Private Equity Deals Offer Alternate Exits to IPOs
WSJ article "IPO Obstacles Hinder Startups" offers a good
coverage of how IPOs are becoming tougher for small
venture-backed companies.
This raises the question, what should CEOs and early-stage VCs
do, once a company has reached $100 M+ in annual sales? (Below
this threshhold, it is absolutely undesirable to go public;
investor courting, ongoing investor management, Sarbanes-Oaxley
compliance related paperwork and massive expenses - being some
key distractors ...)
In general, by year 5 or year 6 in a company's history, the
Series A investors, the Founders, and the early executive team
that is still around - get itchy to extract some liquidity.
Today, given the sophistication, the available money, and the
level of activity in the Private Equity industry, a late-stage /
LBO fund could easily step in and provide the necessary
liquidity.
Liquidity, I believe, is no reason to go public prematurely. An
enterprise that has built-in scalability should stay private,
stay on course, and execute, execute, execute. If, however, the
business does NOT have built-in scalability - and most don't -
they should absolutely NEVER go public. They should get
acquired, and become part of a larger portfolio.
Last year, 41 start-ups backed by venture-capital investors
became publicly traded U.S. companies, down from 67 in 2004 and
250 in the boom year of 1999, according to research firm
VentureOne.
I would say, the recent numbers are much closer to what they
should be.
After all, how many enterprises really have built-in scalability
in their business model?
Most companies simply go public and then struggle, giving smart
investors absolutely no reason to touch them, and hence, giving
analysts no incentive to cover them!
Rather, a secondary exit market for private placements of a
chunk of the company's shares held by early shareholders - is a
far better alternative.