Published on January 23, 2013 by Sandy Miller
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Today’s IPO market is only a shadow of what it was in the mid-to late 1990s. The question is why? Can we bring it back? Do we want to bring it back?
The IPO is the lifeblood of our stock markets; it’s the vehicle that helps bring capital, liquidity and a sense of optimism to the U. S. economy. In the late 1990s, we had a market that was flush with technology-related IPOs. Today’s IPO market has been a series of stops and starts compared to then, and notably tainted by highly scrutinized, extremely volatile offerings.
While there have been recent successful IPOs like Eloqua, FleetMatics, Palo Alto Networks, ServiceNow, Splunk, Workday and Yelp, the investing public and the media are still skeptical. We keep seeing headlines like “The Other Tech IPO that Just Faltered,” “IPOs Remain Out of Kilter,” and “Lofty Gains Lift Gloom in IPO Market.” I have yet to talk to anyone who thinks much is going to change. It’s unfortunate, because I believe if you step back and look from a broad perspective, the elements are in place to bring the IPO pipeline closer to what it once was. It’s time to stop bashing it and look forward.
Throughout my years as a securities lawyer, investment banker and now venture capitalist, I have been intimately involved with over 100 initial public offerings. Most of them have been venture-backed companies in the technology sector. Many who have tracked my career would say I have worked on more technology IPOs than any other venture capitalist out there, with my first rodeo being with Four Phase Systems in 1975 all the way to FleetMatics, which went public in October.
I spent almost 20 years as a technology investment banker, eight of which were spent at Montgomery Securities, where I ran technology investment banking. It was there that I saw our IPO deal pipeline — at its peak — larger than Wall Street’s entire venture-backed company today. I came to this stark realization only recently, when I looked at a half-page sheet of upcoming public technology offerings from all the investment banking firms. It’s shocking to see. Our own deal sheet at Montgomery would always run onto a second page — and we were just one of the major firms at the time.
I am a firm believer that things can change. We can boost the pipeline of attractive offerings in today’s market by looking at it as a three-legged stool so that we start to fill more pages.
Three-Legged Stool Beneath the IPO Ecosystem
I view the IPO market as a three-legged stool that needs to be supported by a specific triad of parts to stay stable. Two of the three are already in place. The first leg is represented by a huge crop of strong attractive growth companies. The second is based on a favorable regulatory environment due to the recent passage of the Jumpstart our Business Startups (JOBS) Act. The third leg involves the investment banking system, which is the leg that needs adjustment. Once the three are aligned together, I believe the market can be ripe for recovery.
Leg No. 1: An Abundance of Venture-Backed Innovative Growth Companies
From what I am seeing right now, there are an incredible number of entrepreneurs creating compelling growth companies. While there were significantly more IPOs in the 1990s, the number of private companies currently being built is about five times what it was during that time. For example, in 1991, there were 319 venture investments in the core areas of the technology we know today. In 2011, there were 1,825. Yet there are far fewer IPOs.
Today’s entrepreneurs are defining massive, fast-growing markets that hardly existed 15 years ago, such as enterprise mobility, social marketing and big data analytics. They are also disrupting large established industries like travel, transportation and legal services. Compared to the 1990s, technology companies today have more sustainable, scalable models