but the person doesn't "own" this wealth, the trust does. How do we decide that a trust is just a way to shelter wealth from being taxed versus an honest means for people to manage an asset?
Assuming we can figure out who these people with "too much" are, and how the government is going to tax it from them, how is this wealth going to get in the hands of the middle class? Do we just have the government write out checks to everyone? Let's just go with that.
How do we know these people that get the checks will invest this wisely? And, what does "invest wisely" mean? I assume this means making a profit. Some of these people with their government checks aren't going to invest wisely. That's just a fact. It might look wise to invest in something, only to have it become worthless. Maybe a certain drug looks promising, but ends up causing birth defects or cancer. Maybe a new kind of energy saving light bulb, only to have a better one come along later. Maybe these people will spend their money on fancy cigars and just burn that money, not that there is anything inherently wrong with enjoying the occasional cigar just that this might not be wise for someone invest into in quantity.
Those that invest poorly will end up with less, but they might not care because they'll just get another government check next year. Those that invest wisely will become wealthier. Perhaps even some of them wealthy enough to become those with "too much" and have the government take some of it from them later.
If you've read this far then I hope you see the folly in this. We'd have the government take money from those that invested wisely, got "too much" wealth, and then distributed among the population where some of them will invest less wisely. We didn't make the economy any better, we just punished people that invested wisely and rewarded those that did not. This is an economic death spiral. There is no problem with people having "too much", that's just an inevitability. Trying to fix this is a cure worse than the disease.
I am armed because I am free. I am free because I am armed.
The cost of compliance with information disclosure regulations is also part of the issue, here. Sarbanes-Oxley is estimated to cost more than $500K/year. That is no small sum for companies with a few million in profit, so the bar for going public is concomitantly raised. A good rule of thumb is that you need to be at $100M+ of revenue to even consider this. Lots of very good, profitable companies do not make that threshold.
If humans are mostly water, and beer is mostly water, then humans must be mostly beer.
Couple of important points you're missing here. Firstly: in tech especially these days you might not even have to convince a group of VC investors, if you've got promising technology one of the larger tech players might well be willing to invest in you. Alphabet/Google and the rest are funding quite a lot of small companies these days. Secondly: if your plan is to develop a sustainable business that will end up making you a lot of money, then going public might not be the best approach to begin with. The more stock you/the original founders keep on yourself, the more you're going to get out of the company when it starts turning a profit, regardless of whether you go public eventually or not.
When you add to this the points mentioned in the summary: namely that the amount of capital required by new companies is going down (software especially is nowhere near as capital heavy as it used to be) and hat going public makes you subject to stricter transparency rules which might not be ideal competition-wise, it's clear that unless you absolutely have to go public due to not being able to get funding elsewhere (or for some reason requiring large amounts of it), it often makes no sense for a startup to go public as a means of getting funding.
"It is the business of the future to be dangerous" -Alfred North Whitehead
How much is "too much"?
How much wealth inequality do you think is unhealthy for a society? I can easily agree that some people contribute 10 times more than others. I can probably agree that some people contribute 100 times more than others. I might be able to agree that some people contribute 1,000 times more than others. I'd be hard pressed to find people that I think contribute 10,000 times more than others. So what happens if we say 1,000 times the median net worth? In 2013, the median net worth of a US household was $81,400. So what happens if we add a large wealth tax for people with a net worth above $81,400,000, and maybe a smaller one for people above $8,140,00 (and adjust them annually based on the median)?
Someone at the smaller threshold basically never has to work if they don't want to. If they're spending the capital over a 70-years lifetime, it works out at over $100K/year. If they spend $1m on a house and then invest the remainder in something that gives a return of 1% above inflation, then they have no mortgage and an income of the real-terms equivalent of $70k/year in today's money, in perpetuity. That's enough to live very comfortably.
Someone at the larger threshold gets the same numbers multiplied by a factor of 10: they can buy a mansion (or a few large houses in different places) and has a return of $700k/year from investments to live on. Their annual return from investments is more than what someone working a full-time minimum-wage job will make in their lifetime.
Those seem like numbers that are large enough that no one is going to say 'I won't work anymore because I have already made as much money as possible,' but means that you won't have anywhere near the wealth concentration that you have now. Of course, implementing such a system is very difficult, if not impossible (for fun, look at how many US Senators would be hit with high taxes under this model).
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...This is an economic death spiral. There is no problem with people having "too much", that's just an inevitability. Trying to fix this is a cure worse than the disease.
The disease of Greed will inevitably lead to our demise.
Solve for Greed. Otherwise, expect billionaires to strive for nothing more than to become trillionaires, to the detriment of the rest of the human race.
This is actually at the core of the problem of income inequality. As Thomas Piketty points out in Capital in the 21st century:
When a tiny fraction of the top 1 % owns nearly half of everything, and the bottom 90 % owns practically nothing besides their residences (and 75 % of all publicly held debt (source)), and the above conditions being true this division is only going to grow unless something is done, it should be clear that this model is not sustainable.
"Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime's labor by a wide margin, and the concentration of capital will attain extremely high levels - levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies." [pg. 26]
Or, or you could do any number of things other than 'writing checks'. Secondly of course it makes no sense to tax it away entirely, no-one's even proposing that. Through your history you've previously had high marginal rates for those making the most money, and despite that people still kept investing and making money because as long as you don't tax a 100 % of it, there's still going to be an incentive to make more. You could tax inherited wealth / dividends above say tens of millions at a marginal tax rate of something like 70-80 % and use said money to provide for example universal health care and education to the lower and middle-classes which would not only significantly improve their quality of life, it would also allow increased social mobility by allowing people to educate themselves without having to take massive amounts of debt in a situation wherein a degree is a requirement - but no longer a guarantee - of getting a well paying job. Not to mention all the other possibilities such as reducing the amount of debt the government has to take, funding infrastructure building, research, etc. Eventually automation and AIs will make most current jobs (even the white-collar ones) obsolote, at which point if you wish to maintain domestic demands for goods and services, the only way for that to happen is via something like universal basic income. The companies need less and less paid staff to run their operations going ahead, but at the same time less and less staff means less and less demand for products as less people are getting paid unless something is done. You can't stop the technological progress causing machines to overtake humans in efficiency, so really the one thing you can change for more easily is taxation.
Of course I'm not American but neither is the nature of this problem: income inequality is going up nearly across the board in the west, the US is just the case wherein it has gone on for the longest time.
"It is the business of the future to be dangerous" -Alfred North Whitehead
We didn't have much trouble getting money from banks at LIBOR +2%, IIRC. If you can get money that cheap without sharing equity in the growth phase, why would you?
Of course, if all you have is an idea and you are relying on contract manufacturers in China to build it for you you might need a little extra...
I think the real reason IPOs are out of favor is summed up in TFS: the "intangible assets" aren't really worth what they claim. No positive cash flow, no dice.