A decade ago, tech IPOs ruled the stock markets and Silicon Valley. They were the end-all and be-all for ambitious entrepreneurs and venture capitalists looking to become instant billionaires, or at least millionaires. That was many booms and busts ago. The IPO market never came back, and the multiple financial meltdowns which brought on Sarbanes-Oxley and other regulations made going public even less appealing to shoot-from-the-hip entrepreneurs. The founders of the most successful tech companies today—Facebook, Skype, LinkedIn—are pushing off the inevitable IPO for as long as possible. And for smaller tech companies, IPOs seem hardly worth the bother.As I said in my April post on "Why Ten Million Dollar IPO's Matter", the U.S. IPO torrent has turned into to a trickle:
My concern is that we are not graduating the “Intels” of tomorrow.But why? Erick, as well as some of the people he quotes like Fred Wilson and Frank Quattrone, point to one or two barriers to going public - mostly the lack of "category-defining, earthshaking" precedents, and regulatory hurdles (such as Sarbanes-Oxley). But I think that's just the tip of the iceberg.
AT&T, Disney, General Electric, Genentech, Cisco, Intel, Microsoft, Google and E-bay all had a public offering. Since going public, they have all benefited from the credibility, profile and prestige associated with being publicly traded companies. And of course the access to capital, both as IPOs, and perhaps even more importantly, with secondary offerings. The ability to do a short lead time secondary offering gives a company enormous flexibility.
But that flexibility is unavailable to most growth companies today.
Would the phone, talking movie, television, personal computer, and internet industry have been as innovative if these leading companies were instead acquired as a division of Western Union? I think not, but that is the future of most venture-backed companies today. M&A has become the only available exit for growth investors and Founders.
As I posted before, there are at least nine major impediments preventing tech IPO's:
1. Death of the mid-market investment firmsQuattrone's conclusion is right - VC's need an IPO market. But I think he's wrong if he thinks the problem will be solved just by a few high profile IPO's from some current web standard bearers.
3. Rise of the Internet Brokerages
4. Growth of Prop Trading.
5. End of Equity Research.
6. Increased Litigation Risk
7. The Internationalization of Wealth.
8. Larger Global Funds.
9. Increased Regulatory Expense including Sarbanes-Oxley.
Our community needs to address ALL the key impediments for tech IPOs. Something must change, even if it means moving the IPO market off-shore and and excluding U.S. participation to under 500 U.S. “Qualified” Investors.
There are smart people in Silicon Valley, London, New York and Hong Kong working on ways to overhaul the IPO process. As tech innovation moves millions more into the middle class, people need a better place to invest their new wealth. And by 2035 the majority of the world’s wealth is expected to be outside the G20. It's inevitable that markets will connect these investors with start-ups and innovation will continue, that's a given.
But the big question -- how long it will take U.S. entrepreneurs and investors to figure this out?