Dozens of tech companies have gone public in the past five years while losing money. Some keep on posting losses for years after their IPO—and sometimes the amounts are significant, more than a quarter of a billion dollars per year.
But here’s a modest proposal that might coax companies into achieving profitability: “I wonder if the solution may be that companies can IPO with losses, but that founders and VCs are severely limited in the amount they can cash in,” says Tony Greenham, a London investment banker turned think-tank director.
Greenham was an investment banker at Credit Suisse First Boston from 1996 to 2000, during the go-go years of the first Internet bubble. He is now director of economy, enterprise, and manufacturing at the Royal Society of Arts, in London. The RSA was founded in 1754 to address social challenges. Greenham’s online bio says he aims to create “a new kind of economics—one that has human and planetary welfare as its goal.”
In his plan, founders and VC firms could not sell shares into the IPO but instead would put them into a trust. The shares would be released only after the company posts two years of consecutive profits. Founders and VCs might take a bit of money off the table at the public offering, say $5 million for individuals and $25 million for VC firms. But otherwise they would have to wait.
If the company becomes profitable, the founders and VCs get rich. “But if the company goes bust, the founders and VCs will never get the money. If it is acquired below the IPO price, their shares could be sold to make good the public shareholders up to the IPO price,” Greenham says.
The idea is to create incentives that prod companies to become sustainable. One downside is that some founders might focus too much on the short term, racing to show a profit (and grab their bounty) as quickly as possible. Another is that venture capital would be locked up rather than cycled into other startups. Rules like this also might dissuade VCs from placing ambitious long-shot bets—depriving the world of some “moonshot” ideas. But at least the proposal would “align the interests of founders and VCs with the interests of the public shareholders,” Greenham says.
To be sure, this is all kind of pie in the sky. Regulators aren’t likely to implement radical changes when markets are booming. And if anything, we seem to be entering a period when regulations on businesses and Wall Street will be loosened rather than tightened.
But that said, bull markets don’t last forever. And when markets crater, people always cry foul and howl for reform. We may look back on the past half-decade as an era in which savvy founders and VCs were able to generate billions for themselves by flogging shares to gullible punters.
If and when that reckoning comes, feel free to call forth this “modest proposal.” Hey, if nothing else, it’ll rile up some VCs.
Dan Lyons is the bestselling author of Disrupted: My Misadventure in the Start-Up Bubble.
A version of this article appears in the January 1, 2017 issue of Fortune with the headline “Tying VCs to Shareholders.”
