Is The Tech IPO Market Back?
Keith Benjamin, who was a wall street analyst when I first met him almost 10 years ago, has posted twice in the past week and a half about the impact the "credit crunch" could have on tech IPOs and venture returns. The first post is on Keith's blog and the second is on Venture Beat.
As an aside, I don't know why both posts aren't on both blogs. Content should be everywhere you might want to read it.
Keith argues that public investors are going to move away from sectors that are affected by the tightening of credit we are now seeing in response to the mortgage lending mess. And he points to VMware as the kind of seminal IPO success story that will lead to more (remember how Netscape kicked off the web IPO boom in the late 90s?).
VMware is indeed a fantastic success story. Virtualization of servers (and desktops) is a big deal. It allows the IT organizations to buy whatever hardware they want and to run whatever software they want on it. VMware is trading at a $27bn valuation. And a huge multiple of the next 12 month's expected earnings (almost 100x). But it's a big time growth story with significant revenues and earnings. Maybe it can hold this valuation. Maybe it can keep going up. I honestly don't know enough to predict what's going to happen with VMware.
But I do know a bit about the IPO market's desire to buy tech companies. Our Flatiron portfolio had two IPOs this summer, comScore (SCOR), and Mercado Libre (MELI). Both have peformed very well for investors who bought into the offerings. comScore is up 35% from its offering price and Mercado Libre is up 67%.
I don't know what the average tech IPO is up this year, but I suspect it's a good number. And given the amount of money sloshing around in hedge funds seeking returns, there may be a growing appetite for more deals like VMware, comScore, and Mercado Libre.
If so, that is indeed good news for VCs. But maybe we can learn from these three offerings and our past mistakes too. VMware was started in 1998, comScore and Mercado Libre were started in 1999. They've all had nearly a decade to become seasoned well run companies. All are profitable and have been profitable for a while. All are leaders in their sector. All have bright prospects of being solid public companies.
So if we are, in fact, witnessing a return to a favorable climate for tech IPOs, the best way to keep it going is by being very selective about the companies we take public. I think the bankers, the public market investors, and the VCs are certainly going to try to do that, but at some point greed will get in the way and we'll screw it up. We always do.