In 1995 we started Broadcast.com as AudioNet. In July of 1998 we took the company public. Within a year, 300 of our 330 employees were worth more than 1mm dollars in Broadcast.com stock. We became on of almost 300 companies to go public that year. We were one of about 125 to go public with under $50mm in sales and we became one of the 8k public companies listed on the major exchanges.
The amount of destruction in the IPO and public markets since then and its impact on this country are what can only be described as horrific
Lets go back in time and look at the Entrepreneurial thought process. I remember my goals and those of my peers very well. Build a great company. Grow it as big and as profitable as you could, with the ultimate goal of not only generating profits, but also taking the company public.
Why take it public ? Because the stock market was a source of cash that could help you grow. It was a marketing and validation opportunity that told customers and prospects you had arrived. It was a liquidity opportunity that while not guaranteed, if you could continue to grow the company over the long haul, would value your company at a multiple of earnings and allow me, my investors (many who were close friends) and my employees to increase our net-worth and cash holdings.
The capital from the public markets could also allow us to retain our independence. As a public company we not only had our IPO cash, we could go back to the markets for additional offerings. Keep moving forward towards our corporate goals and the possibilities were only dependent on our ability to execute our plans. Being public, unlike the private markets where every cash raise is a battle over valuation, we knew exactly how the market was valuing our company.
As a private company the best I could do was take cash out of the business as a reward. That’s not a bad thing. It had worked well in my first company, MicroSolutions. We never had a losing month and I was able to generate a lot of cash. But anything I took out was not there to grow the business. Maybe I took too much out, but we never were quite big enough to go public. Our liquidity event that rewarded me, my partner and our employees came in the form of a sale to CompuServe. Even though it worked out well, had I been able to take MicroSolutions public, I would have.
So would have every other entrepreneur I knew. We all wanted to go public. That was how you had a chance to get obscene amounts of wealth. Back then the goal wasn’t to be a billionaire, the term was simply “Fuck You Money” Which was however much money it took to own a private plane and to not have to work again if you chose not to. For all but a few who built huge private enterprises, that goal was only attainable by going public.
Was/Is that level of greed good ? In my world, those same peers would reward their investors and employees just as I did. So yes it was. Just as hundreds of my employees attained 7 and 8 figure net-worths, we were not unique. The same happened at many of those hundreds of companies that were going public every year that were able to execute on their business plans.
More importantly, it was a source of drive. It was motivation. Not just for me, but for all of our investors and employees. We all could see what happened when companies we knew went public. We got to talk to their employees and hear the stories of the amazing wealth they had earned. For those of us who wanted to achieve a high level of financial success, it made us work even harder.
Fast forward about 16 or 17 years and it had all changed.
It doesn’t matter how or why (I’ve written enough about the SEC, no reason to rehash their ineptitude here, again). What matters is that today’s entrepreneurs do not see taking the companies they have built public as a reasonable or even smart goal. Instead they want to stay private as long as they possibly can. They want to raise Series A, B, C, D, E, F, ? until when I’m not sure.
Their reasons are not many.They don’t want the reporting requirements which have gotten more onerous and expensive since we went public (even accounting for the new Reg A+ offerings). They don’t want to deal with regulators (I can appreciate this one). They hide behind the straw man of not wanting to have to play “the game” of meeting quarterly expectations and hyping the stock to investors. Neither of which is a requirement of going public. In contrast, ask any entrepreneur these days how much of her time is spent wondering how they are going to raise their next round.
Personally, I think they are wrong. But it’s their company. Their decision.
Unfortunately the momentum of the “Stay Private” movement is devastating our economy.
Here is how:
- Hundreds of Billions of dollars from investors , from mom and pops to huge funds, are tied up in private companies and returning nothing. That capital is dead money. It doesn’t matter what it is marked to on their books. It is dead. It can not be reinvested anywhere. That hurts our economy.
- We aren’t talking about dead money for a few weeks or months, we are talking YEARS. Ok, maybe not just years, maybe a DECADE or more in some cases.
- The balance sheets of probably 80pct of those investors is massively overstated because those private companies can’t or won’t go public. That creates its own potential issues. Because of the uncertain liquidity of those hundreds of billions of dollars, the remaining liquid assets of those investors is placed far more conservatively.
- Not only is that money dead to investors, it is dead to employees of those private companies. Sure, some of the hottest companies that find raising their 4th or 5th round easy may return some to key employees, but those companies total how many, 10, out of how many tens of thousands of private companies that have raised capital ? And even then its only upper management. The rest of the poor people working for those companies are most likely to stay that way. Poor.
