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

It is reflecting the stock market of today?

[Anonymous Coward]

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?

Re:It is reflecting the stock market of today?

[Mordaximus]

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.

Re:It is reflecting the stock market of today?

[Anonymous Coward]

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.

Re:It is reflecting the stock market of today?

[blindseer]

but no one is in it for the long run anymore.

No, that's not true. Shareholders are not in it for the long haul. Private investors are in it for the long haul.

This may not have always been true. Holding stock was in the realm of the wealthy as a means to get some like minded people to invest in a common goal. It then became a means for the moderately wealthy to have an asset that would likely increase in value. Then it became a tax shelter or other hold of wealth for most anyone with a job. Then people with little knowledge of how the market worked, or little care for the "long haul", used trading stocks as a their day job. Then share value for the moment became the focus of a large number of small companies. A bad stock value from panic selling could mean the death of a company.

How did people in it for the long haul address this change in shareholders' actions? They stay with private investors.

I expect this to work it's way out eventually. Either the people that trade stocks will put in means to manage this or some other legal and economic construct will develop that has "filters" to keep out shareholders/investors that lack the intent for a long term investment.

Re:It is reflecting the stock market of today?

[TheRaven64]

The problem with private investors is that you're limited to a fairly small number (about 100, I think), by SEC and similar rules unless you go public. Some companies work around this to an extent: Facebook made Goldman Sachs a single shareholder and GS then created a fund that was backed by their Facebook shares and could be turned into Facebook shares at or after the IPO, so they could effectively sell shares, except without any of the normal legal protections.

Why go public?

[LostMonk]

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.

Re:Why go public?

[fermento]

>>Why go pubic? you need a viable business plan and other annoyances like profits and disclosure to do that.
I need a viable business plan to go pubic? Is dinner and a movie enough of a plan? Or do I need to bring bank statements?

1%ers

[Anonymous Coward]

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.

Re:1%ers

[blindseer]

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.

Re:1%ers

[TheRaven64]

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).

Re:1%ers

[geekmux]

...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.

Re:1%ers

[Kiuas]

People die. People are born and inherit this wealth.

This is actually at the core of the problem of income inequality. As Thomas Piketty points out in Capital in the 21st century:

Piketty's Main Claims
1. The Return on Capital is Greater than Growth.
Piketty claims that r, the average annual rate of return on capital, is in the long-run greater than g, the growth of the economy (i.e., the annual increase in income or output).

r > g (1)

And, "If . . . the rate of return on capital [r] remains significantly above the growth rate [g] for an extended period of time . . . , then the risk of divergence in the distribution of wealth is very high."
[pg. 25]
2. Inherited Wealth Grows Faster than Income. If r > g, then inherited wealth grows faster than output and income. The reason?
"People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole." [pg. 26]

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]

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?

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.

Re:1%ers

[AnotherBlackHat]

The problem isn't wealth, it's that wealth generates income.
If money can make money, then money will concentrate.

The problem, in a word, is rent.

A large number our current problems could be fixed by simply outlawing loans greater than 20 years. (impede renting money long term).
We could also create a special (extra) tax on rental income, and on interest income (impede renting and renting money).

But in general, "we" aren't going to do anything which stops the rich from become richer until the rich have less say about what we do than "we" do.

Re:1%ers

[sjames]

If we tax wealth so one individual can have only so much wealth then we are capping the national economy.

Nice try, but no. It simply means that when the economy grows a lot of people get a little richer rather than a few people getting a lot richer.

As for the rest, the leading indicator of wealth is being born to above average wealth. It's not like there aren't plenty of people in the middle and lower class who are just as intelligent, it's just that they have a lot further to go and a lot less help getting there. Most of us don't get a "small loan of a million dollars" from the Bank of Dad.

Of course!

[GerryGilmore]

Here's the operative sentence from TFS: "That could have worrying implications for America's long-term economic prospects." which is completely wrong! "Public" companies are vampires for "shareholders", which is great if you're one of them. Otherwise, you're at the shitty end of Piketty's r>g equation.

Re:Of course!

[rmdingler]

Yes, as long as you reside in a nation where corruption is nor pervasive.

