Comment by chris_marino | Hacker News Reader

Comment by chris_marino | Hacker News Reader

The article does not mention or address an important contributor to the current state of VC. The increase in regulations, post GFC, made it impractical/impossible for small companies to go public. And, until recently M&A was actively avoided. The alternative was to stay private longer offering higher returns for private investors wanting to capture a (previously non-existent) illiquidity premium. The co-dependency of companies and growth VC fueled an entirely new asset class (that many still call VC). As well as 100s of overfunded zombie unicorns.

Today, the AI boom is a perfect storm of opportunity to put $Ts to work in frontier model AI Cos.

"In recent years, as private markets inflated, the default behavior switched to remaining private and absorbing more capital (to justify more VC fee income). This has resulted in fewer IPOs, and worsening prospects post-IPO for venture-backed companies."

https://x.com/credistick/status/2092259921177804930

So, maybe more regulation is not the answer.

> The increase in regulations, post GFC, made it impractical/impossible for small companies to go public.

Care to be more specific? "Regulations bad" is a pretty common platitude around here but you've stated your main thesis, here, without a hint of support to back it.

My observation is that the glut of available private credit has meant for at least 15 years you could just raise funds from those markets, and that's the ultimate reason IPOs have become less common.

This hasn't made it "impossible" for companies to go public. It just eliminated the need. If you can raise billions of dollars in a G round why go to the public markets at all?

They're poking at SOX and Dodd-Frank I think, but it's a bit of a specious argument, in my opinion the rise of massive private equity (plus the absurd market orientation around short term results) is more of the story, as you say.

And further, if the goal is to eliminate regulatory frictions in public markets that keep companies staying private, then you're effectively advocating for eliminating public markets.

The entire damn deal we make when a company goes public is that the company can raise money from a much broader, potentially less sophisticated investor base that don't have to be accredited, etc, and in exchange there are more stringent requirements around reporting and so forth.

So sure, we could just throw away that regulatory and social contract, but at that point the public market serves no purpose.

Regulations is a scary word for rules.

There's no strong consensus, but there's weak consensus that post-GFC regulation is a factor behind but is not causal in any way, for the decrease in IPOs. Here's a paper [1] (well it's the paper author discussing his paywalled paper lol) exploring SOX regulations and their effects on IPOs. There's other papers and I think a good survey will help you on this topic. I don't think there's consensus on regulations being the causal factor, but it is one of many.

I thought GP was modest in calling it out as simply a contributing factor. Regulation is complicated and reaching for it should be something done with care.

(Also FWIW, I think you're being a bit cheap by appealing to culture war talking points.)

[1]: https://corpgov.law.harvard.edu/2009/09/21/the-effect-of-sox...

I think you're being oversensitive or just looking for a fight if you detect even a hint of "culture war talking points" in my comment.

It's hard for me to read '"Regulations bad" is a pretty common platitude around here but you've stated your main thesis, here, without a hint of support to back it.' as anything more than that.

It's an observation about prevailing libertarian values in the HN community that tend to attract upvotes while going unchallenged.

If you consider that part of a "culture war", then it seems that term has lost all meaning. Might as well just accuse me of being "woke" and get it over with.

I think this forum has a lot of values and don't think it's been libertarian in outlook in a long time based on what gets upvoted here so appealing to that is a bit silly but anyway I don't think this is a fruitful conversation so have a good day.

I think we're running into (or at least pretty close to) a Two Guys Fallacy here:

There's still a strong libertarian streak in HN posters, in a variety of ways.

However, there are also (mostly) different posters who have more vocally shifted the site's Overton window to the left.

These days, I find it fairly common to, for instance, make a comment that points out the very obvious problems the Republican Party has created in recent years, get downvoted to -3, and then upvoted to +5 (or vice versa), all within a few hours. This would suggest that there are contingents of posters (or at least voters!) in both camps.

I generally operate with the understanding that HN today has lots of groups, with an overall "left" lean (as much as anyone can flatten politics into a single axis.) Libertarians, leftists, liberals, nationalists, everyone is here. Appealing to one "enemy" group strikes me as a cheap blow; it's sure to increase engagement for your post with little added discourse value. IMHO at least.

Sure. SOX reg sec 302 and 404. Section 302 is a 100% dealbreaker for most companies, so I stand by my 'impossible' threshold. My comment was simply shorthand for all the upfront and downstream costs of going public, combined with fewer exit alternatives. Auditor/directors increased/personal liability, litigious shareholders, time and attention of management, etc. And, to your point, the lower cost of capital from growth investors. But that wasn't always the case. Certainly not true during the dot-com bubble (pre-SOX). I'll leave it to the academics to try to and isolate causality.