- The dead money tied up in stock owned by anyone not in top management is one key reason that income inequality continues to get worse. Lets do some guessing with math.
- Lets say that like in 1998, 300 operating companies went public. And let’s make a guess that each of those 300 companies, had 200 employees that had vested stock options. That is 60k employees with stock in a newly public company. If the average value of that stock at IPO was $25,000, that is $1,500,000,000 increase in liquid net-worth to everyday Americans in a single year . If the majority of those companies continue to grow, then the value accrued to paid by the hour and salaried admins, analysts, security guards, receptionists, etc will enable them to participate in the same wealth creation that the One Percent does. That is of no small importance
- As a point of reference, here is an article that says that more than half of America has a net worth of less than 25k. So by working for a company that goes public, you immediately increase your chances of having a net-worth greater than half the country. To me, that is a big deal.
- Replicate the wealth impact each year and we can do more for the net-worth of hard-working Americans than any government policy or tax change. Nothing else can add thousands of people a year to the roles of the Top 50pct’ers like a revitalized IPO market.
- Lets say that like in 1998, 300 operating companies went public. And let’s make a guess that each of those 300 companies, had 200 employees that had vested stock options. That is 60k employees with stock in a newly public company. If the average value of that stock at IPO was $25,000, that is $1,500,000,000 increase in liquid net-worth to everyday Americans in a single year . If the majority of those companies continue to grow, then the value accrued to paid by the hour and salaried admins, analysts, security guards, receptionists, etc will enable them to participate in the same wealth creation that the One Percent does. That is of no small importance
- When private companies can’t or won’t go public, they become easy pickings for their competitors to buy them.
- In my not so humble opinion, this is the ultimate productivity and investment killer in the USA today.
- One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies. They recognize that the current conventional wisdom for those disrupters is to stay private. Which means that with just a minuscule number of exceptions, their investors will be crying for them to be acquired. Why would a company invest in the uncertainty of R&D and other innovative organic options when there are hundred of billions of dollars of dead money tied up in ground breaking companies, all looking for liquidity ? In this age of stay private, it makes no sense to build when you can buy.
- When you buy, you not only have far greater value certainty vs R&D, but you also eliminate a competitor. And you may get the additional benefit of paying for the entire investment through job cuts
- It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition. It is a “Precognitive Anti-Trust Violation” I know that sounds laughable in so many ways. But at its heart, it’s true. It’s also incredibly destructive to our standing in the world and our economy.
- Some may say that this is all wrong because there isn’t a market for IPOs. There will never be a world where 300 companies go public. They will point to january of 2016 , which had no IPOs as proof of just how impossible an IPO market revitalization will be. I will tell you that the lack of IPOs is more a reflection of the intent of today’s entrepreneurs. This market is DYING for growth companies. There are so few growth stories that companies with 250 BILLION dollar market caps are looked at as growth companies. If Entrepreneurs made going public a goal again and had their IPOs while they were in an accelerating growth period rather than 10 years into their business cycle and only when their investors demanded it, I know I would be all over buying their IPOs and so would other investors.
If you have gotten this far into my long-winded diatribe, thank you. Let me be clear, I’m not religious about any of this. I believe it. I’m investing in trying to fix it. But like everything else, I am putting it out in public in order to “check my hole card” and get feedback from everyone so I can get a little bit smarter about the whole thing.
thanks
m
After having read the blog post and most of the comments here I feel it is necessary to give the perspective of someone attempting to launch a company that has the potential to make a large impact on the middle class in America. One of the main issues faced by entrepreneurs is the lack of access to capital. My business is different than a lot of others since it is a combination product/service based business operating in the recycled materials markets. While not unique in the world I am taking a slightly different approach than most others in the same space. The current global market is $300 billion annually and projected to double in the next 10 years. Giving my company huge growth potential. My projected figures show gross revenue of $1.6 billion on operational expenses of $450 million, these numbers are based on a single facility. With numbers like this you would think I would have investors knocking down my door to invest in my company, but the reality is that none of the VC firms I have approached has expressed any interest in looking at my business plan, much less having a discussion about a possible IPO. Maybe it is my pitch, maybe it is something else.
