Hear is an excellent article, IT’S OFFICIAL: The IPO Market Is Crippled — And It’s Hurting Our Country in the Business Insider, on the damage we have done to our capital markets. The article starts out by showing that many of our biggest companies went public when they were very small. At the time there were numerous underwriters and often the main inventors were individual investors. For instance, the article explains:
As recently as 1986 Adobe had an IPO raising $6M. None of these companies could have gone public in today’s environment even adjusting for inflation. Virtually all the buyers at the time were individuals and there was a robust “over the counter” after market for young companies.
The article then explains that a company has to have a market valuation of $250M or more to be viable in today’s market. My estimates are higher. The article points out that a major reason for this change in the market is because of Sarbanes Oxley or SOX, which imposes onerous accounting requirements on companies. The article then discusses some attempted solutions to this problem. (I have suggested an alternative in my post Circumventing Sarbox and the IPO drought)
This has been a disaster for the venture capital industry. As a result, VCs are looking for companies that can exit by M&A at earlier states. VCs are also not investing in capital intensive companies.
Unfortunately, the article calls for half measures of curtailing but not eliminating SOX. They suggest this course of action despite the fact that they do not single benefit provided by SOX. The authors point out that:
The number of annualU.S.issuers listing IPOs onU.S.exchanges has declined since 1996 from 756 to a low of 36 in 2008 and 50 in 2009 and 120 last year according to Dealogic. By contrast, there have been 346 Chinese issued IPOs listed onChinaexchanges in 2010 even though the U. S. GDP is 3x larger thanChina’s.
This is just one more example of how were are exporting our innovation and jobs overseas.
The insane thing about our securities laws is that in the U.S. you have to hire a lawyer to invest in a non-public company, but you can blow your money in Vegas, Atlantic City, etc freely. One activity creates jobs and wealth and creates value. The other is a less than zero sum that destroys wealth.
According to business and patent expert David Kline and Henry R. Nothhaft, CEO of technology miniaturization firm Tessera, Inc. in the Harvard Business Review:
The U.S. Patent and Trademark Office (USPTO) may be the single greatest facilitator of private sector job creation and economic growth in America. It is this agency, after all, that issues the patents that small businesses — especially technology startups — need to attract venture capital investment, develop new products and services, and serve their historic role as the primary source of almost all new net job growth in America. According to one recent study, 76 percent of startup executives say that patents are essential to their funding efforts.
David Kline is an expert in this area. He is author of ground breaking book, Rembrandts in the Attic , on patents in business. He is also author of Burning the Ships that explores how Microsoft used patents to transform their business. According to the authors, “The costs of the forgone innovation resulting from patent delays in the many billions of dollars annually.” I think they are underestimating the cost of patent delays.
Please read the full article at http://blogs.hbr.org/cs/2010/05/the_biggest_job_creator_you_ne.html
Mr. Halling did an interview about his book, The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, and jobs with Political Chick, Lisa Chase. Here the whole interview at http://chataboutit.com/political-chick-employment-and-the-anywhere-revolution-episode-24/ .
Dale Halling is on the John Clemens show on USA Radio Network which is syndicated around the country. The transcript of the show is provided below.
With a nine-point-seven percent unemployment rate, many Americans are asking, “where are the jobs?” Business-policy expert, entrepreneur, patent attorney and author Dale Halling says politicians should begin to look at where the real jobs can be created. John Clemens reports.
3:00 Standard close
Dale Halling is the author of the book, “The Decline and Fall of the American Entrepreneur.” Halling writes if Washington wants to create real jobs, they should look at technology where 70 percent of new jobs will be found.
:20 “advances in technology”
He says entrepreneurs have been stifled by legislation over the last two decades.
:11 “number of entrepreneurs”
Dale Halling says over the last decade foreign countries have made great advances in technology, while the number of American patents issued has been flat.
:26 “to their inventions”
Dale Halling has a four step plan to get America back on track.
:30 “stock options”
It has been both legal rulings as well as legislation that has placed road blocks in front of many potential entrepreneurs and with that the loss of potential jobs for Americans
:26 “to grow”
Dale Hallings is doing his best to get the attention of not only politicians but those Americans witnessing the Decline and Fall of the American Entrepreneur.
:13 “Halling b l o g-dot-com”
This is John Clemens.
According to the BBC article “Governments stifle hi-tech innovation, says trade group” , American believe innovation is critical to the US’s success as a world economic leader. The article states:
The weakening financial markets meant that in 2009 America was overtaken as the most competitive economy by Switzerland.
As regular readers of this blog know, In my opinion since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.
Technology start-ups drive innovation. According to the book, The Decline and Fall of the American Entrepreneur, a start-up needs almost a billion dollars in sales to justify going public because of the cost of complying with rules such as Sarbanes Oxley, depriving our technology sector vital financial capital.
Decline and Fall clearly shows:
*Sarbox fails to achieve its goals;
*Thriving IPOs are critical to providing capital for technology companies, even if most of those companies never go public;
*The SEC estimates the cost of Sarbox compliance at $91,000/yr per company, the actual cost is closer to $4.0M/yr!!!
*Is the medicine worse than the disease!!
Percentage of World IPOs:
1996 – 60% in U.S.
2005 – 20% in U.S.
*Decline and Fall shows how we can turn this around- Make the US the world leader again in Innovation. Jobs. Capital.
Your copy of The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, by Dale B. Halling, is at Amazon.com. Continue reading
Larry Kudlow is predicting a strong V shaped economic recovery in 2010. His reasons for this prediction are a steep positive yield curve and the rising stock market. While Mr. Kudlow is a top notch economist and I appreciate his optimism, here is why I believe he is wrong.
A steep positive yield curve is not necessarily a good predictor of the strength of the economy. As seen in the chart below, the yield curve was positive and above the 80 year average throughout the 1930s and this did not portend strong economic growth.
(Source: http://seekingalpha.com/article/23870-an-80-year-yield-curve-history-and-its-implications (12/24/09), An 80-Year Yield Curve and its Implications, Shaw, Richard, “Seeking Alpha.”
In the 1970s, the yield curve was positive and above the 80 year average for much of the decade and this did not portend strong economic growth. The 60s saw the yield curve below the 80 year average and negative twice, which did not signal weak economic growth. Continue reading
The book The Invisible Edge, in chapter 8, makes a compelling case that the recession of the 1970s was largely due to the Federal Trade Commission’s (FTC) antitrust policies that limited the value of patents owned by U.S. companies. The book describes in detail the shameful abuse of government power by the FTC to force Xerox to license all its technology to all comers for a pittance. Xerox spent millions of dollars and over a decade to perfect the plain paper copier. They held numerous patents on the technology that made the plain paper copier possible. In 1975 when Xerox agreed to the FTC consent decree to license their patents, they had almost a 100% market share in plain paper copiers. Just four years later, their market share was down to 14% and most of the rest of the market was controlled by Japanese companies. Continue reading
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