The IPO and the American Dream

The summer of 2010 offered many signs that America is on the road to economic recovery. Corporate profitability has improved, balance sheets are healthier, the level of investable assets is high, and the threat of inflation remains low. But we are not yet seeing the new jobs needed for a full recovery. Instead, apprehensions about the strength of recovery and policy uncertainty have manifested themselves in a general unwillingness to make long-term investments in America.

Ultimately, new jobs come from entrepreneurs who are able to turn ideas into successful businesses. And turning ideas into job-creating businesses requires access to capital. President Obama’s proposal to allow companies to write off 100% of capital investments through 2011 is a step in the right direction. But if the U.S. is to be seen as a place where companies can invest and grow for the long term with confidence, the administration and Congress must convey that the U.S. is not only open for business, but that it welcomes business.

In the wake of most economic downturns, an overwhelming majority of new jobs have been created by smaller enterprises. The Kauffman Foundation concluded in a recent study that net job growth occurs only through start-up firms, which created approximately three million jobs a year from 1977 to 2005. Clearly, access to affordable capital and well-functioning capital markets are critical components of what is needed to fuel a robust recovery.

For decades we have seen how a company’s decision to undertake an initial public offering (IPO) has been the best accelerator of job growth. In a study published in March 2009, the National Venture Capital Association estimated that 92% of all job growth within publicly traded U.S. companies occurs after the company goes public. Creating an atmosphere where entrepreneurs are able to access capital to grow and expand their companies ought to be the touchstone of the public-policy debate as we enter the coming election season.

For most young companies, the act of going public is the beginning of a long-term transformation. In August, CNBC broadcast a documentary about the founding of Pixar. After the roaring success of its first movie, “Toy Story,” the company faced a dilemma. It could continue to fund successful projects one at a time, or it could create a major movie studio to support a pipeline of creative projects. Pixar chose the latter, which required taking the company public in order to quickly grow its scale. When Pixar was making “Toy Story,” it employed fewer than 100 people. Today the company employs over 850 and supports hundreds of other jobs in related businesses.

Even in a down economy, many companies that have managed to go public in the past two years are thriving. Rackspace, an IT hosting company, was founded in the late 1990s, received a series of investments from venture capital firms, and enjoyed steady expansion. But since its IPO in 2008, the company’s growth has surged and it’s now hiring hundreds of new employees.

Vitamin Shoppe went public in 2009. According to CEO Richard Markee, in the nine months after it accessed capital markets the company added 273 associates and opened 29 stores—the fastest expansion in its history.

Other U.S. companies that recently went public—such as Bridgepoint, SolarWinds, Rosetta Stone and Team Health—have also dramatically increased their hiring, even in the face of much economic anxiety.

Access to capital markets remains the most reliable job creator we know. Unfortunately, just when the U.S. needs more IPOs, we’re seeing fewer due to economic uncertainty and the high cost of operating a public company.

Over the past 12 months, the Shanghai, Hong Kong and Shenzhen exchanges have outpaced the U.S. in the number of IPOs. The Chinese government is actively encouraging companies to access capital markets to unlock job growth and it’s seeing results. In the past year, Chinese companies raised $59 billion from public offerings while U.S. companies raised only $15.6 billion.

The U.S. needs to reignite the fires that have fueled investment activity, in good and bad economies, for much of the past 20 years. That means pursuing tax policies that spur investment and lower the cost of capital; streamlining the 2002 Sarbanes-Oxley financial regulations to reduce the burdens of going public; attracting the most talented engineers, computer scientists and innovators from around the world; and maintaining openness to global trade.

On their own, these policies may not appear to be steps toward recovery and fuller employment. Yet as a practical matter, they are essential. As our legislative leaders prepare their campaign platforms, they should ask themselves: What will it take to encourage entrepreneurship, promote the availability of capital and position our public markets to do what they do best?

Those remain the most important job-creation questions—and they require immediate answers.

Mr. Niederauer is chief executive officer of NYSE Euronext.




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