In my particular case an IPO is not desirable for a number of reasons. So let’s take a quick look at the reasons why. First when an IPO is initially made the ones who really make the money are the investment firms making the offering since they are carrying the majority of the risks. Let’s look at some numbers to help illustrate this point. We will use my company as an example. I need to raise $250 million to construct my first facility and get it into full operational status. So let’s assume I approach ABC venture capital and they like my business plan and can see the value. They offer $25 per share and offer to take on the cost for the IPO. However, they want a 45% stake in my company to do this. So in order to get their assistance I have to give up 45 percent of my company before I have received a dime, so on one hundred million shares of common stock I get to keep 55 million shares initially. The first round of funding I sell 10 million shares at $25 per share to get the initial $250 million, now I’m down to 45 percent stock ownership and I no longer own the company, I’m merely in a senior stock position. The IPO gets a lot of press and is well received by the investment community and as a result the closing stock price ends up at $250 per share.
ABC venture capital sells off half of its stake in my company as part of the IPO and makes $5.6 billion dollars for the effort while still maintaining a majority interest in my company. While it is true that I would still hold almost a majority interest in the company I would have lost controlling interest in the company and would have to negotiate with the investors for everything I wanted to do. True, I would become an overnight billionaire but would not be able to run the company the same as I would be able to were it a private company. This is the dilemma faced by all entrepreneurs.
Comment by William King -
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Mark you are allays on the mark on everything you wright and for the life in me i don’t understand why the government is making the life a businessmen so difficult to do business?
Comment by Koutrougiannios (@greekinventor) -
Enter the progressive politician…… this politician thinks he is saving the world by regulating business…. because they deep down in their soul they think business is led by bad people who want to rob from the poor and keep it themselves. So the progressive politician passes Sarbanes Oxley regulation and Dodd-Frank Wall Street Reform and Consumer Protection Act. Actually what they end up doing is costing a lot of the poor decent jobs and a future for children of the poor by making it much more difficult for a business to succeed.
Comment by unsinkable300 -
I think one interesting option would be to have crowdfunding companies where investors can buy equity in a company. The natural progression of that would be to also provide an exchange where investors could sell or buy these shares. Seedmatch in Germany is in the crowdfunding business, but apparently crowdfunding in exchange for equity is not legal in the US yet. The U.S. is supposed to be introducing laws to make this possible, and I think there could be a huge secondary market for companies looking to raise cash to grow their business.
On a side note, I think it would also be fun if Shark Tank offered viewers a way to participate in an investment with the Sharks. So Mark could choose to use $100,000 of his own money, and add $100,000 of the viewers money.
Comment by Eric Bernal -
A a relatively new startup founder and investment/IPO neophyte – November 2014, all of these issues are are less a concern than building a winning product at this point. That said, I think there is are a couple of other reasons why founders are staying private as long as they can.
1. They want to be the next Facebook/Zuckerberg. The Uber guys come to mind. You go public when you dominate your market. You then use your cash to gobble up the innovators (instagram/whatsapp).
2. They think they have already won the FU money. Slack is in this category. I heard Butterfield say that he will already have more money than his kids can ever spend so he wants to run his company however he wants and thus why he has turned down billions in offers.
For me the harm done to the employees who are trapped in jobs because they can’t exercise their options, is the real problem. IPO or an acquisition when the product has taken flight doesn’t matter to me. In the past, many of these employees trained in “how to build a winning company/product” leave and start their own companies. Ex-employees of Apple, Google, Facebook, and the famous Paypal Mafia come to mind.
Besides making your employees rich, giving them the opportunity to take flight should also come into the equation.
Comment by Russell Cowdrey -
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I agree. The market dynamics have changed a great deal. As one commentator pointed out, most brokers under their compliance departments, compensation schemes and FINRA rules are not stock selectors but financial planners today and investment banks are not partnerships that underwrite securities carefully with follow-on sponsorship and interest aligning warrants compensation as part of the deal. The regulatory pendulum will swing back towards those structures (some stockbrokers/stock pickers/early-stage and small cap syndicates and HARM type investment banks) but it will take too long to help the economy in the near term.
Comment by William C. Feeley (@feeley_bill) -
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Your article inspired me to take http://www.FreeRecyclingQuotes.com public on the pink sheets! Mark you know how to reach me if your interested in helping.
Comment by recyclingquotes -
You are point on. The winners in all of these musical chairs are the VC preferred liquidity rights. They’re the only one making the cash. Who cares about the employees…is the new model. Top notch talent then leave vs. retaining talent with stock options that are actually worth something. We continue to see these VC’s getting paid out after these companies go public with the common stock shareholder left with damaged goods. And who owns that? You got it, employees and mom/pop. Basically the new model is to ATM these companies. Public markets are a dumping ground for this trash. The SEC and Dodd Frank have created a very broken US market structure. But that’s ok, you need to break the system to reinvent it. We currently see a little light at the end of the tunnel with the Chicago Stock Exchange buyout, Nasdaq Private Mkt, various crowdfunding portals, and hopes of the Delaware Board of Trade. Come take a look at what we’re doing at TreveriCapital w/ liquidity events. Peace out!!
