Exit Strategies Dry Up

July 28, 2008

I found this article very interesting.  Basically, it’s pointing out some potential harm all the red-tape of running a publicly traded company could be doing.  Sarbanes-Oxley has created a lot more work for businesses and we’ve seen a lot of companies go private mostly because of the higher costs related to being public.  Not only have we seen current public companies go private, but we’ve also seen a slow down in new companies going public.  As the article points out… “The second quarter of 2008 marked the first time in 30 years that no venture-backed companies went public. Not a single one.”

So what does all this really mean?  When you start a business you usually want some sort of pay-off at the end.  You put in very long hours and worked really hard for potentially a lot of years, so you deserve it.  If you built your business using venture capital money, then you have even more forces pushing for a big return…potentially more than 50% ownership which is never a good position to be in.  Historically, there have been two main ways to get this pay off, either go public with an IPO or sell to another company.  The concern this article brings up is that the new laws are making the acquisition route (either by a current public company or private firm) much more appealing than the IPO route.  The most driven entrepreneurs have usually been pulled toward the IPO route so as to remain in control of the company, but that may not be the case anymore.

The article points out several “what if” scenarios that really bring the point home.  What if Bill Gates or Michael Dell had sold out early in their career to existing companies?  What if Google had been acquired by Yahoo! instead of going public?  It definitely gives us some food for thought.  Ultimately, I still think the most driven people will still opt to remain in control of their company.  We just may start seeing more people stay private and make private offerings instead of going public.  There may not be quite as big of a purse in that market, but when you weigh the total cost including the cost to meet all the SEC requirements, I think it will be much more appealing than it had been in the past.