Categorized | venture capital

IPO’s lose their luster

Wiley Publishing Sarbanes-Oxley for Dummies
More entrepreneurs are thinking that Sarbanes-Oxley is, in fact, for dummies.

All that glitters, it seems, is not golden. In a trend not totally related to recessionary pressures, entrepreneurs and venture capitalists are increasingly turning their back on the traditional brass ring of business startups, the initial public offering. Although we’ve all been saturated with stories of young entrepreneurs swimming in cash when their business goes public, according to a recent article in the San Jose Mercury News, much of the stardust has worn off the IPO dream.

A mere 18 tech companies have gone public in the last two years as compared to the two years prior to that. Even controlling for one of the worst recessions since Silicon Valley became a household word, that’s a pretty daunting dropoff, especially when you consider some of the going-gangbusters tech companies that have done the high-growth conga line in the past two years, recession or no. While the article posits several reasons for this shift, the one I keep hearing from entrepreneurs and venture capitalists in my business wandering is the increased draconian regulation of public corporations.

If, as the Mercury News postulates, Sarbanes-Oxley is largely responsible for the fall-off in IPO’s, what explains the decidedly hefty lag time between the passage of Sarbanes-Oxley in 2002 and the fall-off in IPO’s in 2008? Did entrepreneurs and venture capitalists really take six years to digest the regulatory and legal ramifications of Sarbanes-Oxley?

The answer, quite honestly, is yes. Sarbanes-Oxley started as a law, produced a mad scramble, and then ushered in a longer period of “competency acquisition” on the part of all the major players, including government regulators. As a corporate competency, Sarbanes-Oxley really didn’t “mature” until near the end of the decade. We now understand better than ever the full corporate requirements — including competency requirements — of the Sarbanes-Oxley regulations. And, despite the image of Republicans as business-friendly, the bulk of the Bush term saw greater protections for investors in both statutes and regulations — another necessary aspect of the “maturing” of Sarbanes-Oxley.

Still, the Mercury News is wrong to believe that IPO’s are out of the picture. There are, as the proverb goes, many ways to skin a cat. Most of the entrepreneurs and venture capitalists I talk with talk about regulation in terms of the value it takes from the company. It’s as if tighter regulations were a higher “tax,” if you will, on the sale of a business to public investors. That tax, however, is relatively fixed, meaning that the higher you sell the company, the lower the marginal cost of the regulatory “tax.” Which is why so many VC’s I know are actively pursuing direct sales of their companies to other corporations, most of them publicly traded. It’s similar to going public, but doesn’t involve the Sarbanes-Oxley tax — or transfers that tax to a company already expert in S-O.

Like everything else, however, designing an exit strategy for your startup involves doing your homework. If you still are after a little pinch of that IPO pixie dust, you need to bone up on the regulations governing publicly traded companies and how they affect your prospects.

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One Response to “IPO’s lose their luster”

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