Comment by Jem M -
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You lost me at income inequality, but grabbed my attention with the explanation; thought provoking, I’ll admit. That stated, its hard to imagine that something like this would turn around the perceived problem.
Comment by David Gruner -
A great post Mark and also quite a number of insightful comments. This subject really hits at something I was thinking about recently which is the complete absence of the “small cap ecosystem” that is needed to support those IPOs. With $50mm in sales at IPO what was Broadcast’s valuation ? I would guess it wasn’t over $500mm but correct me if I’m wrong. At that valuation today, a company would most decidedly be put in the small cap bucket…maybe even microcap in some people’s eyes. Regarding the ecosystem, back when Broadcast went public there were market makers that provided liquidity in the stock which allowed institutional investors to have confidence that they could enter into (and exit from) positions without massive market disturbance. There were also “retail brokers” that bought individual stocks for their client accounts. Both of these elements created self-perpetuating depth of market. Now, market makers are gone and the number of brokers buying individual stocks is way down.
I have been in the securities industry for 23 years, with experience as a market maker, analyst, and portfolio manager. I recently transitioned to investor relations. One commonality over the past half dozen years or so that I see consistently is the refrain from institutional investors of “it looks like a good company but its just too small/illiquid”. This becomes a negative reinforcement loop which is immensely difficult for a company to break out of.
Finding a solution to this problem is hardly easy unfortunately. The ecosystem is gone because it became uneconomical (or illegal) for those market participants to continue providing the services they were. Something like that doesn’t just come back from the dead. I suspect the easiest aspect to fix might be to re-introduce “legitimate” market making (as opposed to parasitic high frequency trading) where someone/firm is willing to provide ready liquidity to the market through negotiated block trading – assuming that’s even legal anymore. If that were to exist, we might then see some of the lower tier investment banks able to bring more companies public. That success would attract more market participants and so on and so on.
Comment by Jeremy Hellman -
I agree with the observation that we have too much of “dead money.” Postponing or avoiding IPOs might be an important reason, but I am not sure if this is the only reason, and if this is the most important one.
My point of view is of someone who has a great idea and not able to start with my money or money of my friends and family. Simply very few people have now money for risky investments. Hanging around the other startups with a similar predicament, I see many potential angel investors with money, but with no willingness for risky investments either. A petty mobile application, with a few thousand users, will likely get funded because can bring a modest but low risk profit, despite that it might be forgotten five years from now. Someone with idea of iPhone caliber, less Steve Job’s fame and money, will not find funding to build a prototype, despite that this idea can bring unparalleled profit and can be the game changer for the industry. Hence, from my point of view, we do not have as many IPOs as before, because there are fewer startups; at least fewer that are the next big thing. My question is: why?
Henryk A. Kowalczyk
http://www.henrykkowalczyk.com
Comment by Henryk. A. Kowalczyk (@HAKowalczyk) -
K, Mark I agree with you that the drive to stay private vs going public is in large part due to regulation, however you are missing the fact that a private company often has a different culture then the culture you find in Corporate America today. Sox is not killing the country its a good thing but I find it fascinating that big private companies are not held to the same regulation. GAPP accounting should be better taught in our schools and should be followed by every company and you’ll find a private companies can screw you just as easy as Enron can. The culture I am talking about is the family culture you find in many private businesses because it is not about Fuck You Money for them. like a Rumpke Disposal vs. a Waste Management. Rumpke’s employees are taken care of and love that they are not like the big oligopolies on wall street. Corporate culture wants you to live for the numbers game to keep share holders happy. Shareholders are your customer not your true customers, and a lot of social capital is lost in that. A private company strives to win social capital all the time and takes some pride in not trying to take over the world.
Comment by Kevin Barnes -
How about changing who the first ones in on IPO’s are. Instead of the already wealthy always getting first dibs, why not allow those making less than 75,000 dollars a year get first dibs on an IPO. This allows the real money people to come in later on and amp up the value and this in turn might inspire a back and forth between different economic sectors of the economy. What could ruin this scenario is the wealthy coming in with lower and lower stock purchase offers to try and panic the first ones in so they bottom out the stock. I guess no idea is perfect but I still find the concept intriguing of allowing the general public in on IPO’s and making the big wigs wait.
