Technology initial public offerings (IPOs) were once a sign of innovation and, yes, stock market froth, too. But is that still true? Can we have economic vitality and growth without a robust IPO market?
In 2016, according to Jay Ritter of the University of Florida, just 73 firms went public in the US (0). Only five years in the past 37, going back to 1980, saw fewer. It’s well-known that winter came to the US IPO market 15 years ago, and that it never really thawed. In 2014, the best year in a long while, 206 firms went public. That would have been only average in the 1980s and the worst of the 1990s. For more perspective, consider:
- The 10-year period of 1980–89 saw 2,043 IPOs;
- The 11-year period of 1990–2000 saw 4,471 IPOs;
- The 16-year period of 2001–16 saw 1,734 IPOs; and
- Not one year since 2000 has matched anyyear between 1991 and 2000.
Clearly, something big has changed. The Sarbanes-Oxley Act of 2002 (SOX) and other financial market regulations have surely boosted the costs of being public, and overall sluggish growth has probably dampened IPO prospects across the board. But the knowledge economy’s structure may also have a lot to do with it. The total number of public firms has plummeted (1), from around 7,300 in the mid-1990s to just around 3,500 today, and the drop began before SOX came along. Whatever the cause, I think the lack of access to public financing has probably dampened overall economic growth and especially hurt nontechnology industries.
However, internet-related firms seem to have found ways to stay warm during the IPO winter. Deep and sophisticated venture capital and private equity markets can fill much of the gap (2). Large acquirers, such as Apple, Google, and Facebook, have also gobbled up hundreds of firms and thus supplied exits for venture capitalists and founders. The internet seems to have thrived despite the lack of public funding opportunities.
But can this self-contained private funding cycle continue forever? And what are we missing? In other words, what are the unseen opportunities of healthier public markets? Perhaps the pace of technological innovation would be much more rapid with a broader array of financing options.
Many Washington policy wonks push a new theme that industry concentration is the big problem and that we need more vigorous antitrust enforcement and other industry-specific regulation to combat it and open up the economy.
But what if just the reverse is true? What if it’s Washington’s policies that are themselves the chief source of concentration?
For example, I think it’s more likely that financial market overregulation discourages IPOs and pushes small firms into the arms of big acquirers. Or how about the Affordable Care Act, which supercharged the incentives for consolidation in the health care market? Or Dodd-Frank, which did the same for banking? Or the FDA’s policies, which often make it prohibitively expensive for small firms to get new pharmaceuticals and devices to market?
Reversing or rationalizing many of these harmful policies could not only directly lower the costs of going and staying public but also would make it easier for small firms in every industry to invest and innovate. Maybe IPOs don’t matter as much as they used to. Or maybe, with better policy in 2017, we could see an IPO thaw and an economic spring.