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Sunday, July 8, 2012

Silicon Valley needs to rethink its fascination with IPOs

Silicon Valley needs to rethink its fascination with IPOs

"In the Valley, they call the IPO an “exit” and glorify the entrepreneurs who have reached this milestone. Young entrepreneurs are led to believe that, when their company goes public, they become rich and famous and get to enjoy the fruits of their labor. Meanwhile, in Washington, the conventional wisdom is that the IPO is a job-creation and economic-growth elixir. One of the key provisions of the much-touted JOBS Act was an “IPO on-ramp” which eased regulations for certain companies wanting to go public. The Presidentsaid the Act “will help entrepreneurs raise the capital they need to put Americans back to work.”
When it comes to the IPO, both the Valley’s entrepreneurs and our government leaders are misguided. The IPO isn’t a profit superhighway, with on-ramps and exits for entrepreneurs thirsty for a quick profit. Rather, an IPO is like a marriage. Post-IPO, an entrepreneur’s life changes completely. They are burdened with greater responsibilities that they are too often not prepared to handle. When it comes to job creation, yes, companies do create some jobs after they go public, but nothing approaching the 900 percent growth in employment over 10 years that the University of Florida Professor Jay Ritter says a 2011 National Venture Capital Association report implies. The cumulative 10-year growth rate for IPOs, according to Ritter, is closer to 60 percent. But only 29 percent of the startups that go down the IPO path survive as public companies, according to a Kauffman Foundation report co-authored by Ritter and released in May.
The biggest IPO winners are the investment banks, which rake in huge fees regardless of the IPO outcome, and the venture capitalists who get to cash out. That is why their lobbyistswork so hard to persuade our government to loosen IPO regulations.
Take Facebook as an example. Its IPO may actually end up harming the company and creating fewer jobs than if the company had remained a private entity. Yes, Facebook hasraised $16 billion that it can spend on building new technologies and acquiring startups. But it won’t be able to use all of that cash because it is under extreme pressure to increase profits and exceed analyst expectations. So, the company will likely hire fewer employees and find ways to sell more ads and commercialize the information it has about its users, which will alienate its user base. Facebook also faces resentment from the people who have lost a significant percentage of their investment because of the disappointing stock price."

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