Monday, November 10, 2008

These days, IPOs are an accident. Since 2002, there have been just 351 IPOs out of 19,300 VC-backed companies--fewer than one in 50.

Think long term. Long, long term.

In the short term, there will be pain in Silicon Valley. Start-ups will have to survive 2009. Layoffs will be in fashion: "You didn't do a layoff? What's wrong with you?"

Venture capitalists will be hit just as hard. Their investors--the endowments, the pension funds and others--are hurting. The entire portfolio of the California Public Employees Retirement Fund, for example, a major investor in venture funds, is down 20% and needs to raise capital. Cash will be scarce in 2009, no matter if you're a pension fund, a VC or a start-up. Wall Street is broken.

But Wall Street has been broken for eight years now, as far as Silicon Valley is concerned. Alan Patricof, a legendary venture capitalist, recently remarked: "We no longer invest with the idea of taking our companies public. If they do [IPO], it's an accident."

He's right: These days, IPOs are an accident. Since 2002, there have been just 351 IPOs out of 19,300 VC-backed companies--fewer than one in 50. If the notion of an IPO seems so 1990s, well, it is. Just two years in the late 1990s, namely 1996 and 1997, saw more IPOs than the last eight years (2001 to 2008) combined. The ratio of mergers and acquisitions to IPOs has gone from roughly 1:1 from 1996 to 2000 to 6:1 during 2001 through 2008. The National Venture Capital Association has all the grim statistics.

Given this lack of IPOs, VC returns have plummeted and the average VC is likely to lose money. But the impact is much bigger than the VC business.

Wall Street has been unwilling to risk investing in relatively small, rapidly growing, unprofitable technology companies. A $100 million high-growth revenue company is no longer an interesting candidate for an IPO. Being acquired is the only logical endpoint. Thus the $100 million company that could have potentially become a $1 billion company with some nurturing and capital instead becomes a piece of some large company. With its fate no longer in its hands, the company loses its key management and its vision, and in most cases, is eventually forgotten.

For example, a company like (nasdaq: AMZN - news - people ), which went public in 1997, could never have had an IPO in this environment. Instead it would have become a part of Walmart and likely would have been shut down during the tech bust. In today's market, you need to be a Google (nasdaq: GOOG - news - people ) to make an IPO. For most companies, that's just too high a bar.


Fkd Economy said...


John Thain said Tuesday morning that the global economy was seriously stalled and would not bounce back quickly, and likened the current environment to the period that ushered in the Great Depression.

In his comments at Merrill Lynch’s banking and financial services conference in New York, Mr. Thain said one had to look back to the 1929 period “to see the kind of slowdown we’re experiencing now,” Reuters reported. “It is not like ‘87, it is not like ‘98, it is not like 2001,” he said.

Mr. Thain, who led NYSE Euronext before taking charge at Merrill last year, is known more for his cool, analytical nature than for hyperbole. So his comments might be especially unnerving to investors, analysts and others concerned that the economic fallout from the mortgage crisis and the credit squeeze could be long-lasting.

“The U.S. economy is contracting very rapidly,” creating uncertainty “at least over the next few quarters,” Mr. Thain said, according to Reuters. “We are going to be in a very difficult economic environment for a significant period of time.”

On a less gloomy note, Mr. Thain also said he was “cautiously optimistic” about the outlook for the financial services industry, in part because of the United States government’s $700 billion financial bailout package.

Karrie said...

Hearing worse case scenario playing out at google.

Company losing talent at rapid pace.

Low salaries and worthless equity compensation along with ever increasing bureacracy driving gifted teams out in droves.

Anonymous said...

Grand Canyon Education is going out soon.
“Thanks to your hard work and dedication, we are about to reach our goal of consummating an initial public offering of our stock,” according to an email sent today from Brian Mueller.