I’ve spent many of my spare moments over the last few weeks absorbed by speculation about the current state of the environment for and future of IPOs in the United States, especially IPOs of small, high-growth companies, broadly, and, more narrowly, companies for whom business is about more than just profits.
I’ve taken the opportunity to speak with a number of thought leaders in the space, as well with public market investors who day-in, day-out are active, trading in the market, seeing what’s working and what’s not for these companies in the markets today. And as I’ve researched, talked and considered, the US IPO market has continued its march back—in April more companies filed to go public than in any month since August 2007.
Based on all I’ve gathered and absorbed, below are a few select observations about today’s market and several prognostications about developments and innovations happening, needed or likely to happen in the US IPO market in the next twelve to twenty four months:
1. Shrinking Market for Small Cap IPOs While smaller companies can and do tap public markets to great effect--as demonstrated by Zipcar's April deal--for many small, growing companies the perceived costs and risks of listing today outweigh the benefits, so they sidestep the public markets, either altogether, by selling out, or until they’re larger, denying public market investors the opportunity to get on board early.
2. Meaningful Value and Limited Role of Secondary Share Markets Although controversial, secondary share markets have played a valuable role in keeping capital flowing in the market as the IPO markets have come back to life. Yet their role is and is likely to remain subject to important limitations. And in the context of IPOs, as secondary share markets exist today they are more of a band-aid than they are a solution: they don’t solve public market access issues facing the small, growing companies who do, in fact, want to go public relatively early in their existence.
3. Open Window for a New Public Market Tallying points 1 and 2 led me to thinking that the public market solution for smaller companies is development of an alternative trading venue. So I tracked down Cromwell Coulson, President and CEO of OTC Markets, for a conversation about the changes he’s been making in his marketplace over the last few years.
And after a series of exchanges with Cromwell and several members of his leadership team, I reached the conclusion that OTC Markets’ premier tier, OTCQX, has the potential to be an ideal alternative trading venue for small cap companies--made all the more so by pending legislation introduced in March that will raise the limit on unregistered public offerings from $5 million to $50 million.
Trading on OTCQX would offer significant benefits, including a brokered environment, off the exchanges, away from high frequency traders and index rebalancing activity, with access to individual investors and a platform that’s home to the ADRs of many household name companies, including adidas, Air France, BASF and Roche.
It will take a smart, bold company with a pioneering spirit, backed by supportive investors, capable advisors and armed with a knack for strong story telling to step forth, turn an OTCQX offering into an innovation branding event--and navigate with and educate investors on the multi-step process it would take to listing and issuing primary shares.
It will be interesting to see if anyone connects the dots and comes forward in the next twelve to eighteen months to do this. If so, once one does, others will follow, creating a small cap hub, just as NASDAQ once did. If not, look for some other innovative alternative to emerge. Public market investors—both institutional and individual—want to be able to invest in these companies at this stage in their growth. Now that the broader IPO market is back, it’s only a matter of time until the small cap IPO is too.
4. Enabling Infrastructure for an Emerging Asset Class I have to confess that when I first heard about B Corporation certification several years ago, I didn’t really get it. I definitely got the idea of a company committing to building a for-profit business that incorporates consideration of its community, employees and the environment in its business decisions—which is what B Corporations do. But I didn’t get why it had to certify that it was doing it—just do it, was my take. So I promptly forgot about B Corporations until last month, when I spied an article on them in the New York Times that piqued my curiosity in the context of thinking about IPOs. So I set up a call with one of the organization’s founders, Andrew Kassoy, to learn more.
Turns out, what Andrew and his co-founders at B Corporation are doing is pretty interesting. They’re methodically creating the enabling corporate, legal and independent rating infrastructure to allow smart capital to flow effectively and consistently to these types of companies. While there are not yet any publicly traded B Corporations—getting shareholder approval to retroactively amend corporate bylaws to incorporate B Corporation stakeholder language is tricky--there are a number of existing B Corporations that certainly look like they have the characteristics of IPO candidates—Method, Seventh Generation and Cascade Engineering are three.
Further, this summer B Corporation is rolling out the first wave of its Global Impact Investing Rating System (GIIRS, pronounced gears)—a Morningstar-like equivalent for so-called Impact Investing. In GIIRS B Corporation is broadly ambitious, seeking to standardize ratings across wildly different geographies, economic climates, stages of growth and investment strategies. It will be interesting to see how they tackle those challenges. For now it’s only being used by funds investing in private companies. While Andrew didn’t discuss it with me, longer-term ambitions no doubt include the rating of funds investing in publicly traded companies as well.
What the B Corporation certification offers companies going public is the assurance that they can stick to their management principles and priorities even with a broad shareholder base. What it offers investors is a strong sense of corporate governance. Look for the first B Corporation IPO, the first GIIRS-rated fund investing in publicly traded-shares and expect the standards adhered to by both to prove highly attractive to an investor base that’s broader than its core socially-focused one. Outside call: a B Corporation will see the value in pioneering a listing on OTCQX.
5. Designated Marketplace for an Emerging Asset Class West of SoHo, north of TriBeca, right by the entrance to the Holland Tunnel and directly across the street from the offices of OTC Markets are those of a much smaller, newer private secondary market for impact investors--Mission Markets. Founded by Wall Street veteran Michael Van Patten, Mission Markets is early stage and micro cap—forming part of the nascent off-market ecosystem for B Corporations and their like.
Because B Corporation had caught my eye, I spoke also with Mike to learn about his longer-term plans for Mission Markets. While Mission Markets' corporate platform today is all private, the company will file as an Alternative Trading System in the next few months in order to support trading of public companies that meet its sustainability and impact requirements. And in the next six to twelve months it should also be in a position to broker direct public offerings--small, local transactions, generally $1 million and under--on behalf of companies that meet its listing standards.
These plans hint at Mission Markets' longer-term ambitions to create a full service private-public platform catering exclusively to impact investing. Stay tuned, clearly the impact segment of the market is actively innovating and their efforts will undoubtedly spillover to the markets at large.
Capital wants to form. The innovations that are happening, emerging, bubbling up at the smaller end of the IPO market speak to that phenomenon and to providing both small cap companies and investors with choice, something the public equity markets haven’t necessarily done so well in the small cap segment over the past three years. Just as the impact investing innovations are likely to affect the broader market, so too innovations in the small cap segment eventually have implications for the broader market. One needs only look at the evolution of NASDAQ over the last forty years to be reminded of that.
Special thanks to Cromwell Coulson, Timothy Ryan and Grace Keith of OTC Markets, Andrew Kassoy of B Corporation and Michael Van Patten of Mission Markets for generously sharing their time and providing me with insights into their platforms and products. All interpretations of the potential impact of their companies and strategies on the broader markets are entirely mine.
Photo: Bright Source Energy, a solar thermal technology company that filed on April 22nd--Earth Day--for a $250 million IPO. Investors include, among others, Vantage Point Capital Partners, Double Bottom Line Venture Capital and Google.