Well another quarter passes and no IPO’s. That’s 0, nada, nichts, niente, 余, 无 in the last 2 quarters. In fact, the IPO market has been largely dormant for 8 years. The space between the private and public equity markets is severely constipated. Few deals have snuck out and they weren’t necessarily the ones that should have made the move. The problem created by the lack of an IPO market is the lack of capital for innovative growth companies. A few such as Facebook have been able to access institutional capital privately. However, access to public capital has been the life blood of young growth companies for the last 4 decades. Companies such as Microsoft, Apple, Google, Genentech, Cisco, Intel, Netflix, etc. would not be where they are today (creating loads of jobs and pushing the US to the forefront of technology) without access to public capital.
Today, there are dozens of companies constrained by a lack of capital that is stifling their innovation. My guess is that there are roughly 100 companies with the personnel, products, market opportunity and financial stability to be public. They are still private because of a combination of government disincentives, corporate ambulance chasers, timid investment banks, and nervous institutional investors. The result of this constipation is a squeeze on innovation. Sarbanes-Oxley has done its part to squelch the IPO market. That handy bit of legislation has made it expensive and troublesome for companies to offer stock to the public. Such legislation has been a veritable full employment act for lawyers and accountants. I have news for you, lawyers and accountants to not drive US innovation and competitiveness- quite the contrary.
When a company reaches a certain point in its development, an IPO is a tremendous source of capital to allow the company to spend the funds required to do something meaningful. I remember when Akamai went public. The company was building an expensive infrastructure to speed content across the web. Without an IPO, the company would not have been able to create a meaningful business. Today, the company employs thousands of well paid professionals and pays lots of taxes. There are lots of other examples.
Of course there are examples of companies that went public that should not have taken the plunge. But zero IPOs is a far cry from a selective market. I recall back about 15 years ago when I worked at Montgomery Securities. Montgomery was a boutique firm that specialized in growth companies. We took lots of small, promising companies public. Some didn’t make it but lots of them did and are still around in one form or another. Today, there are bulge bracket monoliths such as citigroup, morgan stanley, goldman sachs, merrill… no wait, they are now part of another monolith, and so on. There aren’t any firms specializing in providing investment banking services to smaller, growth companies. Due to the largely justified separation of banking and research that happened after the Internet bubble burst in 2000/2001, there is little motivation to provide research on smaller companies. The big I-banks are nearly incapable of servicing pre-IPO growth companies. They must generate millions of dollars in fees to justify answering the phone.
So what’s the solution? First of all, the government should do less rather than more. The current financial crisis was caused by what amounted to negligent supervision by people like Barney Frank, Chris Dodd, and a host of others. The smarter guys such as those packaging mortgage-backed securities were driven by greed and enabled by the “watchers” that were asleep at the switch. So, we don’t need more legislation, but we could use smarter supervision. The difference is knowing what’s going on and being able to influence it rather than establishing crushing legislation to force everyone to jump over government imposed hurdles. While Washington is at it, why not foster a more paternalistic environment for growth companies to fund their innovation.
The NASDAQ is trying to establish a new class of public offering aimed at allowing growth companies to tap the public markets without having to pass the proctology daily exam required by the current rules. The government should support this effort by allowing the NASDAQ to experiment with a lower bar. The capitol hill crew should supervise this endeavor, with people capable of understanding it, but avoid legislating it into oblivion. Another good move would be to take Sarbanes-Oxley and re-write the rules to be less of an expensive administrative burden and more of a set of clearly stated guidelines. The government should limit the negative impact of class action law suits brought by lawyers with printing presses that go off every time a stock drops 20%. In other words, the government should encourage growth companies to raise capital in the public markets rather than erect barriers. I might even go as far as saying Obama and company should focus less on motivating people to own houses and more on encouraging people to own growth companies.
Finally, we need a few smart and influential people to lead the charge in building confidence in the public offering process. I call it a process because it starts, rather than culminates with the IPO. The IPO is the coming out party. To re-open the public markets for IPOs for innovative growth companies a combination of institutional investors, investment bankers, and boards of directors must mount a charge to breathe life into the system. I am not advocating returning to 2000 when two guys and a dog could go public. I am saying let’s go back to 1997 when a solid, well run company could go public. That’s it, we need to go back to the future. Let’s fire up the flex capacitor and renew our public market system to allow people to invest in the future of great little companies seeking capital to drive innovation and create value for shareholders and employees.
