I’m now back in town after a combined business/personal trip late last week, one without much Internet access. So I’m catching up on some back reading.
One of the articles I missed was printed in Friday’s WSJ, where a commentator noted:
Last quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S.Yes, OK, the market was not very favorable for IPOs, but we’ve had other down markets in the past three decades; the absence seems extraordinary. One obvious implication is that if the traditional exit strategy has been foreclosed, it will be harder to get funding for new startups.
Commentator James Freeman lays the blame at Sarbanes-Oxley, and IMHO (next to the convicted felons from Milberg Weiss), nobody deserves it more:
"A lot of our CEOs are reticent to go through the public process. The [Sarbanes-Oxley] and governance issues are cumbersome, and it means they spend all of their time as administrators versus growing their companies," reports Kate Mitchell of Scale Venture Partners. She adds that chief executives don't want the liability risks of running a public firm and the same goes for candidates to serve as outside board members.Despite the visibility of this problem, neither presidential candidate plans on eliminating the infamous Section 404. Interestingly, if one kook libertarian (no not that one) somehow had made it to the White House, 404 would be history.
As for Sarbanes-Oxley, or SOX, the hope was that by now firms would have gotten over the hump of learning to comply, and auditors would have stopped obsessing over minute risks. Last year the Securities and Exchange Commission explicitly advised firms to focus only on material threats to the integrity of a firm's financials. "The SEC's heart was in the right place, but the accounting firms' hearts are not," says Mark Heesen of the National Venture Capital Association. He adds that the Big Four accounting firms "continue to feast on SOX audits."
Ms. Mitchell says the "SOX tax" runs up to $3 million per year per company, which can reduce a firm's market value by much more. Mr. Harrick says the costs of being a public company can approach $5 million.
The SEC is trying to improve things but it’s not clear if they’ll be effective. If they don’t succeed before Christmas, it seems unlikely that their reform efforts will survive the next administration.
Freeman identifies another form of innovation drag with Elliot “tripped on my zipper” Spitzer, the former chief persecutor of NY State. Since Spitzer’s onerous policies were not voted for by any national politician, it seems hard to see how they’ll ever be repealed, although some provisions seem ready to expire in another 12 months.
Of course, the history of politicians is to neglect a problem until someone screws up badly, and then overreact. There are other ways that the problems of Enron and WorldCom could have been solved, but those would not have made Sen. Sarbanes and Rep. Oxley household names.
Without IPOs, there’s still the acquisition alternative. Freeman aptly summarizes why this alternative tends to produce less innovation than the other:
Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?
An IPO generally means that the founders can continue to run the companies they have painstakingly built, except with greater resources. An acquisition generally means that the founders move on, see projects they championed get axed, and watch old colleagues get fired.