The Wall Street Journal recently asked a highly poignant question: "Who's going to fund the next Steve Jobs?" The Journal asks the question in light of a startling piece of trivia: The second quarter of 2008 marked the first time in 30 years that no venture-backed companies went public. Not a single one.
Why? Through punitive regulations like Sarbanes-Oxley, we may have dried up the appetite for public exits, given that a private buyer means less red tape:
This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?...
By and large, founders of Internet startups are not creating companies with the dream of conquering the world, but rather with the intention of selling to Google, eBay, Yahoo or Microsoft. Our society should be encouraging these entrepreneurs to dream big. Instead, they're looking for the exit before they have to deal with the burdens of our public markets. "All things being equal, 85-90% of our portfolio company CEOs would say they would rather be acquired than go public," says Steve Harrick of Institutional Venture Partners.
At some point, this lack of big exits is going to find its way back into the venture capital firms that continue to pump money into startups, though even that money has started pushing into later-stage investments rather than early-stage investments. In short, if there are no exits to deliver out-sized returns, institutional investors will simply stop funding venture firms...which will stop funding startups.
In the recessionary period we're currently navigating, technology companies have stood firm in delivering excellent returns to their investors. What happens when the next Microsoft sells out to IBM? When a would-be Google opts to be consumed by Yahoo!?
In sum, will the technology economy of necessity cling to a few global brands, rather than diversifying itself through the next Google, the next Apple, the next Microsoft?
I hope not, but we need to open up the public markets to more startups by making it less painful to be a public company. The Enrons of this world are going to happen regardless of ever more burdensome regulations. It's the good guys we're punishing, not the bad guys.