State of IPO Market in the U.S.

Stare Of IPO In The US by Jerome Gentolia: Venturestab

Photo by André-Pierre du Plessis via Flickr

There were 15 companies that postponed their planned IPOs in August 2011. That is the most number of postponed IPOs since April 2001, when 20 IPOs were postponed.

Ten companies went ahead with their IPOs during the 3rd quarter of 2011, although half of these companies did so in Asian and European markets, proof that investor confidence in those markets are much higher than in the US. Compare this with the 25 companies that went public on the US markets during the 1st half of the year. Hopefully, the last quarter we will see more companies going ahead with their planned IPOs in the US market.

The lack of interest in IPOs at this time can be traced to several factors, namely:

a) A stock market adversely affected by the recent downgrade of the US debt rating;

b) More friendly foreign markets, particularly in Europe and Asia.

c) Economic uncertainty in European countries such as Greece, Portugal, Spain and Italy;

d) The growing number of venture-backed companies subjected to mergers and acquisitions;

e) The rising costs associated with being a public company, which is proving to be a significant deterrent to companies considering IPOs at this time; and

f) The preponderance of other ways to raise capital in the secondary market.

Google CEO Eric Schmidt has this to say about the US credit downgrade:

“I am frustrated that America is in the process of falling behind Asia. I was recently in Asia and the Asian view of America is that we are the past” (see Shaky U.S. Markets Have Been Sending IPOs Overseas by Jolie O’Dell).

To address the decline, National Venture Capital Association President Mark Heesen called on the federal government to:

“address this market uncertainty if they want to fulfill the stated goal of increasing long term employment as it is these emerging growth companies that hold the key to future job creation in the United States” (see Shaky U.S. Markets Have Been Sending IPOs Overseas).

Regarding the growing number of companies listing in Asia and Europe, Draper Fisher Jurvetson partner Tim Draper explains that:

“countries with the best rule of law, the best bankruptcy protection, the freest trade, the freest markets, and the best credit ratings are the countries that rule the day” (see Shaky U.S. Markets Have Been Sending IPOs Overseas).

Another factor behind the slowdown of the IPO market is the continuing economic uncertainty in Europe. As NYSE Euronext EVP Scott Cutler explains in the article Highest IPO Backlog in a Decade: How and When It Will Convert:

“The market fears the threat of contagion, the massive exposure to European financial institutions, and the collective negative impact on global growth…A guarantee, a backstop, a clear path, and a plan is what the market wants and needs. The last few days have inspired (a) little confidence that the vested interests in keeping the European union together will create a path forward, but the market wants more certainty.”

While IPOs are languishing, mergers and acquisitions so far this year have seen six venture-backed companies being acquired for more than $700 million each. In M&A Still Bright Spot for VCs, Russ Garland writes that:

“large tech companies are sitting on piles of cash and competition is fierce (for acquisitions).”

This trend means that venture-backed companies can afford to postpone IPOs indefinitely while they seek out potential buyers and investors.

If the stock market volatility continues in the short-term, or even in the long-run, and if costs associated with “going public” continue to rise, what would be the recourse left to investors and companies seeking to list shares to generate much-needed capital? The answer lies in staying private and selling shares on secondary markets.

Semil Shah, in The Primary Colors of Secondary Markets, writes that Fred Wilson of Union Square Ventures:

“makes the case that public markets can potentially ruin a company’s culture and place onerous requirements on it. By remaining private as long as possible, founders, employees, and investors can sell shares while the company is able to maintain its culture and also keep the lid tight on potential technologies it has developed.”

Shah continues:

“While public markets may have been icy toward public offerings for some time, secondary markets filled the void, a valve to reduce liquidity pressures facing founders and employees, and providing an additional (and attractive) financial option for institutional shareholders.”

Shah concludes that:

“bored with public markets, there’s more promise, potential, and possible upside in buying these types of shares (in secondary markets (italics mine)), rather than ploughing more cash into traditional blue chip companies.”

Investors are looking for a revived US stock market in the next year. Whether the number of IPOs will increase remains to be seen. What is certain is that venture-backed companies will need to be resilient and look for funding elsewhere, if the market downturn continues.


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