Home Startups, IPOs, and Exits (or Not)

Startups, IPOs, and Exits (or Not)

The electric car startup Tesla Motors made history this morning: the first IPO for an American car company since Ford in the 1950s.

Eyes are on the company for a number of reasons: questions about the profitability of the green tech industry, the applicability of the VC investment model to the auto industry, the continuation of the post-Paypal success streak, and the possible reprise of the once-great technology IPO.

A decade ago, the IPO was the ultimate exit sought by entrepreneurs and investors. But the stock market – and the economy as a whole – has changed substantially since then. The promises of an initial offering like Google’s, with employees and founders becoming instant millionaires – seem to have faded. Some of today’s leading Internet companies, including Facebook and Skype, have held back from going public, and smaller companies don’t even bother.

VC Fred Wilson recently wrote that “IPOs Just Aren’t What They Used to Be.” Wilson shares two stories of companies who went public, one a failed IPO and one with a “happier ending.” But neither anecdote is a rousing success story and WIlson concludes that “Taken together, these stories tell a sad tale about the IPO market. First, it is way too expensive to go public. And if you don’t get your offering done, which is not an unusual occurrence, you are left with a huge bill to pay (and no cash to pay it with). And if you get your offering done, your company will likely be valued lower than it would be valued in a late stage private financing.”

Wilson admits that he used to see the IPO as the “ultimate exit for a venture backed company.” But times have changed.

Most companies, venture backed or not, really cannot take this route. Acquisition – by the likes of Google or Apple, or even Facebook or Zynga – has been presented as the best possible exit for entrepreneurs and investors.

Tesla did well on day one. The company’s shares gained 41% from their original $17 price. Will more tech startups follow now and opt for an IPO?

(Or, as news breaks this afternoon that Foursquare has just received $20 million in Series B investment from Andreessen Horowitz, perhaps more startups will opt to hold off on their exit altogether.)

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