The Great Business Extinction: Why Companies Are Vanishing from Public Markets

The Paradox of Business Growth and Decline

In 2023, the United States witnessed a record-breaking surge in new business registrations, with 5.12 million new companies entering the market. While 2024 data is yet to be released, expectations suggest this record might be surpassed again. Simultaneously, investors are pouring billions into startups that merely hint at artificial intelligence capabilities, regardless of their revenue or even concrete ideas.

Yet, a peculiar phenomenon is unfolding beneath this veneer of entrepreneurial boom: the number of publicly listed companies in America has plummeted. In 1996, U.S. stock markets boasted an all-time high of 8,090 listed companies. Fast forward to today, nearly three decades later, and despite an economy that has tripled in size and a market handling seven times more capital, less than half that number of companies are available for public investment.

This stark contrast raises critical questions about the changing nature of business, investment, and the very structure of our economic system. Let's delve into the factors contributing to this great business extinction and its far-reaching implications.

The Shrinking Public Market

The Rise of Private Equity

One of the primary culprits behind the dwindling number of public companies is the meteoric rise of private equity. Since the year 2000, the amount of money managed by private equity firms in America has skyrocketed by an astounding 1,200%. This shift has fundamentally altered the landscape of corporate finance and ownership.

Private equity firms invest in companies or assets not listed on public exchanges like NASDAQ or the New York Stock Exchange. For many businesses, the allure of private equity funding outweighs the benefits and burdens of going public. By choosing private equity, companies can avoid the stringent compliance requirements associated with public listings and the need to answer to thousands of stockholders.

Moreover, the trend of private equity firms selling their assets to other, larger private equity firms rather than taking them public has further contributed to the shrinkage of the public market. According to records from Apollo, one of the world's largest private equity firms, the number of companies financed by private equity has increased by over 9,000 since the turn of the millennium.

The Concentration of Ownership

While private equity explains part of the story, it doesn't account for the full extent of the decline in public companies. Given the growth of the overall economy, we should expect to see around 25,000 public companies today. Instead, we have fewer than 4,000.

This points to another crucial factor: the increasing concentration of ownership. The largest shareholders in almost every major company listed in America (and much of the rest of the world) are now some combination of BlackRock, State Street, and Vanguard. These asset management giants manage funds on behalf of millions of individual investors, offering convenient index investment products that provide diversified market exposure.

While this concentration of ownership through index funds isn't necessarily part of an "evil empire" plot, as some might suggest, it does have significant implications for market dynamics and competition.

The Impact of Concentrated Ownership

Reduced Competition

The concentration of ownership through major asset managers like Vanguard has led to a situation where the same entities often hold significant stakes in competing companies within an industry. For example, Vanguard is the top shareholder in Delta, Southwest, United, and American Airlines, which collectively control over 70% of the U.S. air travel market.

This shared ownership across competitors can disincentivize aggressive competition. When shareholders have equal stakes in multiple companies within an industry, they may prefer strategies that grow overall industry profits rather than those that involve companies fiercely competing for market share at the expense of margins.

The Monopoly Paradox

Interestingly, in some cases, monopolies or near-monopolies can temporarily benefit consumers if well-regulated and not in vital industries. Netflix's early dominance in content streaming is a prime example. For a time, it offered a vast library of on-demand content at a reasonable price.

However, as other major players like Disney, Apple, and Amazon entered the streaming market, the landscape fragmented. Now, consumers often need multiple subscriptions to access a comprehensive content library, potentially paying more than they did for traditional cable services.

This pattern isn't unique to the digital age. Throughout history, new technologies have often led to a proliferation of businesses, followed by consolidation. The difference today is that existing large companies often develop new technologies in-house or acquire startups, rather than new businesses emerging to challenge incumbents.

The Scale Advantage

In many industries, size has become a crucial competitive advantage. Amazon's ability to offer same-day delivery and global cloud computing services stems from its massive scale. Traditional retailers like Toys R Us or Bed Bath & Beyond struggle to compete on price or convenience due to their smaller scale and higher overhead costs.

