When Intel went public in 1971, it wasn’t the behemoth that it is today. It was a tiny little company raising a very little bit of money in a public offering. Same with Amgen, or Genentech. Today they’re monster companies, built over 30- to 40-year time periods, but their initial public offerings (IPOs) were relatively small.
Would it be possible to take a tiny company like the Intel of 1971 public today, or would the market only accept an IPO from a company like Google, already measured in the billions of dollars? This is not an idle question, because I think the answer is “No,” something which is having a profound impact on our economy and our society.
I recently participated in a “keynote conversation” with Mark Anderson at the 2014 SNS Predictions Dinner in New York City, which is held every year by Strategic News Service (SNS), a weekly predictive report on technology and the global economy. Our conversation centered around investing in deep science, something that both Mark and I agree is important for our planet, good for business, and an opportunity for long-term investors.
During our conversation, I brought up the lack of smaller IPOs as an obstacle for companies looking to finance a business built around deep science or advanced technologies. Given the response that night, I know that I’ve struck a nerve.
If you look at a period of time in the 1980s and the 1990s, up through the dot-com crash, 75 to 85 percent of all IPOs in the U.S. were for companies raising less than $50 million. But in 2000, the number of IPOs raising less than $50 million dropped from its historic rate of 75 to 85 percent of all IPOs on the market to only 10 percent of IPOs.
After the dot-com crash, the small IPO never returned, in part because of a whole series of regulations on Wall Street that made it very difficult to be a micro-cap company or to successfully complete a small IPO. The whole structure of investment banking and the public market has changed.
What happened? Look at the number of new listings on U.S. stock exchanges. It grew steadily through 2000, and then crashed. This is an issue important not only to Wall Street but also to Main Street. David Weild, in “Why are IPOs in the ICU?,” traced this change to a loss of about 10 million American jobs. These are jobs in fast-growing, good companies that have been decimated by the lack of the small IPO.
If you want to get an investment return on hard-science innovation, you have to do it over a long time period. One of the things we at Harris & Harris Group believe is needed to provide a good return over a long time period is the ability to do an early IPO.
Right now, IPOs are not treated as company growth events but rather as opportunities for the investors to maximize their return and distribute those returns to Limited Partners. If I’m an investor and I have to distribute near term, then my planning is all about profit maximization near-term. But, if I’m doing an early IPO, and I’m actually investing in the IPO, I’m going to hold it for 3, 4, 5 – 10, 15 years, and let it grow. I’m getting in at a good value, and letting it grow over time.
We believe that by getting these companies to the market earlier, with earlier IPOs, these companies can grow and prosper with a larger, more diverse set of investors. The public market, by its very nature, offers a huge diversity of ideas and opportunities for investment. Fidelity, for example, has $1.3 trillion of retail money that needs access to public companies, because there’s transparency and liquidity in these companies.
By enabling earlier IPOs, more of these smaller companies will be able to raise the funding they need; the retail investor will also be able to participate in IPO returns again, which they can’t now. Who’s winning in Uber? A very, very small set of institutional funds. Who’s winning in the IPO market right now? Goldman Sachs and a small set of bankers and 65 institutions that control 95 percent of the commissions on Wall Street. That’s not aligned with the American belief in the democracy of ideas and the democracy of opportunity.
If we go back to relying on early IPOs, we can actually bring diversity of opinions and of ideas back into investing. That’s what it’s going to take to bring hard-science innovation back to the market, and that’s the difference between looking at investments only in the short run versus building companies that are going to make real changes over a long time period.