Comment by Alessandro Machi -
M,
Seems you are saying companies are staying private, because they are better off to get bought than to public. Either way the value gets into the public arena, right?
If they go public, more people get more money, but that is not the goal of business. The goal is to “fuck the money” and not “have to work if you don’t want to”, right?
I may be too stupid to understand, or just missed something.
Keep trying.
c
Comment by Charles Medlock -
Great entry. M
Mark James Neeleman
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Comment by Mark Neeleman -
Mark, I’d also stress that Private markets are a value going up, but Public markets are more valuable going down…all because of liquidity. On the way up, founders and VCs maximize gains by sharing nothing with the public markets, but now that private investors are sitting on their hands there is hardly a market to be made for these companies (and whatever market will be made can easily be made at a major discount to what the public markets would bear).
Basically, greed kills. And those who didn’t take a seat before the music stopped are going to pay big time for riding the vogue “stay private and bleed the rock to death” merry-go-round.
Thanks for another insightful post.
Comment by Damien Hoffman -
Mark,
Great article, thank you for posting. What’s your take on equity crowdfunding platforms such as Dream Funded?
Comment by ndenardo -
“Pre-Cognitive Anti-Trust Violation”.. Lol. Companies are not going public cause the game is rigged. Unless you got access to unlimited cash and attorneys, it is not worth dabbling into the casino. One may label that fear as “Pre-Cognitive …..etc” he or she may like, but the fear is not entirely baseless. And yes with the Plunge Protection teams of the FED and the most of the Hedge Funds acting as front runners of the FED, the truth is that the game is all but left for the selected few to play. There is no real market out there. Do you disagree?
Comment by CarSociable (@CarSociable) -
I think that depends on what you are dong. If you are actually producing something, being public opens up a whole new cash market, there are 1500 mutual funds that specialize in corporate bonds. Most of them won’t touch you unless you are public and subject to FINRA approved audits.
Comment by unsinkable300 -
Mark,
As one of those 300 employees of AudioNet/broadcast.com, it was a great thing (I can still remember the reaction when the stock finally traded that day).
Many employees didn’t really understand the concepts of the options when we were private, but when we went public, and they could easily put a value to their options, they became even more engaged in how they could do their job better, how they could make the company more profitable,,,they realized they owned something, options in a private company just didn’t seem to have the same meaning to them.
andy collins
Comment by Andy Collins (@andydallas1) -
Yep. — http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html
Comment by Matt Milliken -
Mark,
One additional advantage, as one of those 300 employees of AudioNet/broadcast.com, many of the employees didn’t really understand what the stock options meant to them when we were private, when we went public, and they realized how much the options were worth and how they could increase in value, they became more involved in ‘How can we make the company better, how can I be more productive”
andy collins
Comment by Andy Collins (@andydallas1) -
That is a good point Andy, one more reason, i am working towards taking my company public.
Comment by unsinkable300 -
Great post Mark, This gives me some extra validation to go public. We have doubled the past few years straight, and we have not raised money yet. We already have to do audits so its not much of a change. The biggest fear of not going public is that is not the status quo anymore. From the sidelines it looks like I’m missing out with participating in the venture capital bubble. Sometimes you need to see your beliefs echoed by someone you admire. Great post
Comment by Thomas Ince (@thomasince) -
So funny that I read this because right after I watched this Ted Talk with former Minister of Finance of Greece, Yanis Varoufakis and I believe he expressed something similar.
http://www.ted.com/talks/yanis_varoufakis_capitalism_will_eat_democracy_unless_we_speak_up
Comment by EmeryLee -
MR. CUBAN – I really hope you read this comment because I will touch on an element that is relevant to this discussion and the economy as a whole, but one that you do not write much about in your blog posts. Don’t take this for nonsense either, it’s a totally under mentioned area of business that dictates why entrepreneurs, investors, and regulators act the way that they do.
Psychology plays a KEY role in decision making. While all humans have been irrational at some point in their lives, in a big or small moment, generally, at the time in their head they believed they were being rational. Hindsight is 20/20. My point is that people act with what they perceive as rationality, ESPECIALLY high level entrepreneurs and savvy investors that continually support these businesses through personal or institutional capital.
