IPOs Just Aren’t What They Used To Be

I spent the day yesterday with VCs from other firms. I heard two stories about IPOs that are worth sharing.

One VC told me a story about a failed IPO for one of their portfolio companies a few years ago. He told me the legal and accounting bill they got after the IPO was pulled was $3.5mm. Yup, $3.5mm for an offering that was not successful.

The second story has a happier ending. It was about an IPO of a company that happened recently. The company was able to get public. It has revenues of almost $100mm a year and is profitable. The company raised about $75mm in the offering. And it is now trading at a market cap of around $300mm. That is a lower valuation than the company would be able to get in a late stage private financing in my opinion.

Taken together, these stories tell a sad tale about the IPO market. First, it is way too expensive to go public. And if you don't get your offering done, which is not an unusual occurrence, you are left with a huge bill to pay (and no cash to pay it with). And if you get your offering done, your company will likely be valued lower than it would be valued in a late stage private financing.

I used to think that the IPO was the ultimate exit for a venture backed company. Then in the late 90s, I was involved about a dozen IPOs, sat on some public boards, got sued by ambulance chasers, and saw the vast majority of our IPOs underperform and get abandoned by wall street. Since that experience, I've become very wary of the IPO exit.

I believe that the IPO exit is appropriate for only the very best companies, maybe one or two companies per fund, which would be the top 5 or 10 percent of our portfolio. For every other company, I think liquidity offerings followed by an eventual sale transaction is the best outcome. The cost is just too high and the benefits are just too low for most companies these days.