IPO Madness

Many in the venture industry have lamented that there hasn't been a good IPO market in years. And for the most part they are right. But in our Flatiron partners portfolio (where the average age of our investments is 6-7 years), we've had three IPOs in the past couple years and we have one or two more scheduled this year. So there has been and continues to be a market for profitable companies with good growth prospects.

But as Adam Lashinsky correctly points out in this Fortune article, we are now witnessing the kind of offerings that will ultimately kill the resurgent IPO market.  Unprofitable companies that have huge capital requirements and uncertain tracks to profitability (ie story stocks) will always come public in a hot market, but often make for terrible investments.

I am not suggesting we regulate the IPO market.  Letting the market work is fine with me. In this case, I suspect it will work just fine and the investors who get burnt will stop buying for a while meaning less liquidity for the profitable proven business models that follow them.

Comments

[eli]

I'm hoping Divx's IPO will be a positive for digital video/media technology startups. Here's their S1. There just aren't that many public digital media technology companies, and many of the ones that are public have cash but aren't growing that fast (i.e., adobe/avid/autodesk). I like the outlook for this particular sector, but there's no doubt that one or two negative IPOs like you're describing could make it hard for even debt-less profitable companies like Divx. From the S1, "In 2005, 2004 and 2003, our revenues were approximately $33.0 million, $16.4 million and $7.7 million, respectively."

[David G]

Great point - even in i-bubble #1, IPO's were the "if all else fails" financing strategy for the buzzmachines.

There needs to be a better way for the small guy to make early bets on emerging companies without those companies having to sell their souls to the market. Maybe that's the way you guys revolutionize the VC industry; by finding a way for us all to play. What's the smallest investment a VC fund can or will take today?

[Andrew Fife]

I am skeptical about Vonage's IPO especially now that SkypeOut is free for calls in the USA and Canada through 2006.

[Andrew Fife]

David G:
Tim Draper tried that by launching a VC that went public so retail investors could participate by purchasing stokc in the venture firm. I think it is still around but I can't recall the name of the firm.
-Andrew

[Giordano]

On another side, the AIM market in London, created for small-cap and less regulated, is in full swing. They are seeing tens of IPOs every month, especially for European (but not only) tech companies.I was reading a feature, and the CEO of one of those companies said they could have probably floated on Nasdaq in 1-2 years, but the tought of Sarbanes-Oxley scared them away. Is US losing his edge on those matters?

[Dimitar Vesselinov]

Taking Their Business Elsewhere
"The numbers show just how dramatic the move has been. Of the top 25 global IPOs in 2005, only one took place in the U.S.; back in 2000, 9 of the top 10 were listed on American soil. Equally telling, between 1996 and 2001 the NYSE averaged 50 non-U.S. listings annually; in 2005, it gained just eight. Meanwhile, the London Stock Exchange drew 139 new foreign companies in 2005."
http://www.businessweek.com/magazine/content/06_21/b3985054.htm?chan=globalbiz_europe_today's+top+story