The initial public offering (IPO) has been a staple of growth for companies in every sector in the United States by allowing privately-held companies to amass lots of capital by selling shares of their stock to the public. In recent years, however, startups have been eschewing these vehicles for building company wealth in favor of private options like bootstrapping, fundraising, mergers and acquisitions, and private equity firm investments. Startups are no longer seeing value in going through the lengthy and detailed IPO process when other, easier opportunities are available.

The Indianapolis Business Journal first explored the decline in IPOs among Indiana companies in January 2017. Between 1990 and 2000, Indiana companies had 17 IPOs; there were only nine from 2000 to 2016. They posited that an interest in acquisitions, increased government scrutiny, and ample available private cash have all contributed to companies moving away from IPOs.

Recently, Quartz investigated IPOs on a national scale and found similar trends to what’s occurring in Indiana. Firms going public today are much older than they were 20 years ago, while those companies are much bigger in size. This shrinkage of publicly-traded firms has increased the difficulty for startups to find their way onto a public market and extract value from it. Along with similar factors identified by IBJ, the lack of protection of intellectual property contributed to many startups being wary of filing public documents.

Despite the changes in benefits of IPOs, one Indiana tech scale-up does see the value. After reviewing the Quartz article, Scale Computing’s CFO Tim Harvey gave us his thoughts on what the future of IPOs may look like for Indiana tech companies and how IPOs still play roles in building up companies.

“The key longer-term issue is whether the IPO market still offers an interesting and viable option for raising capital. The challenges of preparing for IPO are real in a world impacted by the Sarbanes-Oxley Act financial regulations, and the disclosure and reporting requirements are not trivial, particularly for smaller businesses. That said, it would be premature to say that the IPO process no longer holds important value to U.S. businesses. Here’s why:

  1. The value of potential access to market funding is critical to driving economic growth over time. In spite of new hurdles to ‘qualify’ (both real and perceived), public market access is key to the U.S. system.
  2. The ability to remain and grow as an independent corporation is essential for longer-term growth and market competition. Particularly for the tech sector, where mergers and other consolidations have been remarkably unsuccessful post-event, with the acquired technology and IP horsepower often reduced to holding-pattern-type value and relevance or worse.
  3. The article mentions the declining importance of individual investors being able to purchase stocks. The reality is that relatively few individuals invest directly in companies. Most tend to invest through their 401K (or similar) plans, using large equity investment houses who manage mutual funds based on industry sectors and return profiles. This is still an important investment opportunity for individual investors; without the individual companies to invest in, the mutual funds (primary to the 401K) would have no targets for their investors’ capital. But I’m not sure that a decline in direct investment by individuals is what is driving a shift in IPO activity.

Tim continues to share that, “Obviously, the markets themselves need to accommodate and manage the expansion of technology and the ability for programmed trading in current markets, both to prevent program error risk and uncontrolled market manipulation or unnatural influence.

An IPO is still a capital raise event, providing a very useful mechanism to bring cash into a business. But there is a hidden bottom line an IPO can contribute to.

“A second, but important, advantage of doing an IPO, is to help employees participate directly in, and realize value from, future growth through enhanced enterprise (stock) value. The benefits that can be leveraged for employees in terms of stock option grants and availability of employee stock purchase plans are real and meaningful.” Our ecosystem saw this happen with ExactTarget, which IPO’d a year before the company was acquired by Salesforce.

“At Scale Computing, we consider this a viable option over the long term; in fact, we build our financial business models with visibility to becoming IPO-ready (i.e. of relevant size and scale – $100 million run-rate level; at cash flow break even; and generating operating profits). As a former member of Silicon Valley, I am still a big advocate for having employees participate in active equity compensation programs and hope that companies continue to qualify as IPO-ready and eventually take that step.”

Early into 2018, IPOs are seeing a resurgence in popularity nationwide. As Xconomy noted, there has been a 44 percent increase in the number of IPOs in Q1 2018 than in Q1 2017, with a 17 percent larger total raised to wit. Though this trend may not hold throughout the rest of the year, it demonstrates a potential return to a manner of raising capital that companies have used for years.

You can discover more stories on capital for Indiana tech companies on TechPoint Index.