Similarly, social media platforms benefit from network effects, where their value increases as more people use them. This naturally leads users to gravitate towards the largest providers in each niche, further concentrating the market.

The Role of Venture Capital

Venture capital, a niche within private equity focused on funding startups, has paradoxically contributed to the decline in new, independent businesses. While venture capital should theoretically encourage new business development, the industry has realized that maximizing returns often means scaling businesses quickly with the hope of being acquired by large tech companies.

This approach has systematically stifled genuine innovation. Startups are often funded with the primary goal of being sold, rather than providing long-term value to the market. Moreover, venture capitalists are hesitant to fund startups that might compete directly with existing large tech companies, creating "kill zones" where new businesses struggle to find investors if they threaten established players.

The Consequences of Business Extinction

Impact on Consumers and Employees

The concentration of businesses and market power has significant negative implications for both consumers and employees. With fewer companies dominating markets, consumers often face reduced choice and potentially higher prices. Employees, in turn, may find themselves with limited job options within their field, potentially leading to wage stagnation and reduced bargaining power.

The Finance Industry's Growing Share

Perhaps surprisingly, the great business extinction hasn't even benefited investors as much as one might expect. As private equity, venture capital, and asset management firms have become larger intermediaries between investors and companies, they've captured an increasing share of economic activity through fees, commissions, and performance incentives.

The finance industry's share of GDP has grown from roughly 3.5% in the early 1970s to over 10% today, according to the Bureau of Economic Analysis. This means that a significant portion of the country's economic output is now dedicated to moving assets around between financial institutions rather than productive economic activities.

Regulatory Challenges

The current regulatory environment has struggled to keep pace with these changes in the business landscape. The last time the Federal Trade Commission (FTC) broke up a company was in 1984 with AT&T. Since then, the primary tool for addressing anti-competitive behavior has been fines, which often prove ineffective in curbing the market power of large corporations.

The challenge for regulators is to find ways to promote genuine competition and innovation while addressing the misaligned incentives created by the current system of concentrated ownership and market power.

Looking Ahead

The great business extinction presents a complex challenge for policymakers, investors, and society at large. While the consolidation of businesses can lead to efficiencies and economies of scale, it also risks stifling innovation, reducing consumer choice, and concentrating economic power in the hands of a few large entities.

Addressing these issues will require a multifaceted approach:

1. Rethinking Antitrust Regulation: Updating antitrust laws and enforcement to address the realities of the modern economy, including the role of data, network effects, and cross-industry dominance.

2. Promoting Genuine Competition: Developing policies that encourage the growth of new, independent businesses rather than just fostering startups aimed at quick acquisition.

3. Addressing Ownership Concentration: Examining the implications of concentrated ownership through index funds and considering ways to ensure that shared ownership doesn't lead to reduced competition.

4. Encouraging Public Listings: Creating incentives for companies to go public and remain public, potentially by streamlining regulations for smaller public companies.

5. Fostering Innovation: Supporting research and development initiatives that aren't tied to immediate commercial interests, potentially through increased public funding or tax incentives.

6. Improving Financial Literacy: Educating the public about the changing nature of business ownership and investment to help individuals make more informed financial decisions.

As we navigate this evolving business landscape, it's crucial to strike a balance between the benefits of scale and efficiency and the need for a diverse, competitive, and innovative economy. The great business extinction is not just a matter of corporate strategy or investment returns; it has profound implications for economic dynamism, job creation, and the distribution of wealth and opportunity in society.

By understanding the forces driving this trend and its consequences, we can work towards creating an economic environment that fosters genuine competition, innovation, and broad-based prosperity. The challenge ahead is to harness the benefits of technological progress and economic growth while ensuring that these benefits are widely shared and that opportunities for new businesses and ideas remain abundant.

Ultimately, the health of our economy and society depends on maintaining a vibrant ecosystem of businesses of all sizes and stages. As we move forward, it will be essential to remain vigilant and proactive in addressing the challenges posed by the great business extinction, ensuring that our economic system continues to evolve in ways that serve the broader interests of society.

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