The IPO Market Still Sucks... But Is That A Bad Thing?
from the depends-on-your-perspective dept
There's clearly been a lot of buzz in Silicon Valley the past few months, and people are talking about how the money is flowing from VC purses up on Sand Hill Road into any old startup that has an AJAXy website with rounded corners and a funny name. However, what may be most interesting is that all of this is happening without much help from the IPO market. Back in 2004, when Google went public, there was a lot of talk about how it would open the IPO window back up, creating exit strategies and convincing stingy VCs to invest again. But... that's not happening. Instead, there's a healthy acquisition market (well, depending on whose health you're talking about...). There are a bunch of theories as to why this is happening, with the amazing nuisance that is Sarbanes-Oxley being one of the big contenders for keeping many startups private. Also worth noting is that many of the VC firms that raised tons of money at the close of the last bubble are running out of time to invest it, based on the terms of their funds, and that's creating pressure to put the money to work, even without the clear exit strategies. The real answer may be a combination of all of this. VCs have to invest, but without a big IPO window (in part due to regulations), they're pushing for faster acquisitions instead. Or, of course, you can go with the optimistic viewpoint that the lack of IPOs means that Wall Street has finally learned not to take junk startups public, preferring to wait for real businesses. It's a nice thought, but there have been enough investment bubbles over the years to make it pretty clear that these are not the types of lessons that really seem to stick once enough money starts flowing. And, despite all the "lessons learned," we are still seeing a few of these questionable IPOs make it through. The end result may still be better for the overall stock market -- since fewer bad deals are making it out, but it's hard to buy that it's because of some sort of "restraint" on the part of Wall Street.
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Just say no...
IPO's from BS operations have declined, but the issue involves pricing and the Street's anticipation. The more likely (per voodoo and soothsayers) an IPO is to produce in real life, the more likely the price has been driven up in advance, not only by legitimate demand but by saavy manipulation that results in more capital for the operation.
While your investment might, in the long run, wind up performing, it will likely be a long wait with a considerable (and long-term) drop in price soon after the offering as the stock is flipped en masse. And maybe you too want to flip it but you will often find that large investment houses will have bought this stuff up at the speed of light and the price is already shooting for the moon by the time you put your order in.
Better to wait awhile and let the company establish a track record than swan dive into an empty pool.
Just my opinion, of course.
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Cash Sales & Mergers are a lot easier
An IPO is not a short, quick path to riches. You need to manage well; you must forecast and give good guidance and then achieve those ends. Newer and stricter reporting requirements keep appearing. THEN - as a top executive, after a decently long period of good performance, will you have an opportunity to take a meaningful chuck of cash off the table personally. An IPO isn't an instant liquidity event for everyone involved, it used to just be the VCs with a moderate sized redemption for the execs and employees. Now, in the world that inspired S-O, I'm willing to bet they slow everyone down.
A merger, however, is a path to instant liquidity. Whatever you negotiate is yours at whatever speed you agreed to. Complete control, complete transparency. You likely lose all if not most of your control over your business, but a lot of people seem to take the approach that starting a business is now a path to riches and then a life on the beach - they aren't looking to run that company forever. If so, and you can stomach handing over your baby to someone else - go for it. Its easier, cleaner and requires less monkeying around. Even in a sale to a public company, the HSK hearings and stuff pale before the complexity and pain becoming an independant publuc entity will engender.
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