You are 100% spot on with your thought process regarding how capital is motionless (and hurtful to the greater economy) while parked in private companies that refrain from going public. The continuous circulation of money has long been a crucial ingredient of a lively and growing economy, domestic and global. However, the thousands of economic players in various businesses that are making the decisions every day that embody your analysis are doing this FOR A REASON. Why? Because they believe, at the time, that is the best thing to do for their business and their future. And why is that? Because humans are constantly running Cost-Benefit Analyses of each decision they make constantly throughout life. Some decisions are more important than others of course, like whether to take a company to an IPO or what to order for lunch. But you have to understand that entrepreneurs, investors (institutional or individual) and regulators are simply acting in what they see as the best fit taking in all risk, reward, and potential into account for each decision.
The point of all this is to give you a hint of a different perspective on why people do what they do, because it’s not as simple as “the dead money tied up in stock owned by anyone not in top management is one key reason that income inequality continues to get worse”, or ” this is the ultimate productivity and investment killer in the USA today”.
Our economy has millions of determinants that drive the results every single day. Each player in it plays a role, some larger than others. It seems very obvious to you that an IPO is a no-brainer strategy, but to those involved in the actual companies, it isn’t so cut and dry. And that is for a REASON – because entrepreneurs are calculating whether or not it’s the RIGHT decision every single day, and for all of them in January 2016, it was not the right decision. No one person is bigger than the market, and no company is either. As Joel Greenblatt writes, “If the price named by Mr. Market is neither very high nor extraordinarily low relative to the value of the business, you might very logically choose to do nothing.” While I am not a believer in psychological/emotional reactions influencing my investing or business decisions, there are without a debate volatility risks in the economy. And when the guy running the business feels it isn’t the best decision, and so does every other entrepreneur out there (0 IPO’s in Jan. 2016), it’s probably for good reason. The market may tell white lies but has a trustworthy foundation.
Thank you for reading Mark. I hope you take this and create a lively discussion about psychology in business, and how big of a role it plays in the American economic sphere. The ONE THING that all people (say 99.9%) have in common is that our natural instinct of survival and power drives us to do what is best for ourselves and our future at all times, and in business, this is no exception. People are using their brains to guide them to do what is BEST for them and their businesses/investments at all times. If you consider that, you’ll have a better compass as to why there were no IPO’s in Jan. 2016.
Comment by yaboylive -
Everything you say is true. To make a greater impact I suggest saying, “Sell part of our company to new stockholders and use the money we receive to grow.” Terms like “IPO” and “going public” are useful for you and me but are not really well understood by the general public — the 99%
And what would be the upshot of “selling part of our company to new stockholders?” Individuals, retirement plans and the general public would be able to share in “our” success. Share the wealth.
Comment by rovingbroker -
Mark,
Your perspective is very plausible, but there are not clear actionable steps to resolve the problem. Reduce administrative/regulative burden is implied – albeit will get significant resistance due to prior abuses by corporations and individuals. But how to you lead young founders to aspire to go public, and to take responsibility for being answerable to the markets?
Seems to me like anything in this area, it is simple – the current financial model drives behavior – I suspect that is because too much money is invested by representatives of the wealth (institutional money) vs. actual wealth. And it’s always easier to risk other people’s money. Until the ‘consumer’ wakes up and stops rewards their brokers and investment advisors with massive bonuses whether they win-or-lose, the system will remain broken.
Comment by Wag Jaw -
Lots of long winded comments. Some of them way off the beaten path. If ur company has market value as a buyout target, then the investment in it isnt dead money after all, right? So your beef is that the valuation is too low (vs ipo valuation), or that it comes to late in a growth cycle to benefit stakeholders?
Comment by showyoursexy -
Life Science companies (Bio/Pharma/Med Device) are going public frequently and have been an IPO bright spot in the past few years. And that’s even with Big Pharma on the acquisition trail to refill their pipelines. So Life Science executives don’t have problem with being public. It’s the Internet/Software-enabled industries populated by young founders that don’t want the responsibility of being public. They have been enabled by late stage institutional investors armed with cheap money.
Comment by itsdono -
Very Interesting analysis, itsdono.
Comment by Alessandro Machi -
You’re right, but the solution is to get entrepreneurial. We will be listing more than 50 companies this year using a hack of the traditional ‘roll-up & list’ model. It allows small business owners (under $20m revenue) to get all the benefits of a traditional IPO and it allows investors to tap into fast growth, dynamic small businesses in a low risk way. We call it Agglomeration and you can read a white paper on it here: https://www.linkedin.com/pulse/unity-agglomeration-right-your-business-jeremy-harbour
There’s an estimated 10m businesses going to come on the market in the US alone over the next decade as baby boomers retire. Last year the average sale price for a business was $266k. Today it is less risky to start a business then to buy a business. More sellers, less buyers, the price for selling a business will plummet and trillions of dollars of value will be lost.
