Slump in Initial Public Offerings Bodes Poorly for US Employment, Economic Growth, According to Kauffman Report
Rose Levy, 646-660-8641, firstname.lastname@example.org, Goldin Solutions
Barbara Pruitt, 816-932-1288, email@example.com, Kauffman Foundation
Slump in Initial Public Offerings Bodes Poorly for U.S. Employment, Economic Growth, According to Kauffman Report
Nearly 1.9 million new jobs forfeited in the past decade as
fewer entrepreneurial firms join ranks of public companies, but employment at "emerging growth" companies following IPOs far outpaced other public companies
(KANSAS CITY, Mo.), May 21, 2012 – While Initial Public Offerings like Facebook’s make front page news, life after an IPO and its impact on the broader economy have not been looked at in-depth. A new Kauffman Foundation report released today examines the little-studied employment and revenue growth performance of all domestic operating companies that have made IPOs over the past 15 years and offers insights for policymakers.
According to the report titled "Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996-2010," the volume of initial public offerings fell nearly 70 percent in the past decade from the average volume in the prior two decades. This drop – from an average of 298 domestic operating companies per year during 1980-2000 to an average of only 90 per year during 2001-2011 – was even more precipitous among small companies.
The study’s authors say that the plunge in IPOs during the past decade concerns policymakers because fast-growing entrepreneurial firms create the nation’s most significant employment, and, for these young companies, IPOs long have been considered important for raising capital to fuel continued growth. Further, policymakers worry that the more dramatic descent in IPOs among small companies, whom recent research points to as the nation’s primary job creators, has negatively affected aggregate employment.
"Startup companies are almost solely the catalysts for job growth," said Robert Litan, vice president of Research and Policy at the Kauffman Foundation. "It is important for policymakers to understand the extent to which highly successful startups – those that are able and willing to access the capital markets to finance their growth – expand their revenue and employment once they do go public. The authors of this report provide much-needed documentation that answers that important question."
According to the study, the 2,766 companies that went public in the United States from June 1996 through 2010 employed 5.062 million people prior to their IPOs and 7.334 million in 2010, a 45 percent increase, adding 822 jobs per company after their IPOs. Their inflation-adjusted aggregate sales increased 96 percent, from $1.32 trillion in the year before going public to $2.58 trillion in fiscal 2010. Using these numbers, the report’s authors calculate that, had the number of 1980-2000 IPOs been maintained during 2001-2011, the 2,288 additional IPOs would have created 1.881 million more jobs.
Emerging growth companies (EGC), defined as domestic operating companies less than 30 years old that are not spinoffs, rollups, buyouts or demutualizations, account for 1,700 of the 2,766 companies that went public during the study period. The EGCs’ post-IPO employment increased 156 percent, and inflation-adjusted sales jumped 259 percent, representing far faster growth than the 1,066 other IPOs, which increased employment by 29 percent and revenue by 78 percent.
Employment grew rapidly for the 1996-2000 cohorts. Significant post-IPO growth continued for cohorts that had IPOs after 2000, though at a much more subdued pace. After 2000, only the 2004 cohort, which included Google, Salesforce.com and Texas Roadhouse, grew dramatically. This may be explained by fewer opportunities for "home-run" firms, some of which represent Schumpeterian innovation, in which a firm or group of firms contribute to the reorganization of entire economic sectors.
Among EGC firms that made IPOs from 1996 through 2000, only 29 percent were still operating 10 years later. However, acquisition was a far more common outcome than was failure (55 percent vs. 16 percent). Biomedical IPOs had the highest survival and lowest bankruptcy rates among all sectors; the highest failure rates were in manufacturing and retail.