We built this city on rock ’n’ roll, and logs, airplanes, software and IPOs.
Initial public offerings helped turn Microsoft (1986), Starbucks (1992) and Amazon.com (1997) into giants whose wealth flowed back to the Seattle region, creating jobs, millionaires, corporate palaces and entire industries.
No IPO, no transformative Amazon campus in South Lake Union. No IPO, no Bill & Melinda Gates Foundation, at least not the global philanthropy titan that exists today.
The trajectory of these companies was real-world evidence of the idealized vision of IPOs, where angel investors and venture capitalists carefully nurture promising enterprises and bring them to Wall Street.
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Armed with this larger source of capital, companies can grow, pay down debt and thrive. As their shares rise, investors do well, including pension funds and average stockholders. The seed investors who cashed out use their proceeds to seek out promising new companies.
Flops and failures are part of capitalism’s creative destruction. Losses through mergers are inevitable, too.
For example, Immunex, which went public in 1983, was acquired by Amgen in 2001.
But on the whole the self-interest of entrepreneurs and investors also serves the public interest.
But is this all so-last-century? It’s been years since Seattle has birthed an IPO that turned out like Starbucks or Costco.
To be sure, the Puget Sound region benefited from a unique moment in history when successful IPOs were an essential part of its reinvention into a major technology and corporate center. But the frequency and nature of initial public offerings has changed dramatically since the dot-com bubble burst.
As a result, Tableau Software, which went public in May and is the most promising local IPO in years, will have a much harder time becoming another Amazon. And it will have far fewer compadres.
Back in the 1990s, 400 companies a year might go public.
A Kauffman Foundation report
explains that this averaged out to 298 IPOs a year in the United States from 1980 to 2000. From 2001 through 2011, however, the number of new listings dropped to an average of 90 per year.
So far this year, 64 public offerings on American exchanges raised $16.8 billion, according to Dealogic and The Wall Street Journal. And this would be the most number of IPOs since the financial crisis.
What has changed since the boom years? For one thing, the long bull market came to an end in 2001. Rising stock prices are an essential environment for a successful public offering. That’s why the relative optimism about IPOs now must be tempered by how the stock market performs this summer. Recently, it’s been jittery.
The capital markets changed in myriad ways. Venture capitalists became pickier and less patient. Investors could get better returns in exotic investments such as derivatives. Better returns and promising startups were often found in overseas markets. And companies could raise funding through hedge funds and private equity.
In addition, the placid years from 1983 to 2001, the ”virtuous cycle,” as former Federal Reserve Chairman Alan Greenspan called it, with low inflation, strong growth and modest recessions came to an end. Even before the Panic of 2008, the economy through the 2000s had shown subpar performance outside of the housing boom.
Yet another element may be the rise of highly consolidated industries that make it more difficult for newcomers to gain entrance. Also, companies such as Microsoft and Amazon precipitated and rode revolutions in computing, the Internet and information technology. Some economists, notably Robert Gordon of Northwestern University, argue that those growth-driving sea changes are over, at least for now.
What’s undeniable is that the markets want quick results from rising share prices. So a sale is more likely than long-term growth when a company goes public. Merger talk is especially heavy concerning T-Mobile, which started trading on the NYSE last month after the Bellevue company joined with MetroPCS.
As a result, professor Gerald Davis
at the University of Michigan argued that “the public corporation may have reached its twilight in the United States.”
say Davis goes too far. But one stark metric is undeniable: From the end of 1997 through last, the number of companies listed on U.S. stock exchanges declined 44 percent.
Even last year’s buzz that IPOs might make a triumphant return with Facebook, the biggest in Internet history, was quieted when the offering was botched, ironically, by a computer malfunction on the Nasdaq exchange. The Securities and Exchange Commission fined Nasdaq $10 million and Facebook shares have performed disappointingly.
Within these new limitations, the Puget Sound region has brought some new companies public in recent years, among them: HomeStreet, Zillow, Zynga, Motricity and Clearwire.
Last month NanoString, a life-sciences outfit, filed to raise $86.3 million in its IPO.
This attests to the region’s continued strength as a startup hub. But none is likely to be the next Microsoft, or even Nordstrom or Costco.
Can we continue to thrive if that doesn’t happen? Some of us, certainly.
But there’s no coincidence between the relative lack of growing new companies in America, high unemployment and these tectonic changes in corporate formation and the capital markets.
You may reach Jon Talton at email@example.com