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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?
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.
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.
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.