There is a disconnect in the discussions about the state of public stock markets for venture-backed flotations, or initial public offerings (IPOs).
On the one hand, the US’s two main stock exchanges for entrepreneurs, Nasdaq and the New York Stock Exchange, are by a clear margin the "most promising for venture-backed IPOs globally", according to a global survey by accountants Deloitte in June, and just this past week still offer discount coupon provider Groupon the chance to raised hundreds of millions of dollars.
On the other hand, and again this past week, US trade body the National Venture Capital Association published the four recommendations from the IPO Taskforce set up in the Spring after a US Treasury summit and the same Deloitte survey found 87% of respondents thought the level of IPO activity in the US was lower then necessary to support the health of the venture capital industry.
One possible conclusion from the above is that the US is a great place to list if you are a non-US-based, venture-backed business. This is true enough. All the Israeli respondents to the Deloitte survey of 347 (Editor: apologies there was a mistake in the ezine that was sent out today saying 426) VCs around the world said an active IPO market in other geographies (pretty well much meaning America) was essential for its success, whereas just 40% said a domestic stock exchange was "essential". Similar patterns were found in China, Germany, Brazil and Canada as the cachet and depth of US exchanges is still unparalleled.
But does it mean that either US stock market investors have a preference for overseas firms or that they are more promising than most of the venture-backed, American companies that want to list? Sadly for the NVCA, probably the latter given the success of some IPOs over the past year, such as Taiwan-based Gudeng (backed by Intel) and China’s Tudou (International Data Group) and Renren.
But this global competition among venture-backed companies to list in the US should be welcomed. As the backers of the companies show, US corporate venturers have helped them grow to be able to list in the first place and there is still a cachet in listing in the US compared to domestic markets – the American Dream remains a powerful pull for many entrepreneurs.
That a number of so-so US venture portfolio companies cannot list – among the 215 IPOs pulled or withdrawn so far this year according to data provider Dealogic – is a shame for them and their investors but if the criteria remain high, a good thing longer-term as it challenges them to perform better, or tighten their belt for longer or look for an alternative, such as GI Dynamics listing in Australia. The US companies that have successfully floated, such as networking provider LinkedIn, are astonishing successful global businesses showing that good deals can succeed.
That said, the NVCA report rightly points out that the competition for IPOs is perhaps more intense than it has been, and potentially too strong. The pre-1999 average number of flotations in the US was 547 per year, compared to 192 afterwards – a number which Harvard academic Josh Lerner said transcended the economic cycle.
The IPO Taskforce points out the obvious flaw in the public stock markets – that most investors are high-frequancy traders of large capitalisation stocks rather than long-term investors in emerging growth companies. Its four recommendations (scaled regulation, better information, lower capital gains tax for long-term investors and educating issuers), therefore, should be supported but the fundamental flaw in the markets remain: it no longer efficiently allocates capital to productive assets but is a rigged game of roulette for intermediaries to make money trading shares.
For corporate venturers and other investors in entrepreneurs, finding ways to de-rig the game and look again at how to return the markets to their primary purpose would be better as it hampers the efficient cycling of capital to productive and innovative uses.