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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.
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.
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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.
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.
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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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.
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.
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.