An interesting take on Piketty's equation:

To channel Piketty, inequality will continue to rise in societies where “c > h.” Here, “c” stands for the degree to which corrupt politicians and public employees, along with their private-sector cronies, break laws for personal gain, and “h” represents the degree to which honest politicians and public employees uphold fair governing practices. Corruption-fueled inequality flourishes in societies where there are no incentives, rules, or institutions to hinder corruption. And having honest people in government is good, but not enough. The practices of pilfering public funds or selling government contracts to the highest bidder must be seen as risky, routinely detected, and systematically punished.

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.

If your company is profitable, why go public?

[Anonymous Coward]

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.

Re:If your company is profitable, why go public?

[Chrisq]

If your company makes consistent profits, as Valve does with Steam, what is the motivation to go public?

There are legitimate reasons, if it enables you to go into other markets quicker, or expand faster than you could otherwise it could be the right course of action.

If your share of the profit of the larger company after issuing shares is larger than your share of the profit of the existing smaller company then it makes sense.

Re:If your company is profitable, why go public?

[swb]

I think there are strong reasons to not go public, but the big advantage to going public is that it allows for an external means of enrichment for executives via stock grants which doesn't tap into actual company revenue. Without stock grants, your company has to pay its executives solely through revenues.

I've always found the notion that equity companies raise money via stock to be kind of funny, because for the most part the actual business doesn't get any working capital except through initial stock offerings. Once the stock is sold, the money made from stock sales is really money made by the individuals holding the stock, not the business itself.

I've always been curious if there's a financial model where companies don't sell equity shares but instead just sell bonds which directly contributed to capitalization.

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:Nothing new on Wall Street

[Trogre]

Dave Barry summed it up nicely:

The stock market of the 1920s was very different from the stock market of today. Back then, the market was infested by greed-crazed slimeballs and get- rich-quick speculators with the ethical standards of tapeworms who shrieked "buy" and "sell" orders into the telephone with no concern whatsoever for the nation`s long-term financial well-being.

Whereas, today they use computers.

Regulatory Compliance is Also a Problem

[rogerz]

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.

Re:Regulatory Compliance is Also a Problem

[Jzanu]

Are you stupid? SOX is the fallout from Enron, that scam cost at least $40 billion in 2001-2. I know you weren't born yet but to put it into perspective that's 4 large aircraft carriers now, and more like half a dozen then. Real costs per dollar revenue are a pittance; data storage costs and added costs for accounting information systems are basically nothing now. The real reason your buddies complain is the jail time they now personally face for committing fraud.

Re:Regulatory Compliance is Also a Problem

[bigpat]

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.

Simple solution. Drop the quarterly reporting requirements for companies with market caps under a billion. Replace with a yearly reporting requirement and reduce the reporting requirements on smaller companies and you significantly cut the compliance costs. It shouldn't cost more than the cost of paying your accountant which you would do anyway and paying for periodic audits.

Re:Regulatory Compliance is Also a Problem

[Comrade Ogilvy]

It is a good question. CEOs do perceive that in the post-SOX environment getting your books in order such that it can survive SEC scrutiny and go public is much more arduous. To oversimplify it, either you company is growing quickly or it is not. If it is, then your board will be patient with you, you can get more operating funds, and you consider the question or going public or getting bought for another year, when your valuation is likely to be even more attraction. If you are not growing quickly, maybe you should spend your time being a leader and running your company better, because the distraction of spending roughly a year over the IPO paperwork and roadshow is not going to fix anything on its own. Besides, your best bet in the second scenario is that your can "pivot" to be enticingly competent at something, and then someone might buy you, in spite of your company's obvious crappiness at a bunch of other important things.

Startups *shouldn't* go public.

[Nutria]

Let them first establish a profitable business using privately raised money. (We wouldn't have had the Dot Com Bubble if people had acted in this responsible manner.)

Re:Investors

[Kiuas]

Might be easier to convice a group of libtard VC investors of your brilliant idea (see juceroo) than to acutally develop a sustainable business that convinces a broad range of public investors.

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.

Re:Investors

[darronb]

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.

Not going public can be a good choice

[Zontar_Thing_From_Ve]

I work for a Fortune 500 company as a result of working for a successful startup that got bought out. The startup that eventually hired me started in the late 1990s I think. Employees who were there in those early years told me that the company thought seriously about selling stock, but for whatever reason decided not to. That decision probably saved the company. The internet bubble burst and they avoided being caught up in that. I was told that after the bubble burst they did have some layoffs, but they weren't too bad. The company just chugged along and grew and eventually was bought out by the company I now work for.

