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.
I agree with your statements about VMWare. I’ve tried plenty of virtualization products, including Microsoft’s Virtual PC, and VMWare kills it in comparison. I delivered a website demo project to my client yesterday on a VMWare image. All they had to do was download the free VMWare player, copy my files over, and double-click the icon. Now they have a completely self-contained computer running their demo. Database and web server local, so no need for an internet connection.And now that you can convert your VMWare images to run directly on Amazon’s EC2 (http://www.enomalism.com/fe…, VMWare will be driving the future of cheap, scalable, commodotized web services. Needless to say, this developer is bullish on VMWare.
After having been bearish on the tech sector and IPOs for a long while, I am bullish again. My thesis is, the right tech investments are an intriguing, targeted, hopefully high IRR way to play the “emerging markets” sector:to wit, enough years have now passed so the basic, costly, difficult building blocks of tech infrastructure (think trenches, poles, wires, power plants, pipelines, towers, roads, etc.) have been deployed in a number of large, growing “emerging” markets (China, India, Russia, Vietnam, South Korea, et al). so now the companies that come after that tough initial infrastructure have new ready eager markets waiting.Crude metaphor, but: the prospectors have located the lodes and forged the initial roads and mines. Great time to start manufacturing and selling picks and shovels and barrels and housing and building materials and blue jeans and and and….And yes, i think fundamentals will matter in a world no longer punch drunk on cheap and loose credit.
great thoughts steve. should we be investing in tech enabled services in the developing world too?
i am a big believer that western liberal democracy capitalism is a wonderful genie that once loosed can never be put back in the bottle and now literally billions of people are frantically joyfully (sometimes painfully) playing catch up so if an investor has a decent enough time horizon (say, 3+ years) then i would think any investments in core stuff in emerging markets are worth doing.by core stuff, i mean all the basic stuff these markets/societies/nations/cultures will need to leap forward to western levels of business and consumer comfort and productivity. i leave it to others wiser than me to mull over whether tech enbaled services are core.the one caveat to all this is that investors should be wary of markets where a single resource can allow a government or central controlling entity to override the capitalism/liberal democracy “genie” — e.g. the way massive oil reserves and revenues are financing and empowering the scary Putin regime in Russia.which is not to say investing in russia is a bad idea, just that investors need to have sturdy stomachs and perhaps longer timeframes to bake in the disruptive often bloody and tragic attempts by autocratic regimes to preserve their power and hold back the inevitable.
Fred,This seems to be an emerging theme. You may be interested in a presentation from Always On that I covered for R/WWhttp://www.readwriteweb.com…Thanks,Sean
The fundamental economic forces that are liberating capital around the world, and sending it in search of investment opportunities, have not been undone by the credit crunch. So that capital still needs some way to be put to work, and technology is almost always on the short list of opportunities to consider. I would worry about a skills shortage, not a capital shortage — there are only so many talented entrepreneurs and creative engineers. Although the BRIC countries may be mobilizing capital, they aren’t as good at creating the talent necessary to drive those investing opportunities forward. The IPO market is still the best way to attract, retain, incent and reward that kind of talent; and until the rest of the world understands the interconnection of high-quality engineering schools and venture capital, US-based technology investing is still probably the best arena to play in.