Let me set the scene: It’s 70 degrees outside on a Friday afternoon. I’m all set to give my keyboard a rest, when the following tweet pops up on my screen from noted venture capitalist Josh Kopelman:
I click the link, and learn that Josh is arguing (again) in defense of the JOBS Act that passed the U.S. Senate yesterday. His basic argument is that lubricating the IPO pipeline — one of the legislation’s major objectives — won’t only help venture capitalists, but also will help public market investors generate larger long-term returns. After all, as Josh argues, imagine if you had bought and held Cisco Systems
when it went public in 1990 at a valuation of just $220 million?
After skimming Josh’s post, the first thing I do is check to see if either Henry Blodget or Paul Kedrosky have taken up the gauntlet, so I can go outside. Seems they’ve already checked out for the weekend, or perhaps have better self-discipline against twaunts (that’s what I’m now calling such Twitter taunts). That just leaves me, to explain why Josh is wrong. Here goes:
Venture capitalists have three exit options for their portfolio companies: Take them public, sell them or shut them down. Josh predicates his argument on a belief that going public creates the most public investor value, but that Sarbanes-Oxley has discouraged too many VC-backed companies from going public (thus denying that value to public investors). Therefore, the vast majority of VC-backed companies have been left with just two options since SOX was passed in 2002: Sell or shut down.
Well, clearly we don’t want companies in that latter category going public — at least if our intent is to enrich public market investors. So it’s probably good that they’ve been discouraged from doing so. That leaves us with the companies being sold. And, in the vast majority of cases, publicly-traded companies are the acquirers.
At this point, I’m not so sure why Josh believes public investors receive more value from VC-backed companies going public than being acquired. Again, we’re talking about the marginal VC-backed companies here — ones that get scared off by a few million dollars in extra compliance expenses. Facebook, for example, hasn’t stayed private to avoid an accounting invoice (but we’ll get back to that).
Who’s to say that public investors aren’t actually benefiting more from holding shares in the acquiring company? For example, isn’t it possible that Cisco’s market cap has been buoyed by acquisitions of VC-backed companies like Airespace and Nuova Systems? Would Siri be more valuable today as an independent company, or are Apple
shareholders benefiting more from the 2010 acquisition?
But let’s go a step further, and totally ignore that Josh included Google
in his list of VC-backed companies that have experienced massive valuation bumps since going public (since it IPO’d two years after SOX became law).
Only part of the JOBS Act is aimed at helping companies go public. Another piece is designed to let companies stay private even longer. The most obvious example is the virtual evisceration of the 500-shareholder rule, which now gets expanded to 2,000. Would Google have gone public in 2004 with a 2,000 shareholder limit? Unlikely. Ditto for Groupon
in 2011. And, possibly, for Facebook in 2012.
And those are the most popular VC-backed companies — the Googles and Amazons of their day. But they now are going to stay private even longer. What the JOBS Act giveth, the JOBS Act taketh away.
Remember, companies like Facebook or Twitter have avoided IPOs by choice, not by force. They have plenty of access to private market capital — including from mutual fund managers like T Rowe Price — and don’t want the hassles that come with being a public company (quarterly earning targets, hedge fund butt-kissing, etc.). And it’s not an unreasonable position. In fact, it’s the very argument made by private equity investors, when trying to convince a listed company to go private.
SOX had plenty of unintended consequences, but I remain unconvinced that one of them was to destroy potential value for public market investors. At the same time, I think the JOBS Act may have done just that.
Okay. Time to go outside.
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