I should start by saying that I have not fully fleshed out this stream of thought. It occurred to me this morning in the shower and it’s been knocking around my head all day (when I wasn’t trying to rebook a terrible day of traveling. Thanks snow!) So I decided to blog about it here and see if that helped me work through it.
I’ve been reading quite a bit about start-ups, venture capital, and most specifically venture capital returns in the last few months. Typically venture capitalists make their money when their investments “liquidate” through either an IPO or acquisition. Over the last 30 years there have been many hugely successful IPO’s including Google, Microsoft, Dell, Amazon, etc. This IPO’s are a huge engine of wealth creation and access to capital in our economy. Access to these capital markets can be critical to the success of business growth.
Recently, however, it’s become harder for startups to access these markets. The added regulatory requirements put in place by Sarbanes Oxley have made it significantly more expensive for young companies to launch an IPO (estimates put compliance costs at $2 Million or more). And, in addition to costs, SOx also introduces personal liability for the officers of the company. Increasingly these young companies are turning to M&A instead. They seek out larger players in the market and negotiate a sale.
So what does this mean? In the short term, probably not much. Venture capitalists and their investors may see somewhat smaller returns and company founders may not see the extreme paydays (though Mark Zuckerberg seems to be doing just fine and I don’t hear Ev Williams or Biz Stone complaining at all). Additionally there might be somewhat slower job creation. But overall the short term implications are probably pretty small. The long term implications could be much larger. What happens if the trend continues and we develop a lack of new public companies? What if all new tech startups sell to Microsoft or Google or Apple? Will we eventually have an economy dominated by a few mega-corporations similar to the financial industry today? What happens in the next recession? Do we have to bail out these tech giants? Do they become “too big to fail”?
Or am I over-extrapolating and over reacting?
Good Talk, Tom
I would hazard a guess that it's actually a cost benefit tradeoff. Pay $X to become compliant for bigger payoff (and more importantly independence, which for most entrepreneurs is huge), vs save that money and become subsumed.
ReplyDeleteGiven that many start ups are actually VC funded and driven (and thus have $X to spend most likely), my guess would be that the VC desire for a larger payoff will actually align with founders desire for independence, but it's an interesting thought.