Domenichino, “The Virgin with the Unicorn. Source: Wikipedia
20 years ago entrepreneurs all wanted to go public. The stock market was a way to make yourself and your employees rich. Start a company, develop an innovative concept, grow sales and profits by enough, and the equity markets could reward you. At least, that was the dream.
But now, companies want to stay private as long as possible. They don’t want the reporting requirements that come with a public company. They don’t want to deal with the latest regulatory fad from the SEC—Regs A, B, C, D, or Z-minus. They don’t want to be accused of insider trading because their dog barked at midnight. Going public isn’t a source of pride, it’s a nonstop headache. And there’s lots of private money available.
Private Equity Market Cap. Source: LPEQ
So they raise cash from venture capitalists and other institutional investors when they need to grow, exchanging shares on special nonpublic exchanges. You can buy or sell shares in Uber or AirBnB right now, you just have to have certain credentials. Senior management gets rich; average employees, not so much. Eventually, a big, mega-cap giant comes along and gobbles up the innovative startup, incorporating the disruptive technology into a lumbering, bureaucratic system—like Kodak and digital imaging. The profitability of film kept them from developing the technology, even though their scientists created a megapixel sensor back in 1986. Big companies are where new ideas go to die.
One reason public companies are hoarding cash right now is that it’s cheaper to buy upstart companies that could disrupt them and their industries than it is to invest in their own uncertain R&D. And this may be stifling productivity. Think how the world would be different if—rather than going public—Microsoft had been bought and buried by IBM. We’d all still have terminals plugged in to our Univac mainframes.
Univac Mainframe. Source: Wikipedia
Such is the cost of arbitrary, capricious prosecution by the SEC, and occasional, random accounting pronouncements by the FASB. Entrepreneurs don’t have to put up with the hassle. And the rest of the economy pays the price.
Douglas R. Tengdin, CFA
Chief Investment Officer