The market for small U.S. initial public offerings is “dead,” making sales of startups to larger companies more likely and reducing competition, billionaire investor Mark Cuban said.
The absence of a threat from small, growing companies has led to larger corporations investing less in research and development, Cuban, 54, said today on a panel sponsored by the Clinton Global Initiative in Chicago. While startups have plenty of access to funding, middle-market companies are facing a squeeze, Goldman Sachs Group Inc. President Gary Cohn said on the panel.
There were 12 U.S. IPOs that raised between $5 million and $60 million last year, according to data compiled by Bloomberg. In 1999, there were 249 such deals. A change in the makeup of equity-market participants accounts for that decline, Cuban said.
“Our stock markets are no longer about investing capital in growing companies to help them grow,” Cuban said. “They’ve become platforms for high-frequency trading, algorithmic trading. There’s no more investors, there’s just traders, and that’s the root of the problem.”
Cohn disagreed, saying there were plenty of mutual fund companies that seek long-term returns. The dearth is caused in part by a lack of new money flowing into equity mutual funds after the financial crisis, Cohn said.
“The big companies have access to the capital markets, so they’re fine,” he said. “The small entrepreneurs with creative ideas, they’re fine. It’s really the middle section that’s having the trouble accessing capital.”
Large U.S. companies are able to buy upstart firms to eliminate a competitor and then invest less in innovation, Cuban said. He said that process will unfold in the next few years as large insurance companies buy startups that are seeking to deliver lower-cost health-care services.
“Rather than having 300, 400, 500 booming companies that raised $30 million and used that capital to grow even more, now they’re selling those companies to get that return, so you’re not having nearly the number of companies just explode and compete,” Cuban said.
The Jumpstart Our Business Startups Act, or JOBS, signed into law April 5, 2012, was intended to spur hiring and make it easier for public and private companies to raise capital. About 600 firms elected “emerging growth company” status in the year after it was signed into law, which reduces the compliance cost of going public, according to a Bloomberg Government analysis.