This afternoon's market crash added one more reason for why some of the most eagerly anticipated Web companies are keeping their powder dry and avoiding the public markets. After a year-long reprieve cushioned by easy monetary policy and fiscal stimulus packages, it looks like market volatility may be back with a vengeance.
The Dow Jones Industrial Average fell by 998 points, or the largest intraday loss since the 1987 stock market crash, before paring losses and closing down 347.8 points or 3.2 percent. The VIX, or the benchmark index for U.S. stock options that's often taken as a measure of market volatility, surged 60 percent to its highest since February 2007 amid the financial crisis. Although today's losses may end up being attributed to a colossal trading error, the index has seen its biggest three-day drop since November 2008. It seems that market expectations have finally caught up to the debt that governments assumed through rescue efforts and weaker tax receipts during the recession.
Those economic headwinds aren't promising for companies looking to go public in the near-term. Extreme market volatility makes it incredibly difficult to predict how a deal may be priced, regardless of a company's fundamentals.
There are of course many more important reasons as to why companies are holding off. A company's management might want keep more control of their board of directors. They might not want to be distracted by the market's short-sighted expectations on quarterly earnings instead of long-term market share. They might not want to deal with the increased public scrutiny and onerous accounting regulations like the Sarbanes-Oxley Act. And of course, there's the challenge of building a sustainable and healthy stream of revenue.
Indeed, several of the tech community's brightest stars have taken large, late-stage financing rounds to focus on growing their businesses instead of worrying about public offerings and the accompanying public scrutiny.
Social buying startup Groupon was the latest company to come to the table, bringing in a $135 million round led by Russia's Digital Sky Technologies and Battery Ventures. That was just a few months after Elevation Partners agreed to invest as much as $100 million in local recommendations site Yelp. DST also backed Zynga and Facebook last year. One common thread between all of these rounds was that early employees and founders took money off the table, signaling that an IPO is no longer a primary route to an exit for entrepreneurs and early-stage investors.
In fact, Groupon chief executive Andrew Mason told us why he's not too incredibly keen on an IPO in an unrelated interview today.
"I'm exclusively focused on building an awesome product and the investors that I've chosen are all ones that support that," Mason said. "Money has never been a source of motivation for me in building this company. I look at money as a binary problem. You either have enough or you don't. So our financing was a way that we could sell a very small percentage of the company and permanently solve that binary money problem."
Facebook chief executive Mark Zuckerberg recently expressed a similar sentiment in an interview, saying he was "definitely in no rush" in coming to the market.
If this market turbulence continues and we see deja vu all over again, it may even take a little bit longer.