This coming Wednesday I will be speaking at the REFF West conference in San Francisco about the capital markets crisis and its impact on American innovation. Given the recent upwelling of popular press articles heralding the return of IPOs, my views, which are supported by newly released long-term statistics,are likely to generate some discussion. An abstract of my remarks follows:
The capital markets crisis has put an entire generation of American emerging growth companies at risk. America’s traditional leadership in entrepreneurial growth and innovation is now visibly faltering. This is the result of decades of government and corporate emphasis on short-term development at the expense of funding long-term, basic breakthrough research. Our nation’s lawmakers do not broadly recognize the public policy agenda implications of the fact that technology innovation has gone global. Recently published comparative international economic data reveals long-term declining rates of growth in U.S. government, corporate, and academic Research & Development (R&D) spending, particularly in Information Technology (IT). Further, a new study of the global capital markets illustrates the steep decline of the U.S. global share of public company listings for over a decade while other global stock exchanges have grown and flourished. All of these signs point to America’s slipping global competitiveness.
The global financial crisis has drained risk capital from the private sector at the worst possible time, compounding the effect of decades of neglect of our nation’s IT R&D infrastructure. Of direct consequence to the emerging Cleantech industry, the continuing IPO drought is a symptom of a deeper systemic liquidity crisis for small capitalization companies.
Predictions that U.S. IPOs are about to come back in a meaningful manner are wishful thinking. The current threshold criteria for liquidity as defined by the dominant underwriters in the U.S. accommodate only a small minority of the viable private companies seeking public growth capital. The severity of this untenable situation is compounded by a lack of awareness among our nation’s policymakers that all of these factors are interrelated (the announcement by the White House of an American Innovation Strategy last Monday notwithstanding).
It is not too late to address these challenges with realistic, achievable solutions that will enable structural capital markets reform. We must take specific actions to reverse the unintended consequences of a series of securities regulations bolted onto a framework that has been eclipsed by electronic trading and increasingly left behind in a fundamentally transformed global competitive environment. We must also recognize that, just as we nurture our startups in the unique environment of Silicon Valley, we must provide a public market structure that nurtures our fledgling IPOs and that allows middle market underwriters to support these companies with sufficient liquidity and with thorough, responsible research coverage.
Achieving these goals in the public equity markets does not require the relaxation of Sarbanes Oxley or of other recently implemented measures of corporate governance oversight and director accountability. To respond effectively, however, our legislators and regulators must share a sense of urgency to develop a coherent national innovation agenda that acknowledges new capital formation and new job creation through IPOs as top national priorities.