Start-Ups Slam Into Sarbanes

"I haven't heard anyone make an argument that the benefit from Sarbanes-Oxley is worth $2 million to $3 million a year," says Bob Pavey, a general partner at the venture firm Morgenthaler. "I don't believe the companies we've taken public needed more transparency. It's just added significantly more costs and a level of bureaucracy."

Many companies that would otherwise entertain dreams of going public on a U.S. stock exchange are instead opting for other exit strategies. Most commonly, they are being bought out by other companies, although that has its disadvantages.

"Companies going public do so because they believe they and their shareholders will be better served by staying independent and being able to grow on their own," Pavey says.

The reluctant attitude toward IPOs is reflected in the trickle of venture-backed companies making it into the public markets. According to the National Venture Capital Association, 56 venture-backed companies went public in 2005, down from 93 IPOs in the previous year and 264 in the go-go year of 2000. But 330 were bought or acquired in 2005, even with 339 in 2004 and above 317 in 2000.

For the smallest companies, however, the new laws haven't dampened interest in raising money in the capital markets. Last year was a record year for companies filing SB-2 offerings -- there was a total of 882, compared with 800 in 2004 and 738 in 2000. SB-2 companies aren't required to have their internal controls audited, though many are choosing to do so voluntarily.

Of course, there are other factors keeping the IPO market relatively quiet, notably the continuing fallout from the dot-com crash. "My guess is that venture-backed IPOs would still be somewhat subdued without Sarbanes-Oxley," says Charles Harris, who heads up the New York-based nanotechnology venture firm Harris & Harris. "Other factors that helped IPOs take place have changed, such as the practice of analysts attending roadshows."