WSJ Online - How the IPO Decline Hurts Startup Acquisitions
Fifteen years ago, exits for venture-backed companies were split about equally between IPOs and acquisitions. Now IPOs make up roughly 10% of exits, and acquisitions dominate the dreams of investors and company founders.
Investment banker Paul Deninger warns that the IPO decline isn’t happening in a vacuum. It’s hurting acquisitions too.
“Who are you going to sell to if there’s no one out there that’s public?” said Deninger, the senior managing director of Evercore, an investment banking and advisory firm. “We need to repopulate the buyer base.”
The decade-plus downturn in IPOs—which have settled at about 50 per year, while acquisitions have settled at about 500 per year – can’t help but take its toll, Deninger said. “There are 1,000 companies that aren’t buyers today that would have been ten years ago,” he said.
The IPO decline has happened for many reasons, including a landscape that’s not as friendly to small-cap IPOs, said Deninger, who made his remarks as part of a panel on exits at this week’s SuperReturn conference in San Francisco.
“In the early 1990s, the mantra was,”$5 million a quarter, cash-flow break-even,” for companies wishing to go public, he said. “It’s really hard to do that now.”
Deninger also said that the big buyers out there, like IBM , are twice as big as they were during the IPO heyday, so buying a $50 million company is “not as interesting to them.”
Even if a company is in position to go public, venture syndicates present a particular problem. David Welsh, partner at fund of funds Adams Street Partners and another conference panelist, said early venture investors and later-stage backers rarely have similar agendas. More-recent investors usually had to pay more to grab a piece of the company, so they’re more likely to seek the bigger payday of an IPO to justify their initial investment.
“For earlier investors, [a smaller acquisition exit] could be significantly impactful for their fund,” he said, since funds nearing the end of their life cycle have intense pressure to produce returns for limited partners.
Of course, company founders get a say in the matter—and a founder pushing for an acquisition is sending a message that venture investors should pay attention to.
“You never want to stand between an entrepreneur and the door,” said Kate Mitchell, partner at Scale Venture Partners. “When they want to sell or when they are [wary] of the competition, you really need to listen.”
Assuming entrepreneurs are ready to hang on for the long haul, one way to keep them on board is through secondary stock transactions that allow them to “take some money off the table” and continue running the company. Mitchell said such deals were important for her portfolio companies ExactTarget and Ominiture, both of which went public.
“They got some of that early money, kind of released that pressure, because you’re asking them to go from a sprint to a marathon,” she said, noting that Omniture, for example, received multiple acquisition offers in the $300 million-$400 million range after its founding in 1996, before going public in 2006 and then being acquired by Adobe for $1.8 billion in 2009. “It gives them a chance to get college funds going, get houses paid for.”
In the end, the decision of when and how to exit is tougher for venture-backed companies than it is for private-equity-backed companies, in which individual firms have a controlling stake, Deninger said.
“If you’re dealing with a private equity firm, you’re making one phone call,” he said. “If it’s VCs, you’ve got the board, you’ve got the VCs’ friends, you’ve got outside board members, you’ve got law firms.”
“My job is 5% financial analysis and 95% psychoanalysis,” he said.