There have been any number of economic analyses demonstrating that the public markets remain inhospitable to smaller IPOs and blog posts (many, ours) lamenting the absence of smaller IPOs. Recently, in preparing for a conference, we came across a number of papers that raise the question as to whether we’ve been lamenting something that no longer makes sense and we should, instead, be focused on rethinking the rubric for liquidity opportunities for smaller companies. In particular, I read with interest a paper titled, The Disappearing Small IPO and the Lifecycle of the Small Firm, written by Steven Davidoff Solomon and Paul Rose. This appears to be the first study of small IPOs and reviews data from approximately 3,000 IPOs completed from 1996 to 2012. The study finds that the smaller companies that went public during this time period had a shorter life as a public company (compared to larger market cap companies that undertook an IPO during the same time period). Specifically, the findings showed that within five years of the IPO, only 55% of the smaller companies remained listed. Many had exited the market in M&A transactions or had been delisted. Others that remained listed had not been able to grow. This is consistent with our experience in that we have seen quite a number of successful smaller public companies become “orphaned” once they completed their IPOs.
All of this suggests that perhaps smaller companies need their own, more appropriately scaled “IPO on-ramp” and that greater attention may need to be focused on some of the factors that hamper the ability of smaller public companies to succeed, such as the various impediments to raising capital in follow-on offerings, the lack of equity research coverage for smaller public companies, and the stock exchange continued listing rules, such as the 20% rule requiring shareholder approval for certain financings.