An interesting academic paper (yes, that's possible) - Where Have All the IPOs Gone - suggests that the main reason for the decline in initial public offerings (IPOs) is small, high growth companies are finding it harder to compete with big firms.
This is cutting their profitability, reducing their ability to go public.
As the graph below shows, the number of U.S. public companies has steadily decreased over the last decade.
The reason for this decline is a lack of IPOs. Despite a recent flurry of companies going public (Groupon, Facebook, Pandora, etc.) the number of IPOs has fallen significantly over the last couple of decades.
From 1980 to 2000 the U.S. averaged 311 IPOs per year. From 2000 to 2009 this dropped to an average of 102.
The paper covers the usual suspect for a lack of IPOs, Sarbanes-Oxley and other relatively new regulatory hurdles added since the bursting of the tech bubble.
But it suggests that a lack of small company profitability - especially in the tech sector - is the key reason for the lack of IPOs. This lack of profitability is leading more firms to sell out instead of trying to go public. Key quote:
Our hypothesis that economies of scope and speeding products to market have become more important over time suggests a gradual decrease in the number of small company IPOs, rather than the abrupt and, to date, permanent decline that occurred when the tech stock bubble collapsed after March of 2000.
There's little doubt that getting acquired is the exit strategy of choice for the vast majority of venture-backed tech firms.
Adding to this is our work on industrial structure, which shows most industries are dominated by a few giant firms. This work also shows it's getting harder to be a successful mid-sized firm and growing big enough to be competitive on a global scale.
Adding to this is the view that going public isn't worth it. Wired's For High Tech Companies, Going Public Sucks does a nice job of summarizing this arguement.
All of this begs the question are IPOs obsolete? I think the answer is not completely. There will continue to be disruptive companies like Facebook and Groupon that grow big enough and fast enough to go public.
But it seems likely that we won't see a return to large numbers of IPOs anytime soon.
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