Reform Sarbox To Galvanize High-Tech IPOs

by on May 24, 2011 · 5 comments

Last week’s blockbuster LinkedIn IPO valued the company at nearly $9 billion, surprising many investors, especially given the company’s initial valuation of about $4 billion. While some analysts have pointed to LinkedIn’s valuation as evidence that we may be headed into another tech bubble (a la 2000), it’s important to remember that major tech IPOs remain far less frequent in comparison to their heyday in the dot com boom. While there are many good reasons behind the recent reduction in IPO frequency, ill-conceived public policies have distorted the decision-making process of thriving startups.

In an op-ed in tomorrow’s Investor’s Business Daily, Jacque Otto and I elaborate on this argument:

Silicon Valley is teeming with budding startups whose user bases and valuations are skyrocketing. As these companies seek breathing room to grow, they will face a tough decision: stay private, seek out a buyer or go public.

Making this complex choice all the more challenging is government uncertainty. Filing for an initial public offering is harder than ever due to the onerous regulations and burdensome laws Washington has handed down over the past decade. Microsoft’s $8.5 billion purchase of Skype surprised analysts, many of whom had predicted Skype would seek an IPO or a deal with Facebook or Google.

Meanwhile, Facebook has kept quiet in face of speculation over whether it might file for an IPO. So far, the social networking giant has focused on raising capital privately. Given the risks of going public in this environment, Facebook’s decision is understandable.

While some tech firms — including LinkedIn, Kayak and Demand Media — have gone public or filed for IPOs in the past year, many others — including Hulu, Zynga, and Twitter — are reportedly leaning against going public this year. Some of these may be acquired, as happened with AdMob, a mobile advertising startup rumored to be pondering an IPO until Google bought it for $750 million in 2009.

Why do tech companies appear more reluctant to go public today than they were during the tech sector’s heyday of the early 2000s?

While many factors are at play, new regulations on the finance sector and heavy-handed legislation enacted since the dot-com boom deserve much of the blame. Raising capital through an IPO is especially tough, discouraging startups from seeking to go public. This increases the attractiveness of raising capital through private sources or by being acquired by a bigger firm.

The Sarbanes-Oxley Act, enacted in 2002 after the Enron scandal, has been devastating for investors and promising startups. The law’s onerous mandates on public companies have forced many nascent companies to forget about or delay going public.

Read the rest of the piece here.

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