By Samuel Taube
When Charles Dow first calculated the Dow Jones Industrial Average, it contained 12 companies and had a value of 40.94. Today, it’s closing in on 21,500 – but General Electric (NYSE: GE) is the only surviving company from the original dozen.
Needless to say, GE wasn’t the force behind this 52,000%-plus gain in the Dow. As technology advanced through the 19th and 20th centuries, innovative new companies joined the market through IPOs. In the process, they offered incredibly profitable opportunities to technology-minded investors.
That’s why tech IPOs were once eagerly anticipated events on Wall Street. You’ve probably seen graphs showing the profit margins of investors who bought Apple (Nasdaq: AAPL) in the ‘80s, or Amazon (Nasdaq: AMZN) in the ‘90s.
But as you can see from this week’s chart, the days of lucrative tech IPOs are over. Out of the five top IPOs of 2015, not even one had a positive annual return.
At first glance, that might seem impossible. Technology is advancing faster than ever, and tech startups like Airbnb, Uber and Dropbox are growing faster than ever.
But the problem with the modern tech sector isn’t the tech. It’s the lack of incentives for fast-growing startups to go public.
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Back in 2001, when investors were reeling from the dot-com crash and the Enron scandal, Congress passed a reform called the Sarbanes-Oxley Act. This law imposed a bundle of regulations meant to increase the transparency of publicly traded companies.
Sarbanes-Oxley was a well-intended attempt to fight fraud and disinformation in the financial sector. But it had an unforeseen side effect: It effectively made it impossible for young, fast-growing companies to go public. In order to meet Sarbanes-Oxley reporting requirements, a company needs a full staff of corporate attorneys and accountants. These are unaffordable luxuries for small startups.
Steve Jobs and Steve Wozniak didn’t have a $1,000-an-hour corporate lawyer working with them in Jobs’ mom’s garage. But if they were launching Apple today, they’d need one in order to go public.
Nowadays, by the time a tech company gets a ticker symbol, it has already gotten pretty big. And that means its best days of growth are probably behind it.
That’s why today’s tech IPOs are stagnant at best… and money sinks at worst. In the post-Sarbanes-Oxley world, you need private equity to capitalize on the best tech startups.
For decades, this lucrative asset class was reserved for the ultra-rich. But not anymore. Click here to learn how you can own a piece of today’s most exciting startups for as little as $100.
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Source:: Investment You
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