Except the data doesn't support the claim.

Sarbanes-Oxley passed in 2002 and the number if IPOs climbed between then, in the wake of the dot-com crash, and the GFC six year later, while the median age didn't change much:

https://site.warrington.ufl.edu/ritter/files/IPOs-Age-of-Com...

If your claim was true you'd either expect a decline in IPOs or the age of those companies going up and neither is true during that period.

Now to be clear I'm not saying changes in regulation had no impact. Rather my claim is that regulations plus monetary policy and other macro effects fundamentally changed the structure of the market itself, thereby deincentivizing going public, rather than somehow acting as a break or barrier to IPOs.

Seriously? The "you can't knowingly lie in your financial statements, and you have to make an actual effort when compiling them" section?

If that's a "100% dealbreaker" to you, nobody should ever invest in your company, because you are literally complaining about not being able to defraud them!

Yes this is something I think a lot about.

The issues raised in this article are very real but even aside from that, you end up enabling a class of zombie companies that have no pressure to succeed. Their founders raise and end up as advisors and LPs themselves eventually while employees at these companies receive equity that will never be liquid and will rarely be worth anything. At best the equity in these companies will be realized at steep discounts as the lack of liquid markets makes it very easy for private companies to claim that a company was valued at a certain amount at a certain time with scant certainty of what happens next. Companies stay unprofitable and private for decades, relying on private markets to stay solvent.

Pre-GFC plenty of undisciplined, unprofitable companies would IPO. While some did take public money then eventually go under, most just made their underwriters lose money. With pressure to trade publicly and put sunshine on company books, losers lost and winners won.

The result is a K-shaped economy. Private capital appreciates on paper and private capital holders take out loans on the inflated value of their equities. Meanwhile public markets are more discriminating and fiscally tight by necessity. A private company may eventually go under but cheap loans collateralized on private capital may be paid back before there's any financial reckoning.

I reject that for simple reasons of linear time. The GFC happened in 2008 and Dodd-Frank passed in 2010. Since then, there have been no large, notable regulations passed and Dodd-Frank was watered down a bit in 2018.

While Sarbanes-Oxley did make it substantially harder for small companies (market cap <$1B) to go public, there was a wave of very affordable and notable IPOs throughout the 2010s - Tesla at $2B, Shopify at $1B, Square at $3B, LinkedIN at $4B, etc. All of these have now grown substantially since their IPOs, with Square (absolute dog) being worth 10x their IPO. So yes, SOX killed micro-IPOs, but GFC/Dodd-Frank did not kill affordable IPOs.

Now, you're right that IPOs have grown a lot more expensive over time, but you're absolutely wrong to attribute it to increased regulations post GFC. The actual answer is much more closely related to what the article is talking about - VCs realized how much growth and returns they were leaving on the table and there has been substantial pressure on firms to stay private as long as possible, as well a huge increase in larger rounds and private credit. In fact, rather than increased regulations, there has been a loosening of regulations that allow investors to use SPVs (and SPVs of SPVs, and SPVs of SPVs of SPVs, a veritable matrioshka of SVPs) to get around the maximum number of shareholders a private company can have.

I have seen this first-hand - part of my investing strategy was to blindly buy cheap tech IPOs and that got me some great returns, but this strategy no longer works, because the VCs have effectively managed to hoover up any decent returns retail investors could get. Today you gotta be on AngelList or other platforms (only qualify investors, obviously, more exclusion) buying secondaries if you want decent returns.

Don't want to split hairs here, but SOX was pre-GFC, so I'm not attributing it to only post-GFC. My first-hand experience discussing personal liability with a BoD lasted about 3 seconds. LOL.

Sarbox is a drag, but another issue is the rise of the securities plaintiffs bar. Public companies are subject to Rule 10b-5 claims on each statement they make because the market can "rely" on that statement. This means every public interview, press release, and even tweet needs to be scrutinized by lawyers or risk subjecting the company to expensive lawsuits because the founder's "misstatement" moved the stock price by 45 cents.

I've never run a public company, but my bet is the mechanical filings, etc are way less of a burden than shareholder litigation.

Yeah, I did barely cover the shift in dynamics around IPOs. I originally had a lot more on that, but cut a lot out. I think what you point out is absolutely a huge factor.

I think privatization is always a metric of the functionality and thrust level in a society. Cohesive, honest society, socialized health care. Messy, parralell society ladden mess, private healthcare. Basically the thrust that was in a society gets moved into a smaller parallel privat society.

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