During 2000-2008,
virtually every private company’s investment oriented PowerPoint or Private
Placement Memorandum I saw (as
Compliance Officer of a boutique investment bank), concluded with a “hockey
stick” graph of escalating profitability, with a liquidity event in two
years. The magic number was always 2
years, regardless of likelihood, because this is what companies thought
investors wanted to hear. I cringe when I still hear that. The liquidity
event was usually posited as an IPO (initial public offering) with an
occasional alternative of being bought out by a large public company.
To outline
all the reasons I have long thought that going public early is a bad idea and
an expensive mistake for small companies is another article for another
day. But here, I will outline why and
how small private companies are shut out
from public capital, and what I think the liquidity options are in the near
future for companies worth less than $50 mm.
Initial Public Offerings (IPOs)
The number of
IPOs and their funding totals have declined as both the age and value of the
companies has risen, raising the bars for companies considering this access to capital. Statistics vary in frustrating ways for something that should seem so easily measurable, so consider the two following scenarios that follow the same trend line, but with different numbers.
The first is documented in an informative RR Donnelly speech in March, 2012: One long standing bar is that since 2003, the majority of those that launched IPOs were previously funded by more than $10 mm of venture capital. (So companies that haven’t already raised any outside capital might refocus their attention to growth first). Another is that the age of companies going public has risen from the rather ridiculous youth of 3-4 years in 2000-2002 to a more sensible 6-9 years of records, as was the norm in prior decades. The number of IPOs in each of the past three years has been about 100 – 150, raising $41-44 billion, far below the frothy years epitomized by 2000, with 446 deals raising $108 billion. But even with this reduction in the number of deals, to companies presumably older and “field tested,” from 2004 to date, a sobering 22- 39% have not hit their offering price, despite heavy and expensive lifting by those companies’ marketing, PR, IR staffs and hired investment bankers. They didn't mention the ones that withdrew after starting the process.
The second scenario, here gleaned from the excellent charts and graphs of www.renaissancecapital.com of Greenwich CT, but that I have read elsewhere, too, shows much less volume. They count a measly 53 US IPOs in 2011, a precipitous plunge not only from 125 the prior year, but from a high of 486 in 1999. Perhaps unsurprisingly, the number of IPO withdrawals has increased in the past three years, from 48 to 52 to 67 last year. (Did RR Donnelly use the start-out-the gate number?) The Jan-April withdrawals in 2012 are even with those in 2011. The dollar volume raised by the IPOs differs, too. These sources cite $97 billion in 2000 declining to $36 billion last year. Both sources agree that the average age of companies making an initial public offering have aged, but the Renaissance numbers are MUCH OLDER than the others. They identify the average age as 10 years in 2000, 15 last year, and 27 years old for those so far this year.
GrowThink points out that the number of US IPOs since 2001 remain lower than the 1980s.
The final barrier to entry is the value of the companies. This is tough to assess, because pre-money valuations are usually described by those wanting to attract the money to prove the valuations! Not a very virtuous circle. But it appears that the market is not particularly interested in companies worth less than $50 mm and certainly not those less than $20 mm.
Entrepreneurs who want to say, "we should go public" should instead do their homework to research and analyze the trend line and the differences cited here, before being swept into enthusiasm by service providers who will be paid no matter what happens once the bell rings. This summary doesn't even address the costs of going public and staying compliant, year after year, which is another topic to scrutinize carefully.
My black and white recommendation is that if your company is pre-revenue, pre-breakeven, or even pre-$20 mm valuation, don't even think about an IPO. Doing so derails far too many companies from focusing on legitimate expenditures of time and money to grow market share, customer base, or profit margin.
The first is documented in an informative RR Donnelly speech in March, 2012: One long standing bar is that since 2003, the majority of those that launched IPOs were previously funded by more than $10 mm of venture capital. (So companies that haven’t already raised any outside capital might refocus their attention to growth first). Another is that the age of companies going public has risen from the rather ridiculous youth of 3-4 years in 2000-2002 to a more sensible 6-9 years of records, as was the norm in prior decades. The number of IPOs in each of the past three years has been about 100 – 150, raising $41-44 billion, far below the frothy years epitomized by 2000, with 446 deals raising $108 billion. But even with this reduction in the number of deals, to companies presumably older and “field tested,” from 2004 to date, a sobering 22- 39% have not hit their offering price, despite heavy and expensive lifting by those companies’ marketing, PR, IR staffs and hired investment bankers. They didn't mention the ones that withdrew after starting the process.
The second scenario, here gleaned from the excellent charts and graphs of www.renaissancecapital.com of Greenwich CT, but that I have read elsewhere, too, shows much less volume. They count a measly 53 US IPOs in 2011, a precipitous plunge not only from 125 the prior year, but from a high of 486 in 1999. Perhaps unsurprisingly, the number of IPO withdrawals has increased in the past three years, from 48 to 52 to 67 last year. (Did RR Donnelly use the start-out-the gate number?) The Jan-April withdrawals in 2012 are even with those in 2011. The dollar volume raised by the IPOs differs, too. These sources cite $97 billion in 2000 declining to $36 billion last year. Both sources agree that the average age of companies making an initial public offering have aged, but the Renaissance numbers are MUCH OLDER than the others. They identify the average age as 10 years in 2000, 15 last year, and 27 years old for those so far this year.
GrowThink points out that the number of US IPOs since 2001 remain lower than the 1980s.
The final barrier to entry is the value of the companies. This is tough to assess, because pre-money valuations are usually described by those wanting to attract the money to prove the valuations! Not a very virtuous circle. But it appears that the market is not particularly interested in companies worth less than $50 mm and certainly not those less than $20 mm.
Entrepreneurs who want to say, "we should go public" should instead do their homework to research and analyze the trend line and the differences cited here, before being swept into enthusiasm by service providers who will be paid no matter what happens once the bell rings. This summary doesn't even address the costs of going public and staying compliant, year after year, which is another topic to scrutinize carefully.
My black and white recommendation is that if your company is pre-revenue, pre-breakeven, or even pre-$20 mm valuation, don't even think about an IPO. Doing so derails far too many companies from focusing on legitimate expenditures of time and money to grow market share, customer base, or profit margin.