This isn’t a US issue it’s a global one. It’s time to get creative and use the markets for what they were originally intended for. Appreciate you shining a light on it.
Comment by Callum Laing (@LaingCallum) -
A lot of great points, Mark. I agree with the gist of 4.b but even though huge companies pile up dead cash instead of investing more in R&D, I believe this also makes it easier and motivates entrepreneurs more to start companies from scratch in the first place. Not long ago, I pondered getting involved in a virtual reality startup (one-man team last time I checked) and we did not feel like we had a lot of competition except a few private startups and MAYBE a few secret teams at tech giants (e.g., just read about Apple’s secret VR team and we know Google and Facebook [bought] have one). This means, possibly (I realize this is a big possibly), that more startups can strive to create products/services in niches with competition, but not so much competition that they won’t even start the company. However, I think there should be a lot more R&D by big companies at the same time. They can still scoop up startups if they are better than their own developments.
Keep it real and leave some feedback.
Comment by Maximilian Winter -
Mr Cuban thank you for using your platform to speak up about this. Technology was supposed to make life better but wealth inequality — and the capital markets, I’m not so sure about. Capital gains are being hoarded by those with connections. Going public has become the “pass the turd” moment… However, Canada’s capital markets have long specialized in early stage public companies – from nano-caps on up. These are the TSXV and CSE exchanges. They are wonderful and underutilized crowdsourcing mechanisms for entrepreneurs. http://chat.ceo.ca is the chat app for Canadian securities, “CEO.CA” in the app store. I made it. All the best
Comment by Tommy Humphreys (@tommyhump) -
Thank you for putting in the time on this article.
The highlight for me was the bullet point about *buying value vs. R&D & the resulting job losses.*
Cheers,
TJ
On Thu, Feb 4, 2016 at 5:14 PM, blog maverick wrote:
> CyberDust ID – Blogmaverick posted: “In 1995 we started Broadcast.com as > AudioNet. In July of 1998 we took the company public. Within a year, 300 > of our 330 employees were worth more than 1mm dollars in Broadcast.com > stock. We became on of almost 300 companies to go public that year. We w” >
Comment by Hale-YA -
I think you are 100% right Mark, I developed hydrodynamic and hydrostatic technology for an industry that most private investors have little or no interest so i have struggled to find capital. As I seek capital, the US ARMY buys from me. The US National Park Service buys from me, the US Federal Fish and Wild life buys from me, the National Oceanic Atmospheric Administration, is after me to bid for them. I have a line of buyers (private general public) who have made deposits. When I look at my publically trading competitors almost all of them are trading at a P/E above 15 and yet…. Private Investors ask me the craziest question I can think of….How do you know you can sell this product? Look around they are standing in line to buy!!!!!!!!!!!! and I don’t have the money for proper advertising. They are still telling the friends how great it it. It Solves the most obvious problem…, . I don’t want to list exactly how or what I do just for the of chance that a competitor is reading this….. We are seeking capital and we plan to go public. Mark, if you want to contact me OceansQuest300@gmail.com
Comment by unsinkable300 -
Hi Mark,
Great article and I agree with everything you said but you don’t go into detail as to HOW we go about changing the culture or HOW does the small business owner goes from Point A to Point B?
When you have a seasoned entrepreneur who is ready, willing and able (from a management and experience perspective) to take his or her company public but simply can’t afford to do it without jeopardizing the capital he needs to run the business, how does he get there?
I feel there is so much untapped potential in today’s entrepreneurs – people who otherwise would be capable of growing large, productive companies but just can’t get the capital to make it all happen.
I would really like to know how do you make it happen? How do you put it all in motion to bring your company public? The desire is there for a lot of entrepreneurs but we’re scared of taking something good and ruining it with the expense and regulatory burden of the process itself. I would love to see a post that answers these questions.
Thanks. – Phil
Fireside Patio Mats
Comment by nasdaqphil -
Mark, I agree with your opinion. Perhaps additional reasoning for not going public could be identified through a behavioral finance survey to get insight into the physiology of the decision.
Shlomo Benartzi (Behavioral Decision Making Group) at UCLA could be a good man to lead the project.
Thank you for your contribution towards wealth creation!
Shawn Grand Rapids, MI
Sent from my iPhone
Comment by Shawn -
I could not disagree more Mark. I am happy you made out with what you did, but Yahoo investors and pension funds were the losers, and they paid for your Jet.
