Boo Hoo Hoo for VCs and IPOs?
From the naked self-interest category comes a release from the National Venture Capital Association today, arguing that the paucity of venture-backed IPOs threatens to hurt the economy. It's true: Only 10 venture-backed companies went public in the first quarter. That was barely a hot day when I got to BW in 1999, but you knew that.
Quoth Mark Heesen, NVCA president: “We are becoming increasingly concerned about the economic implications of the lackluster IPO market for venture-backed companies. Although we are bolstered by the continued strength of the acquisitions market, we can not rely on it as the only avenue to produce above average returns for the venture industry. Our economy depends on a strong US capital markets system to create jobs and revenues here. And while the companies that have gone public during the past year have seen their stock prices rise, their successes have not yet translated into a marked improvement in IPO activity. This situation needs to show signs of improvement before year end or we will begin to feel the effects on a much broader scale.”
Quoth me: Eh.
I've said it before, I'll say it again: We are in a pretty smart, if slightly risk averse, IPO market. If you bring out a company that has a clear, obvious path to meaningful profits -- not the lurching-across-the-Mendoza-line kind -- you can nearly always get that deal done. You can even get it done at a high multiple. Ask Google (GOOG), Salesforce.com (CRM), Blackboard (BBBB), VistaPrint (VPRT), Provide Commerce (L), Blue Nile (NILE) and others. The next proof point, as noted in a previous post, will be Visicu (EICU), which after all had only $18 million and change in 2005 sales but makes very solid cash flow. Bring us some $30 million company, or even a $300 million company, that struggles to make money and is not growing fast, and it usually won't happen. If it does, the aftermarket performance rarely makes you glad the IPO got done. In the Web sector, think Alibris and Buy.com for those that didn't get done, and PlanetOut (LGBT) and Red Envelope (REDE) as examples of those that would have been just as well off staying in the garage. More controversially, I could even put Overstock.com (OSTK) in that category: It's bigger, but has struggled to get profitable and stay that way. And its volatility--from the teens to $75 a share to $22 to $29 now, reminds you more of VC than of anything you would put your Mom's money in.
Mike Moe of ThinkEquity Partners had a note last week bemoaning the absence of the good old days, when you could take a few rounds of venture money, get close to profitability, and then launch a $30 million IPO to support maybe a $200 million market cap and take a shot at the brass ring. He blames Sarbanes Oxley for the problem, saying $2 million a year in compliance costs shaves up to $60 million off a company's market cap. And he suspects some worthy companies will defect to the London markets, where they can get a hearing more easily.
Maybe. Moe is a serious guy, so at some point I'll do some reporting and think out what he says more carefully. And I can think of some companies that arguably coulda been public-market contendahs, but laid up -- I'm so convincing when I use golf metaphors, when all the golf I know how to play fits in an Orbitz pop-up ad -- and sold out for dimes on the dollar. But for now, I think the US market isn't missing much if super-smallcaps stay private, sell out to merger partners or float shares offshore. To me, the proper answer is to simply wait for tech companies to get a big bigger, take a little longer, and come public when they're more ready. Until then, there's nothing wrong with such a company taking some late-stage VC to tide them over. That way, public investors get an IPO market with a higher batting average, but one where they still have enough upside left to slug the ball a little. (Oh, opening day! I have my Orioles-orange shirt on too! Camden Yards in spring. Sigh...)
Unless of course, you all think I'm an idiot. If so, say so...