The Chamber of Commerce today kicked off the 10th Annual Capital Markets Summit in Washington, DC. The event is a widely attended affair and a great opportunity to bring together lawmakers, regulators, market participants and observers alike to discuss the state of our capital markets.
Healthy and accessible capital markets are critical to the entrepreneurial ecosystem. At NVCA, we are committed to advocating for a policy environment that makes participation in the public markets an accessible opportunity for startups to grow and succeed. We’re particularly interested in the state of the IPO markets and the experience of small capitalization companies in the public markets. Studying market data trends, it is clear that getting on to the public markets is increasingly a difficult task. Research by University of Florida Professor Jay Ritter shows that the number of firms going public in the U.S. has dropped from an average of 310 firms per year from 1980 to 2000 to an average of 111 firms per year now. Additionally, a recent paper by the National Bureau of Economic Research found that the total number of public listed companies has fallen by nearly half since 1996, with the decline being especially pronounced amongst smaller firms. And, NVCA analysis based on Thomson Reuters data showed that from 1980 to 1999, IPOs made up the majority of venture-backed exits nearly every year, yet has not come close since.
There are numerous explanations for why this has happened, and I’m sure many of them were discussed at today’s event at the Chamber. But it’s important to remember that the U.S. capital markets have undergone a number of significant changes since 2000. The rise of decimalization, passage of Sarbanes-Oxley and a number of other regulatory changes, the 2003 global settlement, the computerization of the markets and the advent of high-frequency trading, the demise of the so-called four horsemen and the consolidation of the major investment houses all have occurred since 2000. All of these changes have significantly impacted the experience of startups becoming and remaining public companies.
Fortunately, this new reality isn’t lost on policymakers and steps have been taken to try and thaw the freeze on the IPO market. The Jumpstart Our Business Startups (JOBS) Act, which NVCA helped to push across the goal line, was a good first step to address the risks, costs, and regulatory burdens faced by startups fighting their way to success.
Of course, just getting to the public markets is only the first step for startups. Making sure they are successful post-IPO is another big challenge and more effort needs to be focused on making public markets compatible with startups and small capitalization companies once again. As a first step to better understand the challenges faced by the companies, NVCA strongly advocated for the implementation of tick size pilot program at the Securities and Exchange Commission (SEC). This pilot will allow certain small capitalization companies to trade at wider tick sizes in the public markets, which will help us gain valuable information that can be used to identify long-term solutions to create more liquidity.
NVCA will continue to work with policymakers to understand the challenges facing this critical market segment and engage in dialogue that can produce solutions that benefit all stakeholders. The U.S. capital market system remains the most powerful engine for capital formation in the world, but we must be vigilant in ensuring that our markets work for new companies as well as the incumbents. Moving forward, more must be done to improve the health and vibrancy of the IPO market as well as address liquidity challenges facing companies after IPO.