Microsoft went public in 1986, valued at $300m. It went to $300bn. Public shareholders got a thousand-time rise. When Google went public in 2004, it had about a $30bn valuation and went to about $300bn. Investors got about a 10-time rise. Facebook went public at about $100bn. It’s now $200bn, so public investors have had a two-time rise.
Pointer from Tyler Cowen.
Why is more value being captured in the pre-public phase than in the post-public phase? My guess is that Sarbanes-Oxley and the hostile environment to public corporations in general probably accounts for some of it. The consequence is that ordinary Americans capture a smaller share of wealth creation from growing companies than they used to.
Aren’t you making a lot generalities about valuations off a few data points here? And we are also comparing different eras of stock sales in that Microsoft occurred in much different environment than Google and Facebook. Microsoft happened in almost pre-historic tech environment where the tech potential was felt. I bet most of the population in 1986 did not know who Microsoft was compared to Google or Facebook. By Facebook IPO, there had been an Academy Nominated Movie about the founder. And finally the Tech Venture Capital companies better knew what they had after 2000 so they took more of the gains.
Sarbanes Oxley probably didn’t help, but I’m not sure I’d pin it all on regulatory costs. Seems like Sox probably just accelerated a trend that was already underway. I think information technology has made it easier for alternative kinds of financiers, like hedge funds and venture capital funds, to attract, you know…funds. Just like it spurred new kinds of investment vehicles in the traditional sectors like ETF’s and ETN’s, complicated derivatives, etc.
With that in mind, maybe what’s driving inequality even more is regulations which shut average investors out of hedge funds, venture capital funds, etc.
Yes and…
These examples are all platform businesses (i.e., with extreme network effects). I would also cite the financial strategy of Lean Startups, to set yourself up for scale with virtually no CapEx. Another quote from Marc: “It’s four kids and their laptops, and the entire company is run on the cloud, on Amazon Web Services, on Salesforce.com, NetSuite, and Gmail. These companies have effectively no capex. It’s literally their laptops and their ramen noodles, and that’s it.” The startups are more mature, have much more traction, before they go public.
We might ask if that is because it is harder to do it otherwise.
I would say the lean startup model was not a reaction to Sox, but Sox would absolutely drive startups to delay or forego an IPO. Indeed, there is plenty of commentary about the growing preference to sell-out to a public company rather than go public.
In general, anything that makes the legal environment more complicated concentrates wealth, as complexity benefits insiders and “smart people” over the general public, who can’t easily access the resources and connections needed to navigate the complexity.
In this case, a startup nowadays needs at least a $100M valuation to have enough free cash available to hire the army of finance people needed to stay SOX-compliant, as well as paying for the very expensive annual audits.
I agree with the “Yes and…”
Investors in these two companies in particular — being nth generation in their respective markets and finally demonstrating revenues their predecessors never did — could afford to wait out the burst of growth before going IPO.
But there are plenty of other private companies that limp into IPOs. Regulations like SarbOx certainly pose costs and frank annoyances to investors, boards, and executives, but they weren’t the deciding factor in who got the gains from Google and Facebook.
I would guess the reverse – greater inequality, the tech wreck, and lower interest rates lead to more venture capital and hedge fund investment, so less need for public offerings for a much diminished public, both in funds and risk. Accounting pales in comparison and must be met anyway once it does go public although m&a is even more attractive these days with flush corporate leaders.
If Sarbox concentrated wealth, this is a feature for the Democrats, since they’re in the business of using government to redistribute wealth. The more concentrated the wealth distribution resulting from voluntary economic activity, the more demand there is for coercive redistribution, which is what the Democrats are selling.
Found some data: https://www.wilmerhale.com/uploadedFiles/Shared_Content/Editorial/Publications/Documents/2015-WilmerHale-IPO-Report.pdf
If an adjustment is made for GDP growth (2001 recession), then this does seem like a plausible story. The number of offerings decreased and the valuation of the median company increased at the time sarbox passed.