IPO! What IPO???

The fifth NetForum meeting took place on May 2^nd, 2013. The topic of discussion was “IPO! What IPO???” It is no secret that the IPO market for technology companies has basically vanished.  Why is that? Is our community less daring, less ambitious? Are we creating companies of lesser value? Or are the public market investors basically not buying it, saying come back when've got something that we can believe in? Are the VCs not interested in IPOs, do they just want quick flips? Or are the strategics snapping up IPO-worthy companies so that they are not letting enough companies go public?  These were the questions that were discussed during another lively discussion. NetForum members were joined by two individuals who are in the heart of the IPO action, Jon Robson, CEO of NYSE Technologies, and Scott Cutler, EVP NYSE EuroNext and Head of its Global Listings Business.

The number of Tech IPOs in the last 5 years is small compared to past periods, and dwarfed by the number of Tech IPOs during the DotCom Boom.  What does that mean?

Members agreed that you needed to look at the dwindling number of IPOs since the DotCom Boom in the right context.  The DotCom Boom years were an anomaly and we should not compare any other period to that period.  The number of Tech IPOs is steadily increasing again, with larger IPOs and more of them.  There is still a proper IPO window for meritorious companies.

However, the public markets are not for the unprepared.  Public markets reward predictability – companies that don’t have their act together, namely can’t forecast how well they will do 2, 3, 4 quarters out at any time will have a hard time in the after-market.  Accordingly, these companies will have a hard time going public.  The drafters of the JOBS Act attempted to lower the regulatory burden on smaller issuers to create an easier pathway to the public markets to earlier stage companies (not to be confused with early stage startups!).  There are numerous benefits of going public, namely the liquidity for investors, and the currency for acquisitions.

The discussion on the predictability of performance led us into a discussion thread that was especially fascinating.  We had numerous executives of Web companies present, with experience stretching to Web 1.0, significant fund raising track records, and even public company experience.  And we flirted with the notion that perhaps tech companies were inherently not well suited to the public markets!  Bluntly said, if the public markets want companies that can tell them how they are going to do in 6 or 12 months and beyond, well, tech companies with short product cycles, business models that are “evolving” and lots of competition from all directions are inherently not capable of meeting the bar. 

So, who is aiming for IPOs?  Several NetForum members stated that venture and private equity funds investing very large sums of money at very high valuations are supporting companies that have no choice but to aim for an IPO.  The buyers for these companies become few and afar as the valuations increase such that only the public markets can provide liquidity to the investors.

In some way, however, the late stage investors are not creating a problem but solving one (or perhaps creating a problem by solving another).  Late stage investors can be seen as “competitors” to the public markets in providing capital to high growth companies.  Some of the big names in the tech sector that went public in the 80s and 90s raised sums on the public markets that are smaller than many late stage rounds today.  (Intel raised $6.8M in 1970, Microsoft raised $61M in 1986, even translated in current day money this is smaller than late stage rounds in companies like Square and Twitter, and many others).  The late stage investors are providing expansion capital and even hard currency for acquisitions to companies that need them – whether these are companies who could have gone public and gotten this capital from the public markets, or they are companies who could not have gone public due to the higher bar previously discussed.  If indeed the markets expect companies to be able to predict revenues and profits accurately, then the companies that are raising these big rounds really may not be able to go public and raising the big rounds is just a logical next step in their lifecycle as maturing companies.

So does this mean that tech companies that go public now are mature businesses by necessity?  Claims that Facebook was a mature business at IPO abounded at that time.  It is certainly hard to continue to grow exponentially when one reaches a certain scale.  Yet, many companies that go public become large job creators, with LinkedIn being a point in case.  Other pointed out that the IPO discipline forces companies to rein in expenses, especially R&D for the sake of R&D.  The broader point was again that there is plenty of capital available to finance the high growth phase of successful companies, so that by the time they go public they have more mature financial profiles.

We did address the psychological or ego element of wanting to go public.  There are still “dreamers” out there, some said.  The term was not meant to denigrate foolish people but to acknowledge that there are CEOs of companies who want to change the world, who believe they have a game changing technology/product/something, and for them staying the course till the IPO is an imperative.  These could be contrasted to CEOs who are running their companies to make money for their investors and themselves, and have been around the block a few times, understand the risks that need to be confronted day in day out, and who don’t think about the IPO as much as about building a good business everyday. Perhaps these are the “realists”?

We ended on a high note, on the NYSE floor just in time for the opening bell for the IPO of ING.