During my time at Business Objects, we did some work with Forbes Magazine and its publisher, Rich Karlgaard. As it turns out, we live in the same town and about once a year I have pleasure of bumping into him in the local grocery store.
Because of this and because he never lacks, shall we say, “point of view,” I always keep a special eye out for his column/blog, Innovation Rules, when reading Forbes. In a recent issue, Rich offers his (judging by the reader comments, controversial) 12-Step Program for fixing America. While I don’t want to jump into the fray on his other 11 points, I must say that I largely agree with point 9.
Dump Sarbanes-Oxley. Enacted in 2002 to prevent the next Enron scandal, Sarbox has thrown sand into the gears of entrepreneurship. It has severely slowed the U.S. market for IPOs, since companies earning less than $200 million in revenue can’t afford the legal and accounting costs of being a public company today. Deprived of capital, young companies not named Facebook or Twitter prematurely stagnate or sell out. Investors are deprived of opportunity, and the nation is deprived of independent companies that surpass the $1-billion-in-revenue mark.
My estimate is that Sarbanes Oxley (Sox) compliance costs a startup about $3M to $5M/year and, more importantly, is a huge distraction for a growth company that should be focused on market share capture. I’ve worked in and around Silicon Valley for about 25 years. Before Sox, every company I worked at went public and did so in the $30M to $50M revenue range. Today, that IPO bar is closer to $100M to $200M. The average time to take a company public pre-Sox was about 5 years. Today, it’s about 10 years.
- More startups than ever exit through sales to large companies, rather than risking it all for 10 years on the IPO journey. This further fuels industry consolidation and raises entry barriers.
- As a result, many entrepreneurs and investors have changed their focus from built-to-last to built-to-flip. Recall the famous Michael Arrington comment: “an entire generation of entrepreneurs [has been lost] building dipshit companies that sell to Google for $25M.”
- VC and private equity firms carry companies further, because the delay causes them to require more funding prior to an IPO. Recall that an IPO is not only a “liquidity event,” it’s also a major financing typically in the $100M range.
- Secondary markets have developed via sites like SharesPost where accredited investors can trade the most famous of the private companies — blindly — without any disclosed financial information whatsoever.
So before Sox, if you wanted to be stupid you could buy shares in Beyond.com with full knowledge that they had no business and lots of disclosures to prove that. After Sox you can buy Facebook — but only if you’re already rich/accredited — and without any information or disclosures whatsoever.
This is progress?