From a business standpoint, today’s publicly traded corporation is a marvel of complexity. Corporations now expand their scope to include innovative new business, add research and development departments to facilitate innovation, operate as miniature investment banks working to acquire firms or diversify their investment portfolio, in addition to delivering on their core service offerings.
The contemporary corporation operates like a hybrid organization that is part research University or lab, part investment bank, and part old fashioned business that delivers products and services across a wide geographic footprint.
The capital structure is one of the most complex aspects of these hybrid institutions. The contemporary corporation’s financial office provides complex due diligence, accounting, and investment functions spanning hundreds of employees.
The public corporation is built to last.
After all, its investors are largely made up of institutional investors that can include pension funds and the savings of working-class individuals across the world.
The flexibility of publicly traded corporates is not largely mirrored in the privately held sector.
Privately held sectors are often limited by constraints imposed by investors. Venture capitalists seek a 10x return and invest in only firms who can scale fast enough to IPO. Private equity investors are usually interested in leveraged or distressed buy-outs of regional firms.
The constraints of privately held investors are due to how the firms manage risk and constraints imposed by liquidity. Venture investors need exit events through additional capital raises or an initial public offering to gain liquidity.
The liquidity constraints make venture capital incredibly expensive. Returns require a 100%+ annual return on investment rather than a 10%+ annual return, more aligned with returns offered by the stock market.
Subsequently, America has an uneven flow of venture capital activity with many regions not possessing enough capital or deals to make investments.
Can smaller and emerging firms operate with the flexibility of corporates in the sense that some of their growth comes from mergers or acquisitions? Can startups or small businesses raise risk capital to launch complementary lines of business?
Further, can new and emerging firms raise capital that requires slow and consistent growth as opposed to requiring a clear path to a 10x return or IPO?
If so, our startup and small business sectors might operate as much healthier and sustainable firms that create ownership opportunities and wealth for businesses outside of the major metros.