There actually are ways without going public to eventually enrich company executives. Someone else mentioned a plus of going public was giving stock bonuses because they don't tap company revenue. The start up I worked for gave some kind of restricted private stock in the company to execs and the rank and file employees got some kind of shares but those rank and file shares weren't as numerous or worth as much. I came on too late to get those so I don't know much about them. All I do know is that when the Fortune 500 company bought us, the rank and file employees did get paid for their private stock shares and the exces made a fortune. Pretty much every one of those execs became a millionaire. Some of them told us they were simply going to retire after the sale because they made so much money they didn't need to work again.

Stakeholder versus stockholder...

[ctilsie242]

What we are seeing is the fact that a company stakeholder and a stockholder are completely different people now. Now, especially with HFT, if your company has any bad news, investors bail in droves. You can't just focus on the next quarter, but the next few days, to keep the shareholders happy. You do a charge-off (a company investment in retooling or some major renovations to change from being a better buggy whip maker to a car accessory maker), you will be served with a class action shareholder lawsuit first thing the next day.

Because companies are under the constant lash of this quarter uber Alles, the only real way to expand into a new market is to buy an already existing company, unless one is Apple and investors know they will have their cake and eat it too when Apple forges into a new area.

Keeping a company private is a wise thing. The board that runs Dell isn't stupid, and after they removed themselves from the public market, product quality has improved. Plus, why subject one to the whims of market manipulators and pump/dump artists, when capital can flow from other sources?

Cause and effect perhaps a bit backwards...

[Junta]

The ratio of how much the funding is used for capital versus other expenditures doesn't change the fact that fundraising through going public can be appealing.

One thing the ratio did in the past, however, was to mitigate the looting the shareholders could do to the company. Capital assets are not trivially liquidated and as such contribute to a company having a hard time financially evolving themselves if they have a lot of money tied up in assets. A lot of companies getting rolling love and pay a premium to have flexibility and so they have perhaps more money being spent, but they can change their minds easily.

However, that flexibility also includes the ability to throw liquidity at the shareholders, and investment firms can get very pushy if they see liquidity and demand stock buybacks and large dividends for short term benefits even if the company's well being is better server through longer term investments. Being a public company attracts investment firms that don't give a damn about your business, and statistically speaking they are better off sucking the blood out of the company than letting it ride, so they will limit a companies ability to make long range bets.

Re:Investors

[darronb]

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.

Re:Investors

[jedrek]

One of the things that I hate about SV/VC culture is that they deride the companies that you're talking about as "lifestyle" companies. You're either a disruptive unicorn or you're nothing. It's a horrible make-or-break culture that doesn't do people any good.

Re:Investors

[aaarrrgggh]

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.

I'd do everything to avoid an IPO, too...

[bjdevil66]

When you sell out, good business decisions take a back seat to the constant pressure to increase profits - and thus the stock price - at all costs. How many companies have eaten themselves alive to feed investors, and then feed the MBAs/consultants that come in to "fix" things but ultimately just gut the company and run?

Re:I'd do everything to avoid an IPO, too...

[TheSync]

When you sell out, good business decisions take a back seat to the constant pressure to increase profits - and thus the stock price - at all costs.

There is no good evidence to support that publicly traded companies have worse long-term returns due to a concentration on short-term stock price.

"a new study of more than 900 funds raised since 1986 finds...no significant return difference between private equity and an equivalent portfolio of publicly traded stocks." (source).

Intangible Assets

[PPH]

Are not treated fairly or consistently under US accounting rules when going public or in the event of an acquisition. So a startup might be better off avoiding that mess and then go public or be bought overseas.

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.

That could have worrying implications? WHY?

[sproketboy]

Don't go public if you don't have to. Then you can control your own company and make your own decisions instead of begin beholden to quarterly earnings reports.

Re:Investors

[burtosis]

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.

Re:first!

[pnutjam]

Was that before or after they had an excellent adventure?

So,

[BitztreamNotARealNam]

How's life in the hypocrite lane?