We certainly don't agree with Mark Cuban on everything, but we give him credit for continuing to hammer on a subject of great importance to the economy at large: the lack of IPOs.
We wrote a post last week entitled "Disconnect in the IPO conveyor belt" discussing some of the ramifications of this problem, ramifications which extend far beyond the somewhat rarified and (to many investors) unfamiliar world of start-ups and venture funding -- ramifications which impact employment, prices, innovation, and the quality of all kinds of goods and services used in business and in daily life.
This morning, Mark Cuban was on CNBC again talking about this subject, and made the point that the dysfunctional IPO landscape also has a negative impact on equity markets in general.
Specifically, he said (beginning at about 00:45 seconds in the above-linked clip):
If we have a problem, it's not that there's frothy valuations for tech companies in the public markets: it's that there's no tech companies that have high growth rates, that are in a position to get frothy valuations -- that's the problem. I mean, if you look at, you know . . . tell me who the high-growth-rate companies are today that have under a hundred billion dollar market caps -- Netflix? You know, how many of them are there? And that's the real problem in this market. And what's happening is, you've got -- because companies are refusing to go public -- it's just, you know, if you want to talk about the Valley, the whole ethos is now: "Don't go public." It's crushing our stock market.This is a huge issue, for all of the reasons we discussed in the earlier post (here's that link again) and in our post from 2013 on this same subject, as well as the reasons discussed in Mark Cuban's blog post from February on this topic, and the even more in-depth discussion in the excellent article from Julie Segal from 2010 which we linked in the previous post as well.
Despite what Mark Cuban appears to be saying at the very beginning of the clip above, we don't actually agree that the solution is to "write down to zero" any investment in a private company that is not yet profitable -- one reason start-up companies raise venture capital is because they are not yet profitable, despite having a new or innovative idea which could be profitable in the future.
For that matter, many innovative public companies may not yet be profitable, but this does not mean that investors should "write their stock down to zero." We actually do believe that there are innovative and worthwhile companies for investors to analyze whose market capitalizations are well below $100 billion (some of which may not yet be profitable), but we definitely agree with Mark Cuban that there are a lot fewer of them than there might be if the funding and IPO landscape were not as dysfunctional as it has been for the past fifteen years.
Of course, there are many other contributing factors to this present environment, including the increasingly convoluted regulatory landscape and the additional costs which have been added to the burden of being public in the past fifteen years (or more -- the process has been going on for quite some time).
We commend Mark Cuban for his efforts to bring this situation to the attention of a wider audience.
At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Netflix (NFLX). For the record, the market cap of Netflix at time of publication was approximately $38 billion.