In my last post, which grew out of my keynote conversation at the 2014 SNS Predictions Dinner, I touched on the sea-change that has occurred in the IPO market since the year 2000, where the smaller IPO of, say Intel in 1971, has given way to the mega IPOs of Google and Uber. This change has made it difficult for small, advanced-technology companies to get the funding they need to grow into world-changing dynamos. By many estimates, the death of the early-stage IPO has led to a loss of 10 million jobs. This is a serious issue that affects both Main Street and Wall Street.
So, how can we fix this problem?
As you can imagine, it won’t be an easy fix. Regulation, for example, is one of the driving causes behind this change in the structure of the public markets. Sarbanes-Oxley and Dodd-Frank, and other regulatory changes going all the way back to 1975, have compounded on each other to create a very difficult environment for IPOs. But regulation is only part of the problem.
What we really lack is an ecosystem built around bringing early IPOs to market. We also need investors who are thinking about building companies rather than exiting them.
When I speak to investors in the U.S., I can’t get anybody to think conceptually beyond three to six months. Sometimes it seems that thinking long-term in the U.S. means looking 12 months out. Contrast this to U.K.-based investors. Invesco Perpetual is a very well-known UK-based investment firm, and their average holding time for their portfolio has been said to be 17 years! Nor is Invesco Perpetual unusual. Woodford, and SandAire, both European-based, also think over generations.
We can build those ecosystems here in the U.S. The players are already out there, but because the structure of the market has broken down, they’re just not all in the same playing field. It’s a matter of bringing them together. We need to provide incentives that will draw these companies into this new ecosystem.
We, as investors, are also half to blame. When we sit around a table and talk about taking a company public, we want Goldman Sachs to do it. If we want a healthier ecosystem, we need to be working with the smaller banks. And by the way, these smaller banks might not be talking up your IPO to the 65 firms that generate 95 percent of the commissions on Wall Street, because these firms actually can’t hold your stock anyway. A company needs to be worth billions of dollars before it is worth holding. Instead, these smaller banks might actually know the smaller investors, ones who are willing to take on a smaller stock.
The beauty of America is that our “oscillation of resilience” is much shorter than in many places around the world. Part of that is because we are more willing to take risks and more willing to reinvent ourselves. Another part is our diversity, and that diversity should apply to our financial system as well. We need diversity to promote innovation.
Thought leaders like Norm Augustine (former chairman of Lockheed Martin) and Andy Grove (formerly of Intel) talk about the need for innovation. People are starting to understand the investment opportunity in the hard sciences. Even Google and Facebook are investing in deep science and hardware as they look to the future.
On the banking side, I think you’re going to see a few firms take the risk and put this model together. They’re going to make money doing it, they’re going to make it reproducible, and then you’re going to see the lemmings follow suit.
These sorts of things move in a sine-function curve — what’s up comes down, and vice versa. I don’t know if it’s going to be two to three years from now, or if it’s going to take five or six years to do it, but I think you’ll see it. There’s too much opportunity out there in hard-science investing and not enough groups doing it. That will self-correct, and the venture capital dollars will come into it, even the traditional venture capital dollars.
And we mustn’t forget that long-term investing is very much in play in the UK and Europe. Harris & Harris Group may be one of the only publicly traded venture-capital firms with permanent capital in the U.S., but the rest of the world understands this model, they’re raising a tremendous amount of dollars from European family office money, and they’re starting to come to the U.S.
So my prediction would be, in two or three years, I believe we will to see some very large venture funds with permanent capital going after the hard sciences in the U.S., but the money behind them is going to be foreign dollars, not traditional U.S. sources.