Start talking about initial public offerings (IPOs) and most people think of Mark Zuckerberg of Facebook or Evan Spiegel at Snap and the millions — or billions — founders rake in the day a company goes public. It’s a big day on Wall Street.
Less talked about is the impact on Main Street. IPOs and publicly traded companies mean jobs — lots of them. These are jobs that pay well. However, 2017 has seen a record low in the number of IPOs. What’s going on?
The challenge posed by declining IPOs is both real and consequential. There were 275 IPOs in 2014. So far, in 2017, 52 companies have gone public. It makes the anemic years of 2002 and 2003, with just under 100 IPOs, look not so bad. IPOs of mid-sized businesses in the $25-million range have virtually disappeared.
The declining number of IPOs reflects a broader trend in public markets. There are around 5,700 public companies today, down 3,000 since 1997 and on par with the number of listed companies in 1982.
So why is the happening? Where is the next Apple, Ford, Walmart, Nike or Boeing — and the hundreds of thousands of middle-class jobs that come with them?
Layers of regulatory burden are undoubtedly one factor. Securities and Exchange Commission (SEC) Chairman Jay Clayton notes: “Increased disclosure and other burdens may render alternatives for raising capital, such as the private markets, increasingly attractive to companies that only a decade ago would have been all but certain candidates for the public markets.”
Going public is expensive. A survey by a research arm of Financial Executives International determined that public companies paid on average $3.3 million in total audit fees. By contrast, privately held companies spent an average of $222,300.
A survey by PricewaterhouseCoopers (PwC) notes that 87 percent of participating CFOs confirmed that their companies spent more than $1 million on one-time costs associated with a recent IPO. The PwC report also notes that CFOs were surprised by the high, on-going costs of being public.
What's more, going public isn’t as cool as it used to be. The long sought-after prestige is muted by ready access to private cash. According to Dow Jones Venture Source, private U.S. tech companies raised $19 billion in 2016 in late-stage funding. The private investing climate is causing companies to delay, or suspend altogether, efforts to go public.
So why does it matter? One word: jobs. If the last election taught us anything, it’s that the middle class feels left behind. And, ironically, while those in the middle of the country may look at IPOs from Silicon Valley and their investors on Wall Street as disassociated from jobs in the Rust Belt, middle America bears the burden of the declining IPO.
The slide in new public company formation becomes even more serious as the economy struggles to absorb the impact of automation and globalization.
The change in the IPO market and the broader rejection of the public market are symptoms of a major reordering of the American economy. As SEC Chairman Clayton suggests:
“Fewer small and medium-sized public companies may mean less liquid trading markets for those that remain public. Regardless of the cause, the reduction in the number of U.S.-listed public companies is a serious issue for our markets and the country more generally.
"To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are, in two words, not good," Clayton said.
One can look at both broad statistics or individual examples that make the case. Since 1970, 92 percent of job creation has occurred post-IPO. Apple, for example, had a market cap of $1.2 billion and employed 1,000 people at IPO. Today, those numbers $754 billion and 80,000, respectively.
Microsoft was a $500-million company with 1,153 employees at IPO. Today, they are at $527 billion and 114,000 employees. Shortly after Costco went public in 1986, it had 22 stores and 7,200 employees. Today they are worth $70 billion, with 741 stores and 214,000 employees.
IPOs are massive funding events and substantial job generators, post-liquidity, creating economic impact at a scale that private capital simply can’t match.
Publicly traded companies also create an opportunity for middle-income investors. Pre-IPO company growth is not wealth that is shared broad and wide. As a result, investors are missing out on companies earlier in the life cycle.
Public markets and job creation are inextricably linked. Policymakers would be wise to pay attention to fix this broken link before any more time, opportunities, and jobs pass by the American middle class.
Joseph L. Schocken is founder and president of Broadmark Capital, which provides corporate finance, equity and debt financing, merger and acquisition, private placement, and fairness opinion advisory services. His white paper, "Restarting IPOs: The Shortest Path to Recreating Economic Growth in the United States," served as the basis for elements of the JOBS act of 2012.