Why 2011 May Be The Year For a Sustainable IPO Market

The IPO market may seem like a dim and distant picture for most entrepreneurs in
the hardscrabble world of an early stage start-up. How about “making
payroll” as a big strategic objective? Or maybe your objective is “get
enough money to pay for hosting, coffee and Ramen”?

But a healthy IPO market, one that is sustainable, actually does matter to all of
us.

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We don’t have enough public market acquirers to sustain the start-up ecosystem.
That was the real back story that explains why Google failed to close a deal to buy
Groupon. Groupon wanted to
sell to Google for $6 billion. Of course they did, that is a huge amount of money – real cold hard cash – for a 2 year old
venture. Do you really think they turned that down for the vague possibility of
making more from an IPO in the distant future? Yes we all hear the stories of
visionary entrepreneurs who are such bold risk-takers and some of that is true but
most entrepreneurs don’t love risk, they love eliminating risk on the way to
building a venture.  The real story is that Groupon only backed off due to worries that the deal
would fall into AntiTrust
hurdles.

If we only have a handful of acquiring companies (basically today it is Google,
Amazon and Microsoft, now that eBay and Yahoo are wounded), the AntiTrust hurdle becomes more real. Even
if there is no AntiTrust
issue, Google, Amazon and Microsoft simply cannot buy all those venture-backed
companies.

So we need Groupon to go public and use their public
currency to buy other ventures working on local advertising/ecommerce. That will be
good news for lots of ventures. And a Groupon IPO success
will spur on other ventures that are getting ready for IPO.

I don’t know if Groupon really have the solid
financials to go public. We won’t know until they issue their prospectus to the
SEC. Until then we only have rumor and speculation. But if I were a betting man, I
would bet on Groupon being able to go public before
Twitter. And, this will be more controversial, before Facebook. But that as they say is another story. I am not trying here
to compile an actual list of ventures that could IPO in 2011. This is more about the
general environment for IPOs.

This has been what Steve Blank calls the “lost
decade” for tech IPOs. So why do I think that 2011 will be the year this
changes? There are 5 reasons:

1. Private
   markets are under SEC scrutiny. This takes away the easy option of getting
   liquidity without either selling or going public. If you have more than 500
   shareholders you have to make your financials public, it is the law.
2. There is a
   backlog of great companies that have the financial strength to IPO. The IPO market
   has been pretty well closed for a couple of years (some notable exceptions prove the
   rule). So the companies that have the potential to IPO have had more time to grow and
   get their act together.
3. Investors
   are hungry for growth outside emerging markets. GDP in America and Europe seems to
   have a ceiling at 3% and the Chindia and BRIC stories of
   emerging markets growing at 8-10% has created too much capital flowing to those
   markets (generating fears of a bubble). So investors want companies in the developed
   markets that can grow at really fast pace (at least 30%, ideally 60% plus) from a
   base of at least $100m revenue for a long time to come. That has to come primarily
   from tech/media ventures.
4. The
   macroeconomic picture is improving. Yes, there are always worries and another
   crash is always possible, but “markets always climb a wall of worry” and the general
   trends seem positive. But cycles don’t last forever, so the people making these
   decisions (Boards and their Investment Bankers) will look at 2011 as a good window of
   opportunity.
5. The bean
   counters have figured out how to live with Sarbox. For a long time, Sarbanes Oxley (“Sarbox”) regulatory overhead has been seen as a reason why you cannot
   run a public company. Baloney, as they say in Brooklyn. It is a simple bit of
   operational overhead, a rounding error for a great company.

IPO is still the golden ticket. Real entrepreneurs want to IPO. Getting acquired
is a great way to build capital, but it is not the dream of the really driven,
talented entrepreneurs. There are logical reasons for this. The valuation at IPO is
usually (not always, plenty of exceptions to this rule) higher than you can get from
an M&A exit. And more importantly for the
entrepreneur, it is actually often easier to manage public market investors than a
bunch of VC with different agendas. But logical reasons be damned, an IPO is simply
the big badge of honor for the entrepreneur and the investors who back him/her.

It is not clear what we will call the decade that starts in a few days time
– the “teens” maybe – but it will possibly be one where we
get a sustainable IPO market for tech ventures. By “sustainable” I mean
that it cannot be a return to the Dot Com bubble years. Only great companies with
really solid financials will get through the IPO gate. And the valuations will have
to remain grounded in reality (short sellers will ensure that is the case).

Here’s hoping. Happy New Year folks.

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