One of the great things about getting older is you see things over and over again and you start to understand. That’s called wisdom I guess. One thing I have seen over and over is that the best of intentions often lead to unintended consequences that are exactly the opposite of what the good intentioned people wanted to happen. I like to call that the “law of unintended consequences” and it goes like this:
Whatever it is that you intend to do, you will likely do the exact opposite
I was reminded of that when I read Marc Andreessen’s comments on Sarbanes Oxley (and IPOs in general) in this interview in Vox. Marc said:
The irony of Sarbanes-Oxley was that it was intended to prevent more Enrons and Worldcoms but it ended up being a gigantic tax on small companies.
Sarbanes Oxley and Regulation FD were an attempt to make the stock market safer for the average investor. What it did is make the stock market less attractive for the average investor by removing the best investment opportunities from the market.
Marc lists investments like Netscape, Microsoft, Oracle, HP, and IBM as companies that went public at relatively small valuations and grew their valuations in the public markets. I would add Apple, eBay, Yahoo!, Cisco, and a host of other silicon valley success stories to that list.
The Vox piece points out that:
Twitter waited until it was worth about $25 billion before it went public last year. Facebook was worth more than $100 billion when it had its IPO in 2012.
Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.
The public markets are not as attractive to emerging high growth companies as they used to be. The private markets have accumulated enough capital to support the growth needs of high potential companies and IPOs are no longer being used to finance growth. They have now been relegated to liquidity paths for the most part. And Marc explains why in this part of the interview:
But for young companies, everything is connected: stock price, employee morale, ability to recruit new employees, ability to retain employees, ability to sign customer contracts, ability to raise debt financing, ability to deal with regulators. Every single part of your business ends up being connected and it ends up being tied back to your stock price.
I have lived through this (being public while you are still building the company) and it is not easy. You really want to wait until you’ve got everything very buttoned up before you run the gauntlet that is the public markets.
Of course the important question is can we go back to the way it was before the federal government messed things up with all of their good intentions. I think the answer is no. We are not going to put that genie back in the bottle.
But I do think there is another way to fix this mess and it is already happening. As my partner Albert likes to say “the line between the public markets and the private markets are blurring”. Platforms like AngelList and our portfolio company CircleUp are allowing individual investors the opportunity to invest in startups and the amount of capital that is being invested on these platforms is growing very quickly.
If the regulators keep their hands off these new emerging markets and let them develop naturally, we will eventually fix this problem. Let’s hope they have learned their lesson from the fuckup that was Sarbanes Oxley and Reg FD and don’t try to help us out again.