Oh Beautiful, for Spacious Skies and the Best Capital Markets in the World

Healthy Capital Markets That Drive Innovation and Economic Growth Are Just as Important as Amber Waves of Grain

Here is something to think about on this July 4^th holiday.  Over the past century, the U.S. has been the single greatest market for capital formation. The strength of our financial markets, coupled with our regulatory framework, continues to attract companies from around the world that want to list on U.S. exchanges.

The result is more robust markets—and that, in turn, improves the health of the U.S economy and drives it forward with greater innovation, sustainability, and job creation. Indeed, supporting economic growth is a meaningful public benefit from private enterprise, particularly startups. And for these early-stage companies, capital is the lifeblood that allows for their growth and maturity.

In the early part of this century, there were a number of factors that led to a precipitous decline in initial public offerings (IPOs) and, therefore, listed companies in the U.S. In 1998 there were 8,823 companies listed, but by the end of 2010 that number had fallen to 5,095. When innovative companies do not have access to capital markets, they choose to focus their business models in areas that do not require significant capital to execute. This, in turn, limits job creation and economic growth.

Fortunately, Congress and President Obama recognized this urgency and, in 2012, passed the JOBS Act into law. That has led to a resurgence in public listings and an explosion in innovation as well as job growth in critical areas of economic importance. A case in point is IPOs by biotech companies, which have been particularly active in the first half of 2021. At Cowen, we have traditionally been strong in life sciences, and we partner with biotech companies producing next-generation tools and diagnostics that are literally life-changing.

All of that takes capital—and the leading source of it is the public market. To put this in perspective, it’s safe to say that we would not have Covid-19 vaccines today were it not for the life sciences companies that raised billions of dollars for the research and development of the science that ultimately led to the Covid-19 vaccine. The capital that was raised via investors in the public market (e.g., IPO and subsequent offerings) exceeded government funding by a multitude. In short, without the JOBS Act there would most likely not be a vaccine.

Another example is the technology sector, where access to public markets benefits the U.S. in strategically important industries such as semiconductors. Manufacturing semiconductors is capital intensive; about 25-30% of revenue goes towards capital expenditures. Since the 1990s, the U.S. has lost market share in semiconductors to South Korea, Taiwan, and other countries in Asia.

When companies consider returning production to the U.S., the task is daunting because most of the other chip components are manufactured throughout Asia. While low-cost production is important, the real advantage—as evidenced by companies that are successfully onshoring production—is getting back-end testing and assembly up and running quickly. That requires easy access to capital, ease of permitting, and local and national government incentives—all of which exist in the U.S.

For companies focused on sustainability, capital formation plays a crucial role to finance their missions and visions—such as improving the environment with cleaner energy, net-zero emissions, and conservation of soil and water. Many companies focused on sustainability have been going public, often through mergers with special purpose acquisition companies (SPACs). SPAC transactions are often particularly well-suited for early-stage companies before there is a long track record of performance and revenue generation.

Consider AppHarvest. With controlled environment facilities in Appalachia, AppHarvest is promoting smarter, more sustainable farming to grow healthier foods on a large scale and year-round—while also creating hundreds of quality jobs and addressing “food deserts” in underserved communities.

As these examples show, early-stage companies need capital to turn their breakthrough ideas into commercially viable products, processes, and production. Rather than being dependent on only one pathway to the public markets, companies should be able to evaluate multiple options, such as IPOs, SPAC mergers, and direct listings. The best avenue for accessing capital will depend on many factors including market conditions and the needs of specific companies.

Having multiple options to access public capital ultimately leads to healthier markets with greater flexibility should one or more pathways become unavailable or less attractive. Most of all, healthy markets mean more robust capital formation so companies can grow, innovate, disrupt, and create more jobs. 

In many ways American capital markets are the “beacon light (that) guides freedom loving people everywhere.”  Now that is something to celebrate this July 4^th!

*Cowen Inc. and Mr. Solomon have financial interests in AppHarvest Inc. Cowen and Company, LLC served as sole financial advisor to AppHarvest Inc. on its merger with Novus Capital Corporation effective on February 2, 2021.