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The IPO Market: Is Larry Bird Walking Through that Door?

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One of the key objectives of the recently passed JOBS act is that it will “open” the now 11 years and counting "shut” window for initial public offerings.

Hopefully, it will help. Because golly, when it comes to the IPO market and public market returns in general, help is needed in a big way.

How bad is it? Since the Internet bubble burst in 2001, the number of IPOs hasn’t recovered to even 1980s levels.

That's 30 years ago, folks.

For perspective, before 2001 over 40% of all venture capital exits were via initial public offerings.

By 2010, that percentage had declined to a mere 3%.

Or, in hard numbers from 1990 to 1996, 1,272 U.S. companies went public.

For the period from 2004 to 2010 a mere 324 did.

Not unrelatedly, since the bottom has fallen out of the IPO market, the performance of the public market as a whole has been dreary to say the least.

Let’s call this the Boston Celtics phenomenon. Twice in the last 20 years the Celtics have had great teams decline as they “got old” as they didn’t sufficiently “re-invigorate” with younger, fresher players. 

And aren’t our public equity markets - after more than 10 years now of only a handful of dynamic, innovative companies being added to them in any meaningful quantity - like that too these days?

The major stock market indices certainly seem to indicate so, with the Dow and the S&P and the NASDAQ trading today basically in the same range as they were 11 years ago.

So the hope of the JOBS bill is to encourage more “emerging” companies to take the IPO plunge via relaxing regulation and reporting requirements for smaller, younger companies as they go public.

Will it help?

Sure but…

…the bill will not in any way alter the technological and global macro-economic forces that:

A) Just make it far more interesting and possible for private companies to do and have everything that public companies do - from big multiple exits (see Instagram), to growth capital (see the robust world of hedge and private equity funds), to liquidity (see Sharespost, Second Market) - without the headache of a public listing; and,

B) Seem to indicate that even when companies do go public that it is almost a sign that their best innovation and growth days are behind, and NOT ahead of them.

Sure, there are exceptions, but in a world driven by SaaS, by open source, and by the “app store” phenomenon, the cost of innovation - and the cost to disseminate that innovation globally - has dropped so far and so fast that the days of needing a public market “balance sheet” to innovate seem long behind us.

What does it all mean?

Well, for investors seeking capital appreciation, it is critical to digest that the “big picture” vectors all point toward private companies that remain private being the main drivers of innovation - and thus growth - for as far as the eye can see.

Now translating this overriding point into a specific, private equity investment strategy is hard for sure…

…but the alternative of looking to public stock market investing as a true growth strategy long ago passed into the realm of that famous definition of insanity as doing the same thing over and over again and expecting a different result.


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