Sep 18, 2019

A push to let mom and pop invest in startups

Illustration: Sarah Grillo/Axios

There is a revived push to allow mom-and-pop investors to buy shares in private companies, something from which they have been generally prohibited.

The state of play: At issue is how a lot of startup value creation has become over-weighted to the private markets, with fewer gains being generated post-IPO.

It wasn't always this way. Amazon, for example, went public in 1997 with a market cap of just $382 million. Google took the plunge 8 years later at a $23 billion market cap, still just a fraction of its subsequent worth.

  • Combined, the two companies raised less than $100 million in venture capital — in a pre-cloud era of higher fixed IT costs.
  • Today, 4 different startups announced $100 million+ rounds.

The current environment was created by 3 main factors:

  1. Low interest rates. This forced investors to search for yield, in order to beat the benchmarks, and that leads to increased interest in alternative assets like venture capital and growth equity. Included in the rush have been startup "tourists" like mutual fund, hedge fund and sovereign wealth fund managers.
  2. Bull public equity markets. Even if a public pension maintains a stable allocation to venture capital and growth equity, it represents more actual dollars.
  3. The JOBS Act of 2012. When passed with bipartisan support, most of the attention was on how it would permit equity crowdfunding for startups. Plus the advent of "confidential" IPO submissions and some new general solicitation provisions. But it also eviscerated the so-called 500 Shareholder Rule, which basically forced startups (including Google) to go public once they reached a certain scale.

The big picture: SEC chair Jay Clayton has regularly bemoaned how Main Street investors are being shut out of private capital formation, saying in a speech last week that his agency will "take a fresh look" at enabling retail access. It's possible this would increase a relaxing of accredited investor rules, which conflate wealth with sophistication.

  • Also last week, the House Financial Services Committee held a hearing on the matter. This was the one in which Rep. Alexandria Ocasio-Cortez mistakenly suggested that retail investors had access to WeWork, and therefore got "fleeced" by its recent valuation drop.

Bipartisan consensus is that D.C. must make it easier for startups to go public, so that they'll no longer want to remain private.

  • But it's not filing costs or reporting requirements that are creating "unicorns" on the sidelines.
  • It's broader market conditions, which only have been exacerbated by recent policy pushes: White House pressure to lower interest rates even further, corporate tax cuts juicing public equities, Clayton and the SEC's refusal to revisit the 500 shareholder rule change.

The bottom line: D.C. can help mom and pop, but only if it first comes to grip with how it hurt them.

Go deeper: The 55 minotaur companies

Go deeper

The fall of unicorns

Illustration: Eniola Odetunde/Axios

Public market investors are turning a more critical eye toward "unicorn" startups, particularly those with lax governance and big losses.

Why it matters: This comes after years of laser focus on top-line growth, and is challenging for older startups that had geared their business models to the old normal.

Go deeperArrowOct 5, 2019

Venture capitalists on track for $100 billion in startup investments

Photo: JOSEPH EID / AFP

Venture capitalists are on pace to invest over $100 billion in U.S. startups for the second straight year, including a record number of rounds more than $50 million. This might be the industry's high-volume mark.

The big picture: The dizzying numbers have been driven by an influx of new money that has helped companies stay private longer. But much of that new money comes from what I've previously referred to as "VC tourists" — or investors for whom startups aren't their core competency.

Go deeperArrowOct 10, 2019

IPO misery

Illustration: Eniola Odetunde/Axios

Once upon a time, going public was a fun and joyous thing to do. In the late 1990s, young companies would raise money in an IPO, there would be an enormous first-day pop, everybody would start talking about you, and the combination of new money and free PR would turbocharge your business.

Flash forward: Today, it's hard to find anybody who's happy with way that companies transition from being private to being public. Even the institutional clients of the large investment banks, who can get significant allocations of coveted IPOs, are feeling the pain. Companies like Uber and Peloton have never traded above their IPO price.

Go deeperArrowOct 3, 2019