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Why Go Public?

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Why the full future for Facebook and the performance of its stock is yet to be written, as of today it is selling at prices significantly less than at which it traded on popular, private secondary markets like SharesPost and Second Market as recently as three months ago.

This startling fact is just the latest example of the "existential" questions that have been raised for quite some time now regarding the whole purpose of traditional public equity markets for investors and companies alike.

For growing companies as recently as 15 years ago, whether or not to go public was a pretty easy decision: if you could go public, you did go public.

Why? Well, for starters, it was usually the purest and best way to raise growth capital. 

Back then, equity finance was dominated by fundamental, long-term investors that had strong biases toward the clean and easy pricing of public stocks and the uniform reporting and disclosure requirements imposed by the major exchanges.

So lots of companies went public - 1,272 of them from 1990 to 1996 - and Wall Street was very much about "long" promotion of companies' growth potential and as "analog" distributors of their stocks.

Compare that to today's financial markets.

Fast, and high-volume computerized trading combined with the utilization of extremely high leverage has made Wall Street trading profits to be many multiples greater than those generated via traditional underwriting, promotion, and distribution of long positions in stocks.

To this, add-on ongoing onerous regulatory and civil litigation bias against stock promotion and distribution and what we have now is the double whammy of traditional equity underwriting not just being unprofitable, but highly risky as well.

So it should be no surprise that not a lot of companies go public anymore.

And when they do, the performance of their stocks has gotten mostly caught up in the malaise that that has seen the major indices trading at levels basically where they were 12 to 14 years ago.

Now, if the public markets are not good for companies nor for investors, then what really are they good for?

Well, the elephant in the room answer to this question is that those with big stakes in the existing order - i.e. Wall Street and the business media built around it - don't want anyone to know is not a whole heck of a lot.

It is not too much of a stretch to say that a good analogy for today’s public markets infrastructure  is that of travel agencies in the 1990s. 

As Internet-based travel bookings began to take hold and become more and more efficient and easy-to-use, travel buyers and sellers just one day looked up and said why do we need these guys anymore?

Now Wall Street and the business media that feeds off of it are a lot more powerful than travel agents ever were, but the tides of history and technological change are similarly not on their side.

While the Facebook IPO debacle is an extremely high profile example of the hollowness of their current value proposition, smart investors and companies seeking liquidity and growth capital have been voting with their feet for many years now.

They have been eschewing the public markets for liquidity via acquisition and for raising growth capital via private equity, hedge funds, and global funding sources.

And sophisticated buyers and sellers are increasingly getting together on the new, clean, and far less friction - filled private stock secondary exchanges like SharesPost and Second Market.

Look in the coming months and years for smart investors and entrepreneurs to do more and more of the same.

And the Facebook IPO debacle will only accelerate this sometimes disturbing but ultimately inevitable and yes welcome trend.


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