What does the future hold for IPOs?
IPOs are going to need a facelift if they want to compete with the new kids on the capital-raising block.
Investors are only excited at rumors that Uber, Lyft, and Pinterest may go public this year. But they forget that there’s been a steady decline in the number of companies going public. According to IPOhub, there were an average of just 100 IPOs per year between 2000 and 2017, compared to 300 per year between 1980 and 2000.
This decline is due to companies finding better access to capital in other places. A number of companies turned to ICOs because they offered a new way to invest in startups and smaller companies — but their instability and lack of regulatory oversight caused them to crumble. Instead of leaning into ICOs, some companies found more capital from VCs with deep pockets or experienced angel investors.
Even though the IPO is declining, it’s not causing big companies to suffer. Instead it’s retail investors and the small- to medium-sized businesses that are getting left behind.
Here’s what we think IPOs need to change in the near future. If these changes are realized, then IPOs can only come back into favor as a reliable investment vehicle.
Let anyone invest
IPOs need to be more inclusive in order to remain viable. Curious investors are shut out from the true value in IPOs, which aren’t nearly as “public” as the name suggests. This is why many investment vehicles like ICOs and STOs have risen in popularity — they have a lower barrier to entry.
IPOs need to even out the playing field going forward. This starts by fixing the problem at its root: the investment banks. They are a necessary part of the finance landscape, but they jeopardize the amount of shares available to their base of institutional investors, and their behavior manipulates share prices. We need to open the system up to more people so that they get their piece of the pie.
What the retail investor can invest in shouldn’t be determined by their broker dealer. The retail investor is often compared to high net-worth clients, so this skews the broker-dealer in favor of wealthier clients. There needs to be a low barrier to entry where anyone can partake in investing without judgment of their total net worth.
Let any business participate
IPOs are too expensive for all but the biggest companies. Between the investment bank and compliance fees, small- and medium-sized businesses can’t afford to go public.
This means it needs to be more affordable for companies to IPO, which might mean cutting out middlemen or expediting regulations.
IPOs must also reduce their timeframe for taking companies public. Going public isn’t just about signing up and getting in line to ring the bell on opening day. It takes an average of around 6 months for a company to go public for the first time.
Make it easy to follow the rules
The SEC was established in the United States to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” They consistently publish rules and regulations to govern crowdfunding, securities, and investment markets. But operating by the book isn’t always smooth sailing.
Regulations are important, but they end up stifling innovation. Technology moves more quickly now than ever before, and regulators are having a tough time keeping up. We’re at a point where people are using (and abusing) technology before anyone can establish hard rules. Regulators are late to the game, so they end up penalizing the people who do things wrong instead of making good examples of the people who do it right.
We’re experiencing this firsthand. We understand these rules and regulations are in place to protect investors, but they make it very difficult to include everyone. Regulations nowadays serve accredited investors instead of the retail investor. It’s easy to see why so many companies only work with accredited investors — it’s the easy way out.
IPOs should maintain the same focus on protecting investors and companies while making it easier to access much-needed capital beyond the elite investment banks and their accredited investors.
The answer is collaboration. It’s easier to solve a problem together than to have people working in separate silos.
Make the IPO process more direct
IPO alternatives thrive because IPOs have lots of middlemen involved in their processes, including investment bankers, institutional investors, and beyond. There are simply too many cooks in the kitchen.
IPO alternatives provide a more direct link between a company and its investors by eliminating the need for all these intermediaries. All of these intermediaries in the process — along with their fees and time commitments — will all be squeezed out because of competition from the alternative investment vehicles.
This is the same issue that past mutual funds faced at the advent of low-cost index funds and ETFs. Mutual fund companies had too many fees.
The people involved in the IPO process have to figure out how to justify their high fees, or they’ll perish along the way.
We need more entrepreneurship, and it starts with better investment vehicles
At 81-c, we want to get everyone involved in investing. The ultimate goal is availability.
We want to educate the curious investor. We want them to know all their options and how they can get the most value from each of them. You don’t need to be a career investor — investing only requires an entrepreneurial mindset and a desire to learn.
We also want to empower small- and medium-sized businesses in search of capital. We’ve seen how these businesses shut out from IPOs and private funding rounds, so they rely on themselves along with bank loans and new lines of credit. But you shouldn’t have to be the next Facebook or Snapchat to gain access to capital.
Our mission for a globally inclusive financial market starts here.