Over the last few weeks I’ve seen an uptick in news articles citing the lack of tech IPOs (my colleague Don Dodge wrote on this just days ago).
Don mentioned some of the macro-economic factors driving the dearth of tech IPOs. But there is another key factor that I haven’t seen discussed much in the major press outlets: CEOs simply no longer see any value in going public.
Ever since Sarbanes-Oxley (and other restrictive regulation around publicly marketable securities), smart CEOs have observed that, unless the market is exceptionally hot, the costs of going public simply outweigh the benefits. If executives of a promising, high-growth company want to take some risk off the table, they can almost certainly negotiate a share sale to private investors with far greater ease and lower costs than the reporting strictures they would face in a public filing.
In today’s Wall Street Journal, Rebecca Buckman writes about the situation, touching briefly on the issue of regulatory burden for small, high-growth companies seeking greater capitalization and/or liquidity. Peter Falvey from Revolution Partners sums it up by admitting that “the economics have been destroyed for small-cap IPOs.”
“Destroyed”—it’s a strong word, and it’s probably not strong enough to convey what over-zealous reporting requirements have done to any previous CEO enthusiasm toward taking small, high-growth companies public.
The implications for venture capital returns are large: The WSJ article reports that the average time for a VC-backed startup to go public is now 8.6 years. If things don’t change, the long-accepted yardstick of “5-7 years” may need to be extended a bit. What’s interesting here is that the time span now matches or exceeds the typical market ramp needed to move a company from first round to public exit successfully. At 8.6 years, unless a VC times its investment perfectly, the odds of a good company getting caught in a macro-level trough are much, much higher. And since delayed liquidity = delayed returns to LPs, one could see a longer gap between fund-raising for VCs in the long run, with a longer-term impact on available capital for startups down the line.