“Its a zero sum game”
If you think its bad now, and we’ve been printing fake money the past 7yrs, then I dont want to be around you when the floor boards come out of this fake economy.
Comment by jimgoose -
My final comment on this subject is that these unicorns need to go public however, I will offer another reason. I see offshore holding structures which act as stock or warrants derivatives of Unicorns (this is only way they are legally circumventing U.S. regulations to go public) literally as dark pool casinos. My question is whether this is good for liquidity and transparency for investors.
Comment by lbomaster -
Moreover, I live in Shanghai (am American) and if you ask any Chinese entrepreneur -IPOing is the end goal. So many people (mostly investment banks and pre-IPO investors) made billions last year (they are minting 2 billionaires a week). It was happening so rapid that IPO subscriptions were suspended by the government. When they allowed IPOs a few months ago, liquidity dried up again. Institutional and retail investors feel it.
Comment by lbomaster -
Thank you so much for such a great post! Living in the Bay Area, I see so many companies delaying going public such as Uber, Airbnb, etc. I always thought that’s the best way to go about it, and I appreciate your take on it.
Comment by Raitis Stalazs -
I would suggest the underbelly to a stumbling economy is never ending consumer debt. Consumer debt cannot be restructured unless a default is first declared. Consumer defaults of all kinds grow year by year and those defaults can follow a consumer around for 10 or 20 years, even longer which allows wall street and the banks to plunder more and more consumer wealth through lower credit scores and higher interest rate charges.
Yes, the economy is squeezing blood out of a turnip and wall street big wigs and banks like it that way. Even if its the big fish that make IPO’s hum, those big fish have already sucked the life out of consumers and the economy and don’t see enough consumer skin left to create new IPO’s in which stock share prices rise because the consumers who are needed to make stocks rise have already been bled dry via defaults, foreclosures, or simply being unable to pay down existing debt.
Comment by Alessandro Machi -
Hey Mark, just wanted to give you a heads up if you wanted to edit this section, “We became on of almost 300 companies to go public that year.”
Hope all is well!
-Dante
Comment by Dante Gian -
I see two reasons in your post about why IPO’s are being delayed. 1) Onerous government reporting requirements and 2) Entrepeneurs don’t want to manage to quarterly expectations or hype the stock. The first one is actionable by elected representatives and the second one is just an attitude among entrepeneurs which we can’t dontrol. My sense is that the reporting requirements since 2008 are typical govermental overreaction to the financial crisis. I’d be astounded if any of this is reversible in today’s political climate. As you well know, Bernie Sanders wants to tighten the vise, not loosen it.
Comment by Jerry Stevens -
I hate hearing about giant tech companies acquiring other companies. Are you saying it is harder for a company to acquire a competitor that has IPO’ed? What suggestions would you have to incentive companies to IPO?
Will the loosening of regulations around small/non professional investors allow private companies to help the economy?
Comment by Joe Hopkins -
So, you’re equating an IPO with the “trickle down” economic theory? What are your thoughts about a guaranteed basic income as a leavening factor to help put a floor under poverty? (along with health care and educational access)
Comment by 1mime -
Pingback: 1 – How the decimation of the IPO market has hurt the economy and worse
The empirical evidence points to SEC as hurting the capital markets. Companies are frozen in fear. When SEC Enforcement Division CPAs engage in judicial deception (see Mark Feathers v. Roger Boudreau, CPA, CV16-0529-EJD, Northern District of CA) and companies are aware that SEC might violate the 4th and 5th amendment, then these companies are forced to employ projections which incorporate massive legal expense reserves or expensed fees. Companies never get off the ground due to that; governmental barriers create artificially high break-even expenses, rather than costs of competition. Entrenched Wall St. companies love that fact…less competition…and since the senior SEC executives have a revolving door with Wall Street firms, well, what conclusions can be drawn there?
Comment by Mark Feathers -
I feel like we are losing some of the dreamers and innovators in this realm which is leading to this sheep mentality when it comes to business. Rather than creative thinkers coming up with the best way to develop and grow their unique company, many people have fallen in line with “the only way” to grow your business, and that is hurting them, and the industry as a whole.
I recently saw a comment stating that the American Dream is dead which I personally think is dead wrong. You cannot pursue the American Dream the way we used to, and maybe more confusing is that the perception of what happiness and success are has changed, and not for the better. We need more people that are willing to take a calculated risk and step out from the crowd to inspire again. Thank you for your powerful insights Mark.
Comment by David -