I’m sorry to relay this, guys, but yes, size does indeed matter, particularly if you are planning on going public. The discouraging reality is that, just like my old college friend, Jill, today’s IPO market kowtows to the well-endowed. The average deal size in 2010 grew to $251M – quite a disparity from 20 years ago when raising $10M in an IPO was commonplace. Emerging companies are no longer able to successfully go public as a small cap stock in a marketplace reserved for matured companies, with an average age of 16 years, possessing over a billion dollars in market capitalization and raising in excess of $100M.
In fact, even some of the most successful IPOs in history including Intel, Adobe, Microsoft, Oracle, Dell, Cisco, E*Trade and Amazon would be hard pressed to find an underwriter eager to take them public in today’s adverse IPO environment. When these tech goliaths went public, on average, they raised $37.9M at an average meager valuation of less than $220M. Combined these companies today generate over $266B in annual revenue, employ close to 500,000 people and have a collected value of approximately three quarters of a trillion dollars. This should serve as a reminder that every mighty oak tree once began as a mere acorn.
Because there is no respectable public market system that accommodates emerging companies being public at lower valuations with less capital raised, it is challenging for shareholders to maximize their returns by investing at the most opportune stage of a company’s growth: the $50M to $500M market cap range. Furthermore, with constricted capacity to tap into the public markets, smaller companies are left unable to develop, innovate, compete and most importantly, hire. Out of desperation many of these companies end up reverse merging into shells, wasting vital resources on ineffective investor relations campaigns and placing their stock with PIPE funds, most of which have very little interest in holding stocks and cultivating companies. As a result, shareholders get diluted, stock prices dwindle and liquidity evaporates. This, in turn, forces companies to squander even more critical cash on fruitless IR campaigns and accept financings that are even more dilutive. It becomes an endless cycle of doom where the only jobs being created are those of attorneys and stock promoters.
Dilutive PIPE financings, in addition to, Sarbanes Oxley, diminished spreads, electronic trading, lack of a viable sell-side research model all have contributed to the demise of the small cap IPO. And while we can discuss all of these reasons ad nauseum, it is “action” not “discussion” that will create jobs and stimulate economies.
The call to action has been answered with the emergence of the secondary marketplace and private company exchange platforms such as Gate Technologies, SecondMarket, SharesPost and Xpert Financial. In this new marketplace, emerging private companies no longer need to be “Dirk Diggler” in order to provide its employees and shareholders with liquidity, attract key personnel and additional capital. Conversely, investors are no longer forced to wait until a company’s largest growth spurt has ended before investing.
Unlike Wall Street, this vibrant young marketplace is untarnished. Its platform currently does not support shorting, margin, derivatives or manipulation. It is a small cap Shangri-la where investors are actually more interested in investing in a company as opposed to simply trading a stock. I view these platforms as the marketplace of the future where emerging private companies are able to flourish and investors are capable of generating optimal investment returns.
Because I so passionately feel that this is marketplace holds the potential of stimulating job growth and ultimately revitalizing the U.S. economy, I have chosen to redirect all my efforts and resources in pursuit of this outcome. Consequently, I have decided to leave Wall Street in order to become a voice for this new street. It is my sincere hope that my contributions help this acorn become tomorrow’s great oak.