(Editor’s note: Lise Buyer, a lead architect of Google’s innovative IPO two years ago, has just launched a new company. It is called Class V Group, and is designed to help guide companies through the choppy waters of the IPO process.)
This week’s headlines blare the good news: “The Dow Jones Industrial Average inches close to all-time high,” and “Dow: Second-best showing ever.”
Hooray, we’re back.
Sort of. After all, this is Silicon Valley, known more for its high risk, high potential IPOs on the Nasdaq. The chances Nasdaq will approach its peak above 5000 anytime soon are lower than the chances that Tom Perkins and Patricia Dunn will be together in the finals of the next Dancing With The Stars.
Why has the 2006 IPO market been soft? One oft-cited issue is the cost of being public, in both time and expense. Clearly, these have exploded since the passage of Sarbanes Oxley, but blaming these expenses for the low IPO count is disingenuous.
Truth is that even private companies with aspirations of an IPO, or of being sold to a public company, need to be in compliance with elements of SOX. Those expenses are going to hit the P&L anyway; it’s just a timing question.
Not surprisingly, when companies consider the increased costs and hassles, other liquidity opportunities are appealing. Enter the corporate buyers and private equity folks, many with bulging wallets rather aggressively looking for deployment opportunities. More M&A and private buy-outs mean fewer IPOs.
Arguably the main reason there have been fewer IPOs this year is that investors watch trends. While the performances of Chipotle and Tim Horton suggest that investors will still bite at IPOs, in technology-land a series of stinkers led by Vonage have caused many to opt for a Tech-IPO bypass strategy.
The recent trends beg the question: With private equity and M&A opportunities at every turn, why go public at all?
Happily, as the tech IPO is arguably a defining characteristic of Silicon Valley, there are still compelling reasons to make the leap. First and foremost is flexibility. The company that sells to a corporate buyer becomes part of someone else’s strategy. Independent public companies have more say in their destiny. If investor expectations are crafted correctly from day one, that newly public company can chart its own course toward its key long term goals. That isn’t always possible for a division or an investment.
Secondly, an IPO is still a tremendous way to raise a company’s name recognition. An IPO is a great way to land on the radar screen of potential customers and partners.
Two of the other reasons to tap the public markets are less tangible but perhaps more important in the long run. One could argue that the promise of the IPO fuels innovation out here. While the Valley’s star products generally result from a sleep-deprived engineering team’s ability and determination to build a better product or service, the specter of gold at the end of this journey attracts managers with the business acumen needed to turn those products into successful companies. The dream of that blockbuster IPO fuels the valley’s entrepreneurial work force, not to mention those who provide the all-important venture capital. The VCs aren’t playing for a buyout that will give them a mere 2-fold return on their investment. The glimmer of Forbes-worthy success undoubtedly drives our entrepreneurial spirit and resilience.
Finally, there’s another somewhat squishy advantage of the IPO over the buyout. An IPO, though promising nothing, democratizes the chance for success. When a successful start up agrees to an M&A transaction or a private offer, the well-deserving team wins. But when a company goes public, not only does the team win, there is a shot that in the future, customers, partners and random bystanders can share in the victory. Who knows? Maybe some outside the inner circle will use their gains to seed new opportunities.
It’s not the answer for every company and not the path of least resistance, but no capitalization option has more impact, potential, flexibility or future opportunity than an IPO. Thanks to healthy early results for Divx (see chart) and perhaps Shutterfly (see chart; it went public at the high end of its projected range), investors may be ready to believe again. That could be good for us all.