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Is Venture Capital Killing the IPO Market?
There has been a sharp fall in the number of listed stocks in the US since 1996 with listings falling by roughly 50% in the US over the past two decades compared to growth of 50% in other developed countries notes Michael Mauboussin in his March 22 research note “The Incredible Shrinking Universe Of Stocks.”
Mauboussin writes that today there are few unlisted companies in the US than there were in 1976, despite the fact that the gross domestic product is three times larger now than it was then. The Wilshire 5000 Total Market Index, established in the mid-1970s to capture the 5,000 or so stocks with readily available price data, now has only 3,816 stocks.
There are many reasons why the universe of investable US stocks has fallen. Mergers and acquisitions, de-listings and buyouts are all to blame, but the largest contributor is the collapse in the number of new listings.
Is Venture Capital Killing The IPO Market?
The average number of IPOs was 282 per year from 1976 through 2000. Since then, the average has been 114. Whereas the addition of new listings exceeded the subtraction of delistings from 1976 through 1996, the opposite has been true since the end of that period.
Mauboussin speculates that one of the reasons why the number of IPOs has dropped is “simply that business dynamism has been on the decline in the US.” For example, in 2016 670,000 new establishments came into existence, 42,000 fewer than the 1996 total despite the fact that GDP today is almost 60% larger and there are 20% more people. In 1996 establishments less than one-year-old created 4.4 million jobs. 2015 the number of jobs being created by businesses less than one year was around three million.
Another reason why companies seem to be spurning the IPO is that IPOs are no longer beneficial. According to Mauboussin, there are several reasons why this could be the case. Firstly the cost of going public has gone up, and as a result, the median age of a company seeking to go public has risen from 7.8 years old in 1996 to 10.7 years old in 2016. Secondly, companies today need less human andphysical capital than they did before technology became so dominant:
“Facebook’s sales per employee were $1.6 million in 2016 whereas Ford’s were $755,000. In 2016, Amazon.com generated $136 billion of sales using invested capital of $19 billion, a capital velocity ratio of 7.1 times, while Wal-Mart’s sales of $486 billion required $135 billion of invested capital or capital velocity of 3.6 times.”
Thirdly, while companies may need less capital to operate today, ironically they have more capital available to them at the earliest stages that previously. At the time Maubossin’s paper was published, there were 155 companies with a value of more than $1 billion, nearly triple the 54 companies with such a valuation in March 2014. In total, these “unicorns” had a total value of $585 billion as of mid-March. 20 years ago, businesses of such scale would have sought an IPO, but today there’s no need. Another benefit offered by IPOs, liquidity has also been made redundant by “the unprecedented ability to raise late-stage venture capital,” which has enabled private company employees to sell stock to venture capital investors.
It remains to be seen how much longer this trend will continue. Many analysts believe the rise of the robots will lead to millions of job losses but will the tech revolution also kill off the public company?
This article was originally published in ValueWalk.