The IPO Debate

The National Venture Capital Association is about to roll out a media effort aimed at getting the word out about the great IPO drought of 2008. The first stop in this campaign was the NY Times: Matt Richtel wrote about it yesterday:

In the second quarter of this year not a single company backed by
venture capitalists has gone public. It is the first time that has
happened since 1978, according to a venture capital industry group.

There’s a lot to this story. IPOs, which made everyone in the venture business a killing from 1996 to early 2000 have been few and far between for most of this decade. As most everyone knows, the IPO boom was way overdone, many companies that should not have been publicly traded were brought public, and many an investor lost money on them.

Of course, once burned twice shy and wall street has not been particularly enamored with venture backed IPOs ever since.

But there is more to the story. VCs themselves, at least this VC, have learned that a sure payday via a M&A transaction is often a better way to generate returns than the hope of a big public market payday.

And then, of course, there is the regulatory environment. In Fareed Zakaria’s book, The Post American Word, he explains that:

In 2001, 57 percent of high-value IPOs occurred on American stock exchanges; in 2005, just 16 percent did. In 2006, the United States hosted barely a  third of the number  of total IPOs it did in 2001, while European exchanges expanded their IPO volume by 30 percent, and in Asia (minus Japan) volume doubled.

Sarbanes-Oxley and other post bubble, post Enron regulations have certainly made it harder to be a public company here in the US. I know every time I sign a 10K or 10Q, my hand shakes a little. Honestly, it takes a very big opportunity to make me want to be a significant shareholder or a director of a public company. The risks and hassles are just so big.

Paul Kedrosky was quoted at the end of the NYT article as saying:

There is no venture industry if there is no I.P.O. market.

I sent Paul a message on twitter saying that I think the venture business can exist without a vibrant IPO market. We’ve had three exits to date in our first USV fund and none have been IPOs. I think we can generate the returns we need to produce to satisfy our investors without a single public offering in our fund.

But the VC business without an IPO market would be a different business. It would be smaller, with fewer funds, and smaller fund sizes. And it would struggle with big bets like biotech and cleantech, and the kind of hardware oriented IT investments that generated such great returns in the 90s.

And that’s not a good thing. Biotech and cleantech are two industries of the future where the US is at the forefront. We need capital markets in this country that can support the development of these industries. And the overly regulated and cautious public market environment we have right now is clearly problematic.

So it would be nice to see a reduction in the regulatory environment. We need to let markets work and not worry so much that some people will lose money on their investments. And most of all, we need some big successes. What will be the "Genentech of cleantech"? It can’t come soon enough.