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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.
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?
This is just another result of the concentration of wealth (and, in particularly, fiat wealth) in society. The difference now is that private equity companies and investment banks can raise billions of dollars if required to fund companies from a small number of ultra wealthy investors. Twenty or so years ago, the only way to obtain those sorts of sums was to attract the savings of the middle class. If you have a good investment, the cost of funding it is basically insignificant, so why would you want to let the unwashed retail investors get their hands on it? The only useful purpose for retail investors is to offload the company once maximum value growth has been obtained.
This is the yet another failing of modern capitalism. The savings of the middle class, which are supposed to be the prudently forgone consumption that allows space in the economic pie for new businesses to develop, have been rendered valueless. Normal people cannot get access to any of the investments that generate decent returns, and central bank supported asset prices bubbles essentially work as localized inflation, destroying the value of savings year on year. The smart money (ultra-rich and their bankers) have been busy using QE money to leverage themselves into all the real assets. The middle class cannot compete with this, and when the tide goes out (global fiat bubbles pop) the middle class will be left with paper, and the ownership of hard assets (real estate, productive companies etc) will make the return of feudalism complete.
Please. From what I understand (and I am not that interested, so I haven't looked all that closely) VCs take even more than they used to. In return, they run companies into the ground by pushing them to grow too fast, where most fail. All for a 0.5-1% better return than responsible stewardship.
Anyone who actually wants to work like crazy for years in return for a 1% chance of success is either delusional concerning their own skills and destiny, bad at math, or just ignorant.
It is exactly the LACK of business finance savvy in startups that VCs take advantage of now. "If you're the next Google, this 0.005% stock will be worth millions!" They've dropped the percentages they give to owners to ridiculously low levels, and the dumb ones keep coming. Please correct me if I'm wrong, but this is what I seem to be hearing. It also makes complete sense, from a point of view that leads to the vulture capitalist label.
I've built my company slowly, mostly as it made sense. If I didn't have a ridiculously over-cautious wife, I'd probably be further along... but we're still doing rather well. (BTW, that's as much luck as skill/hard work) One of my major clients is WAY bigger than me, with like 4 subsidiaries and 20 locations around the US employing hundreds of people. With my 100% ownership of my company vs. the president of that company's current share of his, I'm actually worth more. It's almost embarrassing. He'll bitch about wasting his important time dealing with me, when I'm worth significantly more than him. Big man, indeed.
Sure, I guess taking a shot at greatness in your youth would be the time to do it.... it's just not a very good return on investment. Kind of like using the state lottery as your retirement plan.
I had to run out the door... I meant to add my attempt at useful suggestions/alternatives.
First, I want to back up on what I said a little bit concerning VC capital in certain situations. If you're success as a company REQUIRES lots of capital, then sure... having a little bit of something is better than a whole lot of nothing. There's nothing ignorant or stupid about that, if you've taken a clearheaded look at the situation and that's your call. However, I think many times there are simply better ways to do it.
The point of the article was that startups are avoiding investment money in order to grow themselves. I would imagine, if someone makes that decision, that it's almost certainly a better decision for them. If you CAN do it without selling too much of yourself to investors in the process, wow is that a whole lot better.
Sure, there are cases where you have to go big immediately or you can't even really play. However, they're far fewer than most seem to think. Google was FAR from the first search engine. If someone came up with a fully natural language super-AI search tomorrow, Google would be toast in a couple years if not months.
Anyway, that's a tangent for my point here I guess.
You don't have to have the next big idea to be successful, to make a lot of money, to build a good company... whatever your goals are. There's WAY more smaller niche spots to build a company in that pay better than an executive position at a major corporation. You can grow at a sustainable pace, with WAY less stress and freaking out.
Heck, what I think a huge number of people seem to miss is that you don't even have to be NEW. Sure, there are a million AC repair shops, electricians, gas stations. You just have to be BETTER than MOST. My favorite gas station is absolutely killing it, with 4x the traffic of the spot across the street. The spot across the street is CHEAPER. This place is just cleaner, friendlier, and they work hard to stock good stuff you actually want. That's it. Limited growth potential? Err, not really. Maxxed out your first location? Open another. (CAREFULLY, that's a major killer right there.. the second location)
A lot of small companies still make millions of dollars. Many small companies are run by idiots... that's your competition. A smart person who doesn't make a habit of fooling themselves can do really well, if they can manage to get started. That is, really, the hardest part.
From someone who has had thier not that small startup get absolutely trashed by VC I agree with most of what you wrote, my main disagreement is it's a worse landscape than you paint. You are leaving out a complete disregard for all laws or actions that they probably won't be held accountable to. Here is how I was scammed
It was a university startup and while I had the largest ownership by a good margin, we started with around 12 owners including some facility and licensed the technology through the university (you don't own what you invent at universities just like at companies). This made politics an issue from day one as emails from senior university officials from the business development office had comments like "who cares, fuck the students" and the law services butchered the articles of incorporation when a simple boiler plate would have been better. I was working two and a half full time jobs managing the technology and as this was my first company I had quite a bit to learn. We eventually took on money to produce product, but this basically "required" taking on a CEO with experience who due to various NDAs keeping information from us turned out to be a typical finnancial criminal. After the first CEO colluded with this new hire CEO, he was able to vote shares not yet vested through the milestones outlined in his agreement through a stupid and ignorant loophole in our articles and the agreement language. By combining them with the shares we lost in the opening round we lost control of the company. The CEO then made a predatory purchase agreement with the contract manufacturer who also happened to be the largest VC. This 10 million dollar purchase was hidden from finnancial disclosure during a subsequent investment round. When the company had a shortfall and couldn't pay an emergency shareholder meeting was called 1 week from an announcement on Christmas Eve night where it was announced the 10 million dollars invested in the company was now worthless because the company was insolvent and we now were so lucky to have our entire company bailed out ( with a 14-1 dilution) by undisclosed people who only paid 400k and the whole deal was kept secret to a few select large VC who fucked all the others (and me) over using inside knowledge of the company. They wouldn't provide any of the legal documentation required by law before the meeting and when a class action lawsuit started up the independent council investigating took verbal confirmation that they had in fact had a secret document that had disclosed the 10m off the books deal. I should have known when I tried to hire a law firm and the first 12 had conflicts that I was really fucked.
tl:dr VC will just take your company and kick your withered corpse to the curb but only after milking all of your contacts and resources dry then burning the bridges on your behalf. The only reason you should take on money is if you are damn sure you can get the upper hand and fuck them over financially, because that's the only reason VC invest in startups.