The IPO market may seem like a dim and distant picture for most entrepreneurs in the hardscrabble world of an early stage start-up. How about “making payroll” as a big strategic objective? Or maybe your objective is “get enough money to pay for hosting, coffee and Ramen”?
But a healthy IPO market, one that is sustainable, actually does matter to all of us.
We don't have enough public market acquirers to sustain the start-up ecosystem. That was the real back story that explains why Google failed to close a deal to buy Groupon. Groupon wanted to sell to Google for $6 billion. Of course they did, that is a huge amount of money – real cold hard cash – for a 2 year old venture. Do you really think they turned that down for the vague possibility of making more from an IPO in the distant future? Yes we all hear the stories of visionary entrepreneurs who are such bold risk-takers and some of that is true but most entrepreneurs don’t love risk, they love eliminating risk on the way to building a venture. The real story is that Groupon only backed off due to worries that the deal would fall into AntiTrust hurdles.
If we only have a handful of acquiring companies (basically today it is Google, Amazon and Microsoft, now that eBay and Yahoo are wounded), the AntiTrust hurdle becomes more real. Even if there is no AntiTrust issue, Google, Amazon and Microsoft simply cannot buy all those venture-backed companies.
So we need Groupon to go public and use their public currency to buy other ventures working on local advertising/ecommerce. That will be good news for lots of ventures. And a Groupon IPO success will spur on other ventures that are getting ready for IPO.
I don’t know if Groupon really have the solid financials to go public. We won’t know until they issue their prospectus to the SEC. Until then we only have rumor and speculation. But if I were a betting man, I would bet on Groupon being able to go public before Twitter. And, this will be more controversial, before Facebook. But that as they say is another story. I am not trying here to compile an actual list of ventures that could IPO in 2011. This is more about the general environment for IPOs.
This has been what Steve Blank calls the “lost decade” for tech IPOs. So why do I think that 2011 will be the year this changes? There are 5 reasons:
- Private markets are under SEC scrutiny. This takes away the easy option of getting liquidity without either selling or going public. If you have more than 500 shareholders you have to make your financials public, it is the law.
- There is a backlog of great companies that have the financial strength to IPO. The IPO market has been pretty well closed for a couple of years (some notable exceptions prove the rule). So the companies that have the potential to IPO have had more time to grow and get their act together.
- Investors are hungry for growth outside emerging markets. GDP in America and Europe seems to have a ceiling at 3% and the Chindia and BRIC stories of emerging markets growing at 8-10% has created too much capital flowing to those markets (generating fears of a bubble). So investors want companies in the developed markets that can grow at really fast pace (at least 30%, ideally 60% plus) from a base of at least $100m revenue for a long time to come. That has to come primarily from tech/media ventures.
- The macroeconomic picture is improving. Yes, there are always worries and another crash is always possible, but "markets always climb a wall of worry" and the general trends seem positive. But cycles don't last forever, so the people making these decisions (Boards and their Investment Bankers) will look at 2011 as a good window of opportunity.
- The bean counters have figured out how to live with Sarbox. For a long time, Sarbanes Oxley ("Sarbox") regulatory overhead has been seen as a reason why you cannot run a public company. Baloney, as they say in Brooklyn. It is a simple bit of operational overhead, a rounding error for a great company.
IPO is still the golden ticket. Real entrepreneurs want to IPO. Getting acquired is a great way to build capital, but it is not the dream of the really driven, talented entrepreneurs. There are logical reasons for this. The valuation at IPO is usually (not always, plenty of exceptions to this rule) higher than you can get from an M&A exit. And more importantly for the entrepreneur, it is actually often easier to manage public market investors than a bunch of VC with different agendas. But logical reasons be damned, an IPO is simply the big badge of honor for the entrepreneur and the investors who back him/her.
It is not clear what we will call the decade that starts in a few days time – the “teens” maybe – but it will possibly be one where we get a sustainable IPO market for tech ventures. By “sustainable” I mean that it cannot be a return to the Dot Com bubble years. Only great companies with really solid financials will get through the IPO gate. And the valuations will have to remain grounded in reality (short sellers will ensure that is the case).
Here’s hoping. Happy New Year folks.