IPOs Aren't Attractive to Startups Anymore

Lora Bentley

One of the biggest arguments opponents of the Sarbanes-Oxley Act have made over the years is that compliance with the act is too expensive. Another is that many companies would rather go private than to take on the burden of the strict regulatory regime.

 

But a new survey conducted by venture capital firm DCM indicates that tech startups, at least, view Sarbox and the new regulations for public companies regarding disclosure of executive compensation similarly. In fact, many would go so far as to not even go public at all, just to avoid the regulations.

 

The New York Times reports only 19 percent of those responding to the survey said they planned to go public. Seventy-five percent of those who do not plan to do so cite the stiff regulations to which public companies are subject as a barrier to an initial public offering. The story quotes Zillow.com CEO and Benchmark Capital partner Richard Barton this way:

IPO has become a bad word in [Silicon] Valley.

Writer Claire Cain Miller points out only 18 tech start-ups have gone public in the past two years, down significantly from the 143 startups that did so in the two years before that.

 

Along with the paperwork problem that comes with regulatory compliance, many startups also forego IPOs because their founders focus on the windfall that they could gain with a private sale, the story says. Of those entreprenuers, Barton says:

What [they] don't realize when they take the money is that it's probably not the best path to create a company that your grandkids are going to know. It's selling out.


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Jan 20, 2010 7:04 AM Natalie Natalie  says:

Great post! Keep it up!

Natalie @ PC Housing

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Jan 21, 2010 11:01 AM Dale B. Halling Dale B. Halling  says: in response to Natalie

Sarbox has failed to achieve any of its goals and is killing US innovation (see http://hallingblog.com/2010/01/04/sarbanes-oxley-obstructing-innovation/). In 1996 the US had 60% of the worldwide IPOs in 2005 we had only 20%.  Unfortunately, SOX is just one of several laws since 2000 we have passed 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 http://www.amazon.com/Decline-Fall-American-Entrepreneur-Regulations/dp/1439261369/ref=sr_1_1?ie=UTF8&s=books&qid=1262124667&sr=8-1, explains these problems in more detail. 

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