Today's Pain, Tomorrow's Value

In their recent paper, Market structure is causing the IPO crisis — and more, David Weild and Edward Kim state that the “market for underwritten IPOs, given its current structure is closed to 80 percent of the companies that need it.” They go on to point out that “companies are unable to expand and grow” because they “can no longer rely on the U.S. capital markets for an infusion of capital, nor can they turn to credit-strapped banks.”

It is true that capital has become less accessible to both large and small businesses, and is likely to drive several trends:

1. Greater innovation in how partnerships are sought out and structured.  Businesses that lack access to capital will have to find other ways to obtain the resources they require for growth. They are likely to expand their definition of “synergistic” and seek partnerships outside of their traditional space that can provide resources they normally may purchase with cash.   
2. Increased need for services that can be shared or pooled across different types of businesses, including administrative functions, general HR and office space. Entrepreneurs with their own cash sources who can provide such shared services to a broad range of businesses will find that today's low access to capital works to their benefit.  
3. Demand for angel capital will increase, driving up returns demanded by the earliest investors. Angel investment networks will be able to gain greater ownership of new ventures for less cash. This will leave less for entrepreneurs, particularly after VC rounds. The benefit is that entrepreneurs will treat investor cash more carefully from the start, leading to better financial management as the company grows larger.

The good news is that today's painful trends eventually will help businesses grow with less reliance on external capital, and will lead to a finacially healthier companies in the future.