Summary
The bursting of the dot-com bubble in 2001 coincided with an abrupt and so far lasting change in the development of entrepreneurial venture-backed firms in the United States. Previously, entrepreneurs and investors commonly took viable young firms public through initial public offerings (IPOs). In some well-known cases, these firms subsequently grew into major, globally competitive corporations marketing new products and services and employing large numbers of skilled workers at high wages. Since 2001, venture investors have more frequently exited by selling their companies to established corporations, usually for lower returns. There are concerns among some entrepreneurs, investors, and academics that this change has reduced the potential of young, entrepreneurial firms to contribute to innovation, job creation, international competitiveness, and economic growth. There are also claims that public policies, including securities regulation, have contributed to this result and should be modified or compensated for.
With support from the Ewing Marion Kauffman Foundation, the National Academies’ Board on Science, Technology, and Economic Policy (STEP) convened a meeting in 2007 of investors, entrepreneurs, and academic experts in economics, corporate finance, and law to consider the merits and feasibility of additional research addressing the change in investor exit strategies, its causes and consequences.
Workshop participants identified several factors complicating systematic inquiry, including the following:
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It is difficult to distinguish cyclical from secular changes in this proximity to the boom and bust of 1999-2001.
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Technology and industry characteristics affect the viability of IPO versus acquisition exits and these characteristics change over time.
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Demand as well as supply side factors affect entrepreneurial firms and investor incentives.
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Causal linkages, especially with respect to policy influences, are exceedingly difficult to establish.
Nevertheless, various participants suggested a number of research avenues that could be productive and useful:
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Efforts to quantify and rank policies—securities regulation, legal liability, etc.—that almost certainly raise the financial and opportunity costs of undertaking IPOs and sustaining new public companies;
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International comparisons of IPO markets;
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Comparison of exit strategies across technologies;
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Research on what types of innovation are associated with different firm organizational structures and investment sources;
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Research on whether IPOs are occurring later and acquisitions earlier than previously in the life of entrepreneurial companies and what the consequences are of more mature public offerings and of “premature” sell-outs; and
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Efforts to understand how investors’ expectations regarding their eventual exit affect the development of entrepreneurial firms in different sectors.
