September 15, 2014 at 17:08

Why small technology companies stopped going public

Original author: Jay Ritter
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In the first half of 2014, 30 technology companies entered an IPO in the United States. Among them were: Paycom Software, which produces software based on the SaaS model (software as a service), Castlight Health, which aims to provide access to software “in the cloud” and a UK company King Digital Entertainment , which produces interactive games. Half of the thirty of these companies conclude about 60 transactions a year. This is their best result since 2007.

However, despite record figures, the number of transactions concluded after the companies entered the IPO is only half of the corresponding average annual indicator from 1980 to 2000 (116 transactions). And this is taking into account the actual growth of GDP by more than 2 times, starting in 1980. So why don't other companies strive to become open?

Despite the existence of a legislative act of 2012 (Jumpstart Our Business Startups - literally, Quick Start of Your Business Startup), designed to clarify some of the difficult issues for companies in the Emerging Growth Companies, it is widely believed that after entering the IPO , companies are facing excessive demands. According to the document, the company is at the “stage of recovery" only if it entered the IPO less than 5 years ago and its annual income does not exceed one million dollars.

The refusal of small companies to publicly place their shares on the stock exchange began in 2002, before the Sarbanes-Oxley law was passed (the law tightens the requirements for financial reporting and the process for preparing it). There is indeed a grain of truth about the existence of excessive requirements, but the issue is not only in the legislative part.

In 2013, only 43 technology companies entered IPOs, while venture capitalists sold 376 companies, for the most part to giants like CiscoSystems, Google, Microsoft, and Oracle. In other words, the most successful young companies are more likely to sell their business, rather than become open to private investors. This trend has been observed since 2000. The average annual profit of technical companies that went public IPO over the past year amounted to $ 106 million. In 1996, due to inflation, this figure was only at the level of 25 million. From year to year, venture capitalists prepare companies for sale, instead of putting their shares to public auction.

In the article “Why did companies stop going public?” (“ Where Have All the IPOs Gone?”), Which I wrote with Xiaohui Gao and Zhongyan Zhu, discusses the need for rapid company growth in modern realities. This is especially true for the technical sector. If you give a small technology company with a great new idea to grow itself, then this process will take a very long time. Instead, companies are increasingly finding it more profitable to sell technology to a larger company that can immediately integrate it into existing products. Large players in stock have entire “armies” of engineers and marketers who can start working on a new product without additional delays in the form of hiring new employees and developing the brand.

However, not all companies seek to sell their business. For example, Facebook and Twitter went public IPO and remained independent companies, although this only happened after they grew. Some firms, regardless of their status, need to remain independent in order to survive. The rest are valued more in the composition of larger players. In the technology industry, the sale of your business is considered the most successful step for young companies with technology.

Most of these sales target large organizations, not private equity funds. In the latter case, investment funds stand at the helm of the company, but it continues to be independent.

This year can be considered the richest in the number of IPO companies, starting in 2000, when the technology bubble burst. Among most of these companies, there is a record number of organizations related to biotechnology.

Previous records were set in 1996 and 2000. However, even without relevant biotechnology deals, the IPO market looks impressive. This could be observed from 2004 to 2007. More detailed information on the years can be obtained on this page .

In a word, regardless of the rise in the price level on the stock exchange and the adoption by Congress of the Jumpstart Our Business Startups (JOBS) 2.0 act, I do not expect a large number of young companies to go public IPO, as was the case in the 80s and 90s. For most young technology companies, it’s not so important to “go public” as long as the company remains independent or absorbed by larger players that can quickly capitalize on economies of scale and economies of overlap. For the same reason, WhatsApp sold its Facebook business for $ 19 billion, instead of going public.

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