I’ve said it a few times on this blog recently as offhand comments,
but I feel compelled to say it a bit more loudly. I think we will see
the end of the IPO drought for venture backed companies within the next
year, possibly by the end of this year. I don’t know if this market
rally we’ve been having is a headfake or the end of the bear market. My
gut says we’ll see at least one more pronounced down move before we see
bottom.
But either way, at some point investors are going to
want to own stocks again, and when they do, I think the old fashioned
VC-backed IPO will have quite a bit of appeal. Here’s five reasons I
think this is going to happen:
1) VCs have been in the penalty
box for almost a decade since we committed the cardinal sin of foisting
crap into the public markets. Somehow the investment bankers who helped
us do it got out a lot earlier than we did. But we’ve done our time and
others have replaced VCs as enemy number one of public market investors.
2) There are a lot of really solid companies sitting in venture portfolios waiting for the right moment to go public. Stuart Ellman of RRE wrote last fall that:
RRE has a number of companies that
had zero revenues when we invested and which are now doing $100 million
or more in revenues and growing very quickly. These companies have
achieved what they needed to achieve, become market leaders, yet they
cannot go public or exit under the assumptions that employees or
founders assumed when they began.
3)
Many of these companies are subscription-based or annuity type business
models that make for great public companies. Sarah Lacy touched on this
on her post about Open Table’s IPO:
consumer Internet company, when really it’s a software-as-a-service
company. The good news –for this moment in time—is that that means Open
Table doesn’t have an ad model. It actually has paying customers in the
form of restaurants using its reservation software and paying it
monthly subscription fees.
4)
When investors decide they want to own stocks again, they are going to
look for simple businesses, products they can understand, balance
sheets with cash and not much else, and growth without leverage. Guess
what? That’s what the venture capital industry produces.
5)
Sarbox is now well understood by the accounting industry and by the
finance teams inside of our companies. There are providers of Sarbox
compliance tools and services that have now brought the cost of Sarbox
compliance down to reasonable levels. I’m not saying that Sarbox is
good or that it doesn’t need to be reworked (it does), but it’s a devil
we know at this point and it will not impede the IPO boom when it comes.
Last week the NVCA put out a four point plan to “restore liquidity in the venture capital industry”
at its annual meeting last week in Boston. It involves getting more
investment banks engaged in taking our companies public, spurring the
development of secondary market exchages and related pre-IPO liquidity
activities, continued lobbying for lower taxes on VCs and
entrepreneurs, and reform of Sarbox.
Regular readers know that I
am a huge fan of the secondary market idea and I welcome the NVCA’s
attention and energy on that issue. On the other three, I think they
are wasting their time. It’s like the government suing Microsoft while
Linux was growing in popularity right under their noses. I believe the
market will take care of this problem as soon as we get a market that
wants to purchase equities.
And my gut says that time will come sooner than most think.
(For more from Fred, visit his blog)
(image source: data1.blog.de)
