When a private company decides to have its stock listed on a public exchange, it makes an initial public offering (IPO) of a certain number of shares at a price that reflects the company’s overall value. It provides an opportunity for private venture capitalists to reap a sizable return on the early investment they made in the company. Companies that complete an IPO are required to make public disclosures of quarterly earnings and other important business information, but it does give a company the ability to raise capital from a much larger pool of investors.
In recent years, however, a decline in the number of IPOs conducted by previously private companies has had a big impact on the overall number of companies publicly listed on American stock exchanges. IPO volume in the United States has retreated from an average of 311 companies going public each year between 1980 and 2000 down to an average of 99 companies going public annually between 2001 and 2011. Numbers reported by The Economist indicate that the overall number of public companies in the United States have declined from 7,322 companies in 1996 down to 3,671 by April 2017.
This drawback in the number of publicly listed companies and companies going public through an IPO has come at a time when the overall value of the stock market has greatly increased. The Economist notes that the value of publicly listed firms has increased from 105 percent of gross domestic product (GDP) in 1996 up to 136 percent of GDP in 2017. Although the stock market went through a sizable correction in February, the value of the Dow Jones index briefly broke above 26,000 this January. In the year after the election of President Donald Trump, the Dow Jones increased in value by 28.5 percent, the biggest one-year gain after an election for that index since 1945. Clearly, there’s reason to be positive about the current state of the stock market and the national economy.
When trying to explain the decrease in U.S. businesses going public, commentators tend to point out increased regulations for public companies rolled out during the 2000s and the increased ease of finding sources of private venture capital in the Internet age. But is it possible that an inability to properly protect a business model because of weakened patent rights is at least a contributing factor?
Last March, the American business world watched as the technology and social media company Snap went public in an IPO which valued Snap at $17 per share. Snap shares rose to nearly $24.50 on their first day of trading, an increase of 44 percent in one day. Since then, the value of Snap shares has languished and shares were valued at about $17.60 at the time of this writing. A recent redesign of the Snapchat platform has attracted criticism from many longtime users including Kylie Jenner, reportedly the most viewed person on Snapchat. Jenner’s recent criticism of the platform redesign has been tied to a 7 percent decline in Snap shares.
Snap’s business woes have to do with much more than investor response to the current Twitterocracy, however. Ever since going public, Snap has seen many of its most popular features copied on the various social media services offered by American tech giant Facebook. Around the time of Snap’s IPO, business news outlet CNBC identified at least five different features Facebook had copied from Snap. Snap has continued to try to develop new features but those have suffered from a lack of user engagement. Of course, if those features were to actually create new engagement with users, it’s likely that you’d see Facebook or a different competitor copy that feature, too. Competitors can copy software features with relative impunity because of uncertain patentability standards for the software underpinning these online networks. If Snap cannot protect its ability to differentiate its platform, how is it going to compete with a rival that has more resources and a larger base of distribution? If Facebook and Snap compete on user experience, and that experience is essentially the same between both, there’s no way for Snap, the smaller player, to gain any sort of competitive advantage.
The message being sent by America’s tech elite seems simple enough: if you go public under a business model you can’t protect, we will copy you and push you out of your own market. These are the same companies who lobby for patent system reforms that weaken patent rights to further aid their ability to keep competition from smaller companies at bay.
It’s not just venture capital or businesses that suffer from the stagnation of IPOs. Fewer publicly listed companies means that many investment avenues are closed off to the majority of Americans trading on public exchanges and are increasingly the province of private institutions. When tech giants like Facebook engage in copy and steal tactics, it puts billions of dollars worth of American shareholder value at risk.
An analysis of U.S. capital markets published last May by Ernst & Young noted that the decline of IPO activity over the past 20 years has been so significant that it has warranted conversations on policy action to reverse the trend. A restoration of patent rights, which gives a patent owner a reasonable ability to obtain and enforce patents, could very well have the positive impact desired to improve the business climate for IPOs.