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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/impossib

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 https://x.com/credistick/status/2092259921177804930 So, maybe more regulation is not the answer.

Karrot_Kream 1mo ago
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.
unknownfuture 1mo ago
> 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?
- jaggederest 1mo ago
  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.
  - unknownfuture 1mo ago
    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.
    - specialist 1mo ago
      Regulations is a scary word for rules.
- Karrot_Kream 1mo ago
  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-section-404/ https://corpgov.law.harvard.edu/2009/09/21/the-effect-of-sox...
martythemaniak 1mo ago
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.
- chris_marino 1mo ago
  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.
anildash 1mo ago
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.
xaxbxcxdxe 1mo ago
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.
piker 1mo ago
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.

Karrot_Kream 1mo ago

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.

unknownfuture 1mo ago

> 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?

jaggederest 1mo ago
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.
- unknownfuture 1mo ago
  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.
  - specialist 1mo ago
    Regulations is a scary word for rules.
Karrot_Kream 1mo ago
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-section-404/ https://corpgov.law.harvard.edu/2009/09/21/the-effect-of-sox...

martythemaniak 1mo ago

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.

chris_marino 1mo ago
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.

anildash 1mo ago

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.

xaxbxcxdxe 1mo ago

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.

piker 1mo ago

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.