Will A Fear Of Going Public End The Innovation Boom?
from the money-makes-the-world-go-'round dept
We’ve seen similar articles a few times in the past, but the NY Times has yet another story about how startup execs are less interested in going public than in the past, and suggests two key reasons:
- The regulatory nightmare of going public, means that it’s all paperwork and lawyers, rather than focusing on growth, innovation and markets. Sarbanes-Oxley remains a key problem here.
- For startup founders, it’s become a lot more tempting to just sell out to someone big — because it’s a lot easier, but can still earn you enough money to totally change your life.
Again, neither of these issues are all that new, but a decade ago, the focus for most startups was very much on building companies that could go public and standalone. Admittedly, in the dot com insanity, a ton of startups went public that had no business whatsoever being public standalone companies, but there’s reason to fear that we’ve gone too far in the other direction.
Real innovation depends on creative destruction, as newer startups come up and take over from the old legacy players. That’s where innovation really thrives. And, while I don’t think all great companies need to go public, it could be problematic if each great startup instead just sells out to the legacy players from the last generation. Those companies are often where new innovations go to die, rather than to thrive. This doesn’t mean we should go back to allowing just anyone to go public, but if we make it so difficult for good innovative companies to go public on their own that they’re forced to sell out to other companies, we definitely lose some of the creative destruction that has made Silicon Valley and the tech industry thrive in the past.
Filed Under: innovation, ipos
Comments on “Will A Fear Of Going Public End The Innovation Boom?”
"substantiate" - word of the day
well if thats your thing to get a short term gain that you spend and then its back to slave work.
the system if you people haven’t figured out favors HUGE companies over anyone small
capitalism as it is is not capitalism
its fascism, they lobby govt for favorable laws like trademarks copyright patents and you get screwed and pay
and you the slave do as they say
don’t like it move out off earth they own it
Goal
I thought THE goal of this millennial generation WAS to build a company and then sell out for a gajillion dollars and then “kick back”. Since that generation is mostly “idea people” and not implementers(Eww, let’s not get dirty).
Re: Goal
That goal makes sense. Some propellor head invents (say) some mindblowing speech and facial expression recognition software, he/she doesn’t want to spend the next 5 years doing (badly) what a bigger corporation could do better
– recruitment
– billing
– marketing
etc
He/she wants to sell to someone who can already do that and then go and do more of what he/she is good at.
What’s wrong with that ?
It’s not just regulation that favours a large established company – it’s every single bit of the day to day existence of a company.
What matters is whether the large established company is google or Murdoch…
Open the market
Mike, you have been spot on in calling for the repeal of Sarbanes-Oxley (SOX).
The intended effect of SOX was to ostensibly improve the general public’s trust in public corporations in the wake of Enron, Tyco, Worldcom, et al. I would argue that to some very limited degree, SOX has had this effect.
However, as both you and the Times wrote, this compulsory regulatory headache called SOX has really hurt the US IPO environment. I wouldn’t go so far as to say that it’s completely dead, but if we keep piling regulations on corporations as we have been in the last decade, then the IPO market (for startups, at least) could dry up for good. What we’d likely see then is mostly large corporations (a la Microsoft), or perhaps even conglomerates (a la Berkshire Hathaway) mainly trading on the US based exchanges. For these corporations, SOX administration costs (particularly section 404) aren’t as big of a deal as they would be to smaller corporations who typically generate substantially less income.
I believe that the London Stock Exchange is where we should be looking right now, particularly the Alternative Investment Market. In short, companies who list on the AIM are subject to a decreased regulatory burden compared to those listed on the ‘regular’ LSE. I’m not saying this system is perfect (the Langbar International case would refute this), but it should serve as a reference guide to how the market should operate. Lessen the regulatory burden, thereby freeing up resources to focus on whatever the business specializes in.
As an aside, we may not even get to see congress repeal SOX. There’s a case before the US Supreme Court – Free Enterprise Fund v. PCAOB [Wiki, Docket]. Realistically speaking though, it’s rather doubtful SCOTUS will get in the way of a government program of this nature. But, one can certainly hope.
There are other ways
Going public might still be a decent enough goal for businesses that above all want to be long-term, sustained-growth entities. But why would you? It isn’t necessary, particularly for the people who actually get their hands in and invent or innovate. Sustained growth is good for the management, secretaries, HR departments, lawyers, marketing departments and what-not. But for the developers, inventors, designers and such, a get in/get paid/get out strategy is far less stressful and accomplishes the same net ends.
This might be especially true the more that disruption becomes key. Staying privately held, the developers can, in the event of a disruptive innovation that renders their product less useful, throw up their hands and say “I’ve had a good run” and retire or move on to the next thing and just disappear. Especially if they’ve made sufficient bones that they don’t have to work anymore if they don’t want to. That’s awesome. No need to worry about brand alignment and re-orgs and “tough decisions” and all that. But the bigger you get, the more people you’re responsible (or worse, liable) to, the more difficult it gets to do that without destroying yourself in the process.
So maybe it’s not fear in the horror sense, but more in the risk management sense, which frankly is the thing that makes survival possible. You can develop and license the tech, and you can contract the administrative stuff out to some other company that specializes in that sort of thing (if such companies don’t exist already, then they’re going to eventually, because they’ll be needed). Then you just do what you do until someone with better ideas and lower overhead comes along and replaces you. Then you go to the beach.
Selling well
Ten years ago Cisco grew by buying startups. Nothing wrong with that for Cisco, the startups or the economy.
SOX is a disaster. It was supposed to result in transparency and fair accounting. The fact that so many banks imploded so spectacularly over what were after all accounting and valuation failures just proves what a dismal failure SOX is.
“For startup founders, it’s become a lot more tempting to just sell out to someone big — because it’s a lot easier, but can still earn you enough money to totally change your life.”
This has been my business strategy for decades, and I stand by it as the best balance of risk/reward for me. I don’t sell my whole company, just all rights and resources to the product in hand. I get a very large payoff, and I get to walk away and do something else that is new and exciting.
My payoff is arguably smaller, per project, than if I ran the whole thing from beginning to end, however I am taking a much smaller risk. I get paid even if the product fails in the marketplace. Taken as a whole, though, since I get to do new development cycles more frequently than if I had to babysit the old projects, I make more money than my colleagues who insist on maintaining ownership from cradle to grave.
The real cost to me? I cannot stop producing new things (i.e., innovating). I have no laurels to rest on. This fits my personality well, and I think that it is of greater benefit to society.
Re: Re:
Oh, and I forgot: taking my company public? I did that once, and will never do it again. I’d rather go out of business than lose that much control.
Going public has always been a pain Sarbox makes it a little more painful. IPO’s aren’t dead M&A seems attractive now, IPO’s will be back at some point.