Small Companies: Lead, Grow, Or Get Out Of The Way

small business

This week Xpert Financial was fortunate to be invited to participate in discussions at the U.S. Treasury at its conference: “Access to Capital: Fostering Growth and Innovation for Small Companies.”  

As an entrepreneur and and as an investor in startups, we were both encouraged by the many great opportunities our country has to spur innovation and entrepreneurship.

Yet, as our nation makes its slow recovery from a challenging recession, we face longer-term challenges from stultifying market conditions that limit our ability to accelerate out of recession and innovate for the future.

Fortunately U.S. Treasury Secretary Timothy Geithner heard many solid strategies for fostering growth and innovation for small businesses in America. There are five points that surfaced from the Treasury’s conference that make a compelling prescription to help entrepreneurs and private companies forge America’s path to growth.

•Create tax incentives that focus capital on America’s entrepreneurs, lengthen the time of investment and give young companies time to grow, add jobs and build revenues.

•Expand government programs that “match” equity investments with VC funds focused on early stage.

•Change the economics of investment banking through technology innovation that can aggregate the broad-based demand for investment in private companies from qualified institutional buyers (QIBs) and accredited investors throughout the country. This technology innovation already exists in the form of the newly created XPO and registered alternative trading systems designed exclusively for private company securities.

•Accelerate investments in private companies by standardising the accredited investor and QIB sign-up process with a clearinghouse that ensures investors conform, but reduces the repetitive sign-up process now required for each investment in a private company.

•Enable reporting requirements for companies and investors that are right-sized depending on the stage of company and investors involved. There is no reason a growing business with a few hundred employees should be treated like GM or General Mills.

In the past, all of these issues became mere nuisances if you could make it over the IPO “finish line,” as the access to capital and liquidity accelerated growth, incented employees and management and gave the company market power for acquisitions on par with its incumbent industry peers.

But today that “finish line” has been moved so far in the future that fewer and fewer growth companies remain independent long enough to become the job generating and wealth creating machines we’ve seen from the likes of Intel, Microsoft, Cisco and Google. Today the IPO that helped catapult these great companies is passe. It has gone the way of buggy whips and land-lines.

The IPO is a vehicle only practical for the largest, most mature companies. It is simply too expensive for most growth companies to comply with Sarbanes Oxley regulations and FASB requirements.So what are the options for the CEO of a 5-7 year old profitable company with $20-200 million in revenues? With the IPO obsolete for her company, that CEO faces a true dilemma. Either, the company can put its head down for another 5-7 years in hopes that they can afford to go public near the close of the decade. Or it can sell out to a larger company that can afford to pay the $4 million a year to comply.

Today 90% of growth companies are absorbed by acquisition, which quashes the entrepreneur’s vision and influence within acquiring company. Worse many of their employees will be laid off and far fewer of those employees will see their hard earned equity amount to anything.

Rather than waiting on the dim and distant promise of an IPO or giving in to large incumbent acquirers, private companies of all stages are beginning to see the market respond with alternatives. If we act now to bolster the chances of success for America’s entrepreneurs and growing private companies, things can be different. This time many more investors will get to take part in investing in private companies across private trading systems like Xpert ATS from Xpert Financial where private companies can raise capital through XPOs (Xpert Private Offerings) and have their shares traded electronically across an alternative trading system—all company-controlled and with company-provided information.

Prior to the mortgage and commercial banking crisis of 2008, there was an effort to get rid of Sarbanes-Oxley and increase trading fees—a rather transparent effort to ‘save the banks.’ But today, we have to focus on what is truly good for America and for our economy—job creation, growth of small businesses and entrepreneur access to capital.

As so many small business owners said in Washington, “times have changed, capital is accessible from so many places, and the allure of being public has lost its shine.” Let’s make sure we take that into account and support the future that America’s entrepreneurs are working so hard to secure, rather than reshaping markets to reflect a nostalgic picture of the past.

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