The end of the IPO drought is coming

It will come sooner than most think

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:

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)
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